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US and European nations and t he c ost of which rate is 34% per annum during these years, which is
can be easily passed on to the buyers. a pretty steep target. It will require a well-defined
multi prong strategy to achieve this kind of growth in
Comparative valuations the current challenging environment
(FY09) Alok Industries Arvind Ltd.
Operating ratios
Higher capacity to aid industry growth
70
Revenues (Rs m) 31,367 27,867 Domestic sales
EBIDTA margin (%) 26.5% 11.5% Exports
50
(Rs bn)
Net margin (%) 2.4% -4.1%
Return ratios
Return on equity (%) 7.1% 0.0% 30
Return on assets (%) 1.4% 0.0%
Debt to equity (x) 3.0 2.3 10
Valuation ratios (FY12 E) FY07 FY10 FY12
Current price (Rs) 21 38 Source: Company’s September 09 report
Price to earnings (x) 3.6 10.1
Apparels and garments
Price to book value (x) 0.4 1.0
Price to net sales (x) 0.3 0.2 With the second largest spinning capacity in the
world after China, India commands 25% share of the
global cotton yarn market. However, it has less than
2% of the shuttle less looms (China 10%, Pakistan
Background 7%). This leaves a lot to be desired in t he weaving
category. However, the knitting sector is forecasted
A diversified manufacturer of home textiles, apparel
to maintain a growth of 5% to 6% in volume terms
fabrics, garments and polyester yarns, Alok
and 8% to 10% in value t erms over the next 4 t o 5
Industries evolved from an apparel trader in the late years.
1980s and diversified into home textiles, made ups
and garments in the last decade. The capacity
expansion will poise the company as the country’s
Share of global apparel trade
largest apparel fabric and bed sheet manufacturer FY09 US$ bn % share
and fourt h largest towel manufacturer. The company China 177 30.2
currently derives half of its revenues from the India 19 3.3
apparel division. The contribution of apparel to sales
Turkey 23 3.9
is expected to reduce from 52% in FY09 to 37% by
US 17 2.9
FY12. This is because of inc reased contribution from
home textile, garment and POY segments. With the Europe 184 31.6
commissioning of the spinning capacity and the Others 164 28.2
domestic retail initiative, Alok has achieved complete Total 584 100.1
vertical integration.
Source: Company’s September 09 report
manufacturing plants also moving out of the US. said geographies has started picking up, what is
E ven in case of E urope, manufacturing companies enthusing is the fact that with growing disposable
in Portugal have been struggling with many small incomes, the domestic market also offers significant
companies like Mundo Textil, JMA, La Meirinho on potential. While the shrinking capacities in the US
the brink of closure. This provides a huge are benign for Indian c ompanies, competition from
opportunity for Indian companies with a global low cost producers like China and Pakistan cannot
footprint to cater to thes e markets. be ignored. Based on these factors, we have
assigned a ‘Medium’ risk rating to the sector.
Sector: The growt h in the global apparel and home Long-term EPS growth: We expect the company's
textile industries is closely linked to the GDP growth net profit to grow at a CA GR of 30% between FY09
of the US and the European nations, in addition to to FY12. This is because of higher operating
the emerging economies. While the growth in the
Alok Industries Ltd. Page 4 of 9
23 December, 2009
margins due to better product mix and improved Debt to equity ratio: A highly leveraged business is
capacity utilisation. In a normal scenario, we the first to get hit during times of ec onomic
consider a compounded growth of over 20% in net downturn, as companies have to consistently pay
profits over a period of 3 to 5 years as healthy for a interest costs, despite lower profitability. We believe
company. As such, the rating assigned to t he stock that a debt to equity ratio of greater than 1 is a high-
on this factor is 5. risk proposition. Despit e the rights issue in FY10 and
conversion of FCCBs into shares expected in FY11,
Alok’s debt to equity ratio will remain above 2.0
Return on invested capital: ROIC is an important times until FY12. We have thus, assigned it a high
tool to assess a company's potential to be a quality risk rating of 1.
investment by determining how well the
management is able to allocate capital into its
operations for future growth. A ROIC of above 15% Interest coverage ratio: It is used to determine how
is considered decent for companies that are in an comfortably a company is plac ed in terms of
expansionary phase. Considering Alok's last five payment of interest on outstanding debt. The
years' average ROIC of 6%, which is lower than the interest coverage ratio is c alculated by dividing a
industry average, we have assigned a high-risk company 's earnings before int erest and taxes (EB IT)
rating of 3 to the stock on this parameter. by its interest expense for a given period. The lower
the ratio, the greater are the risks. Alok's interest
coverage ratio has been around 3 times over the
Dividend payout: Alok has had an average past five years, which we expect to be around 2
dividend payout of 16% over the last 5 years, which times over t he next three years. Thus, the rating
we expect to be maintained in the future. The rating assigned to the stock on this parameter is 2.
assigned is on this parameter is 4.
poised to capture the upsides in terms of margins. Moreover, t he higher profits are ploughed back for R& D to
achieve better product mix and improved quality.
Armed with sizeable capacity and strengthened overseas presence, the company is set to reap t he 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 that will be nearly double of that at the end of FY09. We expect thi s company’ s stock
currently trading at nearly half its FY09 book value to double over the next 3 years. We therefore
recommend investors to BUY the stock with a 3-year perspective.
Valuations
(Rs m) FY09 FY10 E FY11 E FY12 E
Total revenues (Rs m) 31,367 32,142 35,063 41,997
Net profit (Rs m) 741.0 1,482.0 2,045.4 3,574.0
Fully diluted EPS (Rs) 1.2 2.4 3.3 5.8
Price to earnings (x) 17.6 8.8 6.4 3.6
Market cap to sales (x) 0.4 0.4 0.4 0.3
Risk Matrix
Rating accorded
Rating# Weighted
Rating Weightage* (A)
(B) (A*B)
Sector Risk - Medium NA
Company - Strong NA
Performance parameters
Sales (US$ m) 5.0% 7 0.4
Operating margins (%) 5.0% 7 0.4
Long term EPS growth (%) 10.0% 5 0.5
Return on invested capital (%) 10.0% 3 0.3
Technical parameters
Dividend payout (%) 5.0% 4 0.2
Promoter holding (%) 10.0% 3 0.3
FII holding (%) 5.0% 4 0.2
Liquidity (Nos. '000) 10.0% 9 0.9
Safety parameters
Current ratio (x) 5.0% 9 0.5
Debt to equity ratio (x) 10.0% 1 0.1
Interest coverage ratio (x) 5.0% 2 0.1
P/E ratio (x) 20.0% 8 1.6
Final Rating# 62 5.4
# Rating has been assigned on the basis of the company's performance over the past fiv e years and expected performance over the next 3 to
5 years. Rating is on a scale of 1 to 10, w ith 1 indicating highest risk and 10 indicating lowest ris k.
* 'Weightage' indicates the relative importance in percentage terms of the parameter. For instance, for an investor, given all the performance
metrics, valuation (say P/E) should be the foremost criteria for buying/not buying stocks.
** The final rating has been arriv ed at by multiplying the rating/points given on each parameter w ith the respective weightage
Balance Sheet
Net fixed assets 62,846 67,144 66,341 63,729
Goodwill on consolidation 492 492 492 492
Investments 4,639 6,495 9,093 3,183
Current assets 30,826 28,186 27,681 34,197
Total assets 98,804 102,317 103,608 101,601
Important Notice: Equitymaster Agora Research Private Limited is an Independent Equity Research Company.
Disclosure: The author of this article does not hold shares in the recommended company. QIS does not hold shares in the
recommended company.
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