Kandagiri Spinning Mills Ltd

Q1FY12 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 (negative 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.

Inventory losses impact profitability Fundamental Grade 2/5 (Moderate fundamentals) Valuation Grade 3/5 (CMP is aligned) Industry Textiles, Apparel & Luxury goods August 19, 211 Fair Value Rs 9 CMP Rs 83 CFV MATRIX Excellent Fundamentals Kandagiri Spinning Mills Ltd s (Kandagiri s) Q1FY12 revenues and earnings were lower than CRISIL Research s expectation. Revenues de-grew by 14% y- o-y and 29% q-o-q to Rs 29 mn. The government had imposed a cap on yarn exports during 21-11, resulting in greater competition in the fragmented cotton yarn segment. This adversely impacted the ability of small spinners like Kandagiri to off-load their yarn inventory. The company reported a loss of Rs 26 mn at PAT level on account of significant increase in raw material costs. High cotton cost inventory and declining cotton yarn prices impacted profitability. We lower our estimates in order to factor in the current industry dynamics of declining cotton prices. We maintain the fundamental grade of 2/5 given moderate demand prospects in the domestic cotton yarn segment. Q1FY12 result analysis Fundamental Grade 5 4 3 2 1 Poor Fundamentals 1 2 3 4 5 Valuation Grade Q1FY12 revenues de-grew by 14% y-o-y and 29% q-o-q to Rs 29 mn due to lower off-take in the domestic market. Kandagiri reported an EBITDA margin of 6.% in Q1FY12, a decline of over 15 bps on a y-o-y basis and 9 bps on a q-o-q basis. Raw material cost as a proportion of revenues rose to 64% in Q1FY12 from 47% in Q1FY11. High cost inventory (raw cotton) procured in the previous two quarters and declining cotton yarn prices in the current quarter significantly moderated Kandagiri s profitability. The company reported a loss of Rs 26 mn at the PAT level as compared to a profit of Rs 25 mn in Q1FY11. A significant decline in operating profitability and higher interest expenses adversely impacted overall profitability. Stretched working capital requirements due to the inventory build-up led to higher short-term borrowings and consequently higher interest expenses. Valuations: Current market price is aligned We have used the discounted cash flow method to value Kandagiri. Our fair value is revised to Rs 9 due to downward revision in earnings estimates. At this value, the implied P/E multiple is 3.7x FY13E and the implied P/BV multiple is.9x. KEY STOCK STATISTICS NIFTY 4944 NSE ticker KANDAGIRI Face value (Rs per share) 1 Shares outstanding (mn) 3.9 Market cap (Rs mn)/(us$ mn) 322/7 Enterprise value (Rs mn) /(US$ mn) 1,63/35 52-week range (Rs) (H/L) 147/79 Beta.6 Free float (%) 3.1% Avg daily volumes (3-days) 1,41 Avg daily value (3-days) (Rs mn).1 SHAREHOLDING PATTERN 1% 9% 8% 7% Strong Downside 3.1% 3.1% 3.1% 3.1% Strong Upside KEY FORECAST (Rs mn) FY9 FY1 FY11# FY12E FY13E 6% 5% 4% 3% 69.9% 69.9% 69.9% 69.9% Operating income 936 1,142 1,52 1,389 1,596 EBITDA 13 213 331 158 316 Adj PAT (27) 32 92 (2) 92 Adj EPS-Rs (7.1) 8.4 23.9 (5.2) 23.9 EPS growth (%) (156.1) (217.3) 185.7 (121.6) NM Dividend yield(%) - - 4.8-3.6 RoCE (%) 4.2 9.9 16.6 5.1 16.2 RoE (%) (12.6) 14.4 33. (6.5) 27.5 PE (x) (4.6) 1. 3.5 (16.1) 3.5 P/BV (x).6 1.3 1. 1.1.9 EV/EBITDA (x) 9.5 6.8 4.8 8.9 4.5 FY11# numbers are based on abridged financials NM: Not meaningful; CMP: Current market price Source: Company, CRISIL Research estimate 2% 1% % Sep-1 Dec-1 Jun-11 Promoter Others PERFORMANCE VIS-À-VIS MARKET Returns 1-m 3-m 6-m 12-m KANDAGIRI -7% -15% -8% -12% NIFTY -8% -9% -4% -6% ANALYTICAL CONTACT Sudhir Nair (Head) snair@crisil.com Neeta Khilnani nkhilnani@crisil.com Arun Vasu avasu@crisil.com Client servicing desk +91 22 3342 3561 clientservicing@crisil.com CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 1

Q1FY12 Result Summary (Rs mn) Q1FY12 Q4FY11 Q1FY11 q-o-q (%) y-o-y (%) Net sales 29 49 336 (29.1) (13.7) Raw materials cost 186 233 159 (2.4) 17.1 Raw materials cost (% of net sales) 64.% 57.1% 47.2% 695bps 1685bps Employees cost 34 32 29 6. 17. Other expenses 53 82 69 (35.2) (22.3) EBITDA 17 62 8 (71.8) (78.3) EBITDA margin 6.% 15.1% 23.9% (97)bps (1787)bps Depreciation 2 2 2 (.5) 1.5 EBIT (2.4) 41.7 6.7 (15.8) (14.) Interest and finance charges 37 31 25 2.9 47.4 Operating PBT (39) 11 36 (128.1) (21.7) PBT (39) 11 36 (455.) (21.7) Tax (13) 3 11 (564.3) (223.8) PAT (26) 8 25 (418.1) (25.2) Adj PAT (26) 8 25 (418.1) (25.2) Adj PAT margin -9.1% 2.% 7.5% (1114)bps (1658)bps No of equity shares (mn) 3.9 3.9 3.9 - - Adj EPS (Rs) (6.8) 2.1 6.4 (418.1) (25.2) Revenues declined y-o-y and q-o-q High cost cotton inventory and declining yarn prices impacted profitability Source: Company, CRISIL Research Reversal of cotton and yarn prices (Rs/kg) 3 25 2 15 1 5 Reduction in delta in Q1FY12 Spinners stock cotton inventory due to its seasonal nature. Inventory of cotton at high costs and declining yarn prices have led to margin contraction for spinners in Q1FY12 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Apr-11 Jun-11 Jul-11 Cotton * cotton cost adjusted for inventory Source: CRISIL Research Cotton Yarn Revenues and EBITDA fell y-o-y PAT and PAT margin on a declining trend (Rs mn) (%) (Rs mn) (%) 45 4 35 3 25 2 15 1 5 27.4 23.9 2.7 19.4 14.9 15.1 6. 256 315 336 378 397 49 29 3 25 2 15 1 5 5 4 3 2 1-1 -2-3 1. 7.8 5.4 2.4 2.6 2. 6 8 26 38 21 8-26 -9.1 15 1 5-5 -1-15 Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q3FY1 Q4FY1 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Revenues EBITDA margin (RHS) PAT PAT margin (RHS) Source: Company, CRISIL Research Source: Company, CRISIL Research CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 2

Share price movement 14 12 1 8 6 4 2 Fair value movement since initiation (Rs) 16 14 12 1 8 6 4 2 (') 45 4 35 3 25 2 15 1 5 Jan-8 Mar-8 May-8 Jul-8 Oct-8 Dec-8 Feb-9 Apr-9 Jul-9 Sep-9 Nov-9 Jan-1 Apr-1 Jun-1 Aug-1 Nov-1 Jan-11 Aug-11 Oct-1 Nov-1 Dec-1 Dec-1 Jan-11 Jan-11 Feb-11 Apr-11 Jun-11 Jul-11 Aug-11 -indexed to 1 Kandagiri Source: NSE, CRISIL Research NIFTY Total Traded Quantity (RHS) CRISIL Fair Value Kandagiri Source: NSE, CRISIL Research EARNINGS ESTIMATES REVISED DOWNWARDS FY12E FY13E Particulars Unit Old New % change Old New % change Revenues (Rs mn) 1573 1,389-12% 188 1,596-12% EBITDA (Rs mn) 338 158-53% 357 316-12% EBITDA margin % 21.5% 11.4% -113bps 19.8% 19.8% bps PAT (Rs mn) 15 (2) -119% 122 92-24% PAT margin % 6.7% -1.4% -811bps 6.7% 5.8% -96bps EPS Rs 27.3 (5.2) -119% 31.6 23.9-24% Line item Reasons for change in FY12 and FY13 estimates Revenues Lower realisations of cotton yarn EBITDA margin High cotton cost inventory and declining cotton yarn prices in FY12 PAT margins Reduction in EBITDA estimates in FY12 Increase in interest rates Higher working capital requirements led to higher debt and, consequently, higher average interest costs CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 3

VALUATION We continue to use the discounted cash flow method to value Kandagiri. We have lowered our earnings estimates and increased the cost of equity by 1 bps in order to factor in the increased risk perception in the present uncertain economic scenario. Consequently, our fair value is revised to Rs 9 per share. At this value, the implied P/E multiple is 3.7x and the implied P/BV multiple is.9x FY13E. One-year forward P/BV band (Rs) 14 12 1 8 6 4 2 Jan-8 Mar-8 Jun-8 Aug-8 Nov-8 Jan-9 Apr-9 Jun-9 Sep-9 Nov-9 Feb-1 Apr-1 Jul-1 Sep-1 Dec-1 Aug-11 Kandagiri Ltd.5x 1.x 1.25x 1.5x Source: NSE, CRISIL Equities One-year forward EV/EBITDA band (Rs mn) 2,5 2, 1,5 1, 5 Oct-8 Jan-9 Apr-9 Jun-9 Sep-9 Nov-9 Feb-1 Apr-1 Jul-1 Oct-1 Dec-1 EV 1x 1.25x 1.5x Source: NSE, CRISIL Equities Aug-11 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 19-Aug-11 Q1FY12 result update 2/5 Rs 9 3/5 Rs 83 * 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 RESEARCH 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 1,389 1,596 Liabilities EBITDA 13 213 331 158 316 Equity share capital 39 39 39 39 39 EBITDA margin 13.9% 18.6% 21.8% 11.4% 19.8% Reserves 167 24 278 258 337 Depreciation 74 79 78 79 79 Minorities - - - - - EBIT 56 134 253 79 237 Net worth 25 242 317 297 375 Interest 97 92 113 111 12 Convertible debt - - - - - Operating PBT (41) 42 14 (32) 135 Other debt 1,121 1,149 1,339 1,129 1,129 Other income 2 2-2 3 Total debt 1,121 1,149 1,339 1,129 1,129 Exceptional inc/(exp) () () - - - Deferred tax liability (net) 13 141 189 189 189 PBT (39) 44 14 (3) 138 Total liabilities 1,457 1,532 1,844 1,614 1,693 Tax provision (12) 12 48 (1) 46 Assets Minority interest - - - - - Net fixed assets 1,158 1,92 1,42 1,43 964 PAT (reported) (28) 32 92 (2) 92 Capital WIP - - - - 8 Less: Exceptionals () () - - - Total fixed assets 1,158 1,92 1,42 1,43 1,44 Adjusted PAT (27) 32 92 (2) 92 Investments 25 25 25 25 25 Current assets Ratios Inventory 16 333 625 381 437 FY9 FY1 FY11# FY12E FY13E Sundry debtors 151 19 192 171 21 Growth Loans and advances 12 93 16 97 112 Operating income (%) 2.3 22. 33.2 (8.6) 14.9 Cash & bank balance 18 15 57 5 32 EBITDA (%) (24.9) 63.8 55.7 (52.4) 1. Marketable securities - - - - - Adj PAT (%) (227.3) (217.4) 185.7 (121.6) NM Total current assets 377 55 98 699 782 Adj EPS (%) (227.3) (217.4) 185.7 (121.6) NM Total current liabilities 13 134 22 152 158 Net current assets 274 416 778 547 625 Profitability Intangibles/misc. expenditure - - - - - EBITDA margin (%) 13.9 18.6 21.8 11.4 19.8 Total assets 1,457 1,532 1,844 1,614 1,693 Adj PAT margin (%) (2.9) 2.8 6.1 (1.4) 5.8 RoE (%) (12.6) 14.4 33. (6.5) 27.5 Cash flow RoCE (%) 4.2 9.9 16.6 5.1 16.2 (Rs mn) FY9 FY1 FY11# FY12E FY13E RoIC (%) 5.5 9.6 14. 6.4 14. Pre-tax profit (39) 44 14 (3) 138 Total tax paid (1) - 1 (46) Valuations Depreciation 74 79 78 79 79 Price-earnings (x) (4.6) 1. 3.5 (16.1) 3.5 Working capital changes 2 (144) (32) 224 (95) Price-book (x).6 1.3 1. 1.1.9 Net cash from operations 54 (21) (12) 282 76 EV/EBITDA (x) 9.5 6.8 4.8 8.9 4.5 Cash from investments EV/sales (x) 1.5 1.4 1.2 1.1 1. Capital expenditure (65) (13) (28) (8) (8) Dividend payout ratio (%) - - 16.7-12.5 Investments and others - - - - - Dividend yield (%) - - 4.8-3.6 Net cash from investments (65) (13) (28) (8) (8) Cash from financing B/S ratios Equity raised/(repaid) - - - - - Inventory days 49 132 192 113 125 Debt raised/(repaid) 19 27 19 (21) - Creditors days 4 48 57 4 4 Dividend (incl. tax) - - (18) - (14) Debtor days 64 38 52 49 5 Others (incl extraordinaries) 3 5 - - - Working capital days 14 15 135 16 125 Net cash from financing 22 32 172 (21) (14) Gross asset turnover (x).6.6.8.7.8 Change in cash position 12 (3) 42 (8) (18) Net asset turnover (x).9 1. 1.4 1.3 1.6 Closing cash 18 15 57 5 32 Sales/operating assets (x).8 1. 1.4 1.3 1.5 Current ratio (x) 3.7 4.1 4.9 4.6 5. Quarterly financials Debt-equity (x) 5.5 4.7 4.2 3.8 3. (Rs mn) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Net debt/equity (x) 5.4 4.7 4. 3.6 2.9 Net sales 336 378 397 49 29 Interest coverage.6 1.5 2.2.7 2.3 Change (q-o-q) 7% 13% 5% 3% -29% EBITDA 8 14 77 62 17 Per share Change (q-o-q) 71% 29% -26% -2% -72% FY9 FY1 FY11# FY12E FY13E EBITDA margin 23.9% 27.4% 19.4% 15.1% 6.% Adj EPS (Rs) (7.1) 8.4 23.9 (5.2) 23.9 PAT 26 38 21 8 (26) CEPS 12. 28.8 44.2 15.2 44.3 Adj PAT 26 38 21 8 (26) Book value 53.2 62.8 82. 76.8 97.3 Change (q-o-q) 214% 45% -44% -61% -418% Dividend (Rs) - - 4. - 3. Adj PAT margin 7.8% 1.% 5.4% 2.% -9.1% Actual o/s shares (mn) 3.9 3.9 3.9 3.9 3.9 Adj EPS 6.8 9.8 5.6 2.1 (6.8) #FY11 numbers are based on abridged financials Note: All ratios are computed on Adj PAT Source: Company, CRISIL Research estimate CRISIL Limited. All Rights Reserved. CRISIL RESEARCH 5

CRISIL Research Team Senior Director Mukesh Agarwal +91 (22) 3342 335 magarwal@crisil.com Analytical Contacts Tarun Bhatia Director, Capital Markets +91 (22) 3342 3226 tbhatia@crisil.com Prasad Koparkar Head, Industry & Customised Research +91 (22) 3342 3137 pkoparkar@crisil.com Chetan Majithia Head, Equities +91 (22) 3342 4148 chetanmajithia@crisil.com Sudhir Nair Head, Equities +91 (22) 3342 3526 snair@crisil.com Jiju Vidyadharan Head, Funds & Fixed Income Research +91 (22) 3342 891 jvidyadharan@crisil.com Ajay D'Souza Head, Industry Research +91 (22) 3342 3567 adsouza@crisil.com Ajay Srinivasan Head, Industry Research +91 (22) 3342 353 ajsrinivasan@crisil.com Sridhar C Head, Industry Research +91 (22) 3342 3546 sridharc@crisil.com Manoj Mohta Head, Customised Research +91 (22) 3342 3554 mmohta@crisil.com Business Development Vinaya Dongre Head, Industry & Customised Research +91 (22) 3342825 vdongre@crisil.com Ashish Sethi Head, Capital Markets +91 (22) 3342823 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.

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