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Alok: Forex losses, debt burden mar performance - Views on News from Equitymaster
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Alok: Forex losses, debt burden mar performance
Apr 5, 2012

Alok Industries declared its results for the third quarter and nine month period of financial year 2011-12 (9mFY12). The company has reported 48% YoY growth in net sales while its profits have fallen by 56% YoY in 9mFY12. Here is our analysis of the results.

Performance summary
  • Topline grows by 48% YoY in 9mFY12 aided by higher volumes in apparels and yarn.
  • EBIDTA margins improve from 27.8% in 9mFY11 to 28.5.5% in 9mFY12 with drop in cotton prices and reduced power costs.
  • Extraordinary losses for the third quarter nine month period of FY12 includes forex losses due to the volatility in exchange rates.
  • Higher interest costs also eroded profits for Alok which reported losses for the third quarter, while net profits dropped by 56% YoY for 9mFY12. Excluding the forex losses, net profits were up by 50% YoY for 3QFY12 and 95% YoY for 9mFY12.


Standalone financial performance
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 16,086 23,866 48.4% 41,591 61,580 48.1%
Expenditure 11,927 17,443 46.2% 30,018 44,038 46.7%
Operating profit (EBIDTA) 4,159 6,423 54.4% 11,573 17,542 51.6%
Operating profit margin (%) 25.9% 26.9%   27.8% 28.5%  
Other income 28 20 -28.6% 40 253 532.5%
Interest  1,302 2,712 108.3% 4,655 7,312 57.1%
Depreciation 1,450 1,875 29.3% 3,644 5,267 44.5%
Profit before tax 1,435 1,856 29.3% 3,314 5,216 57.4%
Tax 450 379 -15.9% 1,079 861 -20.2%
Extraordinary items # 86 1,842 2041.9% 74 3,398 4491.9%
Profit after tax/ (loss) 899 (365) -140.5% 2,161 957 -55.7%
Net profit margin (%) 5.6% -1.5%   5.2% 1.6%  
No. of shares (m)         787.8  
Diluted earnings per share (Rs)*         1.2  
P/E ratio (x)         17.5  
* on a trailing 12 months basis  # Forex losses

What has driven performance in 3QFY12?
  • Alok Industries apparel business continues to draw strength from the growth in volumes in the domestic market, accompanied by higher realizations. However, exports continued to lag. The growth in apparel volumes also helped curtail the impact of rise in input costs to an extent. The home textiles business showed encouraging signs of improvement in volume off-take overseas. While the domestic sales grew by 59% YoY in 3QFY12, exports grew by 31% YoY.

    Segment performance
      3QFY11 3QFY12 Change
    Apparels 8,216 11,369 38.4%
    % of sales 51% 48%  
    Home Textiles 2,731   3,246 18.9%
    % of sales 17% 14%  
    Garments 395 428 8.4%
    % of sales 2% 2%  
    Cotton yarn 437 847 93.8%
    % of sales 3% 4%  
    Polyester yarn 4,305 7,974 85.2%
    % of sales 27% 33%  

  • Raw material costs as a percentage of sales came down from 54% in 3QFY11 to 47% in 3QFY12, resulting in improvement in operating margins.

  • The interest costs were significantly higher in 3QFY12 as the company had long term debt to equity ratio of 1.75 times in 9mFY12 against 1.66 times in FY11. Going forward also the pressure of interest costs may sustain although the company plans to pay off debt with proceeds from sale of stake in the real estate business.

  • While the debtor days dropped from 99 days in FY11 to 87 days in 9mFY12, the inventory days went up from 114 days to 132 days.

  • The company had 350 Homes and Apparels stores on franchise basis at the end of December 2012.

What to expect?

At the current price of Rs 20, the stock is trading at a multiple of 16.7 times trailing 12 month earnings. Despite the core textile businesses doing well, the mark to market forex losses and the high debt burden have been dampeners. The company’s ability to offload stake in the real estate arm has been a long standing concern. In addition, while the promoters own 30% stake in the company, they had pledged 91% of their holding at the end of December 2011, up from 60% in September 2011. While the sale of stake in the real estate arm and write back of forex losses could provide reasonable upsides, we would recommend investors to Hold on to the stock only if their exposure to the same is restricted to less than 2 to 3% of their portfolio.

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