Alok Industries Ltd. Initiating coverage. Enhancing investment decisions

Transcription

1 Initiating coverage Enhancing investment decisions

2 Explanation of CRISIL Fundamental and Valuation (CFV) matrix The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP). CRISIL Fundamental Grade Assessment CRISIL Valuation Grade Assessment 5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP) 4/5 Superior fundamentals 4/5 Upside (10-25% from CMP) 3/5 Good fundamentals 3/5 Align (+-10% from CMP) 2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP) 1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP) Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. Disclaimer: This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. The Data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose. CRISIL Limited. All Rights Reserved.

3 Polaris Software Limited Alok Business Industries momentum remains Ltd intact June Weaving a success story Fundamental Grade 3/5 4/5 (Good (Strong fundamentals) Valuation Grade 5/5 4/5 (CMP has strong upside) upside) Industry Textiles, Information Apparel technology & Luxury Goods Alok Industries Ltd (Alok) has evolved from a trading business into one of India s largest integrated textiles player. The company is present across various verticals of the textile value chain - from yarn manufacturing to garmenting - thereby enabling it to offer a wide range of products. We assign Alok a fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India. Expansion to cater to growing domestic and international demand In the past few years, Alok has set up large-scale capacities in all divisions polyester yarn, apparel fabrics and home textiles - to cater to the global and domestic markets. Its investments have resulted in a diversified product mix and have also made the company a beneficiary of global vendor consolidation. Due to its sizeable capacities and presence across the entire value chain, Alok has become a preferred vendor for several international clients. A balancing act: Integration + optimum capacity utilisation Alok backward integrated into spinning to assure steady yarn supplies and to help mitigate raw material price volatility. Further, Alok has balanced capacity across the value chain, enabling it to operate at optimum utilisation. Exit from real estate business a monitorable Alok is planning to exit its real estate business completely; the proceeds from the sale will be used for repaying debt. The company has a high debt-equity ratio of 3.2x (as of FY11). We believe that the exit will lower the gearing to 2.3x by FY13. However, any delays or change of plans could hamper financial flexibility. Revenues to register a CAGR of 28%; margins to decline With most of the capacities already commissioned, we expect Alok s top line to grow at a CAGR of 28%, from Rs 75 bn FY11 to Rs 113 bn in FY13E. However, its EBITDA margins are likely to decline from 24.5% in FY11 to 23.6% in FY13E due to the increasing share of partial oriented yarn (POY) business. Valuations: Current market price has upside We have used the discounted cash flow method to value Alok and arrived at a fair value of Rs 31. At this value, the implied P/E multiples are 4.6 FY12E and 3.1 FY13E earnings. KEY FORECAST (Rs mn) FY09 FY010 FY11# FY12E FY13E Operating income 31,115 44,202 75,200 95, ,533 EBITDA 8,017 12,704 18,434 22,013 26,731 Adj PAT (834) 927 3,307 5,001 7,780 Adj EPS-Rs (4.2) EPS growth (%) (57.9) (58.9) Dividend yield (%) RoCE (%) RoE (%) (4.9) PE (x) (3.0) P/BV (x) EV/EBITDA (x) #FY11 numbers are based on abridged financials NM: Not meaningful; CMP: Current market price estimate July 26, 2011 Fair Value Rs 31.0 CMP Rs 24.8 CFV MATRIX KEY STOCK STATISTICS NIFTY/SENSEX 5680/18871 NSE/BSE ticker ALOKTEXT/ ALOKIND Face value (Rs per share) 10 Shares outstanding (mn) Market cap (Rs mn)/(us$ mn) 19,857/446 Enterprise value (Rs bn)/(us$ bn) 114 / week range (Rs) (H/L) 35/18 Beta 1.7 Free float (%) 71.7% Avg daily volumes (30-days) 22,903,061 Avg daily value (30-days) (Rs mn) SHAREHOLDING PATTERN 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Excellent Fundamentals Fundamental Grade PERFORMANCE VIS-À-VIS MARKET Returns 1-m 3-m 6-m 12-m Alok Industries 2% -4% -4% 25% NIFTY 4% -3% 0% 4% ANALYTICAL CONTACT Sudhir Nair (Head) Arun Vasu Vinay Chhawchharia Poor Fundamentals 0% 30.9% 4.9% Strong Downside 35.8% 36.3% Valuation Grade 40.9% 41.7% 21.5% 13.8% 13.4% 13.9% 16.9% 16.5% 28.4% 28.4% 28.4% 28.4% snair@crisil.com avasu@crisil.com Strong Upside Jun-10 Sep-10 Dec-10 Mar-11 Promoter FII DII Others vchhawchharia@crisil.com Client servicing desk clientservicing@crisil.com CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 1

4 Alok: Business environment Product / Segment Cotton yarn Apparel Fabric HT Polyester Revenue contribution (FY11) Revenue contribution (FY13) 9% 47% 15% 26% 1% 42% 14% 43% Product / service offering Company has 0.3 mn spindles, around 90% of the yarn is used for captive consumption Surplus yarn is sold in domestic/export market based upon the price realisation and government regulation In-house production provides cost advantage and assured supply for fabric production Alok is engaged in the manufacturing of apparel and knitted fabric It produces different fabrics such as twills, voiles, cambrics, poplins, satin, jacquard Alok produces a wide range of sheet sets, comforters, blankets, quilts, curtains, dobbies, jacquards, printed and embroidered of various thread counts and widths. Alok is also present in the terry towel business Alok offers DTY, FDY, dyed yarn and yarn used for technical purposes Presence Local and export International and domestic brands, domestic convertors 90% of production is exported to 70 countries (40%- USA, 28%- Asian who in turn sell to local countries, 14%- South and global brands America, 13%- Europe) Market position Largest player (single location) in Alok is one of the larger manufacturers of all the fragmented cotton yarn types of fabric industry in India Exports to Latin America and domestic weavers Alok is poised to become the second largest manufacturer of POY in India after RIL It accounted for ~1% of the total cotton yarn production in India in FY11. Vardhman Textiles, the largest player in the cotton yarn industry, accounted for 2.1% of the total cotton yarn production during the same period The company also has adequate processing capacity for fabric, giving it an edge over the unorganised processing and weaving industry With DTY and FDY capacity, Alok is moving towards value-added products Industry growth expectations CRISIL Research expects domestic cotton yarn demand to grow at a CAGR of 6% from FY11 to FY16 CRISIL Research expects domestic RMG and export demand to grow at a CAGR of 10% and 7% over FY11-FY16 CRISIL Research expects domestic HT and export demand to grow at a CAGR of 8-9% and 6-8% over FY11-FY16 CRISIL Research expects POY demand to grow at a CAGR of 8.5% over FY11- FY16 Sales growth (FY08- FY11 3-yr CAGR) Sales forecast (FY11- FY13 2-yr CAGR) 25% 49% 36% 50% -2% 17% 22% 60% Demand drivers Healthy growth expected in the domestic RMG and HT segments. Tight supply of cotton in the global markets will boost cotton yarn exports from India in the short term Demand from readymade garments in the domestic as well as export market, quality product and bulk quantity to also support demand of its products Revival in export demand from the US and EU, vendor consolidation in export market to benefit integrated players Demand from RMG, home textile and technical textile in domestic and export markets Margin drivers Key competitors Ability to pass on hikes in cotton prices, economies of scale, balanced capacity and presence into valueadded products (processes fabric, dyed yarn, FDY) POY business traditionally has been a low-margin business. Expansion of the POY business is expected to drag margins down; the retail business may impact margins marginally Vardhman Textiles, Welspun India, Reliance Industries, Abhishek Industries, Arvind Ltd, Indorama Synthetic Ltd, JBF industries CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 2

5 Grading Rationale Largest integrated textile manufacturer in India Alok, boasting a vintage of two decades, is India s leading textile manufacturer. It is present across the entire textile value chain - from spinning to manufacturing of home textiles and garments, and retailing. Alok s modern equipment, integrated plants and manufacturing flexibility coupled with an efficient product development team give it a competitive advantage over its India s largest integrated player with presence across the value chain peers. In addition, the product, customer and market diversification due to its integrated business model ensures risk mitigation and stability of earnings. Table 1: Balance capacity UNITS FY11 Post expansion Position Spinning (Tonnes) 69,040 80,000 Largest at single location HOME TEXTILE Processing mn. mtrs Largest player Weaving mn. mtrs Largest player Terry Towel (Tonnes) 6,700 13,400 Top 4 player APPAREL FABRICS Processing Woven mn. mtrs Largest player Weaving mn. mtrs rd largest player Knitting (Tonnes) 18,200 25,000 Top 5 player Knitting processing* (Tonnes) 18,200 25,000 - Yarn dyeing* (Tonnes) 5,000 5,000 - GARMENTS mn. pcs Top 15 player POLYESTER YARN DTY (Tonnes) 114, ,000 Top 3 player FDY (Tonnes) 65,700 65,700 Top 3 player POY (Tonnes) 200, ,000 Top 3 player Table 2: Export domestic break-up Rs mn FY06 FY07 FY08 FY09 FY10 FY11 CAGR Domestic % Export % Total % Export % 27.8% 35.2% 31.4% 35.4% 36.2% 34.7% Table 3: Diversified product portfolio FY06 FY07 FY08 FY09 FY10 FY11 CAGR Cotton yarn 0% 5% 14% 4% 8% 9% 62% Apparel fabric 51% 49% 41% 54% 45% 47% 32% Home textile 22% 18% 18% 17% 16% 15% 26% Polyester 26% 26% 23% 21% 28% 26% 35% Others 1.0% 1.6% 4.6% 4.7% 3.3% 2.7% 64% Total sales (Rs mn) % CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 3

6 Domestic market to continue to record robust growth The Indian textile industry recovered in FY10 following a recession-led slump in demand in FY09. Domestic consumption picked up and exports too recovered, albeit gradually, in H2FY10. The momentum was maintained in FY11 - the domestic textile industry grew 8.5% and exports grew 6.5%. Going forward, CRISIL Research expects the domestic market to grow at a robust 10% CAGR over the next five years, while exports are likely to log ~7% CAGR during the same period. Vendor consolidation in export market to benefit integrated players The domestic textile industry is characterised by a high level of fragmentation, which makes the supply of large volumes of assured quality fabrics a challenge. Being the largest and integrated player in the industry, Alok is able to supply consistent quality fabrics in large volumes to global and local manufacturers only due to sheer size. Vendor consolidation in the global retail industry will further benefit Alok. Major global retailers are attempting to reduce the number of vendors in order to lower their logistics and procurement costs. To illustrate, major retailers such as JCPenney and Walmart have reduced their sourcing locations by 30% between Large capacities to benefit Alok as customers opt for vendor consolidation 2004 and 2010 and aim to reduce more in the next few years. By doing so, the company is expecting to reduce the cost of its textile imports. Although, China is the major beneficiary of this shift, it is becoming more expensive primarily due to the rising Yuan and increase in manufacturing costs. India has abundant raw material supply; China though a larger producer of cotton is still a net importer. India also has good designing capabilities and can provide end-to-end textile solutions. Hence, it is increasingly becoming a preferred sourcing destination for global retailers. Segmental growth drives overall performance Alok, which is the largest player in woven and knitted apparel fabrics, and an established player in home textiles is further expanding its capacity in these divisions in order to cater to growing demand. Fabrics: Increasing presence to consolidate position The demand for cotton fabrics is expected to increase at a CAGR of 7% over FY12-FY16; growth will mainly be driven by domestic demand for cotton-based apparels and home textiles. A revival in world economies will boost textile exports as well. Under its apparel fabrics division, Alok has a total manufacturing capacity of 93 mn metres of woven fabric and 18,200 tpa of knitted fabric. Alok is planning to increase the capacity of woven fabric to 110 mn metres and of knitted fabric to 25,000 tpa by FY12. For further value addition, Alok has 105 mn metres processing capacity for woven fabric. It is expected to add another 21 mn metres by FY12. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 4

7 Alok also has a presence in the work wear fabric segment (20 mn meters per annum). Work wear is clothing worn in specialised areas like hospitals, defence, extraction etc. Alok produces different products under this category like clothing that are flame retardant, high visibility, oil resistant, anti-static finish and infra red finish. Alok has executed orders from military of different countries. Table 4: Apparel fabric - capacities FY08 FY09 FY10 FY11 FY12 E Apparel fabrics Units Processing woven mn. mtrs Weaving mn. mtrs Knits Tonnes Knits processing Tonnes Yarn dyeing Tonnes Table 5: Apparel fabric - competitive position FY10 Unit Alok Industries Ltd Arvind Mills Ltd Vardhman Textiles Ltd Woven fabric Capacity Looms Knitted fabric Capacity Machines Alok Industires capacity is for FY11 Home textiles: Large-scale operations to help compete with international players Alok manufactures a wide range of products such as bed sheets, duvets, comforters, blankets, quilts, curtains and towels. The home textiles division commands 16% of total sales. This division is also the largest export revenue generator for the company with 43% of total exports in FY11. Alok managed to increase its revenues from the division faster than total export growth in FY11. The home textile segment s export revenues grew by around 39% in FY11 as against India s home textile exports to the US, which grew by 12% for the same period. Table 6: Home textile revenues (Rs mn) FY06 FY07 FY08 FY09 FY10 FY11 CAGR Domestic % Export % Total % Alok intends to expand its wider width weaving capacity (for the bed linen segment) of 68 mn metres to 92 mn metres in FY12. Further, the company plans to add 22.5 mn metres to the existing fabric-processing capacity of 82.5 mn metres. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 5

8 Table 7: Home textile capacities FY08 FY09 FY10 FY11 FY12 E Home textile Units Processing mn mtrs Weaving mn mtrs Terry towel Tonnes - 6,700 6,700 6,700 13,400 Table 8: Home textiles - competitive position FY10 Alok Industries Welspun India Ltd Indo Count Ind Ltd Installed capacity Mn mtrs Table 9: Terry towel - competitive position FY10 Alok Industries Welspun India Ltd Abhishek Industries Installed capacity Tonnes 6,700 41,500 30,000 While Alok has largely focused on the bed linen market, it has also ventured into terry towels in the home textiles segment by setting up a 6,700 tpa plant. It plans to add another 6,700 tpa, which will take its total capacity to 13,400 tpa. Increased cotton yarn capacities will give better control over costs and assured supply Alok increased its spinning capacity from 150,912 spindles in FY08 to 251,712 spindles in FY09. The company has increased this further to 343,840 spindles in the current fiscal. Bulk of the manufactured yarn caters to in-house production of cotton fabrics and made-ups, while the balance is sold locally and exported. Alok has about 1% of the total industry capacity, and is among the top five Alok will have better control over costs as compared to standalone weavers spinners in the country. Table 10: Cotton yarn capacities FY07 FY08 FY09 FY10 FY11 FY12 E Cotton yarn Units Yarn Tonnes Spindles Numbers Table 11: Cotton yarn - Competitive position Market share (FY10) by capacity % Alok Industries Vardhman Textiles Nahar Spinning Mills Super Spinning Ltd Spindles Market share by capacity % Alok Industires capacity is for FY11 Benefitting from pick-up in cotton yarn demand Alok stands to gain from the recent pick-up in demand for cotton yarn, which declined by ~2.8% during the FY09 economic slowdown; post captive consumption, the company sells yarn in the open market. Robust demand in the domestic market and gradual revival in export markets are largely responsible CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 6

9 for the turnaround. After 6% growth in FY10, and around 10% in FY11, demand for cotton yarn is expected to grow at 6% CAGR during FY12-FY16. The domestic market, accounting for 56% of the total yarn demand in FY11, has been driving overall demand over the years and will continue to be the main driver for the next five years. POY business marks entry into commodity business Alok had backward integrated into the POY business to control costs for its texturised yarn business and to be assured of raw material supplies. It expanded its texturising capacities from 77,000 tpa in FY07 to 114,000 tpa by FY11, and POY capcity from 54,000 tpa in FY07 to 200,000 tpa in FY11. Over the next five years, demand for PFY or texturised yarn is expected to grow at a CAGR of 9-10%. Demand for PFY will be driven by rising consumption of noncotton fabrics used in technical and home textiles, besides being supported by rising consumption of synthetic fabrics. The higher consumption of synthetic fabrics is supported by high cotton and cotton yarn prices, and use of polyester in fabrics. Currently, the POY segment is dominated by Reliance Industries Ltd that accounted for 40% of the domestic installed capacity, followed by Indo Rama Synthetics with 13% in FY11. With the expected capacity additions of 300,000 tpa in FY12, Alok is poised to become the second largest player after RIL. Currently, the company consumes bulk of its POY production for in-house texturising and for FDY production. Going forward, with expansion in POY, the company will sell more than 50% of its POY production in market. Consequently, the commoditised POY business is expected to contribute 40-45% of the total revenues in FY13, resulting in improvement of asset turnover and RoCE, however company s overall EBITDA margins would decline from current level. Table 12: POY capacities POLYESTER YARN FY07 FY08 FY09 FY10 FY11 FY12E DTY (sub capacity) Tonnes FDY (sub capacity) Tonnes POY Tonnes Table 13: POY - Competitive position POY (FY10) Reliance Industries Alok Industries Indo Rama Synthetics Garden Silk Mills J B F Industries Capacity Tonne 822, , , , ,200 Capacity share Per cent CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 7

10 Intentions to exit from non-core realty business a positive but challenges remain Alok ventured into the real estate sector through its 100% subsidiary, Alok Infrastructure Pvt Ltd, in FY07. So far, it has completed three real estate deals. The foray into real estate was to capitalise on the possible opportunities of capital profits and/or perpetual lease rental income. It acquired two prime commercial properties in Lower Parel, Mumbai i.e. one tower in Peninsula Business Park admeasuring 641,580 sq. ft. and Ashford Centre admeasuring 60,000 sq. ft. The company also entered into a 50% joint venture to develop the residential project Ashford Royale at Nahur, Mumbai. The total committed investment in these projects was about Rs 15,000 mn to be financed with a mix of debt and equity. In January 2010, the company announced its intentions to exit this business completely and gave mandate to Cushman & Wakefield of the US to execute the same. The proceeds from the sale shall be used for repayment of debt in an effort to reduce interest cost. Of the 60,000 sq. ft. space (eight floors) smaller commercial space, the company has sold three floors (21,500 sq. ft.) at the rate of Rs 22,000/sq.ft., the company is in the process of selling one more floor and the remaining four floors would be consumed by Alok. For the Peninsula business park property (20 floors), the company has been able to lease out 5 floors and is in the process of selling the property. For our projections, we are assuming Alok will be able to sell this property in FY12. If the company is unable to sell the property, it will have an adverse impact on its financial flexibility. CRISIL Research analysis suggests that though prices in Lower Parel are higher than Alok s investment value, excess supply and lower demand for commercial real estate will make it difficult for Alok to sell its property. The third project is in Nahur, Mumbai (Maharashtra) where the company is in joint venture with Ashford Housing Corporation. It plans to construct residential towers on the 7 acre land it has purchased. We have not factored in the impact of the same in our projections. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 8

11 Figure 1: Structure of the real estate business Alok Industries Ltd Realty Alok Infrastructure Pvt Ltd & (100% Subsidiary) Alok Realtors Pvt Ltd (100% Subsidiary) Peninsula Business park Ashford Royale (50% JV) Nahur Residential Project Alok s retail plans a concern Alok also has a presence in the retail sector, through its wholly-owned subsidiary Alok H&A Ltd, which manages its domestic retail brand H&A at 291 outlets (as of March 31, 2011). The company expects to reach 500 stores by next two years. Alok forayed into retailing in FY07 for front-ending its products in the domestic market and to take advantage of the growing organised retail Alok s retail venture will create demand for its textile products sector. Although the prospects of value retailing in India are good and Alok has competitive advantage over other retailers in the form of a) integrated textile manufacturing capacity and b) wide textile experience, its growth plans appear to be aggressive in the medium term. Competition in domestic retail industry has intensified in recent years leading to major retail players booking thin margins. For example, PAT margins for typical value retailers merely ranges between 1% and 3%. Under a competitive scenario and thin margins, we do not see the domestic retail segment adding significant revenue or profitability to the company. Nevertheless, the cash-and-carry business contributes less than 1% to the company s consolidated top line and hence no major impact is expected in the operations of Alok. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 9

12 Financial Outlook The commissioning of capacity in FY11 and higher realisations in fabrics, home textile, polyester and cotton yarn resulted in 67% growth in revenues over FY10. Going forward, with capacity expansion in polyester, apparel fabric and home textile divisions, revenues are expected to grow by 30% in FY12 over FY11. Contribution from the polyester business is expected to go up to 40% in FY12 from 26%. Figure 2: Revenue and growth (Rs mn) 120, ,000 80,000 60,000 40,000 20, % 42% 36% 25% 27% 19% 22,899 31,115 44,202 75,200 95, ,533 FY08 FY09 FY10 FY11E FY12E FY13E 80% 70% 60% 50% 40% 30% 20% 10% 0% Revenue Revenue Growth(RHS) estimate Figure 3: EBITDA and EBITDA margin (Rs mn) 30,000 35% 25,000 20, % 25.8% 28.7% 24.5% 23.0% 23.5% 30% 25% 20% 15,000 15% 10,000 10% 5, ,391 8,017 12,704 18,434 22,013 26,731 FY08 FY09 FY10 FY11E FY12E FY13E 5% 0% EBITDA EBITDA Margin(RHS) estimate EBIDTA margin is expected to decline from 24.5% in FY11 to 23% in FY12. This decline is due to higher contribution from the polyester business which has relatively lower margins (18-20% EBIDTA margin) vis-à -vis other products. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 10

13 Figure 4:PAT and PAT margin (Rs mn) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, ,000-2, % 5.2% 4.4% 3.2% 2.1% -2.7% ,307 5,001 7,780 FY08 FY09 FY10 FY11E FY12E FY13E 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% PAT PAT Margin(RHS) estimate Figure 5: RoCE and RoE (%) FY08 FY09 FY10 FY11E FY12E FY13E RoE Roce estimate Figure 6: Debt-equity (times) Debt-equity ratio to improve with exit from real estate, healthy cash flow and limited capex in next two years FY08 FY09 FY10 FY11E FY12E FY13E Gearing estimate CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 11

14 Key Risks Volatile raw material prices The company derived around 26% of revenue from polyester business in FY11. With polyester segment expanding in the next two years, revenue is expected to increase to around 40%. Purified terephthalic acid (PTA) and mono ethylene glycol (MEG) are two key raw materials for polyester manufacturing, which account for ~75% of the total operating costs. Historically, PTA and MEG prices have remained volatile and are currently on an upward trend following a rise in crude oil prices (PTA and MEG are crude oil derivatives). PTA prices are directly linked to naphtha prices, while MEG prices are linked to ethylene prices, both of which are volatile in nature. Hence, the company s EBITDA margins are sensitive to the movement in raw material prices especially in a down cycle. Competition in the fragmented fabric segment Alok operates in a highly fragmented fabric industry with competition from both organised and unorganised players. The entry barriers in the fabric market are limited and the branded segment business has seen the launch of an array of brands vying for attention. Additionally, in order to maintain a significant competitive edge, the company will also have to invest in research and development, and constantly upgrade production facilities. These factors could put a strain on its margins. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 12

15 Management Evaluation CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance. Well-experienced management Alok has a well-experienced management headed by Mr Ashok Jiwrajka along with his two brothers Mr Dilip Jiwrajka and Mr Surendra Jiwrajka. All the three brothers have more than two decades of experience in the textiles business, and have played an important role in growing Alok from a trading company into the largest integrated textile player in India. CRISIL Research believes that Alok s growth is driven by management s strategic prowess - the ability to spot business opportunities arising due to opening up of quotas and ensuring continuous product innovation which has Management: experienced and aggressive enabled the company to be a leader in the domestic textile business. The management has also been able to develop strong relationships with leading global vendors. Strong second level of management The second level of management (the sons of the three promoters) is currently being groomed. Further, they are ably supported by key professionals at the middle management level, who have been with the company for a relatively longer duration. Venture into other businesses CRISIL Research believes that the management s foray into the real estate business was opportunistic with no clear roadmap. However, on the retail business front, the management has laid down specific business plans. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 13

16 Corporate Governance CRISIL s fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board composition, typical board processes, disclosure standards, and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a company s corporate governance. Alok s board represents a fair mix of experienced people with the presence of a large number of nominee directors of various financial institutions namely, IFCI, IDBI, EXIM bank and LIC. Overall, Alok s corporate governance conforms to regulatory requirements supported by reasonably good board practices and an independent board. Corporate governance practices at Alok conform to the regulatory requirement Board composition Alok s board consists of 12 members, eight of whom are independent directors, which is in line with the requirements under Clause 49 of SEBI s listing guidelines. The board includes several nominee independent directors; given the background of the directors, we believe the board is well experienced. The audit committee is chaired by an independent director. Further, the position of the chairman is independent from that of the managing director/ceo. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 14

17 Valuation Grading Grade: 4/5 We have used the DCF (discounted cash flow) method to value the consolidated cash flows of Alok s textile, retail and infrastructure businesses. Based on our DCF approach, we have arrived at a fair value of Rs 31 per share. At this fair value, the implied P/E multiples are 4.9x FY12E and 3.1x FY13E EPS. Consequently, we initiate coverage on Alok with a valuation grade of 4/5 implying that the CMP (Rs 24.8 as on July 26, 2011) has upside from the current levels. Key DCF assumptions We have considered the discounted value of the firm s estimated free cash flow from FY13 to FY22. We have assumed maintenance capex of Rs 8,000 mn in the terminal year. We have assumed a terminal growth rate of 3% beyond the explicit forecast period. WACC computation FY13-22 Terminal value Cost of equity 18.8% 18.8% Cost of debt (post tax) 5.4% 6.7% WACC 8.3% 14.0% Terminal growth rate 3.00% Sensitivity analysis to terminal WACC and terminal growth rate Terminal Growth rate Terminal WACC 1.0% 2.0% 3.0% 4.0% 5.0% 12.0% % % % % Source: CRISIL Research estimates CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 15

18 One-year forward P/E band (Rs) Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Alok 3x 3.5x 4x 4.5x 5x Source: NSE, Company, CRISIL Research One-year forward EV/EBITDA band (Rs mn) 180, , , , ,000 80,000 60,000 40,000 20,000 0 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 EV 5x 6x 7x 7x Source: NSE, Company, CRISIL Research P/E premium / discount to NIFTY 0% -10% -20% -30% -40% P/E movement (Times) std dev -50% -60% -70% std dev -80% 0 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Premium/Discount to NIFTY Median premium/discount to NIFTY 1yr Fwd PE (x) Median PE Source: NSE, Company, CRISIL Research Source: NSE, Company, CRISIL Research CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 16

19 Company Overview Alok, established in 1986 as a private limited company, commenced operations with yarn texturising. It has subsequently grown into a multi-divisional textiles company, engaged in weaving, knitting, processing home textiles and readymade garments. The company has a presence across the textile value chain, from spinning to home textiles, garments and retailing Key milestones Alok has one of the largest integrated textile capacities in India FY89 FY91 FY94 FY95 FY96 FY97 FY98 FY99 FY01 FY02 FY03 FY04 FY05 FY06 FY10 FY11 Set up manufacturing facilities for texturising at Silvassa (with one texturising machine) Commenced weaving operation at Bhiwandi, Thane Expansion of weaving capacity (50 Cimmco looms) at Bhiwandi and texturising capacity (three texturising machines) at Silvassa Financial and technical collaboration with Albert Grabher Gesellshaft GmbH & Co of Austria for manufacturing embroidered products through a JV, Grabal Alok Impex Ltd Set up knitting division at Silvassa (eight machines) and a state-of-the-art eco-friendly process house at Navi Mumbai (three stenters) Expansion of texturising capacity (five texturising machines) at Silvassa Modernisation and expansion of weaving (24 Sulzer Projectile looms) at Silvassa Expansion of weaving (28 Sulzer Projectile Looms) and knitting capacities (20 machines) at Silvassa Undertook expansion of weaving and processing capacities under TUFS at an aggregate cost of Rs1,900 mn Completion of modernisation and expansion of weaving project (88 air jet /Rapier Sulzer Looms) at Silvassa Expansion of knitting capacities (28 machines) at Silvassa Completion of modernisation and expansion of processing project at Vapi (two stenters) Expansion of texturising capacity at Silvassa (10 machines) Set up garment unit at Navi Mumbai (100 stitching machines) Expansion of texturising capacity at Silvassa (30 machines) Expansion of knitting capacity at Silvassa (40 machines) Expansion of weaving capacity at Silvassa (170 air jet/rapier Looms) Foray into home textiles (bed sheets) for direct exports Expansion of weaving capacity at Silvassa (170 Air jet/rapier Looms) Completion of wider width weaving and processing project Set up new plant for processing of knitted fabric at Vapi and a POY plant at Silvassa Successfully completed rights issue of 400 mn shares at 2075 :1 at Rs 11 per share The company has shown intention of getting out of the real estate business Source: Company It is also present across various verticals in the textiles value chain. These include apparel fabrics (woven and knitted), cotton fabric and cotton yarn, made-ups (bed linen) and garments. The company is also involved in the texturised yarn business, and supplies POY to standalone weavers in and around Silvassa. It has separate in-house modern facilities for the spinning, yarn processing, texturising, weaving, knitting, processing, garments and made-ups segments. Since FY04, the company has embarked on a huge capital expenditure programme to add capacities and integrate into producing cotton yarn and POY. In FY07, the company acquired an 80% stake in Mileta International, a Czechbased fabric maker. CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 17

20 Annexure: Financials Income statement Balance Sheet (Rs mn) FY09 FY10 FY11# FY12E FY13E (Rs mn) FY09 FY10 FY11# FY12E FY13E Operating income 31,115 44,202 75,200 95, ,533 Liabilities EBITDA 8,017 12,704 18,434 22,013 26,731 Equity share capital 1,970 7,878 7,878 7,878 7,878 EBITDA margin 25.8% 28.7% 24.5% 23.0% 23.5% Reserves 17,280 19,482 22,807 27,490 35,412 Depreciation 2,402 3,718 5,874 6,502 7,089 Minorities EBIT 5,616 8,986 12,560 15,511 19,642 Net worth 19,250 27,360 30,685 35,368 43,290 Interest 5,489 6,812 7,704 8,349 8,258 Convertible debt Operating PBT 127 2,174 4,856 7,162 11,384 Other debt 69,565 96, , ,726 99,726 Other income Total debt 69,565 96, , ,726 99,726 Exceptional inc/(exp) 1, (88) 602 Deferred tax liability (net) 3,064 4,030 4,778 5,024 5,216 PBT 1,893 2,657 5,667 7,376 12,213 Total liabilities 91, , , , ,232 Tax provision 1,058 1,286 1,972 2,463 3,832 Assets Minority interest Net fixed assets 38,586 62,703 67,829 76,669 72,580 PAT (Reported) 834 1,371 3,695 4,913 8,381 Capital WIP 23,770 16,914 15, Less: Exceptionals 1, (88) 602 Total fixed assets 62,356 79,617 83,743 77,584 73,494 Adjusted PAT (834) 927 3,307 5,001 7,780 Investments 4,233 3,812 3,812 3,812 3, % 2.1% 4.4% 5.2% 6.9% Current assets Ratios Inventory 10,687 15,678 24,311 30,881 35,771 FY09 FY10 FY11# FY12E FY13E Sundry debtors 9,305 11,561 20,076 25,501 30,310 Growth Loans and advances 6,320 8,526 15,040 19,104 21,571 Operating income (%) Cash & bank balance 4,274 14,107 10,059 7,588 4,939 EBITDA (%) Marketable securities Adj PAT (%) (214.6) (211.1) Total current assets 31,113 50,332 69,947 83,535 93,051 Adj EPS (%) (208.9) (127.8) Total current liabilities 6,805 7,699 15,366 19,865 24,178 Net current assets 24,308 42,633 54,581 63,670 68,873 Profitability Intangibles/Misc. expenditure 983 2,053 2,053 2,053 2,053 EBITDA margin (%) Total assets 91, , , , ,232 Adj PAT Margin (%) (2.7) RoE (%) (4.9) Cash flow RoCE (%) (Rs mn) FY09 FY10 FY11# FY12E FY13E RoIC (%) Pre-tax profit 224 2,213 5,279 7,464 11,612 Total tax paid (97) (321) (1,224) (2,217) (3,640) Valuations Depreciation 2,402 3,718 5,874 6,502 7,089 Price-earnings (x) (3.0) Working capital changes (4,844) (8,559) (15,996) (11,560) (7,852) Price-book (x) Net cash from operations (2,315) (2,948) (6,066) 190 7,208 EV/EBITDA (x) Cash from investments EV/Sales (x) Capital expenditure (24,160) (22,050) (10,000) (343) (3,000) Dividend payout ratio (%) Investments and others (3,069) Dividend yield (%) Net cash from investments (27,229) (21,563) (10,000) (343) (3,000) Cash from financing B/S ratios Equity raised/(repaid) 1,000 8, Inventory days Debt raised/(repaid) 11,225 27,161 12,000 (2,000) (7,000) Creditors days Dividend (incl. tax) (173) (230) (316) (230) (459) Debtor days Others (incl extraordinaries) 4,715 (1,330) 335 (88) 602 Working capital days Net cash from financing 16,767 34,344 12,019 (2,317) (6,858) Gross asset turnover (x) Change in cash position (12,777) 9,832 (4,048) (2,471) (2,649) Net asset turnover (x) Closing cash 4,274 14,107 10,059 7,588 4,939 Sales/operating assets (x) Current ratio (x) Quarterly financials Debt-equity (x) (Rs mn) Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Net debt/equity (x) Net sales 1,471 1,099 1,452 1,613 2,203 Interest coverage Change (q-o-q) 36% -25% 32% 11% 37% EBITDA Per share Change (q-o-q) 33% -24% 27% 12% 20% FY09 FY10 FY11# FY12E FY13E EBITDA margin 29.1% 29.7% 28.6% 28.9% 25.3% Adj EPS (Rs) (4.2) PAT CEPS Adj PAT Book value Change (q-o-q) 64% -51% 72% 13% 77% Dividend (Rs) Adj PAT margin 6.5% 4.2% 5.5% 5.6% 7.3% Actual o/s shares (mn) Adj EPS #FY11 numbers are based on abridged financials CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 18

21 CRISIL Research Team Senior Director Mukesh Agarwal +91 (22) Analytical Contacts Tarun Bhatia Director, Capital Markets +91 (22) Prasad Koparkar Head, Industry & Customised Research +91 (22) Chetan Majithia Head, Equities +91 (22) Sudhir Nair Head, Equities +91 (22) Jiju Vidyadharan Head, Funds & Fixed Income Research +91 (22) Ajay D'Souza Head, Industry Research +91 (22) Ajay Srinivasan Head, Industry Research +91 (22) Sridhar C Head, Industry Research +91 (22) sridharc@crisil.com Manoj Mohta Head, Customised Research +91 (22) mmohta@crisil.com Business Development Vinaya Dongre Head, Industry & Customised Research +91 (22) vdongre@crisil.com Ashish Sethi Head, Capital Markets +91 (22) asethi@crisil.com CRISIL s Equity Offerings The Equity Group at CRISIL Research provides a wide range of services including: Independent Equity Research IPO Grading White Labelled Research Valuation on companies for use of Institutional Investors, Asset Managers, Corporate Other services by the Research group include Funds & Fixed Income Research Mutual fund rankings Wealth Tracking and Financial Planning tools for asset managers, wealth managers and IFAs Valuation for all debt instruments Developing and maintaining debt and hybrid indices Consultancy and research support to retirement funds Industry & Customized Research Provide comprehensive research coverage across 65 sectors Customised research on market sizing, demand modelling and entry strategies Customised research content for Information Memorandum and Offer Documents CRISIL Limited. All Rights Reserved.

22 About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. About CRISIL Research CRISIL Research is the country s largest independent and integrated research house with strong domain expertise on Indian economy, industries and capital markets. We leverage our unique research platform and capabilities to deliver superior perspectives and insights to over 1200 domestic and global clients, through a range of research reports, analytical tools, subscription products and customised solutions. To know more about CRISIL IER, please contact our team members: Vinaya Dongre Head, Business Development vdongre@crisil.com I Phone : Ashish Sethi Head, Business Development asethi@crisil.com I Phone : Sagar Sawarkar Senior Manager, Business Development ssawarkar@crisil.com I Phone : Regional Contacts: Ahmedabad / Mumbai / Pune Vishal Shah - Manager, Business Development vishah@crisil.com I Phone : Bengaluru / Chennai Anand Krishnamoorthy - Manager, Business Development ankrishnamoorthy@crisil.com I Phone : Hyderabad Kaliprasad Ponnuru - Manager, Business Development kponnuru@crisil.com I Phone : Kolkata / Delhi Priyanka Agarwal - Manager, Business Development priyagarwal@crisil.com I Phone : Head Office: CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai Phone : CRISIL Limited. All Rights Reserved. Web: Download reports from: