Indo Count Industries Ltd (ICIL)

Transcription

1 INITIATING COVERAGE PRIVATE CLIENT RESEARCH MARCH 10, 2017 Pankaj Kumar Indo Count Industries Ltd (ICIL) PRICE: RS.170 RECOMMENDATION: BUY TARGET PRICE: RS.225 FY19E PE: 9.0X Stock details BSE code : NSE code : ICIL Market cap (Rs bn) : 33.5 Free float (%) : wk Hi/Lo (Rs) : 216.3/134.6 Avg daily volume (nos) : Shares (o/s) (mn) : Summary table (Rs mn) FY17E FY18E FY19E Revenue Growth (%) EBITDA EBITDA margin (%) PBT PAT EPS EPS Growth(%) CEPS (Rs) BV (Rs/share) Dividend / share (Rs) ROE (%) ROCE (%) Net cash (debt) (2076) (732) 128 NW Capital (Days) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) Source: Company, Kotak Securities - Private Client Research Shareholding pattern DII 3% Others 23% FII 15% Source: Capitaline Promoter 59% One-year performance (Rel to Sensex) Indo Count Industries Ltd (ICIL) is a leading player in the global home textiles and apparel industry, focusing on bedding products. The company is focusing on growing its home textiles business through asset light model. Its asset light strategy resulted in asset turnover (ATO) of 2.8x as against 1x for its peers. With high ATO and strong margins, the company is operating at high RoCE of 43% in FY16, which is best amongst its peers. ICIL is focused on growing its business through niche value added segment which includes fashion, utility and institutional bedding in the US market with market size of USD 10 bn. We believe that the slow growth in the current year was due to some consolidation in the business and certain seasonal factors and is temporary nature. We expect, the revenue growth to be back on track in future with 15% CAGR in FY17E-19E. Based on FY18E and FY19E EPS of Rs 16.3 and Rs 18.8, the stock is trading at attractive PE of 10.4x and 9.0x respectively. We initiate coverage on the stock with Buy rating and target price of Rs 225, by assigning PE of 12x to FY19E earnings. Key investment argument Asset light model with high returns ratios. ICIL follows asset light business model with majority of its yarn and fabric requirement being met through job work or bought-out and a small portion being presently manufactured in house. As a result, the asset turnover (ATO) of ICIL is 2.8x as against 1x its peers. With high ATO and strong margins, the company is operating at high RoCE of 43% in FY16 which is best amongst its peers. The company would continue to follow asset light strategy with 70% outsourcing even after expansion of its weavings facility, which is planned to meet the requirement of specialized raw materials for niche products. Differentiating from others by entering in niche value added products segment. ICIL has diversified its business by entering into niche value added segment which includes fashion, utility and institutional bedding in US market. There is huge opportunity to grow in the segment as the total market size for these segments is USD 10 bn in US. The penetration of Indian players is at a relatively low level at 7-8% whereas China still holds around 85% of market share. Any shift in the market from China to India, as what happened in bedding segment will result in huge opportunity for ICIL. The revenue contribution from these new segments has already touched 10% mark and ICIL targets to increase it to 30% in the next 3-4 years. This will have positive impact on its EBITDA margins in the longer run. Increasing capacity to enhance capability and support future growth. ICIL is expanding its capacity in two-phases in order to cater to the strong demand from home textile products in a longer run. It is expanding its facilities to cater to new segments such as fashion bedding, utility bedding and institutional bedding. The company plans to spend total Rs 4.75 bn for the capex in two phases. This would be funded through mix of debt of Rs 2.25 bn and balance through internal accruals. The capex would add Rs 6-7 bn to its topline in next 3-4 years. Despite this capex, ICIL would continue to follow asset light strategy with 70% outsourcing model. Source: Capitaline Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

2 Indian textiles exports is expected to grow at 15% CAGR. The size of Indian textiles industry is at USD 108 bn of which 37% is exports and 63% is domestic. The size of the industry is expected to be USD 223 bn by 2021, with 12.8% CAGR in The size of Indian exports was at USD 35.4 bn in 2015 and had grown at a CAGR of 8.2% in Indian textiles exports are expected to grow at 15% CAGR in to USD 82 bn. (source: IBEF). This growth will be driven by India's strengths and advantages particularly in cotton based textile products, among other textile categories. Financial Outlook We expect company's sales and PAT to grow at a CAGR of 10% and 12% respectively in FY16-19E. This is based on 9.5% CAGR in volume and 1.3% CAGR in realization in home textiles segment and 6.5% CAGR in yarn business primarily led by realization growth in the segment in FY16-19E. We expect revenue growth in FY17E to be at 2% by factoring in certain one-offs in a year and expect revival in FY18 and FY19 with 14% and 16% yoy growth respectively. Valuation Based on FY18E and FY19E EPS of Rs 16.3 and Rs 18.8, the stock is trading at PE of 10.4x and 9.0x respectively. The stock is available at an attractive valuation and is at a discount to many of its peers in the sector. We initiate coverage on the stock with Buy rating and target price of Rs 225, by assigning PE of 12x to FY19E earnings. Risks and concerns Raw material price volatility: ICIL operates in fixed price make-to-order contract and major volatility in the raw material prices may impact its margins. Cotton prices have witnessed a rise in recent times on account of late arrival of cotton in the market led by demonetization. But, the company hedges its cotton and other raw materials for its orders in pipeline by getting into back to back arrangement for its orders with its suppliers. US protection policy: Any protective policy by the US government, as witnessed in some of the other manufacturing sector, would be negative for textiles sector. Aggressive expansion: ICIL is present in capital intensive business of home textiles. In the past company faced challenges after high capex followed by slowdown in the economy. Any major capex on backward integration may impact balance sheet and returns ratios. Forex volatility risk: 90% of the business of ICIL is contributed by exports. Any major volatility in the currency would negatively impact the profitability in exports business. The company fully hedges its exports sales but any steep volatility in the currency may negatively impact earnings. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

3 COMPANY BACKGROUND Indo Count Industries Ltd (ICIL) incorporated in 1988, is a leading player in the global home textiles & apparel industry, focusing on bedding products. It is the 2nd largest manufacturer and exporter of bed sheets, bed linen, quilts from India and among top 3 bed sheet suppliers to US. It holds 20% share in Indian bed linen exports to the US, which is the largest market for it and contributes nearly 65% of its turnover. Further, its other key markets include developed countries of Europe, UK and Australia. The company exports to 49 countries spread across 5 continents. It sells products through top retailers like Walmart, JC Penney, Target, etc. In addition, its products are also sold online through e- tailers such as Amazon under the brand Color Sense. The company has an integrated manufacturing unit located at Kolhapur, Maharashtra with total spinning capacity of spindles, weaving capacity of 9 mn meters per annum and processing capacity of 68 mn meters per annum with cut and sew units, where it manufactures yarns, fabrics and bed sheets. Moved out of troubled waters The company went through troubled time during financial crisis in FY09. It incurred capex of Rs 2 bn in FY07 for diversifying its business from spinning to home textiles in order to tap opportunity from US market after the quota regime ended in As a result, the company s debt to equity increased to 1.7x in FY09, while demand slowed down due to economic crisis in US. It was unable to service debt. At the same time, it suffered heavy losses due to exotic derivate contracts. This forced ICIL to go for Corporate Debt Restructuring (CDR) in August The company took corrective measures by winding down derivative contracts. With the improvement in economy, ICIL focused on growing its home textiles business which improved utilization and cash flows. The company exited CDR in FY15 and continued its focus on growing its home textiles business through asset light model. Product segment The company is present across various products in bedding space which includes bed sheets, Fashion bedding, Utility bedding and institutional bedding. In bedding it offers Flat sheet, fitted sheet and pillow cases. In fashion bedding it offers comforters, bed in bag, quilts and coverlets, decorative pillows, etc. The utility bedding segment includes basic white bedding, mattress pads, protectors, white filled comforters filled with poly fill fibre. The institutional linen segment caters to hotels, hospitals, etc and includes products such as flat sheets, pillow cases, duvet covers and shams. Management Background Name Designation Background/Role Anil Jain Executive Chairman He is Promoter of the Company with 37 years of experience. He is widely recognized in the industry for his outstanding ability of turning business around Mohit Jain Managing Director He is Promoter of the Company with Over 17 years of Experience in Global Marketing & Entrepreneurship. He graduated from Babson College, USA K.R. Lalpuria Executive Director He is Chartered Accountant with more than 30 years of experience in the Textile industry. Associated with the company from past 6 years and has good network for business development globally Kamal Mitra Director (Works) He is Associated with the company from past 11 years & having more than 35 years of experience in the Textile Industry. He is responsible for the entire manufacturing operations of the Spinning facilities of the Group Dilip Ghorawat Chief Financial Officer He is Chartered Accountant with more than 25 years of experience in the Industry. He is responsible for Financial Strategy, Raising of Funds, Mergers & Acquisitions Source: Company Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

4 KEY INVESTMENT ARGUMENT Asset light model with high returns ratios ICIL follows asset light business model and majority of its yarn and fabric requirement is met through job work or is bought out and a small portion, 15% fabric and 30% yarn is presently manufactured in house. Outsourcing model does not face any major risk as there is enough capacity in India for both yarn and fabric to meet its requirement. Several of its peers have also started outsourcing because making in-house with flexibility is not feasible as there are many variables in the product and it keeps on changing. Hence, it is tough to manufacture everything in-house. As a result, the asset turnover (ATO) of ICIL is 2.8x as against its peers having ~1x. With high ATO and strong margins, the company is operating at high RoCE of 43% in FY16 which is best amongst its peers. The company would continue to follow asset light strategy with 70% outsourcing even after expansion of its weaving facility, which is planned just to meet the requirement of specialized raw materials for niche products. Peer Comparison based on expanded capacity Capacity Indo Count Trident HSL Welspun India Yarn Spinning (Spindles) 80, , , ,000 Sheeting/Processing (mn meters) 90* Terry Towels (tonnes p.a.) * Source: Company, Industry, Note: *Proposed/expanded capacity Comparative ROCE (%) Comparative Gross Block Turnover (x) Indo Count Trident HSL Welspun Source: Company, Capitaline Source: Company, Capitaline Differentiating from others by entering niche value added products segment ICIL has diversified its business by entering into niche value added segments which include fashion, utility and institutional bedding in US market. These are high quality premium products with high value addition interms of design, stitching patterns, embroidery etc. The company manufactures wide range of products from 300 TC to 1000 TC. There is huge opportunity to grow in the segment as the total market size for these segments is USD 10 bn in US. The penetration of Indian players is relatively low at 7-8% whereas China still holds around 85% of market share. Any shift in market from China to India due to competitive advantage, like what happened in bedding, will result in huge opportunity for ICIL. The revenue contribution from these new segments (new segments of fashion, utility and institutional bedding) has already touched 10% mark and ICIL targets to increase it to 30% in the next 3-4 years. The company has focused on this segment through aggressive marketing of these products. We believe that its efforts on growing this segment would reap in benefits in the longer run. Further, this will have positive impact on its EBITDA margins in a longer run. The company expects EBITDA margins go to upto 22%-23% in a longer run on increased share of these value-added products. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation Indo Count Trident HSL Welspun

5 Value added products Product Segment Fashion bedding Details Comforters, bed in bag, quilts and coverlets, decorative pillows, etc.... Utility bedding Basic white bedding, mattress pads, protectors, white filled comforters filled with poly fill fibre... Institutional linen Flat sheets, pillow cases, duvet covers and shams; caters to hotels, hospitals and others Source: Company Breakup of USD 10 bn opportunity in new segment Institutional 20% Utility bedding 30% Fashion bedding 50% Source: Company Going through consolidation phase, brand building to support growth After high growth of last 5 years, ICIL is presently going through a consolidation phase, which is one of the reasons behind muted growth in FY17. The company is focusing on building brand in global as well as Indian markets. The company has launched 3 licensed brands and three propriety lifestyle brands in US market to serve the fashion, utility and institutional bedding businesses. The licensed brands have been introduced in North America and have been licensed through Walker Greenbank PLC UK who is having strong presence in UK & Australia. The company has opened showrooms (in New York) and design studios in major markets to reach customers directly and understand their needs. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

6 It has been able to place its brands with new clients as well as existing clients and it is finding good response among them. Further, it has also added some new clientels on the sheets side which will support growth in bed linen business. We believe that its efforts to consolidate and build brands would reap benefits in longer run. We believe that the growth in current year was also affected by certain seasonal factors which were of temporary nature. We expect the revenue grow to get back on track in future with 15% CAGR in FY17E-19E. Licensed Brands Three new lifestyle brands have been launched in the US market Brands Features BOUTIQUE LIVING Boutique Living is targeted at successful professionals who travel frequently Source: Company... REVIVAL Targeted at professionals who look for classic detailing with a modern outlook. It is made of Natural fabrics with color palette of sophisticated and muted tones... THE PURE COLLECTION It is for healthy and environmentally conscious way of living for health and environment conscious consumer. The entire collection is 100%-organic cotton Source: Company Increasing capacity to enhance capability and support future growth ICIL is expanding its capacity in two-phases in order to cater to the strong demand from home textile products in a longer run. It is expanding its units in Kolhapur as well as putting in new facilities to cater to new segments such as fashion bedding, utility bedding and institutional bedding. The company plans to spend total Rs 4.75 bn for the capex in two phases. This would be funded through mix of debt of Rs 2.25 bn and balance through internal accruals. The company has strong cashflows which will help it in meeting its equity commitment in these projects. In first phase (Phase 1) it would incur capex of Rs 1.75 bn. This is towards 1) increasing processing capacity from current 68 million meters to 90 million meters, (by Q1FY18) 2) setting up a state of-the-art RO and water effluent treatment plant, (Rs 500 mn, already completed in FY16) 3) automation of cut and sew (partially completed in FY16) 4) warehousing (completed in FY16). Out of total 1.75 bn, Rs 1.1 bn has been capitalized till FY16 and balance Rs 650 mn will be capitalized current financial year (FY17). In second phase (Phase 2), it would incur Rs 3 bn capex towards 1) upgrading the existing spinning facilities, 2) Investments in additional weaving (with specialized looms of ~18 mn meters per annum) and 3) value added equipment for the delivery of fashion and utility bedding. This is expected to be completed in the next 2 years. The phase 2 involves setting up of a new facility which will get all benefits under Maharashtra's Mega industrial project policy where it will get capital subsidy. ICIL intends to utilize 80% of the increased capacity in the next two to three years. It expects Rs 6 bn-7 bn of additional anuual revenue from the capex plan. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

7 Builtup in processing capacity (mn meters per annum) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Strong operating cashflows (Rs mn) 3,000 2,500 2,000 1,500 1, (500) FY13 FY14 FY15 FY16 FY17E FY18E FY19E Indian textiles exports are expected to grow at 15% CAGR The global Textile and Apparel trade was at USD 756 bn (in 2015) and grew at CAGR of 4.7% (in ). It is estimated to grow in the band of 4.5% - 5% going forward and likely to touch approximately USD 1 trn by (Source: World Trade Statistical Review 2016, WTO). As per the current rankings, India is the 19th largest exporter and 12th largest importer of merchandise trade in the world. Global textile market (US$ bn) Source: Industry, International Trade Statistics 2015, WTO Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

8 The size of Indian textiles industry is at USD 108 bn of which 37% is exports and 63% is domestic. The industry contributes 5% of the Indian GDP and 13% of India's exports. The size of the industry is expected to be USD 223 bn by 2021, with 12.8% CAGR in The size of Indian exports was at USD 35.4 bn in 2015 and had grown at a CAGR of 8.2% in Indian textiles exports is expected to grow at 15% CAGR in to USD 82 bn. (source: IBEF). This growth will be driven by India's strengths and advantages particularly in cotton based textile products among other textile categories. Indian textiles sector: Domestic Vs exports Exports 33% Domestic 67% Source: Industry, International Trade Statistics 2015, WTO Indian Textiles exports to grow 15% CAGR (US$ bn) Source: Industry, International Trade Statistics 2015, WTO Indian textiles exports (US$ bn) Source: Industry, International Trade Statistics 2015, WTO Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

9 Domestic home textile market: Categorywise market breakup Bed Linen Towels Curtains Blankets Upholstery Kitchen Linen Rugs & Carpets Source: Industry India gaining market share in cotton based home textiles in US Global home textiles market is estimated in the range of USD bn, with US constituting 40% of the total market. US home textiles market is estimated in the range of USD bn with organized market contributing 99% of total. The market is dominated by large specialty store chains, department store chains and big box discount chains. The sourcing of cotton based bedding products for the United States market is predominantly from India, China and Pakistan with India gaining market share from China and Pakistan in the past 6 years. India's share of imports of the above products has grown from 19% in 2009 to 36% in 2015 in cotton based bedding segment. This is on account of rise in labour cost in China, China's internal consumption witnessing sharp surge led by urbanization, increased government support to textiles sector in India, availability of raw materials and labour in India, quality products offerings by Indian players, etc. US Imports: Cotton based bedding products, India's share is increasing 100% In d ia China Pakistan O thers 75% 50% 25% 0% Source: OTEXA, Department of Commerce, United States of America Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

10 Extension of duty drawback positive for the sector The central government in its cabinet meeting held recently decided to extend additional duty drawback benefits to the made-ups sector (including towels, bed sheets, curtains, decorative cotton products, etc) in a time-bound manner (source: news articles). In June 2016, the government had announced a Rs 60 bn package for the textile sector. This was aimed at generating 10 million jobs in the sector in the next three years. Under this, 5% additional duty draw back was allowed for garments sector, but made-ups sector was not included in the same. Based on industry demand (Cotton Textile Export Promotion Council, Texprocil), the cabinet approved the inclusion of made-ups in the apparel package, in a time-bound manner, but the rates have not been notified by the drawback committee. Once the rates will be notified, Indian home textiles players would be benefited as they would be more competitive as against countries like Pakistan and Bangladesh who enjoy duty benefits under Free Trade Agreement with European countries. Pakistan and Bangladesh have zero duty against 9.6% duty for Indian players in Europe. Any revision or extension of FTA with India would be a big positive for the Indian home textiles players as it would open large size opportunity from European market which is as big as US. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10

11 RISKS AND CONCERNS Raw material price volatility: ICIL operates in fixed price make to order contracts and major volatility in the raw material prices may impact its margins. Cotton prices have witnessed a rise in the recent times on account of late arrival of cotton in the market led by demonetization. As per industry players, the present condition is temporary in nature as demonetization impacted short term supply. The situation is expected to stabilize in time to come. Further, the company hedges its cotton and raw material for its orders in pipeline. It gets into back to back arrangement for its orders with its suppliers. Protective policy by US: Any protective policy by the US government, as witnessed in some of the other manufacturing sector, would be negative for textiles sector. Aggressive expansion: ICIL is present in capital intensive business of home textiles. In the past company faced challenges after high capex followed by slowdown in the economy. Any major capex on backward integration may impact balance sheet and returns ratios. Forex volatility risk: 90% of the business of ICIL is contributed by exports. Any major volatility in the currency would negatively impact the profitability in exports business. The company fully hedges its exports sales but any steep volatility in the currency may negatively impact earnings. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 11

12 OUTLOOK AND VALUATIONS In the past 5 years (FY11-16), ICIL's sales and PAT grew by 25% and 90% respectively with EBITDA margins improved from 6% to 20%, RoCE improving from 4.4% to 43% plus, net D/E from 1.8x to 0.5x and improved operating cash flows. The growth was driven by strong demand from exports market particularly from US, which resulted in improved capacity utilization and asset turnover. Fixed asset turnover of the company improved from 0.7x in FY10 to 2.8x in FY16. The growth rate slowed in FY17 due to some consolidation in the business and certain one-offs. ICIL intends to grow its business in future with increased contribution from niche segments in fashion, utility and institutional bedding. This segment has huge market size of USD 10 bn in US with China commanding 85% market share. The company is increasing capacity to meet future opportunity. Based on this, we expect company's sales and PAT to grow at a CAGR of 10% and 12% respectively in FY16-19E. This is based on 9.5% CAGR in volume and 1.3% CAGR in realization in FY16-19E in home textiles segment and 6.5% CAGR in yarn business primarily led by realization growth in the segment. We expect revenue growth in FY17E to be at 2% (factoring in certain one-offs in the year) and expect revival in FY18 and FY19 with 17% and 16% yoy growth, respectively. We estimate a steady 70 bps improvement in EBITDA margins in FY16-19E, higher scale and improved contribution from niche segment. Based on FY18E and FY19E EPS of Rs 16.3 and Rs 18.8, the stock is trading at PE of 10.1x and 8.8x respectively. The stock is available at an attractive valuation and is at a discount to many of its peers in the sector. Based on strong balance sheet and asset light model, the company commands higher RoCE as compared to most of its peers. We believe that the company is gearing itself up to achieve higher scale by catering to new product segments where opportunity is huge. We initiate coverage on the stock with Buy rating and target price of Rs 225, by assigning PE of 12x to FY19E earnings. PE Band (x) (R s) x 9x 6x 3x 0 M a r-11 M a r-12 M a r-13 M ar-1 4 M a r-1 5 M ar-16 M a r Source: Capitaline, Kotak Private Client Research Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12

13 Peer Comparison Parameters Indo Count Trident* Himatsingka Welspun Sales (Rs mn) CAGR% - 5 years EBITDA (Rs mn) CAGR% - 5 years PAT (Rs mn) CAGR% - 5 years EBITDA Margins % PAT Margin% RoCE% Net Debt/Equity Gross FA T/O Source: Company, Capitaline, Kotak Private Client Research, *4 yrs CAGR Peer Comparison (Forward basis) Comparative CMP Mcap EV FY16-18E FY16-18E FY18E FY18E FY16 FY16 Net FA (Rs) (Rs bn) (Rs bn) Sales PAT P/E (x) EV/ RoE RoCE D/E ATO CAGR % CAGR% EBITDA (%) (%) (x) Indocount Himatsingka Siede* Welspun India* Trident* Source: Kotak Securities - Private Client Research, *Bloomberg Standalone Q3FY17 results highlights In Q3FY17, ICIL's sales was flattish at Rs 5 bn while PAT declined by 14.9% yoy. There was a 270 bps yoy decline in margins at 20.3%. The performance in the quarter got impact on extended summer season in US which slowed down winter orders. The margins took a hit in the quarter on higher job work charges for procuring specialized fabrics in fashion bedding. The company believes that the dependency over this kind of high cost outsourcing would reduce one its backward integration gets completed. The company reported 43.5 mn meters volume in 9MFY17. Due to slower winter demand, the management reduced its volume guidance to mn meter in FY17 as against mn meters earlier. In 9MFY17, the company reported 2.4% yoy growth in revenue and 5.5% yoy growth in PAT with EBITDA margins flattish at Rs 20.9%. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 13

14 Quarterly results Year to March (INR Mn.) Q3FY17 Q3FY16 %Chg Q2FY17 %Chg 9MFY17 9MFY16 %Chg Net Revenues 5,029 5, ,763 (12.7) 15,719 15, Raw Materials Cost 2,479 2,547 (2.7) 3,085 (19.6) 8,112 7, Gross Profit 2,550 2, ,679 (4.8) 7,607 7, Employee Expenses (0.2) Other Expenses 1,248 1, , ,497 3,603 (2.9) Operating Expenses 4,009 3, ,599 (12.8) 12,433 12, EBITDA 1,020 1,151 (11.4) 1,164 (12.4) 3,286 3, EBITDA margin 20.3% 23.0% 20.2% 20.9% 20.9% Depreciation Other income Net finance expense (2.4) 116 (21.2) (22.8) Profit before tax (13.8) 975 (12.9) 2,748 2, Provision for taxes Reported net profit (14.9) 688 (18.3) 1,792 1, As % of net revenues COGS Employee cost Other Expenses Operating expenses EBITDA Reported net profit Tax rate (% of PBT) Source: Company Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 14

15 FINANCIAL PROJECTIONS Expect 10% revenue CAGR in FY16-19E We expect revenue of ICIL to grow at a CAGR of 10% in FY16-19E led by 9.5% CAGR in volume and 2.3% CAGR in realization in FY16-19E in home textiles segment and 6.5% CAGR in yarn business primarily led by realization growth in the segment. The increase in processing capacity from 68 mn meters to 90 mn meters by Q1FY18 would support the company in growing its business from existing as well as new segments. We believe that, there is still some scope for Indian home textiles players to increase their share in US exports as they continue to enjoy competitiveness on cost and quality front. We expect improvement in margins on account of improved product mix and higher scale of operations. Expect 12% PAT CAGR in FY16-19E with returns ratios expected remain strong We expect PAT to grow at a CAGR of 12% in FY16-19E driven by 1) 70 bps improvement in EBITDA margins in FY16-19E on improved volume and better product mix and 2) interest cost to continue to remain under control on low cost funding for future capex and strong cash flows. We expect company to add Rs 2 bn of debt in order to get TUFs benefit. But based on strong cash flows from operations, the net debt to equity is expected to remain very low. We expect returns ratios to remain strong at over 30% on strong margins and asset turnover ratios. Net sales and growth trend EBITDA and Growth EBITDA margins and PAT margins (%) ROE and RoCE (%) Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 15

16 Working capital (days) Net D/E (x) Source: Company, Kotak Private Client Research Source: Company, Kotak Private Client Research Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 16

17 CONSOLIDATED FINANCIALS Profit and Loss Statement (Rs mn) FY16 FY17E FY18E FY19E Revenues % change yoy EBITDA % change yoy Depreciation EBIT Other Income Interest Profit Before Tax % change yoy Tax as % of EBT PAT % change yoy Shares outstanding (mn) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) Cash Flow Statement (Rs mn) (Rs mn) FY16 FY17E FY18E FY19E Pre-Tax Profit Depreciation Change in WC (1487) (862) (1282) (1517) Other operating activities (1220) (1408) (1662) (1913) Operating Cash Flow Capex (1107) (800) (750) (1500) Free Cash Flow Change in Investments Investment cash flow (1107) (800) (750) (1500) Equity Raised Debt Raised (256) (800) Dividend & others (305) (160) (189) (217) CF from Financing (586) (960) Change in Cash (213) Balance sheet (Rs mn) FY16 FY17E FY18E FY19E Paid - Up Equity Capital Reserves Net worth Minority Interest Borrowings Net Deferred tax Total Liabilities Gross block Depreciation Net block Capital work in progress Total fixed assets Inventories Sundry debtors Cash and equivalents Loans and advances & Others Total current assets Sundry creditors and others Provisions Total CL & provisions Net current assets Other net assets Total Assets Ratio Analysis FY16 FY17E FY18E FY19E Profitability Ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Inventory (days) Loans & Advances Payable (days) Cash Conversion Cycle Asset Turnover Net Debt/ Equity Return Ratios: RoCE (%) RoE (%) Valuation Ratios: P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 17

18 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. Fundamental Research Team Dipen Shah IT, Economy dipen.shah@kotak.com Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com Jatin Damania Metals & Mining jatin.damania@kotak.com K. Kathirvelu Production k.kathirvelu@kotak.com Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com Ritwik Rai FMCG, Media ritwik.rai@kotak.com Pankaj Kumar Midcap pankajr.kumar@kotak.com Teena Virmani Construction, Cement teena.virmani@kotak.com Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com Nipun Gupta Information Technology nipun.gupta@kotak.com Arun Agarwal Auto & Auto Ancillary arun.agarwal@kotak.com Amit Agarwal Logistics, Paints, Transportation agarwal.amit@kotak.com Jayesh Kumar Economy kumar.jayesh@kotak.com Technical Research Team Shrikant Chouhan shrikant.chouhan@kotak.com Amol Athawale amol.athawale@kotak.com Derivatives Research Team Sahaj Agrawal sahaj.agrawal@kotak.com Malay Gandhi malay.gandhi@kotak.com Prashanth Lalu prashanth.lalu@kotak.com Prasenjit Biswas prasenjit.biswas@kotak.com Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 18

19 Disclosure/Disclaimer Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSEI). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/ deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to clients as well as our prospects. This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on our website ie Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. "A graph of daily closing prices of securities is available at and (Choose a company from the list on the browser and select the "three years" icon in the price chart)." Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai CIN: U99999MH1994PLC134051, Telephone No.: , Fax No.: Website: Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai Telephone No: SEBI Registration No: NSE INB/INF/INE , BSE INB /INF , MSEI INE /INB /INF , AMFI ARN 0164, PMS INP and Research Analyst INH NSDL/CDSL: IN-DP-NSDL Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: , or ks.compliance@kotak.com. In case you require any clarification or have any concern, kindly write to us at below ids: Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Online Customers (by using your city STD code as a prefix) or Toll free numbers / , Offline Customers Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 19