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Sunday, April 22, 2012

SRF Ltd: Dividend Gem and Midcap Star

SRF is a multi-business group, global entity with manufacturing plants in four countries and is market leader in most of its businesses in its home market in India. SRF is also the world's 2nd largest manufacturer of both the Nylon 6 tyre cord as well as the belting fabrics.

SRF began in 1970 when its parent company DCM decided to set up a separate entity to manufacture nylon tyre cord fibres. SRF became one of the first companies in India to start manufacturing nylon tyre cords. Over the years, the company expanded its product line in technical textiles and also diversified into other businesses like Chemicals, Packaging Films and Engineering Plastics. Its one of the few manufacturing successes emerging out of India and is winning globally over the years.

Its important to note that a good company and good stock are sometimes two different things. In SRF’s case, this Midcap star is also a good stock to own as firm is available at decent valuations and with great track-record of rewarding shareholders with generous dividend payments over the years.

Sample this, SRF has not missed its annual dividend payment since 2001. For 2011 and 2010, its dividend payment was 140% of face value. In 2012, firm has already paid 70% of dividend to its shareholders.

Most important thing to note about any stock is to see how are promoters valuing its own stocks. i.e. is their ownership in their own company going up over time, or are they diluting and washing off their hands off the firm, with public being left holding most of the diluted stock. You would find very few companies whose promoter ownership goes up over time, and in case you find such firms, be ready to own them and own them for long. If promoter values his own firm and is ready to buy back shares, common shareholder would be duly rewarded with strong stock price support and regular dividends.

In case of SRF Ltd, its good to see that promoter ownership has grown from past three quarters, from 47.81% three quarters back, to 48.31% two quarters back to 49.45% in last quarter.

Looking under the hood, we find that company is in very good financial health and Reserves and surplus has grown from 745 crores in 2007 to 1522 crores in 2011. The current market cap of firm is just about 1384 crores, hence you are getting a firm worth 1384 crores which is actually holding 1522 crores of Reserves and surplus. The current market price of 238.70 is a good discount to the Book Value of Rs 271 per share. Hence you are able to procure the firm at a very reasonable valuations of 12% discount to its Book Value.

This discount to Book Value for good companies like SRF Ltd is just a Bear Market phenomenon. In Bull markets, financial advisors would be advising you to buy firms at 50% or even 100%, 200% higher prices than Book Values, because none of the good firms would be actually trading anywhere near its Book Value. Hence Value Buyers like Warren Buffet are often quoted saying that they feel like a kid in candy store during a bear market, because so many good companies are available at discounted prices, which is not possible during the Bull runs.

SRF’s revenues have grown very well from Rs 1963 crores in 2007 to Rs 3063 crores in 2011. Given its Dec quarter runrate of Rs 949 crore revenue in one quarter, its annual revenues might well touch Rs 4000 crores in next financial year. EPS or earning per share is a robust Rs 79.91 per share in 2011. This results in PE ratio of just about 2.99. Imagine owning a world leader company at a PE ratio of 2.99. This again is a Bear Market possibility. In Bull runs, good firm trade at P/E ratios of well over 10-12 and of course it again depends on market segments, growth rates and many such fancy parameters.

To summarize, SRF is a robust firm, world leader in its segment, excellent dividend track-record, available at discounted valuations and promoters in this case care about the firm to buy shares in their own company and increase their holdings. A true dividend gem and Midcap star and a future Multi-Bagger.

1 comment:

  1. I have a few question regarding SRF ltd. SRF enjoys a much better operational efficiency than its competitors. Is it because of CER revenues?
    If the CER revenue cease to exist, what is the future of this company?
    What do you think is the reason in drastic decline in the Margins in the first 2 quarters of 2012-13 ?


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