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Eastern Silk: Marred with uncertainties - Views on News from Equitymaster

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Eastern Silk: Marred with uncertainties
Nov 6, 2008

Performance summary
  • Topline grows by a muted 2% YoY in 2QFY09 due to slowdown in demand from the US and European markets

  • EBIDTA margins remain stable in 2QFY09 but drop by nearly 0.8% during 1HFY09 over 1HFY08 on the back of rising costs.

  • Net margins (excluding extraordinary items) drop from 14.0% in 2QFY08 to 13.8% in 2QFY09, in line with the drop in operating margins.

  • Has yet to account for mark-to-market (MTM) loss of Rs 64 m on forex derivatives in the coming quarters.



Standalone financials

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 1,512 1,545 2.2% 2,759 2,844 3.1%
Expenditure 1,222 1,252 2.4% 2,192 2,292 4.6%
Operating profit (EBDITA) 290 293 1.2% 567 552 -2.6%
EBDITA margin (%) 19.2% 19.0%   20.6% 19.4%  
Other income 40 35 -14.0% 67 57 -13.7%
Interest 56 62 10.2% 108 113 4.3%
Depreciation 34 41 22.9% 73 82 11.6%
Profit before tax 240 224 -6.5% 452 415 -8.2%
Tax 29 11 -62.1% 50 32 -36.0%
Profit after tax/(loss) 211 213 1.1% 402 383 -4.7%
Less: Loss on derivative contracts - 102   - 78  
Net profit / (loss) 211 112 -47.1% 402 306 -24.0%
Net profit margin (%) 14.0% 7.2%   14.6% 10.8%  
No. of shares (m)       15.8 78.9  
Diluted earnings per share (Rs)*         6.1  
Price to earnings ratio (x)         1.5  
(*On a trailing 12-month basis)

What has driven performance in 2QFY09?
  • The economic slowdown in the US and European regions (accounting for about 65% of its export dispatches) have taken a toll on Eastern Silk’s sales growth over the past six months. The company has also compromised on the realisations of some of its high value products for retaining market share. 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 has inflicted pressure on Eastern Silk’s input costs in FY09, after very marginal increases in the past few fiscals.

  • Eastern Silk 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. However, the company entered into some derivative contracts in FY08 that led to losses with the sharp depreciation of the rupee against the US dollar in recent months. The company has yet to provide for mark-to-market (MTM) loss of Rs 64 m on forex derivatives in the coming quarters.

What to expect?
At the current price of Rs 9 the stock is trading at an attractive valuation of 2.4 times our estimated FY11 EBIDTA. Even the dividend yield on the stock currently stands as high as 20% (Rs 1.8 dividend declared in FY08 divided by current market price). Higher capacity in made-ups, better realisations and enhanced product mix position Eastern Silk very favourably to compete against its peers like Himatsingka Seide. However, with the forex losses and relatively muted growth prospects of the company in the wake of a global economic slowdown the outlook for the company continues to remain marred with uncertainties.

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