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Alok Ind.: Leverage may play spoilsport - Views on News from Equitymaster
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Alok Ind.: Leverage may play spoilsport
Jun 3, 2010

Alok Industries declared its FY10 results. The company grew its sales and profits at 45% and 29% YoY respectively.

Performance summary
  • Topline grows by 45% YoY during FY10, up 62% YoY in 4QFY10.
  • Improved volumes and higher realizations help EBIDTA margins grow by 2% each during the fourth quarter and full year 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 and fall in other income.
  • Debt to equity remains at 2.6 despite raising additional capital through QIP and rights issue in FY10.


Standalone financial performance
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 9,084 14,711 61.9% 29,769 43,146 44.9%
Expenditure 6,678 10,430 56.2% 21,751 30,578 40.6%
Operating profit (EBDITA) 2,406 4,281 77.9% 8,018 12,568 56.7%
EBDITA margin (%) 26.5% 29.1%   26.9% 29.1%  
Other income 163 16 -90.2% 208 45 -78.4%
Depreciation 754 1,023 35.7% 2,335 3,562 52.5%
Interest 824 1,816 120.4% 3,041 5,378 76.8%
Profit before tax 991 1,458 47.1% 2,850 3,673 28.9%
Extraordinary income/(expense) (10) -   - -  
Tax 279 506 81.4% 966 1,248 29.2%
Effective tax rate 28% 35%   34% 34%  
Profit after tax/(loss) 702 953 35.6% 1,884 2,425 28.7%
Net profit margin (%) 7.7% 6.5%   6.3% 5.6%  
No. of shares (m)         605.6  
Diluted earnings per share (Rs)*         3.4  
Price to earnings ratio (x)         6.0  
(*On a trailing 12-month basis)

What has driven performance in FY10?
  • With demand showing signs of picking up in the home textile business, Alok has been able to profitably capture the incremental growth in volumes during FY10. After a few quarters of sluggish textile exports, the incremental growth in volumes and realizations aided improvement in margins during FY10. While the company’s garment business has been affected by 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. Alok’s expanded polyester yarn (POY) capacity that is the largest single location capacity in the country has also shown good growth in volumes.

    Home textiles lead the growth
    Rs m FY09 Share FY10 Share Change
    Apparel Fabrics 16,094 56.2% 19,184 48.4% 19.2%
    Woven 14,615 51.0% 17,685 44.7% 21.0%
    Knit 1,479 5.2% 1,499 3.8% 1.4%
    Home textiles 4,985 17.4% 6,987 17.6% 40.2%
    Garment 1,386 4.8% 1,329 3.4% -4.1%
    POY 6,192 21.6% 12,101 30.6% 95.4%
    Total 28,657   39,601   38.2%

    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 by FY11.

  • 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. However, we believe that expansion in margins may remain capped until the economic recovery in export markets takes shape.

  • As cited earlier, the high debt to equity ratio and exposure to real estate are our prime concerns with regard to this company. Although the company did manage to partially reduce its debt burden by redeeming FCCBs in 1QFY11 with the proceeds of QIP and rights issues in FY10, the same continues to remain high. The debt to equity ratio was nearly 2.6 times even after the FCCB redemption. Only if the company manages to encash its real estate assets quickly will it be relieved of this problem. The management has cited steps taken on this front. This, however, stands a key risk to our forward estimates.

What to expect?
At the current price of Rs 19, the stock is trading at an EV/EBIDTA multiple of 5.8 times our FY12 estimates. 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 have the potential to nearly double from the current levels. While we remain positive on the long term prospects of the company, we may have to revisit our estimates if the problem of high leverage lingers for too long.

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