A Good Value Pick

With the Sensex touching a 25-month high and the sentiment continuing to remain buoyant, it makes sense to hunt fundamentally strong counters available at good bargains. Our search led us to the Gurgaon based company SRF. Growing at a five-year CAGR of 22 per cent in profits, huge capex, 17-year dividend track record, high dividend yield, and EV/EBDITA of mere 4x makes SRF an attractive bet. The company operates in three segments viz. the technical textile business (TTB), chemicals and polymers business (CPB) and the packaging film business (PFB) each contributing 50 per cent, 34 per cent and 16 per cent respectively to total sales. Through these segments SRF caters to various industries such as automobiles, infrastructure, consumer durables, pharmaceuticals, agrochemicals etc. SRF is a consistent performer and has been growing at a five-year CAGR of 22 per cent in profits and 17 per cent in sales. To drive its future growth SRF had undertaken an aggressive capex of Rs 1,400 crore from FY08 through FY11 for expansion, backward integration and acquisitions. Some of SRF’s expansion plans include setting up of a 14,500 TPA polyester industrial yarn at a cost of Rs 184 crore, investing Rs 257 crore towards capacity enhancement and poly chip plant in the packaging film segment, Rs 40 crore for a dipping tyre cord plant, Rs 92 crore for wind power project and Rs 60 crore for laminates. Once this capex is completed it would push SRF revenues to another trajectory altogether. Secondly, SRF isn’t averse to growing inorganically and has acquired two companies in FY09 viz. Thai Baroda Industries (for USD 35-38million) which manufactures nylon tyre cord fabric (NTCF) and South Africa-based belting fabric manufacturer called Industex Belting (for USD 5 million). In fact SRF would continue to look for such opportunities, which augurs well. These acquisitions make SRF the world’s second-largest producer of NTCF as well as belting fabrics, strengthening its TTB segment. NTCF accounts for 80 per cent of its TTB revenues and 50 per cent of SRF’s total revenues. NTCF is used as reinforcement in tyres and SRF is a leader in India with a 50 per cent market share. Almost all tyre manufacturers are its clients. The revival of the auto sector, lack of new capacities coming up globally, buoyancy in the transport sector that will keep the replacement demand high and the anti-dumping duty imposed on NTCF imported from China will collectively provide good impetus for SRF to grow. But what’s more to the SRF story is the income it receives from the sale of Carbon Credits. It should be noted that SRF can generate maximum of 3.8 million certified emission reductions (CER) per annum and it is entitled to carbon credits till 2014. Though the company declined to comment further on this, considering the maximum units it can generate per annum and present rate per CER around Euro 12-15, SRF could end up making a cool Rs 271-338 crore, which is huge. Coming to the financials, SRF could post revenues and profits of Rs 2,019.61 crore and Rs 250-264 crore for FY10. At these estimates SRF generates PE of 4.8x, which is low when compared to Century Enka’s over 6x. Besides, SRF has declared two interim dividends each of Rs 7 per share in FY10 compared to Rs 5 for FY09. Assuming that these are final dividends for FY10, its dividend yield stands at a high of 7 per cent, which not only limits the downside, but indicates good upside potential. Hence one can buy the scrip with a target price of Rs 296.DSA Good Value Pick