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Eastern Silk: Rubbed by recession - Views on News from Equitymaster
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Eastern Silk: Rubbed by recession
Jan 23, 2009

Performance summary
  • Topline falls by 26% YoY in 3QFY09; heavily impacted by the slowdown in demand from the US and European markets
  • EBIDTA margins drop by nearly 15% and 5% during 3QFY09 and 9mFY09 respectively over the corresponding periods of FY08.
  • Higher interest cost and drop in other income completely drains the bottomline for the third quarter.
  • Has yet to account for mark-to-market (MTM) loss of Rs 97 m on forex derivatives in the coming quarters.


Standalone financials
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 1,690 1,255 -25.7% 4,448 4,099 -7.8%
Expenditure 1,281 1,149 -10.3% 3,444 3,388 -1.6%
Operating profit (EBDITA) 408 106 -73.9% 1,004 711 -29.2%
EBDITA margin (%) 24.2% 8.5%   22.6% 17.3%  
Other income 6 2 -61.0% 35 8 -77.7%
Interest 62 68 9.7% 170 181 6.5%
Depreciation 46 41 -10.9% 110 123 11.8%
Profit before tax 306 (0)   759 415 -45.4%
Tax 41 -   91 32 -64.8%
Profit after tax/(loss) 265 (0)   668 383 -42.7%
Less: Loss/Gain on derivative contr. 10 (3)   10 75  
Net profit / (loss) 255 2 -99.1% 657 308 -53.2%
Net profit margin (%) 15.1% 0.2%   14.8% 7.5%  
No. of shares (m)       15.8 78.9  
Diluted earnings per share (Rs)*         3.4  
Price to earnings ratio (x)         2.3  
(*On a trailing 12-month basis)

What has driven performance in 3QFY09?
  • Poor economic conditions in the US and European regions (accounting for about 65% of its export dispatches) continued to take a toll on Eastern Silk’s turnover over the past nine months. Along with pressure on realisations, the company has also witnessed lower volumes, which have led to a significant 26% drop in sales in the third quarter, despite it being a festival season. Higher operating costs on the other hand have impacted the operating margins by 15% and 5% respectively in the third quarter and nine month period respectively. Eastern Silk has scaled up the value chain over the years and is currently operating in various segments such as handloom fabrics and velvet. The company’s goal is to increase average realisation from the current US$ 16 per metre to US$ 20 per metre by FY10. The same, however, seems a difficult target in the current scenario. We have reduced our topline growth estimates from a compounded annual rate of around 12% to 9.6% between the years FY09 to FY11. However, we may have to revise this further down if the company’s volume offtakes continue to remain muted.

  • Although the fact that China remains Eastern Silk’s largest raw material source (nearly 80%), the fact that the company has entered into an associated joint venture in China wherein the latter is obligated to supply about 120 MT per annum to the company, is a comforting factor. Having said that, the rise in labour cost in China has inflicted pressure on Eastern Silk’s input costs in FY09, after very marginal increases in the past few fiscals.

  • While the current quarter has been one of the worst ones for Eastern Silk in the past few years, the fact that the company has incurrent foreign currency losses has made matters worse. Although the company has a natural hedge for its export revenues (nearly 70% of the company's turnover is derived from exports), as the outsourced yarn requirement is entirely imported, it entered into some derivative contracts in FY08 that led to losses with the sharp depreciation of the rupee against the US dollar in recent months. The company has yet to provide for mark-to-market (MTM) loss of Rs 97 m on forex derivatives in the coming quarters.

What to expect?
At the current price of Rs 8 the stock is trading at an attractive valuation of 2.4 times our estimated FY11 EBIDTA. Although the business model of Eastern Silk places it favourably against its peers due to higher capacity in made-ups, better realisations and enhanced product mix, the risks to the same are expected to linger in the medium term. While we have factored in most of the business risks, a sharper global economic slowdown combined with the forex losses may warrant a revision of our outlook for the company going forward.

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