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Eastern Silk: Conference call excerpts - Views on News from Equitymaster

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Eastern Silk: Conference call excerpts

Nov 19, 2008

The demand for textile exports from India has taken a sharp hit in the past quarter (July-September 2008) with the major export destinations undergoing severe economic stress. The prospects of several companies in this sector have therefore undergone an unforeseen transformation and warrant a revision in outlook. While the baggage of unutilised capacity and workforce is something that the companies are seasoned to deal with, absolute lack of visibility on future volume growth and falling realisations make this one of the hardest hit sectors in times of slowdown.

Companies like Eastern Silk that do not face competition from local unorganised players, derive superior relaisations due to their value added products, have a low leverage ratio and are relatively hedged on the currency risks; seem to be best positioned in the sector to withstand any storm. The company’s 1HFY09 results read here also were not very distant from our estimates.

However, our interaction with the management on the current global scenario and its impact on Eastern Silk’s business highlighted some uncertainties with regard to its near term growth prospects. Hence the same warranted a more conservative estimate for the stock.

Following are the key excerpts of the conference call with the company.

Order book: Having clocked sales to tune of Rs 2.8 bn in the first two quarters of this fiscal, the company has another Rs 1 bn worth of orders to be supplied until the end of the third quarter. Having said that, the third quarter also happens to be the most lucrative, being a festival season in the Western countries. The company could not provide any details on prospects of accretion to the order book in the subsequent quarters.

Realisations: 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 has managed to increase its average realisation in fabrics to US$ 16.5 per metre in 1HFY09 (from US$ 14.6 per metre in FY07) due to the value addition and resisted the pressure of slowdown. However, in made-ups, which the company started manufacturing in-house from FY08 onwards, realisations have fallen from US$ 22.9 per piece in FY07 to US$ 16.3 per piece in 1HFY09.

Going forward, the company sees the pressure on realisations getting more severe as volume growth becomes difficult to come by. As a result, we have reduced our estimate with regard to capacity utilisation in the made up segment (43% in FY08) and overall EBIDTA margins (19.4% in 1HFY09).

Forex risks: 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.

Capital expansion: The company had Rs 1.2 bn of debt in its books at the end of September 2008 (debt to equity of 0.3 times) and will spend Rs 600 m on capex this year for value addition. While the leverage ratio is not an issue, the higher cost of debt can drain the company’s already flagging bottomline.

Dividend: Eastern Silk has had an attractive dividend payout history (4 year average of 12%) and paid dividend of Rs 4.5 per share for FY08. While it did not comment on the possible dividend for FY09, at the current payout ratio, investors can expect to receive dividend of 60 paise per share (post stock split), which would offer them a yield of 6.7% on the current price.

What to expect?
Given the revision in our estimates for the company we need to revise our FY11 estimated target price for the stock to Rs 33 per share, which can offer investors an upside of 72% (CAGR) from the current levels. While the relatively muted growth prospects of the company in the wake of a global economic slowdown cannot be denied, we believe that the company continues to be better placed than most other Indian textile companies.

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