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Alok Inds.: Capex on track, profits unsteady - Views on News from Equitymaster
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Alok Inds.: Capex on track, profits unsteady
Apr 16, 2009

These are certainly not the best of times for companies in the textile sector. A significant drop in export orders, little bargaining power on the realisation front and highly leveraged balance sheets have brought even some of the most established players to their knees. A diversified presence into apparel as well as home textile coupled with a small presence in textile retailing has helped Alok Industries compete effectively against its peers even during these difficult times. However, a couple of factors continue to remain a drag on the company’s performance. We recently visited Alok Industries’ plant in Silvassa where the company is putting on stream higher capacities for spinning, woven apparels, towels and garments. Here are the key takeaways from the visit.

Capacity catering to higher order books: Alok Industries’ capacity expansion in the spinning, woven apparels, towels and garments divisions are firmly on track and will come on stream partly in FY10 and FY11. Despite the company being able to record a healthy growth in exports (23% YoY) in 9mFY09, given the economic scenario we have estimated approximately 50% of the new capacities to get utilised in the first year of operation. The average capacity utilisation levels have hovered around 100% for the spinning and apparel fabric division while the same has been 80% for the garment division. The company did not have in-house towel manufacturing capacity so far. Given that it has entered into long term contracts for procuring organic cotton that are in huge demand in the export markets, we do not see the company facing any bottlenecks on this front with regard to procurement of raw material. The higher capacity is expected to help the company grow its sales volume by an average of 15% per annum (across products) over the next two to three years. We have estimated the company’s sales (net of excise) to grow at a CAGR of 9% until FY11. We expect the company’s asset turnover ratio to move up from 0.5 times in FY09 to 0.7 times by FY11 as against the company’s target of taking up the ratio to 1 time in the next two to three years.

Equity dilution depressing medium-term returns: At the end of 9mFY09, Alok had return on networth (RONW) of 10.2%. However, with the rights issue (83:40) in 4QFY09 and subsequent equity dilutions in FY10 and FY11 due to the conversion of the warrants and FCCBs into equity shares; we see the company’s RONW to touch 8% levels by FY11. The company’s equity capital will increase by 2.4 times during this period and bring down the net debt to equity ratio from 2.9 times in 9mFY08 to 2.5 times. The same, however, is reasonably high and will continue to remain a drag on the company’s balance sheet in the medium term.

Alok Ind. Vs Textile Sector
Source: Prowess, company
Cash flows stabilising over long term: While historically Alok Industries has performed better than its peers in the textile sector in terms of operating and net margins, going forward the same will depend on the company’s ability to efficiently utilise the higher capacities and reap higher realizations on the same. Also, the company’s investments in the retailing and construction businesses need to break even soon. With stability in cash flows we see the interest coverage ratio moving up from 2.2 times in FY09 to 3.1 times by FY11. The EBIDTA and net profit margins are estimated to remain at an average of 25% of 5% until FY11.

High risk – high return tradeoff: Despite its historical track record, the key risks to Alok’s business are its inability to bring the incremental capacities quickly on-stream and use them efficiently to cater to larger order books. The company currently has orders to utilize its capacity until the end of FY10. However, given the high leverage in its books, it is paramount for Alok to clock a higher asset turnover ratio.

At the current price, the company is trading at a price to earnings ratio of 5 times our estimated FY11 earnings and 0.4 times our estimated FY11 book value, which offers considerable value to investors with a high risk appetite.

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