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Alok Ind.: Exports surge ahead - Views on News from Equitymaster
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Alok Ind.: Exports surge ahead
Nov 12, 2010

Alok Industries declared its 2QFY11 results. The company grew its sales and profits by 49% YoY and 40% YoY respectively. Here is the analysis of the results.

Performance summary
  • Net sales grow by 49% YoY and 45% YoY during 2QFY11 and 1HFY11 respectively.
  • Improved volumes and higher realizations help EBIDTA margins move up marginally to 29.2% during 1HFY11.
  • 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.
  • Long term debt to equity ratio marginally lower at 1.8 times at the end of 1HFY11 as compared to 2.3 times at the end of 1HFY10.

Standalone financial performance
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales     9,747    14,515 48.9%   17,610   25,505 44.8%
Expenditure     6,830    10,346 51.5%   12,539   18,067 44.1%
Operating profit (EBDITA)     2,917      4,169 42.9%     5,071     7,438 46.7%
EBDITA margin (%) 29.9% 28.7%   28.8% 29.2%  
Other income    8   12 49.4%  12  12 0.8%
Depreciation        846      1,200 41.8%     1,630     2,194 34.6%
Interest     1,221      1,782 45.9%     2,107     3,352 59.1%
Profit before tax        858      1,199 39.7%     1,346     1,904 41.5%
Tax        288 401 39.1%        456        641 40.6%
Effective tax rate 34% 33%   34% 34%  
Profit after tax/(loss)        570 798 40.0%        890     1,263 41.9%
Net profit margin (%) 5.8% 5.5%   5.1% 5.0%  
No. of shares (m)             787.8  
Diluted earnings per share (Rs)*         3.6  
Price to earnings ratio (x)         9.4  
(*On a trailing 12-month basis)

What has driven performance in 2QFY11?
  • Making a strong comeback in the export markets, Alok Industries did reap the benefits of some recovery in demand for home textiles and garments overseas. While the domestic sales grew by 28% YoY in 1HFY11, the export revenues grew by 78% YoY. While the company’s apparel and garment business locked in sales growth of 52% YoY and 31% YoY respectively during the half year period, the more stable home textile business grew 47% 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.

    Apparels derive volume benefit...
    Rs m 1HFY10 Share 1HFY11 Share Change
    Apparel Fabrics 7,567 45.9% 11,504 48.1% 52.0%
    Woven 6,888 41.7% 10,488 43.9% 52.3%
    Knit    679 4.1% 1,016 4.2% 49.6%
    Home textiles 3,120 18.9% 4,597 19.2% 47.3%
    Garment    729 4.4%    954 4.0% 30.9%
    POY 5,085 30.8% 6,854 28.7% 34.8%
    Total 16,501   23,909   44.9%

  • 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.

  • The company’s retailing business - `Homes and Apparels (H&A) chain of stores - opened an additional 25 shops during the second quarter; taking the total number to 251. The company’s target is to have 400 stores operational by March 2011.

  • 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 1HFY11 with the proceeds of QIP and rights issues in FY10, the same continues to remain high. The long term debt to equity ratio was nearly 2.3 times at the end of 1HFY11.

    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 34, the stock is trading at an EV/EBIDTA multiple of 10 times our FY12 estimates. The company’s operating performance in FY11 has been in line with our 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 from the current levels. While the very long term prospects of the company continue to remain attractive especially if it manages to reduce debt with higher cash flows and sale of real estate assets, most of the near term upsides seem to be already priced in.

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