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Alok Ind.: Leverage risks persist - Views on News from Equitymaster
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Alok Ind.: Leverage risks persist
Aug 30, 2010

Alok Industries declared its 1QFY11 results. The company grew its sales and profits by 40% YoY and 45% YoY respectively. Here is the analysis of the results.

Performance summary
  • Topline grows by 40% YoY during 1QFY11.
  • Improved volumes and higher realizations help EBIDTA margins grow by 2% during the quarter.
  • While home textile business enjoys higher margins, polyester yarn business adds fillip to volume growth.
  • Bottomline growth impacted by higher interest costs and negligible other income.
  • FCCBs to the tune of Rs 1 bn redeemed during the quarter; debt to equity continued to remain high at 2.8 times at the end of June 2010.


Standalone financial performance
(Rs m) 1QFY10 1QFY11 Change
Net sales 7,863 10,989 39.8%
Expenditure 5,712 7,722 35.2%
Operating profit (EBDITA) 2,151 3,267 51.9%
EBDITA margin (%) 27.4% 29.7%  
Other income 3 - -100.0%
Depreciation 784 993 26.7%
Interest 886 1,571 77.3%
Profit before tax 484 703 45.2%
Extraordinary income/(expense) 1 -  
Tax 16 26 58.0%
Effective tax rate 3% 4%  
Profit after tax/(loss) 469 677 44.5%
Net profit margin (%) 6.0% 6.2%  
No. of shares (m)   787.8  
Diluted earnings per share (Rs)*   7.4  
Price to earnings ratio (x)   2.7  
(*On a trailing 12-month basis)

What has driven performance in 1QFY11?
  • Alok Industries did reap the benefits of some recovery in demand for home textiles and garments in the export and domestic markets. In fact the company’s garment business locked in sales growth of 66% YoY during the quarter while the more stable home textile business grew 29% YoY. 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. 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 end of FY11.

    Garments catching up...
    Rs m 1QFY10 Share 1QFY11 Share Change
    Apparel Fabrics 3,675 46.7% 4,836 44.0% 31.6%
    Woven 3,400 43.2% 4,387 39.9% 29.0%
    Knit 275 3.5% 449 4.1% 63.3%
    Home textiles 1,404 17.9% 1,817 16.5% 29.4%
    Garment 188 2.4% 312 2.8% 66.0%
    POY 2,143 27.3% 3,529 32.1% 64.7%
    Total 7,863   10,989   39.8%

  • As indicated earlier, the expansion in operating margins is seen coming from the move towards value added fabrics. As per the management, 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 going forward as inputs costs rise.

  • 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 2.8 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 20, 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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