08 October 2012 CMP: Rs.1.71 Industry: Textiles BSE Group/Index: Group B Promoters Praful Shah and family Garden Vareli Group Year of incorporation 1945 Registered office Garden Mills Complex, Sahara Gate, Surat Gujarat 395010 Key Data (as on 8 Oct 12) BSE 530185 ISIN INE936A01025 Face Value (Rs.) 1 Mkt Cap (Rs.mn) 379.7 Current P/E 1.8 Current P/BV 0.6 52 week highlow (Rs.) 2.41.0 30 day avg daily trading vol 17,957 nos. Equity capital (Rs.mn) 222.0 Net worth (Rs.mn) 693.5 Company Business Surat Textile Mills Limited ( STML ) is engaged in the manufacture and sale of polyester filament yarn, polyester chips and cotton spun yarns. It has three manufacturing units in Surat, Gujarat and one in Silvassa, Dadra and Nagar Haveli. The company has a total installed capacity to produce 25,000 tonnes of polyester chips and 5000 tonnes of polyester yarn across the four manufacturing facilities. STML, formerly known as Garden Cotton and Yarn, is part of the Garden Vareli group promoted by Praful Shah and family. The group s flagship company, Garden Silk Mills Limited, is a garment manufacturer and reported net losses of Rs.788 mn in FY12. Company website http://www.surattextilemillsltd.com Write to us at: equity.research@outlook.com Peer group analysis Particulars (FY12, Surat Super Jindal Cotex Sarla Performance Rs.mn) Textile Mills Spinning Limited Fibres Total Income 2,174 3,924 2,745 1,912 EBIDTA 319 (126) 142 252 EBIDTA margin 15% (3%) 5% 13% PAT 198 (429) (165) 109 PAT margin 9% (11%) (6%) 6% EPS 0.9 (7.8) (3.7) 15.7 Cash accruals 213 (239) (56) 179 BV/share 3.1 11.4 62.7 131.8 Debt/EBIDTA (x) 0.0 (11.3) 11.1 2.4 Debt/Equity (x) 0.0 2.3 0.6 0.7 ROANW 33% (69%) (6%) 12% ROACE 31% (17%) 1% 13% P/E 1.6 (0.8) (14.9) 7.8 P/BV 0.5 0.5 0.9 0.9 Source: Moneycontrol, Company STML has recently changed its operating strategy by moving away from auxiliary businesses (like trading) and increasing focus on its core textile operations. The strategy paid off in FY12 and STML performed better than most of its peers during the year. At a time when the industry is facing challenges on account of high raw material prices and mounting interest expenses, STML has benefited significantly by reducing its borrowings and achieving a near debtfree status. Page 1 of 6
Business capacities Business Capacity Annual Polyester Chips 25,000 tonnes Polyester Filament Yarn 5000 tonnes Cotton spindles 29728 figures for FY11 Share Price Performance 20% 8% 0% 20% 3 YR3% 2 YR 6% 1 YR 40% 32% 60% 80% 62% 63% STML BSE Small Cap Top Public Shareholders with >1% shareholding Sl. No. Name of the Shareholder No. of Shares held (mn) Shares as % of Total No. of Shares 1 IDBI Bank Ltd 15.45 7.0 Total 15.45 7.0 Change in Shareholding Pattern (%) Shareholding Pattern (%) Year Promoters DII FII Others Jun12 80.9% 7.9% 11.3% Mar12 80.9% 7.9% 11.3% Dec11 80.9% 7.9% 11.3% Sep11 80.9% 7.9% 11.3% Mar11 81.2% 8.1% 10.7% Mar10 82.0% 9.3% 8.7% Mar09 82.0% 9.3% 8.7% Mar08 77.5% 13.8% 8.7% 7.86% 11.29% 80.85% Promoters DII FII Others Page 2 of 6
Key strengths Diversified product mix STML has a diversified product portfolio which includes cotton yarn, polyester filament yarn (PFY) and polyester chips. Since cotton and polyester are substitutable products, the product mix gives STML a natural hedge against volatile and uncertain demand conditions. Key concerns Volatility in crude oil prices Competitive handicap Crude oil derivatives like Purified Terphthalic Acid (PTA) and Mono Ethylene Glycol (MEG) are used for manufacturing polyester chips the primary raw material for polyester filament yarns. Consequently, crude oil prices (which are subject to a high degree of volatility on account of global demand and exchange rates) have a direct impact on the company s expenses and any adverse movement is therefore likely to put additional pressure on its profit margins. STML currently has to pay taxes on sale of chips and yarns outside of Gujarat. This places it in disadvantageous position visàvis its peers located in other areas such as Silvassa and Daman, which are exempted from sales tax. While the proposed Goods and Services Tax (GST) will provide uniformity in taxes across states, STML is likely to take a hit on its margins till the time the bill is ratified and passed into law. Industry overview Key contributor to economy Growing demand for polyester fabric The Indian textile industry plays a major role in the economy and contributes 3% to the GDP and 14% to the overall industrial production in the country. The industry is also one of the largest exporters and India has set an export target of $40.5 bn (Rs.2106 bn) for the fiscal year 201213. While cotton fabric constituted 60% of the total textile production in the mid90s, its share had decreased to 48% by the end of FY09. This is largely attributable to a shift in consumer preferences and growing demand for noncotton manmade (synthetic) fabrics such as polyesters. India is now the second largest producer of manmade fibre (MMF) at 6.1 million tonnes per annum, 80% of which is contributed by polyester. The reversal is also driven by the limited availability of cotton/cotton yarn, which has resulted in a significant price differential between cotton and manmade fabric. Government policy Foreign Direct Investment (FDI) policy The government has approved 100% FDI in the textile sector under the automatic route. The ministry of textiles has also set up a FDI Cell to attract foreign investments in the textile sector. The role of the cell will be to assist foreign companies in finding out potential joint venture partners in India and to provide support for coordination with state governments. Company fundamentals Ceased to be a sick company STML had registered with the Board for Industrial and Financial Reconstruction (BIFR) in 2003 after recording a negative reserves and surplus balance of Rs.119.4 mn. Subsequently however, the company has achieved a significant turnaround by revamping its operations and reducing its debt levels. In January 2010, BIFR passed an order following which the company has been discharged from the purview of the Sick Industrial Companies Act (SICA). Page 3 of 6
Discontinued trading activities Apart from manufacture and sale of polyester chips and textile yarn, the company also traded MEG and PTA, which contributed 37% to the overall sales in FY11. However, fluctuating prices of these materials prompted the company to discontinue its trading activities from this year and focus only on its manufacturing operations. Key financial indicators Improvement in profitability In FY12, the revenues of the company decreased by 22%, primarily due to the discontinuation of trading operations. While the loss in revenues was partly made up by the sale of some fixed assets, it still resulted in a net decline of around Rs.554 mn in the topline. However the company s strategy to focus only on core operations to improve its profitability paid off, and the EBITDA margin increased significantly to 15% (from 6% in FY11). The company has not paid any dividends to equity shareholders in the last ten years, citing the need to plough back its profits into the business. While the company s profitability and leverage ratios have improved significantly over the last few years, the shares are still underpriced in the market with low P/E and P/BV ratios as compared to the industry average. Nonprovisioning Reduction in borrowings The statutory auditor has remarked that no provisions have been made to recognize diminution in the value of longterm investments amounting to Rs.102.0 mn (previous year Rs.74.3 mn), which is contrary to the accounting practice recommended by the Institute of Chartered Accountants of India. As a result, net worth is overstated by this extent. STML has taken concerted steps to reduce its borrowing levels over the years. In FY12, it disposed of some of its surplus land and buildings for an amount aggregating to Rs.281 mn and used the proceeds to repay some of its outstanding loans. The company, which had a total debt of Rs.1029 mn at the start of the decade, is currently debtfree. Quarterly results Particulars (Rs in mn) Apr 12 to Jun 12 Apr 11 to Jun 11 % Change 1 Jan 12 to Mar 12 % Change 2 Total income 451.2 389.3 15.9% 441.4 2.2% Total expenditure 442.4 387.0 14.3% 430.0 2.9% EBIDTA 8.9 2.3 287.0% 11.4 (21.9%) PAT 4.6 (12.4) (71.9) Cash Accruals 8.3 (9.1) (67.1) EPS 0.0 (0.1) (0.3) 1 compared to corresponding quarter in the previous year 2 sequential comparison Page 4 of 6
Book value per share Key ratios 3.5 3.0 2.5 2.0 1.5 1.0 0.5 3.1 2.2 1.4 BV/share 1.0 0.8 0.6 0.4 0.2 0.9 0.3 0.4 EPS DPS Profitability ratios Leverage ratios 35.0% 33.3% 2.5 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 22.8% 30.9% 20.6% 13.1% 14.9% ROAE ROACE 2.0 1.5 1.0 0.5 2.0 1.8 0.9 0.6 0.0 Debt to EBITDA Debt to Equity Segmentwise contribution to total revenue 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 37.3% 5.5% 24.5% 32.7% FY11 0.0% 5.4% 35.2% 59.4% FY12 Trading Spun/Cotton Yarn PFY Polyester chips Page 5 of 6
Financials P&L (Rs. mn) Balance Sheet (Rs. mn) Total income 2,430 2,728 2,174 Share Capital 222 222 222 EBIDTA 145 164 319 Reserves & Surplus 95 274 472 EBIDTA margin 6% 6% 15% Net worth 317 496 694 Depreciation 18 17 15 Borrowings 290 290 9 EBIT 127 147 304 Other liabilities 363 222 251 Interest 40 39 29 Total liabilities 970 1,008 954 PBT 87 108 275 Net fixed assets 237 220 209 Tax 15 25 77 Other noncurrent assets 186 230 206 PAT 72 84 198 Loans and Advances 174 46 69 PAT Margin 3% 3% 9% Current Assets 372 512 470 Dividend Total assets 970 1,008 954 Dividend Payout Cash Flow (Rs.mn) Valuation ratios PBT 87 108 275 P/E 14.02 6.90 1.62 CF from Operation 199 (118) 52 P/BV 3.19 1.16 0.46 CF from Investment (60) 42 265 CF from Financing (68) (36) (306) Inc/(dec) Cash 71 (112) 11 Closing Balance 123 10 21 Disclaimer The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Our company shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation which may affect their investment in the securities of companies referred to in this document (including the merits and risks involved). The discussions or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. Page 6 of 6