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Alok Ind.: Operating leverage bears fruit - Views on News from Equitymaster

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Alok Ind.: Operating leverage bears fruit
Feb 4, 2010

Performance summary
  • Topline grows by 38% YoY during 9mFY10, up 33% YoY in 3QFY10.
  • Improved volumes and higher realizations help EBIDTA margins grow by 4% each during the third quarter and nine month periods.
  • While home textile business enjoys higher margins, polyester yarn business adds fillip to volume growth.
  • Bottomline growth continues to remain sluggish due to higher interest costs.
  • To raise additional capital to the tune of Rs 4.6 bn through QIP in 4QFY10.


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 8,164 10,824 32.6% 20,579 28,435 38.2%
Expenditure 6,019 7,596 26.2% 15,384 20,147 31.0%
Operating profit (EBDITA) 2,145 3,228 50.5% 5,195 8,288 59.5%
EBDITA margin (%) 26.3% 29.8%   25.2% 29.1%  
Other income 5 16 244.4% 19 28 47.3%
Depreciation 704 904 28.4% 1,722 2,533 47.1%
Interest 701 1,455 107.6% 1,629 3,563 118.7%
Profit before tax 745 885 18.8% 1,863 2,220 19.2%
Extraordinary income/(expense) (25) -   (71) -  
Tax 244 303 24.0% 612 747 22.2%
Effective tax rate 33% 34%   33% 34%  
Profit after tax/(loss) 475 582 22.4% 1,180 1,472 24.8%
Net profit margin (%) 5.8% 5.4%   5.7% 5.2%  
No. of shares (m)         605.6  
Diluted earnings per share (Rs)*         5.7  
Price to earnings ratio (x)         4.2  
*On a trailing 12-month basis

What has driven performance in 9mFY10?
  • Despite the pressure on export demand from developed economies, larger players in the Home Textile industry continue to derive the benefits of consolidation. After a few quarters of sluggish textile exports, Alok has been able to profitably capture the incremental growth in volumes and realizations during 9mFY10. While the growth in the company’s apparel business has been relatively slower, thanks to the heightened competition, home textile business continues to remain unaffected. The latter infact has managed to reap better realizations from its marquee clients in global retailing. The volume growth on the other hand was contributed by Alok’s expanded polyester yarn (POY) capacity that is the largest single location capacity in the country.

    Growth across segments
    Rs m 9mFY09 Share 9mFY10 Share Change
    Apparel Fabrics 10,454 53.3% 12,663 47.2% 21.1%
    Woven 9,334 47.5% 11,571 43.1% 24.0%
    Knit 1,120 5.7% 1,092 4.1% -2.5%
    Home textiles 3,544 18.1% 4,978 18.6% 40.5%
    Garment 953 4.9% 978 3.6% 2.6%
    POY 4,679 23.8% 8,216 30.6% 75.6%
    Total 19,630   26,835   36.7%

    Alok will be attaining sizeable capacity across segments i.e., spinning, toweling, sheeting and garmenting once the phase-III of the capacity expansion gets fully commissioned by FY10. The incremental 14,000 TPA (tonnes per annum) of spinning capacity will make the company 60% self sufficient as far as its yarn requirement goes. The terry-towel, sheeting and garment capacities will lend the company operating leverage against its peers in the home textile and readymade garment industry.

  • As per the management, the entire process of converting cotton to finished fabric ensures gross operating margins of around 37%. The conversion of fabric to garment offers additional operating margin of 12%. Thus vertical integration is expected to play an important role in sustenance of the company's operating margins and improvement in net margins.

  • Although the TUF debt has kept the company's funding costs relatively moderate and most of the capacities have already been commissioned, extended period of lower capacity utilisation may force the company to bear interest costs longer than expected without deriving the benefit of growth in volumes and margins. Having said that the planned equity dilution will help the company lower its debt to equity ratio.

What to expect?
At the current price of Rs 24, the stock is trading at an EV/EBIDTA multiple of 6.2 times our FY12 estimates. Synonymous to its chain of retail stores - 'Homes & Apparels', this company's business model is in contrast to most other single-product players in the textile sector. Its integrated structure makes it ideally poised to capture the upsides in terms of margins. Moreover, the higher profits are ploughed back for R&D to achieve better product mix and improved quality.

Armed with sizeable capacity and strengthened overseas presence, the company is set to reap the benefits of higher sales and better realizations over the next 4-5 years. What is more, lower interest and depreciation cost will mean return ratios that will be nearly double of that at the end of FY09. We maintain our positive view on the stock

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