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Eastern Silk: Poor exports leave it threadbare - Views on News from Equitymaster

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Eastern Silk: Poor exports leave it threadbare
Aug 6, 2009

Performance summary
  • Topline grows by 17% YoY in 1QFY10; continuing to be heavily impacted by the slowdown in demand from the US and European markets
  • EBIDTA margins drop by nearly 15% during 1QFY10 due to poor pricing power
  • Higher interest cost drains the bottomline despite higher other income. Has yet to account for mark-to-market (MTM) loss of Rs 1.8 m on forex derivatives in the coming quarters.


Standalone financial performance
(Rs m) 1QFY09 1QFY10 Change
Net sales 1,299 1,518 16.9%
Expenditure 1,015 1,417 39.6%
Operating profit (EBDITA) 284 101 -64.4%
EBDITA margin (%) 21.9% 6.7%  
Other income 23 43 87.0%
Depreciation 41 36 -12.2%
Interest 50 56 12.0%
Profit before tax 216 52 -75.9%
Extraordinary income/(expense) - -  
Tax 21 8  
Profit after tax/(loss) 195 44 -77.4%
Net profit margin (%) 15.0% 2.9%  
No. of shares (m)   79.0  
Diluted earnings per share (Rs)*   0.5  
Price to earnings ratio (x)   28.0  
(*On a trailing 12-month basis)

What has driven performance in 1QFY10?
  • The pressure on realisations coupled with lower volumes have led to muted sales for Eastern Silk in the first quarter of FY10. However, it may be noted that the first quarter is typically a sluggish time for the company and sales do pick up in the subsequent quarters because of the festival season. Higher operating costs on the other hand have impacted the operating margins by nearly 15% YoY. 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 twelve months.

    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 had inflicted pressure on Eastern Silk’s input costs in FY09, after very marginal increases in the past few fiscals.

  • 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. The company has yet to provide for mark-to-market (MTM) loss of Rs 1.8 m on forex derivatives in the coming quarters.

What to expect?
At the current price of Rs 14 the stock is trading at an attractive valuation of 4.2 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, persisting global economic slump (particularly in the Western countries) combined with the forex losses may warrant a revision of our outlook for Eastern Silk going forward. The company’s disclosures also leave a lot to be desired.

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