Zodiac Clothing Company Ltd (ZCCL)

Zodiac Clothing Company Ltd (ZCCL) BUY CMP: Rs.426.00 Rs.3574.14mn. Key Ratios: Particulars FY09 FY10E FY11E OPM (%) 10.34 14.37 14.39 NPM (%) 5.35 7.98 7.97 ROE (%) 12.85 16.77 15.32 ROCE (%) 17.64 22.66 21.08 P/BV(x) 3.04 2.53 2.14 P/E(x) 23.62 15.08 13.97 EV/EBDITA(x) 12.22 8.38 7.74 Debt-Equity(x) 0.21 0.18 0.16 Key Data: Sector Textiles Face Value Rs.10.00 52 wk. High/Low Rs.440.00/Rs.148.00 Volume (2 wk. 1451 Avg.) V.S.R. Sastry Vice President Equity Research Desk 91-22-25276077 vsrsastry@firstcallindiaequity.com Target Price: Rs.490.00 Market Cap.: SYNOPSIS ZCCL is a vertically integrated, designdriven, transnational clothing company with manufacturing facilities in India and Dubai. It has been in this business for the last 50 years and is considered to be the finest quality shirt maker in India. ZCCL has one of the best business models in the form of production against order, which allows ZCCL to derisk its business to the highest extent. ZCCL is emerging as one of the fastest and strongest growing branded retailers in India. ZCCL is laying more focus on increasing its domestic revenues and at the same time, it intends to stabilise its growth in the export segment as well. The top-line and bottom-line of the company are expected to grow at a CAGR of 12% and 8% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

Table of Content Content Page No. 1. Investment Highlights 03 2. Company Profile 04 3. Peer Group Comparison 07 4. Key Concerns 07 5. Financials 08 6. Charts & Graph 10 7. Outlook and Conclusion 11 8. Industry Overview 12 2

Investment Highlights Result Update (Q2 FY10) Zodiac disclosed a good increase in standalone net profit for the quarter ended September 2009. During the quarter, the profit of the company rose 62.94% to Rs 83.10 million from Rs 51.00 million in the same quarter last year. Net sales for the quarter rose 0.55% to Rs 735.60 million, while total income for the quarter rose 0.66% to Rs 745.50 million, when compared with the prior year period. It posted earnings of Rs 9.90 a share during the quarter, registering 62.94% growth over previous year period. Operating profit margin of the company witnessed a increase to 19.10% from the corresponding previous quarter of 12.97%. Interest cost increased 16.67% to Rs 3.50 million while depreciation cost increased 8.49% to Rs 11.50 million over previous year period. Quarterly Results Standalone (Rs in mn) As at Sep-09 Sep-08 %Change Net Sales 735.60 731.60 0.55 Net Profit 83.10 51.00 62.94 Basic EPS 9.90 6.08 62.94 Designs on the youth The demographics have changed radically over the last four or five years because of the number of young people coming into the work-force, some of who are paid really big money. Many of these people have one-third of their income left over for discretionary spending. There is an unstated dress code executives follow at the Zodiac office in Worli, Mumbai. They wear one brand of the company on each day of the week. So while Wednesday is for Zodiac linens, Thursday is reserved for Z3, the youthful shirts launched by the company less than a year ago.the company has been positioned in the market place as casual wear which requires very low maintenance the shirts needn t go under the iron at all. It as a perfect fit for the man who doesn t wear a tie to work. 3

Dividend Declaration The company has recommended a Dividend of Rs 6.50 per share (@ 65% on face value of Rs.10/- each) for the financial year ended March 31, 2009. Company Profile ZCCL is a vertically integrated, design-driven, transnational clothing company with manufacturing facilities in India and Dubai. With nationwide sales, distribution & retail network, ZCCL has a 5,000 sq. ft. Design Studio in Mumbai coupled with Design & Sales offices in 3 fashion capitals of the world London, New York & Dusseldorf. Currently has 3 powerful brands Zodiac - for the classic yet contemporary male. ZOD! Club Wear for the socially active young man & Z3 a casual wear positioned as Relaxed Luxury. Business Areas 4

Company products Ties Shirts Suits Trousers Cotton polo knits Cuff links, Belts Socks and handkerchiefs 5

Company major brands ZODIAC It has become a strong premium masculine brand that appeals to people above 35. ZOD ZOD is one of the most popular brand. Z3 Z3 has been positioned in the market place as casual wear which requires very low maintenance. Subsidiaries Multiplex Collapsible Tubes Ltd. Zodiac Clothing Company S.A., Switzerland Zodiac Clothing Company (U.A.E.) 6

Peer Group Comparison Name of the company Zodiac Clothing CMP(R.s) (As on Jan. 13, 2010) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) 426.00 3574.14 21.26 20.04 3.04 65.00 Page Industries 860.00 9592.30 31.60 27.22 11.05 170.00 Gokaldas Exports 170.00 5843.90 0.33 515.15 1.32 - KPR Mill 98.00 3692.90 1.75 56.00 0.72 20.00 Key Concerns Glob economic slowdown More number of players and tough competition Labour costs which have risen substantially in the country for two consecutive years. Increased volatility in forex. 7

Financials Results update 12 months ended Profit & loss Account (Standalone) Value(Rs. in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales 2282.30 2829.30 2970.77 3208.43 Other Income 201.50 31.20 40.56 44.62 Total Income 2483.80 2860.50 3011.33 3253.04 Expenditure -2121.90-2567.90-2584.57-2791.33 Operating Profit 361.90 292.60 426.76 461.71 Interest -14.90-11.90-14.28-15.71 Gross Profit 347.00 280.70 412.48 446.00 Depreciation -36.00-41.50-47.73-52.50 Profit before Tax 311.00 239.20 364.75 393.51 Tax -109.40-87.90-127.66-137.73 Profit after Tax 201.60 151.30 237.09 255.78 Equity Capital 83.90 83.90 83.90 83.90 Reserves 1066.50 1093.10 1330.19 1585.97 Face Value 10.00 10.00 10.00 10.00 Total No. of Shares 8.39 8.39 8.39 8.39 EPS 24.03 18.03 28.26 30.49 8

Quarterly ended Profit & Loss Account (Standalone) Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec- 09E Description 3m 3m 3m 3m Net Sales 708.00 637.90 735.60 772.38 Other Income 8.60 8.70 9.90 10.89 Total Income 716.60 646.60 745.50 783.27 Expenditure -659.90-567.20-605.00-663.47 Operating Profit 56.70 79.40 140.50 119.80 Interest -2.90-3.30-3.50-3.68 Gross Profit 53.80 76.10 137.00 116.12 Depreciation -10.30-11.00-11.50-12.08 Profit before Tax 43.50 65.10 125.50 104.05 Tax -18.20-23.70-42.40-36.42 Profit after Tax 25.30 41.40 83.10 67.63 Equity Capital 83.90 83.90 83.90 83.90 Face Value 10.00 10.00 10.00 10.00 Total No. of Shares 8.39 8.39 8.39 8.39 EPS 3.02 4.93 9.90 8.06 9

Charts 10

1 Year Comparative Graph ZODIAC BSE SENSEX Outlook and Conclusion At the current market price of the stock Rs.426.00, the stock trades at a P/E of 15.08x and 13.97x for FY10E and FY11E respectively. The EPS of the stock is expected to be at Rs.28.26 and Rs.30.49 for the earnings of FY10E and FY11E respectively. The top-line and bottom-line of the company are expected to growth a CAGR of 12% and 8% respectively over FY08 to FY11E. On the basis of EV/EBDITA, the stock trades at 8.38x and 7.74x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 2.53x for FY10E and 2.14x for FY11E. ZCCL is engaged in premium readymade men s wear. It also has a retail presence that is slated to grow fast. ZCCL is laying more focus on increasing its domestic revenues (through its own retail chain and sales to independent stores) and at the same time, it intends to stabilise its growth in the export segment as well. 11

We recommend to BUY this stock with a target price of Rs.490.00 for medium to long term investment. Industry Overview The Indian textile industry is one of the oldest and most significant industries in the country. It accounts for around 4 per cent of the gross domestic product (GDP), 14 per cent of industrial production and over 13 per cent of the country's total export earnings. In fact, it is the largest foreign exchange earning sector in the country. Moreover, it provides employment to over 35 million people. The Indian textile industry is estimated to be around US$ 52 billion and is likely to reach US$ 115 billion by 2012. The domestic market is likely to increase from US$ 34.6 billion to US$ 60 billion by 2012. It is expected that India's share of exports to the world would also increase from the current 4 per cent to around 7 per cent during this period. India's textile exports have shot up from US$ 19.14 billion in 2006-07 to US$ 22.13 billion in 2007-08, registering a growth of over 15 per cent. Textiles and Apparel Trade As per the latest figures available with the Ministry of Textiles, India exported textiles worth US$ 15.27 billion during April-December 2008. Indian textiles, handlooms and handicrafts are exported to more than 100 countries, with the US being the largest buyer. Readymade garments (RMG) are the largest export segment, accounting for almost 41 per cent of total textile exports. RMG exports from India were worth US$ 9.06 billion in 2007-08. During April 2008- February 2009, RMG exports were worth US$ 8.59 billion, an increase of 4.86 per cent over the corresponding period of 2007-08. Significantly, apparel is the second largest retail category in India. The domestic apparel retailing industry is estimated to be round US$ 2.7 billion and in spite of recession is likely to grow at 5-7 per cent in 2009-10. The domestic organized garment retailing clocked a growth of 13-14 per cent for year ended March 2009. 12

The accessories market is pegged between US$ 298.6 million and US$ 597.3 million, which has been growing at 15 to 18 per cent. Within this, the branded accessories segment is growing at 25 per cent. Investments in the Textile Sector The domestic textiles and apparels market in India is witnessing strong growth owing to a young population, an increase in disposable incomes and a rapid growth in organized retail. Consequently, the domestic market is estimated to grow to over US$ 50 billion by 2014. Significantly, the textile sector is estimated to offer an incremental revenue potential of no less than US$ 50 billion by 2014 and over US$ 125 billion by 2020. The textile industry has attracted FDI worth US$ 850 million during August 1991 and December 2008. Textile and Apparel Sourcing India is fast establishing itself as a global textile and apparel-sourcing hub with its abundant multi-fibre raw material base, well established production bases, design capability and skilled labour force. According to the Confederation of Indian Industry-Ernst & Young Textiles and Apparel Report 2007, the Indian sourcing market is estimated to grow at an annual average rate of 12 per cent from an expected market size of US$ 22 billion-us$ 25 billion in 2008 to US$ 35 billion-us$ 37 billion by 2011. Simultaneously, world's cutting edge fashion brands such as Hugo Boss, Diesel and Liz Claiborne are stepping up their sourcing from India. Khadi The Asian Development Bank (ADB) has offered to lend US$150 million to India to help revive the popularity of Khadi. The revival of Khadi industry is expected to bolster employment opportunities in India, particularly in the rural areas. India s Eleventh Five Year Plan notes Khadi production has huge employment prospects, particularly for women and minorities. A US$ 2 million grant will be provided by the Japan Special Fund through ADB to support the implementation and monitor the progress of the Khadi industry reform package funded by the ADB loan. 13

Technical Textiles Technical or functional textiles are those textiles that have some functional properties attached to it and are different from traditional textiles that are merely used for adoration. The technical textiles market which at present is around US$ 80.1 million and growing at a healthy pace of about 12 per cent, is expected to touch US$ 13.7 million by 2012-13. Keeping this in mind, the government has designed Centres of Excellence for agrotech, buildtech, meditech and geotech group of technical textiles at an outlay US$ 8.97 million. The government will shortly launch a US$ 122.42 million Technology Mission on Technical Textiles and also create a Development Council for Technical Textiles. In an effort to promote the technical textile industry in the country, the central government has formed a committee to put in place a regulatory framework for usage of technical textile products in different areas. Government Initiatives In an effort to increase India's share in the world textile market, the government has introduced a number of progressive steps. 100 per cent FDI allowed through the automatic route. De-reservation of readymade garments, hosiery and knitwear from the smallscale industries sector in end-2000. Technology Mission on Cotton was launched in February 2000 to make quality raw material available at competitive prices. Technology Upgradation Fund Scheme (TUFS) which was launched to facilitate the modernization and up gradation of the textiles industry in 1999 has been given further extension till 2011-12. A total of 18773 applications involving a project cost of US$ 24.91 billion have been sanctioned under TUFS upto March 31, 2008. 40 textile parks are being set up under the Scheme for Integrated Textile Parks (SITP) which will attract an investment of US$ 4.38 billion. In current times of a global meltdown, the government has come out with an economic stimulus package for the textile industry. This includes: 14

Additional allocation of US$ 285.66 million to clear the entire backlog in TUFS, which would enhance cash flow of the exporters. Extension of interest rate subvention of 2 per cent on pre and post shipment credit Additional fund of US$ 224.42 million for refund of terminal excise duty. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. 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. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for 15

any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Research: Email info@firstcallindia.com B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Auto Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. 16 For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai 400 071