SRF Limited features in Vivek Sukhani’s Top 5 picks at the moment. I found it very compelling to investigate this further.
This is how Vivek introduced the SRF Opportunity.
1). SRF Limited: My reasoning here is pretty simple. Here is a company which is doing all the right things with the cash it is generating. It is doing buy-back, it is increasing its productive capital ( thats the term I use generally for fixed assets)at a brisk pace, it is distributing reasonable dividends and most importantly, its increasing its profits at a great pace.
Further discussions from that thread copied here, for us to take this up separately.
Posted byVivek Sukhaniat Thursday 15:08
Previously GreyFool wrote:
I was looking at SRF too earlier. Some things that were of concern for me were:
1). Big capex in Packaging film segment: I understand this is a commodity business and valuations are low for other players like Jindal Polyfilms, Cosmo Films. Also the cycles are typically short & volatile. Right now down cycle is starting.
2). Carbon credits: There was a proposal to cut annual quota’s by 50% last yr(not sure what current status is). Not sure how much of cash flows they contribute to SRF now. They were significant a few yrs back.
3). Nylon Tyre cord prospects: This is used in tyres for heavy duty Buses /trucks to strengthen them. With Indian roads becoming better steel radials will likely limit the use of NTC over the long term.
I think valuations are low but SRF seems to have only traded at 4-6 p/e in recent yrs. Couldn’t figure out why such low valuations for a co. with 22+ ROE.
Valid concerns. But capex is high because they are trying to utilise the cash flows to generate still higher sales. The way I look at capex is that it should result in significant turnover growth in future. And SRF has demonstrated that in the past. Infact, capex is what got me attracted to IGL. If the Capital expenditure can be done without significant increase in borrowings, that should ultimately good for the company in the long run.
With radialisation, demand for NTCF may reduce. But SRF has last year got into PTCF, which is used in radial tyres. Also, cross-ply tyres will not be out of production altogether.
Packaging films is tricky business for sure. But its a good business. So if you have the scale, this can be a cash-cow. If you dont have scale and versatility, its a cash-guzzler.
Carbon credits is an added advantage with SRF. Also, their market share in refrigerant business is close to 40 p.c. That should do fine in the coming years. Also, SRF is building a decent size state-of-the-art plant at Dahej. This should lead to even higher revenues.