Kandagiri Spinning Mills Ltd

Q4FY11 Result Update Enhancing investment decisions CRISIL Limited. All Rights Reserved.

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 (1-25% from CMP) 3/5 Good fundamentals 3/5 Align (+-1% from CMP) 2/5 Moderate fundamentals 2/5 Downside (- 1-25% 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. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-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.

Higher cotton costs impact profitability Fundamental Grade Valuation Grade Industry 2/5 (Moderate fundamentals) 5/5 (CMP has strong upside) Textiles, Apparel & Luxury Goods Kandagiri Spinning Mills Ltd s (Kandagiri s) revenues were in line with CRISIL Equities expectations on the back of strong demand in the cotton yarn segment. However, profitability was below expectations due to higher raw material costs and one-time impact of the reversal of carbon credit worth Rs 15.4 mn. We maintain the fundamental grade of 2/5. Q4FY11 result analysis Kandagiri s Q4 revenues grew by 27.9% y-o-y to Rs 49 mn driven by strong realisations in the cotton yarn segment. EBITDA margin contracted by 111 bps y-o-y and 436 bps q-o-q to 15.1%. In this quarter, the company had to bear a one-time impact of Rs 15.4 mn from the reversal of carbon credit. The management has indicated that the United Nations Framework Convention on Climate Change board rejected Kandagiri s carbon credit claims for FY1; no specific reason was given. EBITDA margin declined both y-o-y and sequentially - while higher power costs, inclusive of the one-time impact of carbon credit claims, resulted in the y-o-y decline, higher raw material expenses led to steeper q-o-q contraction. Higher revenue growth offset the impact of lower operating profitability and higher interest costs. Consequently, adjusted PAT remained flat at Q4FY1 levels of Rs 8.3 mn. Adjusted PAT margin contracted by 57 bps y-o-y to 2.% in Q4FY11. Delay in modernisation and expansion plan The management has indicated that they have postponed the capacity expansion of ~8, spindles as well as the modernisation plan due to an unfavourable industry scenario arising from the run-up in cotton prices in the past few months. Accordingly, we now expect these plans to materialise in Q2FY13 and not in Q2FY12 as earlier expected. Valuations: Current market price has strong upside We continue to use the discounted cash flow method to value Kandagiri. Due to reduction in earnings estimates owing to the delay in capex plans, our fair value estimate is revised to Rs 13 per share. The fair value implies P/E multiples of 4.7x FY12E and 4.1x FY13E. KEY FORECAST (Rs mn) FY9 FY1 FY11# FY12E FY13E Operating income 936 1,142 1,52 1,573 1,88 EBITDA 13 213 331 338 357 Adj PAT (27) 32 92 15 122 Adj EPS-Rs (7.1) 8.4 23.9 27.3 31.6 EPS growth (%) (156.1) (217.3) 185.7 14.2 15.8 Dividend yield(%) - - 3.6 2.7 2.7 RoCE (%) 4.2 9.9 16.6 15.7 16.5 RoE (%) (12.6) 14.4 33. 29.1 26.4 PE (x) (4.6) 13.2 4.6 4. 3.5 P/BV (x).6 1.8 1.3 1..8 EV/EBITDA (x) 9.5 7.3 5.1 4.7 4.4 NM: Not meaningful; CMP: Current Market Price #FY11 numbers based on the abridged financials Source: Company, CRISIL Equities estimate June 3, 211 Fair Value Rs 13 CMP Rs 89 CFV MATRIX KEY STOCK STATISTICS NIFTY 555 NSE ticker KANDAGIRI Face value (Rs per share) 1 Shares outstanding (mn) 3.9 Market cap (Rs mn)/(us$ mn) 352/8 Enterprise value (Rs mn) /(US$ mn) 1,629/36 52-week range (Rs) (H/L) 147/8 Beta.51 Free float (%) 3.1% Avg daily volumes (3-days) 775.8 Avg daily value (3-days) (Rs mn).1 SHAREHOLDING PATTERN 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Excellent Fundamentals Fundamental Grade 5 4 3 2 1 Poor Fundamentals % Strong Downside PERFORMANCE VIS-À-VIS MARKET Returns 1-m 3-m 6-m 12-m Kandagiri -8% 1% -22% 15% NIFTY -3% 1% -8% 11% ANALYTICAL CONTACT Sudhir Nair (Head) Neeta Khilnani Arun Vasu 1 2 3 4 5 Valuation Grade 3.1% 3.1% 3.1% 3.1% 69.9% 69.9% 69.9% 69.9% snair@crisil.com nkhilnani@crisil.com avasu@crisil.com Strong Upside Jun-1 Sep-1 Dec-1 Promoter Others Client servicing desk +91 22 3342 3561 clientservicing@crisil.com CRISIL Limited. All Rights Reserved. CRISIL EQUITIES 1

Q4FY11 Result Summary (Rs mn) Q4FY11 Q3FY11 Q4FY1 q-o-q (%) y-o-y (%) FY11 FY1 y-o-y (%) Net sales 49 397 32 2.9 27.9 1,52 1,57 43.8 Raw materials cost 233 217 182 7.5 28. 811.2 565 43.5 Raw materials cost (% of net sales) 57.1% 55% 57.% 245bps 5bps 53.3% 53.5% -1 bps Employees cost 32 36.4 26 (12.6) 23.3 131.2 93 4.6 Other expenses 82 66.8 6 23.1 37.2 246.4 184 33.6 EBITDA 62 77.2 52 (2.2) 19.1 332 215 54.7 EBITDA margin 15.1% 19.4% 16.2% -436bps -111bps 21.8% 2.3% 153 bps Depreciation 2 19.6 2 1.5 1. 78.4 78.64 EBIT 41.7 57.6 32. (27.6) 3.3 253.4 136.6 85.5 Interest and finance charges 31 23.2 23 31.9 34.8 113 92 23.23 Operating PBT 11 34.4 9 (92.1) 19.4 14 45 2.13 PBT 11 34.4 9 (67.7) 19.4 14 45 212.7 Tax 3 13. 1 (78.5) 18. 48 12 315.7 PAT 8.3 21.4 8.3 (61.2). 93 33 177.2 Adj PAT 8.3 21.4 8.3 (61.2). 93 33 177.2 Adj PAT margin 2.% 5.4% 2.6% -336bps -57bps 6.1% 3.2% 293 bps No of equity shares (mn) 3.9 3.9 3.9 - - 3.9 3.9. Adj EPS (Rs) 2.1 5.6 2.1 (61.7). 23.9 8.7 177 * We have used the reported numbers instead of CRISIL s adjusted numbers for FY1 for the above table to facilitate comparison with FY11 numbers Source: Company, CRISIL Equities Q4 EBITDA margins dipped...... so did PAT margin (Rs mn) (%) (Rs mn) (%) 45 27.4 3 4 12 4 35 3 25 2 15 1 5 23.5 23.6 2.7 19.4 14.9 15.1 258 256 315 335 378 397 49 25 2 15 1 5 35 3 25 2 15 1 5 1. 7.5 4.5 5.4 2.4 2.6 2. 12 6 8 25 38 21 8 1 8 6 4 2 Q2FY1 Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q2FY1 Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Revenues EBITDA margin (RHS) Source: Company, CRISIL Equities PAT PAT margin (RHS) Source: Company, CRISIL Equities Stock price movement Fair value movement since initiation 14 (Rs) (') 12 1 8 16 14 12 1 45 4 35 3 25 6 4 2 8 6 4 2 2 15 1 5 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 29-Oct-1 9-Nov-1 19-Nov-1 3-Nov-1 9-Dec-1 22-Dec-1 31-Dec-1 11-2- 1-Feb-11 1-Feb-11 24-Feb-11 11-24- 4-Apr-11 18-Apr-11 2-18- 31- Kandagiri -indexed to 1 NIFTY Total Traded Quantity (RHS) CRISIL Fair Value Kandagiri CRISIL Limited. All Rights Reserved. CRISIL EQUITIES 2

EARNINGS ESTIMATES REVISED DOWNWARDS FY12E FY13E Particulars Unit Old New % change Old New % change Revenues (Rs mn) 1729 1,573-9% 1929 1,88-6% EBITDA (Rs mn) 372 338-9% 382 357-6% EBITDA margin % 21.5% 21.5% bps 19.8% 19.8% bps PAT (Rs mn) 128 15-18% 134 122-9% PAT margin % 7.4% 6.7% -71bps 6.9% 6.7% -2bps EPS Rs 33.3 27.3-18% 34.7 31.6-9% Source: CRISIL Equities Line item Reasons for change in FY11 and FY12 estimates Revenues Delay in capacity expansion plan - we now assume the additional 8, spindles to come on-stream in Q2FY13 and not in Q2FY12 as earlier expected. Similarly, due to the delay in implementing the modernisation plan, utilisation rates will improve post Q2FY13. EBITDA margin We maintain EBITDA margin estimates. Excluding the one-time impact of the reversal of carbon credit claims, the company would have reported EBITDA margins of 22.8% for FY11. Margins for spinners like Kandagiri are expected to dip from FY11 levels due to higher cotton cost inventory and relatively lower cotton yarn prices. PAT margins Reduction in EBITDA estimates. Higher working capital requirements led to higher debt and, consequently, higher average interest costs for FY12. CRISIL Limited. All Rights Reserved. CRISIL EQUITIES 3

VALUATION We continue to use the discounted cash flow method to value Kandagiri. Due to the downward revision in earnings estimates, our fair value is revised to Rs 13 per share. At this value, the implied P/E multiples are 4.7x FY12E and 4.1x FY13E. One-year forward P/E band (Rs) 14 12 1 8 6 4 2 One-year forward EV/EBITDA band (Rs mn) 2, 1,8 1,6 1,4 1,2 1, 8 Sep-9 Oct-9 Nov-9 Dec-9 Jan-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Feb-11 Apr-11 Jun-11 Sep-9 Oct-9 Nov-9 Dec-9 Jan-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Feb-11 Apr-11 Jun-11 Kandagiri 2.5x 3.x 3.5x 4x EV 4.x 5x 4.5x P/E premium/discount to NIFTY -7% P/E movement (x) 5. -74% -78% 4.5 4. 3.5 +1 std dev -82% 3. 2.5-1 std dev -86% 2. Sep-9 Oct-9 Nov-9 Dec-9 Jan-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Feb-11 Apr-11 Jun-11 Sep-9 Oct-9 Nov-9 Dec-9 Jan-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Feb-11 Apr-11 Jun-11 Premium/Discount to NIFTY MEDIAN 1yr Fwd PE (x) MEDIAN CRISIL IER reports released on Kandagiri Spinning Mills Ltd Date Nature of report Fundamental grade Fair value Valuation grade CMP (on the date of report) 29-Nov-1 Initiating coverage* 2/5 Rs 124 4/5 Rs 11 8-Feb-11 Q3FY11 result update 2/5 Rs 141 5/5 Rs 13 3-June-11 Q4FY11 result update 2/5 Rs 13 5/5 Rs 89 * For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters. CRISIL Limited. All Rights Reserved. CRISIL EQUITIES 4

FINANCIALS Income statement Balance Sheet (Rs mn) FY9 FY1 FY11# FY12E FY13E (Rs mn) FY9 FY1 FY11# FY12E FY13E Operating income 936 1,142 1,52 1,573 1,88 Liabilities EBITDA 13 213 331 338 357 Equity share capital 39 39 39 39 39 EBITDA margin 13.9% 18.6% 21.8% 21.5% 19.8% Reserves 167 24 278 37 478 Depreciation 74 79 78 79 82 Minorities - - - - - EBIT 56 134 253 259 275 Net worth 25 242 317 48 517 Interest 97 92 113 14 96 Convertible debt - - - - - Operating PBT (41) 42 14 155 179 Other debt 1,121 1,149 1,339 1,239 1,164 Other income 2 2-2 3 Total debt 1,121 1,149 1,339 1,239 1,164 Exceptional inc/(exp) () () - - - Deferred tax liability (net) 13 141 189 189 189 PBT (39) 44 14 157 182 Total liabilities 1,457 1,532 1,844 1,836 1,87 Tax provision (12) 12 48 52 6 Assets Minority interest - - - - - Net fixed assets 1,158 1,92 1,42 1,43 1,41 PAT (reported) (28) 32 92 15 122 Capital WIP - - - - - Less: Exceptionals () () - - - Total fixed assets 1,158 1,92 1,42 1,43 1,41 Adjusted PAT (27) 32 92 15 122 Investments 25 25 25 25 25 Current assets Ratios Inventory 16 333 625 63 679 FY9 FY1 FY11# FY12E FY13E Sundry debtors 151 19 192 198 228 Growth Loans and advances 12 93 16 11 127 Operating income (%) 2.3 22. 33.2 3.5 14.9 Cash & bank balance 18 15 57 63 13 EBITDA (%) (24.9) 63.8 55.7 1.9 5.8 Marketable securities - - - - - Adj PAT (%) (227.3) (217.4) 185.7 14.2 15.8 Total current assets 377 55 98 975 1,46 Adj EPS (%) (227.3) (217.4) 185.7 14.2 15.8 Total current liabilities 13 134 22 26 242 Net current assets 274 416 778 769 84 Profitability Intangibles/misc. expenditure - - - - - EBITDA margin (%) 13.9 18.6 21.8 21.5 19.8 Total assets 1,457 1,532 1,844 1,836 1,87 Adj PAT margin (%) (2.9) 2.8 6.1 6.7 6.7 RoE (%) (12.6) 14.4 33. 29.1 26.4 Cash flow RoCE (%) 4.2 9.9 16.6 15.7 16.5 (Rs mn) FY9 FY1 FY11# FY12E FY13E RoIC (%) 5.5 9.6 14. 13.5 13.8 Pre-tax profit (39) 44 14 157 182 Total tax paid (1) - (52) (6) Valuations Depreciation 74 79 78 79 82 Price-earnings (x) (4.6) 13.2 4.6 4. 3.5 Working capital changes 2 (144) (32) 15 (85) Price-book (x).6 1.8 1.3 1..8 Net cash from operations 54 (21) (12) 2 119 EV/EBITDA (x) 9.5 7.3 5.1 4.7 4.4 Cash from investments EV/sales (x) 1.5 1.5 1.3 1.1 1. Capital expenditure (65) (13) (28) (8) (8) Dividend payout ratio (%) - - 16.7 11. 9.5 Investments and others - - - - - Dividend yield (%) - - 3.6 2.7 2.7 Net cash from investments (65) (13) (28) (8) (8) Cash from financing B/S ratios Equity raised/(repaid) - - - - - Inventory days 49 132 192 179 171 Debt raised/(repaid) 19 27 19 (1) (75) Creditors days 4 48 57 56 56 Dividend (incl. tax) - - (18) (14) (14) Debtor days 64 38 52 5 5 Others (incl extraordinaries) 3 5 - - - Working capital days 14 15 135 165 151 Net cash from financing 22 32 172 (114) (89) Gross asset turnover (x).6.6.8.8.9 Change in cash position 12 (3) 42 6 (5) Net asset turnover (x).9 1. 1.4 1.5 1.7 Closing cash 18 15 57 63 13 Sales/operating assets (x).8 1. 1.4 1.5 1.7 Current ratio (x) 3.7 4.1 4.9 4.7 4.3 Quarterly financials Debt-equity (x) 5.5 4.7 4.2 3. 2.3 (Rs mn) Q4FY1 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Net debt/equity (x) 5.4 4.7 4. 2.9 2.2 Net sales 315 335 378 397 49 Interest coverage.6 1.5 2.2 2.5 2.9 Change (q-o-q) 23% 6% 13% 5% 2.9% EBITDA 47 79 14 77 62 Per share Change (q-o-q) -12% 69% 31% -26% -2.1% FY9 FY1 FY11# FY12E FY13E EBITDA margin 14.9% 23.6% 27.4% 19.4% 15.1% Adj EPS (Rs) (7.1) 8.4 23.9 27.3 31.6 PAT 8 25 38 21 8 CEPS 12. 28.8 44.2 47.7 52.8 Adj PAT 8 25 38 21 8 Book value 53.2 62.8 82. 15.8 133.9 Change (q-o-q) 34% 22% 51% -44% -61.% Dividend (Rs) - - 4. 3. 3. Adj PAT margin 2.6% 7.5% 1.% 5.4% 2.% Actual o/s shares (mn) 3.9 3.9 3.9 3.9 3.9 Adj EPS 2.2 6.5 9.8 5.6 2.1 #FY11 numbers based on the abridged financials Source: Company, CRISIL Equities estimate CRISIL Limited. All Rights Reserved. CRISIL EQUITIES 5

CRISIL Independent Equity Research Team Mukesh Agarwal Senior Director +91 (22) 3342 335 magarwal@crisil.com Tarun Bhatia Director, Capital Markets +91 (22) 3342 3226 tbhatia@crisil.com Chetan Majithia Head, Equities +91 (22) 3342 4148 chetanmajithia@crisil.com Sudhir Nair Head, Equities +91 (22) 3342 3526 snair@crisil.com Prasad Koparkar Head, Research +91 (22) 3342 3137 pkoparkar@crisil.com Ajay D'Souza Head, Research +91 (22) 3342 3567 adsouza@crisil.com Aparna Joshi Head, Research +91 (22) 3342 354 apjoshi@crisil.com Manoj Mohta Head, Research +91 (22) 3342 3554 mmohta@crisil.com Sridhar C Head, Research +91 (22) 3342 3546 sridharc@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 CRISINFAC Industry research on over 6 industries and Economic Analysis Customised Research on Market sizing, Demand modelling and Entry strategies Customised research content for Information Memorandum and Offer documents CRISIL Limited. All Rights Reserved.

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