Alok Industries Limited

Transcription

ICRA EQUITY RESEARCH SERVICE
ALOK INDUSTRIES LIMITED
Industry: Textiles
September 19, 2011
ICRA Online Grading Matrix
Valuation Assessment

Alok Industries Limited (Alok), promoted by the Jiwrajka family, is a vertically
integrated leading textile manufacturer having presence across the value chain from
cotton spinning, polyester yarn, apparel fabrics, home textiles and garments
manufacturing to retailing of garments and accessories. The company has 16
manufacturing plants located at Silvasa, Vapi and Navi Mumbai.

Besides textile operations in India, Alok holds 100% stake in ‘Mileta a.s.’, an integrated
textile company with established distribution network in Czech Republic. On
completion of the recently approved merger with ‘Grabal Alok Impex Limited’, Alok
would hold ~90% stake in ‘Grabal Alok (UK) Limited’ - a garments and accessories
retailing chain having 219 stores across England, Scotland and Wales. Besides, Alok
has also made one time investments into commercial and residential real estate
business through its wholly owned subsidiary, ‘Alok Infrastructure Limited’. Although
the retail investments of the company may take time to yield results, we expect the
company to actively monetize its investments in real estate business to improve the
capital structure and the return indicators over the medium term.
78.8
Market Cap (Rs. crore)
1445.6
52-Week High (Rs.)
35.0
52-Week Low (Rs.)
15.6
Free Float (%)
70.6%
Beta
1.2
6 Month Avg Daily Volumes (Rs Cr)
22.6
Source: Bloomberg, as on 16th September, 2011
Alok Industries: Current Valuations
8.00
6.9
5.9
6.00
4.00
3.4
4.9
4.1
3.3
1.9
2.00
1.3
FY11a
FY12e
FY13e
Price/Earnings
FY14e
EV/EBITDA
Shareholding Pattern (30th June, 2011)
Promoters
29%
NonInstitutions
38%
FIIs
21%
DIIs
12%
Share Price Movement (18 months)
175%
150%
125%
100%
Alok Industries Ltd
Sep-11
Jul-11
Aug-11
Jun-11
Apr-11
50%
May-11
75%
Mar-11
FY14E
13,888
22.0%
7.7%
13.66
38.1%
1.34
0.29
23.8%
16.8%
4.08
18.4
Shares Outstanding (crore)
Jan-11
FY13E
11,203
22.9%
7.0%
9.89
78.1%
1.86
0.36
20.9%
14.0%
4.85
Alok In
Current Market Price (Rs.)
Feb-11
Table 1: Alok’s key financials indicators (Consolidated)
FY10A
FY11A
FY12E
Operating Income (Rs. crore)
4,423
6,612
9,038
EBITDA Margin (%)
28.7%
27.4%
23.2%
3.1%
6.6%
4.8%
PAT Margin (%)
EPS (Rs.)
1.75
5.39
5.55
EPS Growth (%)
86.0%
208.1% 3.1%
P/E (x)
10.50
3.41
3.30
P/BV (x)
0.53
0.52
0.43
RoE
5.9%
15.7%
14.1%
RoCE
9.5%
10.3%
11.1%
EV/EBITDA
7.71
6.88
5.93
Source: Company, ICRA Online estimates
Bloomberg Code
Dec-10
Grading Sensitivities
The key grading sensitivities in our view are: 1) Sustainability of the global economic
revival remains to be seen 2) Vulnerability to regulatory policies and foreign exchange
rates 3) Steep decline in cotton prices could impact margins in near term due to high
cost inventories 4) Competitive pressures from other low cost destinations could
worsen incase of relapse in global demand outlook 5) Consolidation of UK retail
business to moderate margins and weaken capital structure in near term 6) Delays in
monetization of non-core assets could impact the capital structure and return
indicators of the company.
Key Stock Statistics
Oct-10
Grading Positives
The key grading positives in our view are: 1) Well diversified client base and strong
domestic business 2) Aggressive capacity expansions and strong domestic
consumption demand could result in healthy volume growth going forward 3) Efforts
to move up the value chain could further improve realizations 4) Vertically integrated
operations leads to operational efficiencies; focus on improving capacity utilisation
and asset turnover to help maintain profitability margins 5) Potential exit from the
non-core businesses (Real Estate & Retail) to improve capital structure and return
indicators over the medium term
A
B
C
D
E
5
4
3
2
1
Fundamental Grading of ‘3/5’ indicates “Good
Fundamentals”
Valuation Grading of ‘A’ indicates “Significantly
Undervalued” on a relative basis
Nov-10
ICRA Online has assigned the Fundamental Grade ‘3’ and the Valuation Grade ‘A’
to Alok Industries Limited (Alok). The Fundamental Grade “3” assigned to Alok
implies that the company has “good fundamentals” relative to other listed
securities in India. The Valuation Grade ‘A’ assigned to Alok implies that the
company is “significantly undervalued” on a relative basis (as on the date of the
grading assigned).
Sep-10
Fundamental and Valuation Grades
Fundamental
Assessment
Initiating Coverage
Nifty index
Source: Bloomberg, ICRA Online Estimates
1
ICRA Equity Research Service
INVESTMENT SUMMARY
Diversified and integrated nature of operations with strong domestic business
Alok Industries : Revenue Break-up (FY11)
Garments
3%
Spinning &
Trading
9%
Polyester
26%
Home
Textiles
15%
Apparel
Fabric
47%
Alok Industries : Revenue Break-up (FY11)
Exports
Sales %
35%
Domestic
Sales %
65%
Source: Company; ICRA Online Estimates
While the near term outlook for the domestic textile industry remains uncertain due to renewed fears of global
economic slowdown, volatility in cotton prices and exchange rate fluctuations; we expect the large diversified players
like Alok to be better placed due to integrated operations and relatively strong domestic business. Alok’s textile
operations are vertically integrated with in-house spinning, weaving, knitting, designing, processing and garmenting
units making it one of the few large scale organised players in India. For its apparel fabrics and home textiles segment,
backward integration into manufacturing of cotton yarn (spinning) and in-house processing of grey fabric for fashion
wear / technical textiles has enabled the company to garner higher operating margins. Apart from presence across the
cotton value chain, the company also has presence in synthetic fibre through its polyester texturising capacity,
backwardly integration into Partially Oriented Yarn (POY). Further, large scale of operations enables procurement
efficiency through bulk raw material purchases and diversified client base enables stable demand and better
realizations even during uncertain times.
Capacity expansions and strong domestic consumption demand could result in healthy revenue growth;
Improving capacity utilisation / asset turnover and focus on value-added products to maintain profitability
Alok is currently undergoing capacity expansions accoss its spinning, apparel fabric and home textiles segments.
Besides, we expect the company to aggressively expand its polyester yarn capacity from ~200,000 MTPA in FY11 to
~500,000 MTPA in FY12e and ~900,000 MTPA in FY14e; inorder to leverage upon the rapidly increasing manmade
fibre demand due to limited land availability for cultivation of natural fibres, high dependence on agro-climatic
conditions and higher domestic spending in the price sensitive rural markets. As a result, polyester division will
emerge as the largest revenue contributor for Alok with revenues increasing from 25% of Alok’s overall sales in FY11
to 42% of sales in FY14e. Overall, aggressive capacity expansions across business segments (more so in polyester
division) along with continuing strong domestic consumption demand are expected to result in a healthy 28% CAGR
in the consolidated revenues for the company over the FY11-FY14e period.
2
Exhibit 1: Installed Capacities
Units
'000 MT
('000 Spindles)
Rotors
FY09a
33.3
252.1
936
FY10a
58.5
300.1
3,792
FY11a
69.0
343.8
3,792
FY12e
80.0
411.8
5,680
FY13e
80.0
411.8
5,680
FY14e
80.0
411.8
5,680
Apparel Fabrics
Processing Woven
Weaving
Knits
Mn. Mtrs
Mn. Mtrs
'000 MT
105.0
70.0
18.2
105.0
93.0
18.2
105.0
93.0
18.2
126.0
170.0
25.0
126.0
170.0
25.0
126.0
170.0
25.0
Home Textiles
Processing
Weaving
Terry Towels
Mn. Mtrs
Mn. Mtrs
'000 MT
82.5
47.0
-
82.5
68.0
6.7
82.5
68.0
6.7
105.0
92.0
13.4
105.0
92.0
13.4
105.0
92.0
13.4
Polyester Yarn
Drawn Texturised yarn (DTY)
Fully Drawn Yarn (FDY)
Partially Oriented Yarn (POY)
'000 MT
'000 MT
'000 MT
77.0
182.5
114.0
182.5
114.0
70.0
200.0
170.0
70.0
500.0
170.0
70.0
700.0
170.0
70.0
900.0
Garments
Mn. Pcs.
15.0
22.0
22.0
22.0
22.0
22.0
Spinning
Although the company has industry leading operating margins, the company plans to further improve capacity
utilizations and optimise product portfolio by focusing on higher value-added products such as yarn-dyed fabrics and
technical textiles. Yarn-dyed fabrics are used in fashionable shirting / womenswear and command better prices than
its current range of products, while technical textiles owing to their specialised nature carry higher margins than the
conventional textiles. Besides, competition is relatively moderate in the technical textiles segment as there are few
established domestic players in this import dependent segment. In polyester yarn segment, Alok’s fresh capacity
additions are aimed at higher value-added yarns such as cationic, dope-dyed, bright and black-dyed yarns. Overall,
despite the steep correction in raw material prices, we expect the company to maintain ~34% EBITDA margins in
apparel fabrics, ~28% in home textiles and ~18% polyester segments. With increasing contributions from polyester
business, overall EBITDA margins are expected to decline by ~4% over the next three years, although the return
indicators are expected to improve considerably due to higher asset turnover and RoCEs in polyester segment.
Potential exit from the non-core businesses (Real Estate & Retail) could improve capital structure; return
indicators to get futher fillip from with increasing contribution from polyester segment
Alok had entered the real estate business and invested ~Rs. 1,500 crore in FY07 to take advantage of the real estate
boom witnessed during 2004-2008. These investments however did not yield desired results and the management is
now pursuing monetisation of these investments and exit the real estate business to improve the capital structure of
the company going forward. Besides, the retail ventures (‘H&A’ & ‘Store Twenty One’) too being B2C businesses have
different and complex business models from Alok’s core spinning, weaving, processing based B2B businesses. These
investments, although require significant management time and energy, currently contribute little to the overall
profitability. Hence, the management may look at exiting the retail ventures too at an appropriate time, inorder to
improve the financial profile and focus on the core profitable businesses of apparel fabrics, home textiles and
polyester yarn. Besides, the large capital expenditures incurred across segments over past five years are expected to
stabilize and improve the return indicators for the company going forward. Again, the overall return indicators are
expected to improve with increasing contribution from polyester segment, as the latter is less working capital
intensive and higher asset turnover (~2.5 times) in comparison to cotton based businesses (~0.5 times).
3
Competition remains intense across segments; international competition could worsen incase of renewed
economic slowdown
In the apparel fabric segment, Alok is present in mid to premium segment where price competition pressures remain
high owing to fragmented nature of industry and consumer price consciousness in the domestic markets. In the home
textiles segment, Alok is mainly present in the exports markets (>95% revenues) where it continues to face stiff
competition from Chinese manufacturers with higher economies of scale and from manufacturers based out of other
low cost destinations like Pakistan. In the polyester yarn segment, domestically the company faces competition from
larger and fully integrated players like Reliance Industries; while internationally Alok faces stiff competition from
chinese manufacturers that account for close to 70% of global production capacity. While increasing domestic
demand, rising finance cost and reducing labour cost arbitrage in China are likely to aid long-term prospects for
leading Indian manufacturers like Alok; faultering global economic growth and weakening discretionary spendings
could intensify competitive pressures due to lower capacity utilizations over the near term.
Exhibit 2: Intense competitive pressures across segments
Key Segments
Apparel Fabrics
Key Competitors

Competitors from the organized segment include Arvind Mills, Vardhman Textiles, Nahar
Industrial Enterprises and Bombay Rayon Fashions

Abhishek Industries, Indo Count Industries, Himatsingka Seide, Bombay Dyeing and Welspun
India are some of the major Indian players in the bed linen segment.
Stiff competition with manufacturers based out of China and Pakistan
Competition from established domestic players like Reliance Industries, JBF Industries, Indo
Rama Synthetic, Garden Silk Mills, Futura Polyesters and Century Enka
Competition from Chinese polyester yarn manufacturers that dominate the global polyester
market with ~ 70% market share
Home Textiles


Polyester Yarn

Besides, the merger of Grabal Alok Impex Ltd and thereby consolidation of Grabal Alok UK (retail business)
could moderate margins and weaken capital structure at the consolidated level
Exhibit 3: Estimated Merger Impact
FY12e
Alok (Ex Grabal Alok UK)
Revenues (Rs Cr)
EBITDA (Rs Cr)
EBITDA Margin (%)
8,012
2,057
25.7%
Grabal Alok UK
Revenues (Rs Cr)
EBITDA (Rs Cr)
EBITDA Margin (%)
1,026
41
4.0%
Alok (Consolidated)
Revenues (Rs Cr)
EBITDA (Rs Cr)
EBITDA Margin (%)
9,038
2,098
23.2%
EBITDA Margin Impact
-2.5%
Alok’s board of directors have recently approved the
proposal for amalgamation of Grabal Alok Impex Limited
(GAlok),
engaged in manufacturing wide range of
embroidered fabrics. GAlok had reported ~Rs. 235 crore
revenues with ~21% EBITDA margins in FY11. Besides,
since GAlok holds 48.7% in Grabal Alok (UK) Limited
(GAUKL), Alok’s effective shareholding in this UK based
retail chain will increase from ~41.3% to ~90%, making it a
subsidiary of Alok Industries.
We expect the consolidatation of GAUKL to adversely impact
the financials of Alok industries in near term, as the retail
chain has recently achieved EBITDA breakeven and is yet to
breakeven at net profit levels. Considering the weak outlook
for retail sales in UK, we have assumed ~9% revenue growth
and ~4% EBITDA margins for GAUKL in FY12e. Overall, the
merger is expected to reduce the consolidated EBITDA
margins by ~2.5% and weaken the capital structure by
additional debt burden of ~Rs. 600 crore, in the near term.
4
Valuation seems quite attractive even after factoring the near term headwinds
Despite the near term headwinds faced by the textile industry, Alok’s current valuation multiples (~3.3 times FY12
earnings, ~0.43 times FY12 book value) seems quite attractive considering Alok’s integrated and diversified business
model with lower dependence on textile exports. The valuation multiples are are expected to further moderate
rapidly from the FY12e levels due to strong earnings growth over the next three years contributed by large capacity
additions and improvement in the capital structure through exit from non-core businesses. Overall, we expect the
company to report a robust 28% CAGR revenue growth and 36% CAGR EPS growth over the FY11a-FY14e period,
aided by robust capacity expansions and healthy domestic consumuption demand going forward. Hence, we assign a
valuation grade of “A” to Alok on a grading scale of ‘A’ to ‘E’, which indicates that the company is “significantly
undervalued” on a relative basis.
Exhibit 4: Relative Valuations Vs Equity Indices:
Alok
ICRA Estimates
Industries Ltd
NIFTY
INDEX
CNX 500
INDEX
CNX MIDCAP
INDEX
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Price/Earnings
3.30
1.86
13.98
11.88
13.27
11.09
11.31
9.39
EV/EBITDA
5.93
4.85
9.48
8.22
9.35
7.92
9.70
7.91
Price /Sales
0.16
0.13
1.58
1.43
1.30
1.16
0.82
0.74
Price /Book Value
0.43
0.36
2.32
2.03
2.09
1.81
1.51
1.31
Price/Cash Flow
1.36
0.99
10.26
8.85
9.53
8.00
7.01
5.76
* Bloomberg Consensus Estimates as on 16th September, 2011
Exhibit 5: Relative Valuations Vs Industry Peers:
Alok
ICRA Estimates
Industries Ltd
S. Kumars
Nationwide Ltd
JBF
Industries Ltd
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Price/Earnings
3.30
1.86
3.61
2.43
2.68
EV/EBITDA
5.93
4.85
3.94
3.32
3.24
Price /Sales
0.16
0.13
0.23
0.19
Price /Book Value
0.43
0.36
0.44
Price/Cash Flow
1.36
0.99
2.69
Provogue
(India) Ltd
Vardhman
Textiles Ltd
FY12E
FY13E
FY12E
FY13E
2.21
7.96
6.85
3.49
3.38
2.88
10.87
9.39
4.57
4.77
0.13
0.12
0.57
0.51
0.28
0.29
0.36
0.57
0.49
0.46
0.43
0.45
0.41
NA
1.85
1.62
5.69
4.89
1.89
1.90
5
OPERATING PROFILE
Snapshot:
 One of the largest integrated textile companies in India with presence across the value chain from cotton spinning
to manufacturing polyester yarn, apparel fabrics, home textiles and ready-made garments. The company has 16
manufacturing plants located at Silvasa, Vapi and Navi Mumbai.
 Besides, Alok holds 100% stake in Mileta a.s., an integrated textile company with established distribution network
in Czech Republic and will hold ~90% stake in Grabal Alok UK Ltd., a leading garments and accessories retailing
chain having 219 stores across England, Scotland and Wales.
 Alok also made onetime investments into commercial and residential real estate business through its wholly
owned subsidiary, Alok Infrastructure Limited.
Alok’s textile operations comprise of five divisions that span the entire textile value chain. The company is vertically
integrated with in-house spinning, weaving, processing and garmenting units making it one of the few large scale
integrated and organised players in India. Besides, the company, through its subsidiaries and joint ventures have
entered into retailing of garments and accessories as well as real estate construction businesses. The table below
gives break up of operating revenues and EBITDA margins by business segment on consolidated basis:
Exhibit 6: Segment-wise revenues and margins
Revenues (Rs Cr)
FY08a
FY09a
FY10a
FY11a
FY12e
FY13e
Spinning & Trading
294
111
327
574
402
409
430
Apparel Fabric
895
1,610
1,943
2,967
3,107
3,585
4,008
Home Textiles
389
499
707
986
1,087
1,263
1,442
Polyester
493
619
1,193
1,664
2,592
3,905
5,864
Garments
100
139
141
175
175
191
210
Others
123
136
111
212
1,675
1,849
1,936
2,294
3,113
4,423
6,578
9,038
11,203
13,888
FY14e
Total
Revenues Contributions (%)
FY14e
FY08a
FY09a
FY10a
FY11a
FY12e
FY13e
Spinning & Trading
13%
4%
7%
9%
4%
4%
3%
Apparel Fabric
39%
52%
44%
45%
34%
32%
29%
Home Textiles
17%
16%
16%
15%
12%
11%
10%
Polyester
21%
20%
27%
25%
29%
35%
42%
Garments
4%
4%
3%
3%
2%
2%
2%
Others
5%
4%
3%
3%
19%
17%
14%
Total
100%
100%
100%
100%
100%
100%
100%
EBITDA Contributions (%)
FY08a
FY09a
FY10a
FY11a
FY12e
FY13e
FY14e
5%
1%
3%
4%
2%
2%
1%
Apparel Fabric
54%
66%
56%
57%
50%
47%
44%
Home Textiles
22%
19%
20%
16%
15%
14%
13%
Polyester
16%
13%
18%
17%
22%
27%
33%
Garments
3%
3%
3%
2%
2%
1%
1%
-1%
-2%
0%
4%
9%
9%
7%
100%
100%
100%
100%
100%
100%
100%
Spinning & Trading
Others
Total
6
Spinning / Cotton Trading Divison
Snapshot:
 Alok’s Cotton Spinning business has lower revenue contribution (~9% in FY11a) as 80-85% cotton yarn
manufactured is utilized for captive consumption by the fabric and home textiles divisions of the company.
 Alok has the largest spinning facility in India at a single location (Silvassa); further capacity expansion planned
from 343,840 to 441,840 spindles (58,750 tons) and 3,792 to 5,424 rotors (20,210 tons) in FY12 to support
expansions at the in-house weaving and knitting capacities in the fabric and home textiles segment
 Procurement of raw cotton in bulk and during harvest remains crucial to the division’s overall profitability; steep
volatility in cotton prices driven by global demand-supply scenario could squeeze operating margins
 Cotton Trading business remains opportunistic as it gains from temperory mispricings in the market, however
EBIDTA margin remain lower due to the trading nature of business
Lower revenue contribution as 80 to 85% of cotton yarn produced is used for captive consumption; EBIDTA
margins lowered by cotton trading activity
Alok has an in-house spinning unit for cotton yarn, which not only mitigates the risk of reliance on outside supplier
but also enhances margins through the value chain. Besides, the division also trades in raw cotton and cotton yarn to
leverage upon the managment’s deep understanding of domestic and international demand-supply conditions and
gain from temperory mispricings seen the market.
In FY11, the spinning and cotton trading division accounted for Rs. 574 crore or ~9% of operating income for the
company. Volumes and hence revenue generated by spinning & cotton trading activity increased by ~75% in FY11,
primarily on account of low base effect in the previous years and increase in cotton trading activity to encash upon the
rise in cotton prices in the open market.
Exhibit 7: Spinning & Cotton Trading Division – Key Operating Indicators
Product mix
Compact yarn, dyed yarn, blended yarn and organic cotton from coarse to fine counts
Target segment


Primarily captive consumption by fabric and home textiles division (~75 to 80%)
18 to 25% of cotton yarn production is sold to traders, distributors and manufacturing units in
the domestic as well as export markets
Highlights

Largest capacity at a single location in India (Silvassa)





Volatility in raw cotton costs due to uncertain demand-supply situation
Sustained high prices could result in further substitution by polyester
Steep fall could result in company left holding high cost inventories
The company does not generate significant revenue from sale of cotton yarn as large part of the
produce is utilized for captive consumption.
Cotton trading operations of the company are opportunistic, primarily to benefit from spurt in
cotton prices and the company remains a very small player in the said segment.
Thus competition from other spinning mills and cotton traders is not applicable to the company


44,980 tons ring spun yarn (343,840 spindles)
13,520 tons open-ended yarn (3,792 rotors)

Capacity expansion for ring spun yarn to 58,750 tons (411,840 spindles) and open-ended yarn
to 22,250 tons (5,680 rotors) at total cost of Rs. 400 crore in a phased manner till FY12.
Expansion to be funded through term loans Rs. 315 crore and internal accruals of Rs. 85.0 crore.
Expanded capacity too will be used primarily for captive consumption for fabric and home
textiles segment
Industry Scenario
Competition
Current Capacity
Future plans



Source: Company; ICRA Online Research
7
Bulk buying during harvest season leads to high inventories risks; however, trading operations gains in case
of favourable price movements
Alok mitigates the risk of cotton price fluctuations to an extent by purchasing cotton in bulk quantities during the
buying season; when the quality, availability and costs are favourable. Alok procures raw cotton from the open
market, primarily from states of Gujarat, Maharshtra and Andhra Pradesh; though there are no long-term contracts. It
maintains an average nine months inventory of raw cotton primarily for yarn manufacturing resulting in high
inventory holding period. In rising cotton price scenario, the company gains as the benefits of low cost inventory may
not be completely passed on to the customers; however the situation reverses and margins decline if the raw cotton
prices fall steeply in short duration leading to high cost inventories.
Capacity expansions to aid growth in spinning reveneus in FY12, Cotton trading revenues and margins are
expected to moderate after a strong performance over the last two years
Alok is expanding its spinning capacity for manufactring ring-spun yarn to 58,750 tons (411,840 spindles) and openended yarn to 22,250 tons (5,680 rotors) at total cost of Rs. 400 crore in a phased manner till FY12. The expanded
capacities too are expected to be used primarily for captive consumption, while open market sales may continue upto
the tune of ~10-15% annually. Besides, we expect the growth in cotton trading revenues and overall margins for the
division to moderate marginally, after a strong performance over the last two years.
Exhibit 8: Spinning & Cotton Trading Division – Key Financial Indicators
Key Estimates
FY09a
FY10a
FY11a
FY12e
FY13e
FY14e
MT
MT
33,300
8,348
58,500
10,259
69,040
10,356
80,000
9,600
80,000
8,000
80,000
8,000
Cotton Yarn Revenues*
Growth
Rs Cr
%
59.1
71.6
21%
101.1
41%
70.3
-30%
61.5
-13%
64.6
5%
Trading Revenues
Growth
Rs Cr
%
52.0
255.5
392%
473.2
85%
331.2
-30%
347.8
5%
365.2
5%
Total Revenues
Growth
Rs Cr
%
111.1
327.1
194%
574.3
76%
401.6
-30%
409.3
2%
429.8
5%
Spinning Capacity
Cotton Yarn Sales*
* Cotton Yarn Sales refers to open market sales post captive consumption
8
Fabric Division
Snapshot:
 Key business segment for the company contributing ~45% to revenues and ~57% to EBDITA in FY11
 One of the largest and most profitable fabric manufacturer in the country with revenues of ~Rs. 2,967 crore and
EBITDA of Rs. 1,080 crore in FY11
 Higher value addition through processing of grey fabric, with inputs from in-house designing team, differentiates
the company’s fashion wear and technical textile product range; presence in high-end fabric effectively eliminates
competition from unorganised market
 Growth momentum to continue going forward due to the planned increase in annual weaving capacity to 170.0
million meters, knitting capacity to 25,000 MT and processing capacity to 126.0 million meters by FY12
 While the dependence on the fabric division is expected to reduce going forward in the wake of large capacity
enhancement in the polyester division, it is estimated to remain the largest EBIDTA generating segment for Alok
Exhibit 9: Fabric Division – Key Operating Indicators
Product mix
Target segment
Highlights
Industry Scenario
Competition
Current Capacity
(p.a.)
Future plans
(capacity p.a.)

Diversified product mix with cotton / cotton blends of yarn-dyed / piece-dyed fabrics in knits /
woven for daily wear, fashion wear, industrial or technical textiles




Garment converters in India who in turn sell in the domestic as well as export markets
Wholesalers, retailers and traders in the domestic market
Garmenting companies and large format retailers in export market
Institutions/corporate customers for technical textiles


One of the largest players in the apparel fabric segment
Alok’s largest revenue segment (47% of FY 11 sales) with high EBDITA margin of 36% on account of
in-house spinning, designing and processing capacities; increasing share of value added fabric range;
diversified and quality conscious customer base

India’s fabric production was estimated at 54,966 million sq. meters in 2009, strong growth in recent
years as the Indian fabric industry is becoming increasing more competitive globally
The current market size for technical textiles in India is estimated at close to Rs. 40,000 crore with
demand estimated to grow at 11% CAGR to reach about Rs. 66,000 crore by FY 2013



The unorganized / largely fragmented nature of industry makes estimation of market share difficult
Competitors from the organized segment include Arvind Limited, Vardhman Textiles, Nahar
Industrial Enterprises and Bombay Rayon

Processing Capacity of 105.0 million meters
(segregated into three continuous processing lines and one batch processing line)
Weaving capacity of 93.0 million meters (808 weaving looms)
Knitting capacity of 18,200 tones
Yarn Dyeing Capacity of 5,000 tones







Processing capacity – 126.0 million meters
Weaving capacity – 170.0 million meters
Knitting capacity – 25,000 tones
Capacity expansion to be completed in FY12 at an estimated cost of Rs. 225.0 crore through external
debt (~80%) and internal accruals (~20%)
9
One of the largest fabric manufacturer in India with high end processing capabilities
Alok, one of the largest player in the apparel fabric segment, has presence in yarn-dyed fashion wear fabrics and
technical textile fabrics. The company has an in-house weaving capacity of close to 93.0 million meters (to be
increased to 170.0 mn meters) per annum and knitting capacity of 18,200 tones (to be increased to 25,000 tonnes)
per annum. Entire processing of grey fabric (output from weaving and knitting operations) is carried out at its inhouse facility at Vapi which has an annual processing capacity of 105.0 million meters (to be increased to 126 Mn
meters) per annum. The value addition through processing of grey fabric and the company’s in-house designing team
are crucial high margin generators and differentiator for the company’s fashion wear and technical textile product
range. Besides, Alok has benefited in terms of technology absorption for high-quality yarn-dyed fabrics, which are
used for fashionable shirting and high end women’s wear and command premium prices in the market, through its
acquisition of Mileta.
High competitive pressures due to fragmented nature of industry and price consciousness in the domestic
markets; however, presence in value-added fabrics mitigates competition from the unorganised segment
In the apparel fabric segment, Alok is present in mid to premium segment where price competition pressures remain
high owing to fragmented nature of industry and consumer price consciousness in the domestic markets. Alok
competes with organised players like Vardhaman, Arvind, JCT, Nahar Industries and Bombay Rayon. However,
presence in value-added fabrics mitigates competition from the unorganised players that mainly cater to the
commodity fabric or the economy end of the fabric segment. Current installed weaving and processing capacities of
some of the major competitors is given below:
Exhibit 10: Fabric Division – Competitve Scenario
Company
Installed capacity (FY10)




Nahar Industrial Enterprises


Arvind Limited


Vardhman Textiles Limited
Bombay Rayon Fashions


Actual production (FY10)*
Weaving Capcity: 93 million meters
(808 weaving looms)
Knitting Capacity: 18,200 tonnes
Processing Capacity: 105 million
meters


192.3 million meters of woven fabric
7,200 tons of knitted fabric

83.5 million meters of grey and processed
fabric
Weaving Capacity: 34 million
meters of woven shirting fabric, 21
million meters of Khakhi fabric, 33
million meters of voiles
Knitting Capacity: 10,000 tonnes


29 million meters of woven fabric
38 MT of grey fabric
Weaving Capacity: 82 million
meters of fabrics (900 looms)
Prcessing Capacity: 90 million
meters

108 million meters processed fabric

78.2 million meters (large part of capacity was
under commissioned in FY10)
Weaving capacity: 52.8 million
meters (with 453 looms)
Processing Capacity: 58.4 million
meters
Weaving
meters
Source: Company Websites; ICRA Online Research
Capacity:
220
million
*Actual production includes production through third party contractors outsourced production)
10
Technical textiles to gain focus in wake of increasing demand and potential for higher EBIDTA margin
Unlike conventional textile industry, the technical textile industry (market size estimated to reach Rs. 66,000 crore by
FY13e) is an import intensive industry with few companies in India having expertise to manufacture speciality fabrics
such as fire retardant fabric, water repellent, soil release fabric and high visibility fabric. These are widely used in
industrial, aerospace, military, marine, medical, construction, transportation and high technology applications. Alok is
in talks with several international players for technology tie-ups and plans to considerably increase exposure to this
segment to gain from the lower competitive pressures and garner higher margins from the same.
Reputed and diversified customer base helps mitigate client specific risks; strong backward integration helps
minimize the impact of yarn price fluctuations
The apparel fabric division has a highly diversified and reputed customer base which includes garmenting companies
like Shahi Exports and Madura Garments in domestic market (~65-70%), garmenting companies in international
market (~15-20%), institutional sales to armed forces and government organisation (~5-7%) and work wear or
technical textiles (~5-10%). The company manufactures fabric primarily against orders which helps mitigate the risk
of unsold inventory, while the pricing takes into account prevailing market price of raw material (yarn) and foreign
currency rate for exports. Besides, strong backward integration with in-house cotton and polyester yarn production
helps minimize the impact of any adverse fluctuations in yarn prices.
Strong revenue growth expectations on account of healthy domestic demand and capacity augmentation;
margins expected to be maintained through migration to high value-added and fashion fabrics
The apparel fabric division has witnessed strong growth over the years driven by increase in volumes on the back of
healthy demand and capacity augmentation. The segment generates EBDITA margin of close to 36% on account of
backward integration into yarn production, high-end processing and increasing presence in the fashion wear and
technical fabric. Going forward, the shifting production base to Asian countries like India, along with increasing
demand for higher quality fashion apparel and ready-to-wear apparels in India, is likely to benefit established textile
majors like Alok. Besides, the focus on technical textiles along with increasing share of yarn-dyed fashion wear fabrics
is likely to drive realizations and revenue growth for the company. Operating margins too are estimated to remain
strong despite volatile raw material prices as the company, being a large integrated player, benefits from economies of
scale and has demonstrated its ability to pass on increase in input costs to its customers. Overall, we expect the
division to report ~11% CAGR revenue and 34-35% EBITDA margins over the FY12e-FY14e period.
Exhibit 11: Fabric Division – Key Financial Indicators
Key Estimates
FY09a
FY10a
FY11a
FY12e
FY13e
FY14e
Installed Capacities
Processing Woven
Weaving
Knits
Mn Mtrs
Mn Mtrs
MT
105
70
18,200
105
93
18,200
105
93
18,200
126
170
25,000
126
170
25,000
126
170
25,000
Production
Woven fabrics
Knitted fabric
Mn Mtrs
MT
168
6,693
205
6,802
240
9,135
275
12,789
306
16,625
331
19,950
Rs Cr
%
1,610
1,943
21%
2,967
53%
3,107
5%
3,585
15%
4,008
12%
Total Revenues
Growth
Source: ICRA Online Research
11
Home Textiles Division
Snapshot
 Home Textiles division accounted for ~15% of overall revenues and 16% of EBITDA in FY11; Integrated
operations & presence in mid-premium export segment enables high margins (31% EBITDA margin in FY11)
 Alok is mainly present in the exports markets (>95% revenues) where it continues to face stiff competition from
Chinese manufacturers with higher economies of scale and from manufacturers based out of other low cost
destinations like Pakistan
 Presence in the relatively high end home textiles (300 to 500 counts product category) enable higher price
realisation and helps mitigate competition from other low cost manufacturing locations and domestic companies
 Established and reputed multinational clientele results in strong customer profile; periodic pricing resets to
protect marings in case increase in input costs
 Integrated operations with spinning / processing capabilities enables better control over product quality
 Planned increase in processing capacity to 105.0 million meters and terry towel capacity to 13,400 MT to drive
revenue growth going forward
Exhibit 12: Home Textiles Division – Key Operating Indicators
Product mix
Target
segment
Highlights
Industry
Scenario
Alok produces wide range of bed sheets sets, comforters, blankets, quilts, curtains and terry towels. Bed sheets
account for close to 80% of the division’s sale while bed spreads and terry towel account for 10% each





Largest Indian player in export of bed sheets (Received various export awards from Government of India)
Top five player for terry towels
Strong integration with Alok’s spinning division, which supplies close to 80% of its raw material (cotton
yarn) requirement and in-house processing unit enabling control over end product quality

Home Textiles segment is estimated at around US$ 22 - 27 billion, accounting for 5-6% of the total global
textile market
India currently the largest supplier of terry towels and bed sheets
Spend on home textiles is price sensitive in nature with demand vulnerable to economic slowdowns;
however, demand may shift to lower value segment within home textiles



Abhishek Industries, Indo Count Industries, Himatsingka Seide, Bombay Dyeing and Welspun India are some
of the major Indian players in the bed linen segment.
Stiff competition with manufacturers based out of China and Pakistan




Bed sheets – 17.5 million pieces
Processing - 105.0 million metres
Weaving - 68.0 million metres
Terry towels - 6,700 tons

Capacity expansion for processing of fabric to 105.5 million meters, weaving of fabric to 93.0 million metres
and terry towels to 13,400 tons at a cost of Rs. 175.0 crore, to commissioned by FY12.
The capacity expansion will be funded through Rs. 140.0 crore external debt & balance through internal
accruals

Competition
Current
Capacity
Future plans
Export to overseas retailers and brands like Walmart, J.C. Penny, Kohl and Target (exports accounting for ~
95% of overall division’s sales and 45% of total exports of Alok)
Domestic retailers and brands

12
Largest home textiles exporter from India with significant presence in high count bed sheets and terry towels
Alok is the largest manufacturer and exporter home textiles from India with Rs. 986 crore in sales in FY11, growing at
36% CAGR over the last three years on account of increase in capacities, diversification in product mix and improved
realisation per unit on account of higher value add products. The product mix consists of 80% bed sheets, while 10%
is bed spreads and rest are terry towels. Around 10% of terry towel products of Alok are yarn-dyed providing higher
margins while the rest is solid or piece dyed. Alok has limited presence in the domestic market mainly consisting of
economy segment (less than 300 thread counts) and dominated by large number of unorganised players. The
company mainly focuses on export markets (>95% of products are exported) with 300 to 500 thread count products,
where competition is moderate and realizations / margins are relatively higher.
Stiff competition from other low cost destinations; however, presence in the relatively higher count helps
mitigate competition
In the home textiles segment, Alok is mainly present in the exports markets (>95% revenues) where it continues to
face stiff competition from Chinese manufacturers with higher economies of scale and from manufacturers based out
of other low cost destinations like Pakistan. However, presence in the relatively high-end home textiles (300 to 500
counts product category) enable higher price realisation and helps mitigate competition from other low cost
manufacturing locations and domestic companies (products from Pakistan are estimated at 8-12 USD/unit FOB value
while that from Alok are priced at 15-20 USD/unit). Besides, the shift in procurement strategy of large global retailers
from high cost US / European destinations to low cost destinations like India and increasing demand for textile
products in China’s domestic market augurs well for the large Indian players like Alok. The installed capacity of
certain organised players is given below:
Exhibit 13: Home Textiles Division – Competitive Scenario
Company
Installed Capacity (p.a)
Hanung Toys & Textiles
Bed Sheets - 6.85 million pieces
Himatsingka Seide
Bed Sheets - 2.96 million Pieces, Weaving Capacity - 15.7 million metres, Processing Capacity - 20.9
million metres
Abhishek Industries
Terry Towels -41,500 tons
Alok Industries
Bed Sheets - 17.5 million pieces, Terry towel - 6,700 tons
Weaving capacity – 92.0 million meter and processing capacity – 105.0 million meters
Welspun Industries
Weaving capacity – 45.0 million metres, Terry Towel - 41,500 tons
Established and reputed multinational clientele results in strong customer profile; periodic pricing resets to
protect marings in case increase in input costs
The customer portfolio for the home textiles division includes retail giants like Walmart, Target, Kohl’s and JC Penney
in the export market and Pantaloons in the domestic market. The client portfolio for the company is quite diversified,
with top four to five customers accounting only 40% of revenues for the division. In terms of geographies North &
South American markets comprise ~80% of the total sales, Europe contributing ~15% and domestic customers
accounting for balance 5% of the segment’s revenue. Besides, ~95% of products are sold as private labels in these
markets and only 5% are sold as branded products.
13
The company’s customer base consists primarily of organised retailers in the US and European market, where average
spend on and replacement of home textile products is relatively higher than that in the other parts of the world, thus
making it a steady business for retailers. This generates steady order book for large integrated companies like Alok
who can deliver large quantities of higher value add home textile products at reasonable rates and meeting stiff
delivery schedules. Besides, the company has volume-based contracts with its customers where prices are negotiated
every three months based on the input (cotton yarn) prices, thus allowing Alok to hedge its raw material risk.
Capacity enhancements to drive volume growth going forward; however, realizations and margins remain
vulnerable due to significant uncertainities in global demand outlook over the near term
Alok is expanding its Terry Towels capacity, a relatively new segment for the company, from 6,700 MT to 13,400 MT
in FY12. Besides, the company is increasing its in-house weaving capacity from 68.0 to 92.0 million meters per annum
and processing capacity from 82.5 to 105.0 million meters per annum in FY12, inorder to maintain the quality of
finished product. While capacity enhancements are expected to result in robust volume growth going forward, we
expect the operating margins of the division to remain vulnerable to renewed uncertainities over global demand
outlook in the near term. The revenue growth could also be impacted by declining cotton prices and resulting lower
realisations.
However, we expect the price corrections to be buffered by presence in higher count products and high value addition
(i.e. lower raw material costs / realizations) by the division. Besides, the impact on operating margins are expected to
be somewhat mitigated by operating efficiencies resulting from higher economies of scale, integrated nature of
operations, high-end designing capabilities and diversified client base of the company. Overall, we have assumed the
contribution from terry towels to increase to from ~10% in FY11 to ~20% in FY14e and the division to report ~13%
CAGR revenue and 28-29% EBITDA margins over the FY12e-FY14e period.
Exhibit 14: Home Textiles Division – Key Financial Indicators
Key Estimates
Processing
Weaving
Terry Towels
Production
Made-ups
Made-ups
Terry towels
Total Revenues
Growth
FY09a
FY10a
FY11a
FY12e
FY13e
FY14e
Mn. Mtrs
Mn. Mtrs
MT
82.5
47
0
82.5
68
6700
82.5
68
6700
105
92
13400
105
92
13400
105
92
13400
'000 Sets
'000
Pieces
MT
4,073
4,948
5,690
6,401
7,041
7,569
2,456
3,737
4,297
4,835
5,318
5,717
-
1,703
2,555
3,704
5,186
7,001
Rs Cr
%
499
707
42%
986
39%
1087
10%
1263
16%
1442
14%
14
Polyester Yarn Division
Snapshot
 Polyester Yarn division is the second highest revenue generating segment, with close to 25% revenue
contribution and 17% EBITDA contribution in FY11, the division is expected to become highest revenue
contributor by FY14e on the back of large capacity enhancement being undertaken by the company
 Demand scenario likely to remain robust due to increasing substitution of natural fibres; considerable increase in
capacity across sub-segments to meet captive & open market demand to drive volumes growth going forward
 Strong competition from Chinese manufacturers, large Indian peers & unorganised domestic texturisers; however
large scale of operations enables supporting high volumes at competitive prices
 Relatively moderate EBDITA margins due to commodity nature of business; significant volatility in raw material
(MEG & PTA) prices may dampen profitability margins if not hedged or passed through adequately; however
RoCE is expected to remain relatively healthy due to lower working capital intensity and capex requirements
Exhibit 15: Polyester Yarn Division – Key Operating Indicators
Product mix
Present mainly in commodity segment; manufactures Partially Oriented Yarn (POY), Fully Drawn Yarn
(FDY), Drawn Texturised yarn (DTY)
Target segment
Domestic power loom weavers, Direct exports
Highlights
Among top three polyester yarn manufacturing company in India

Competition


Industry Scenario
Competition from established domestic players like Reliance Industries Ltd, JBF Industries Ltd,
Garden Silk Mills Ltd, Futura Polyesters Ltd, Indo Rama Synthetic Ltd., Century Enka
Competition from Chinese polyester yarn manufacturers that dominate the global polyester market
with ~ 70% market share
The global production of Polyester fibre grew by 5.3% in CY10, Polyester Filament Yarn recorded
strong growth of 5.7% to 19.3 million tons and Polyester Staple Fibre grew by 4.6% to 12.6million
Tons. On the other hand, cotton fibre showed a de-growth of 4.8%.
Current Capacity*
POY : 200,000 tons, FDY : 70,000 tons, DTY : 114,000 tons
Future plans
Capacity expansion for DTY to 170,000 tons per annum and to 500,000 tons for POY at an estimated cost
of ~Rs. 860 crore by FY12e
*POY - Partially Oriented Yarn; FDY- Fully Drawn Yarn (FDY), DTY - Drawn Texturised yarn;
Strong competition from Chinese manufacturers, large Indian peers & unorganised domestic texturisers;
however large scale of operations enables supporting high volumes at competitive prices
The polyester yarn segment faces competition from larger & fully integrated players like Reliance Industries
domestically and stiff competition from chinese manufacturers (that account for close to 70% of global production)
internationally. However, Reliance Industries is mainly present in Polyester Staple Fibres (~62% market share) and
has lower presence in Polyester Filament Yarn (~29% market share) segment catered by Alok. Besides, increasing
domestic demand, rising finance cost and reducing labour cost arbitrage in China are likely to aid long-term growth
rates for leading Indian manufacturers like Alok over the medium term.
15
Exhibit 16: Polyester Yarn Division – Competitive Scenario:
Company
Installed Capacity*
Reliance Industries Limited
Indo Rama Synthetics Limited
JBF Industries
Garden Silk Mills Limited
Alok Industries
800,000 tons
303,600 tons
201,200 tons
230,400 tons
200,000 tons
Significant volatility in raw material prices may dampen margins if not hedged or passed through adequately
Polyester Division - Raw Material Price Trend
PTA (US$ per ton)
May-11
Jan-11
Mar-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
1800
1600
1400
1200
1000
800
600
400
200
0
Purified Terephthalic Acid (PTA) and Mono Ethylene
Glycol (MEG) are the primary raw materials constituting
~50-70% of the total sales value for polyester yarn. Being
petrochemical products, prices of PTA and MEG fluctuate
in line with fluctuations in crude oil prices in the long
term. Domestic refining companies like Reliance and IOC
cater to ~75% of Alok’s PTA requirement while the
balance is imported. MEG is completely imported by the
company. Volatility in raw material prices remain a key
challange for the company in view of the commodity
nature of the business.
MEG (US$ per ton)
Source: EmergingTextiles.com
Polyester Yarn division is expected to become highest revenue contributor by FY14e on the back of large
capacity enhancement being undertaken by the company
Alok’s Continuous Polymerisation plant with 200,000 TPA POY capacity became full operational in FY11. We expect
the division to further expand aggressively ~500,000 TPA in FY12e and ~900,000 TPA in FY14e; inorder to leverage
upon the rapidly increasing artificial fibre demand due to limited land availability for cultivation of natural fibres, high
dependence on agro-climatic conditions and higher domestic spending in the price sensitive rural markets. Besides,
Alok plans to shift from semi-dull polyester yarn to relatively higher end products like bright black/cationic yarns
currently being produced by Reliance Industries, JBF Industries and Indo Rama Synthetics. As a result, we expect the
polyester yarn division to report a robust ~52% CAGR revenue growth and emerge as the largest revenue contributor
for Alok, with its revenue contribution increasing from 25% of Alok’s overall sales in FY11 to 42% of sales in FY14e.
While the EBITDA margins for the division are expected to remain moderate (around ~18%); the division generates
higher ROCE on account of relatively lower working capital intensity / capex requirements and higher asset turnover
(~2.5 times) in comparison to cotton based businesses (~0.5 times).
Exhibit 17: Polyester Yarn Division – Key Financial Indicators
Key Estimates
FY09a
FY10a
DTY
FDY
POY
'000 MT
'000 MT
'000 MT
77
0
182.5
114
0
182.5
FY11a
FY12e
FY13e
FY14e
114
65.7
200
170
65.7
500
170
65.7
700
170
65.7
900
16
Production
DTY
FDY
POY
Total Revenues
Growth
FY09a
FY10a
FY11a
FY12e
FY13e
FY14e
'000 MT
'000 MT
'000 MT
71
10
104
28
108
16
56
125
36
140
131
43
279
137
49
488
Rs Cr
%
619
1193
93%
1664
39%
2592
56%
3905
51%
5864
50%
Note: DTY - Drawn Texturised yarn; FDY- Fully Drawn Yarn (FDY), POY - Partially Oriented Yarn
Garments Division
Snapshot
 Currently low level of activities at Alok’s garmenting division; large part of garmenting activity outsourced
 Garment division accounted for close to 3% of total operating income and 2% of EBITDA in FY11
 Division unlikely to contribute significantly higher revenues due to lower management focus currently
Garments currently a small division
Garment division of Alok is currently the smallest in terms of revenue and capacities. During FY11 the division
recorded sales of Rs. 175 crore, an increase of 24% over the previous year. Exports contributed to the majority share
of sales for this division. The garments division increased production capacity to 22 million pieces per annum from 15
million pieces per annum in FY09. The capacity utilisation at present constrained as availability of workers at current
factory location of Silvassa is a problem due to transportation issues for workers. Hence, further capacity
enhancement (7 million pieces) was done at Daman where there is ample availability of labor which is expected to
improve capacity utilisation of the segment in future.
Though opportunities are available in workwear segment for this division to grow, Alok has no plans to aggressively
expand the garmenting facilities further at present however it is considering outsourcing opportunities especially in
Bangladesh, where quality garments can be produced at competitive prices. However, going forward too, the division
is expected to remain a minor contributor to Alok’s overall sales.
Exhibit 18: Garment Division – Key Financial Indicators
Key Estimates
FY09a
FY10a
FY11a
FY12e
FY13e
FY14e
Mn. Pcs.
15.0
22.0
22.0
22.0
22.0
22.0
Production
Mn. Pcs.
4.7
3.7
4.4
5.1
5.9
6.8
Rs Cr
%
139
141
175
175
191
210
39%
2%
24%
9%
10%
11%
Total Revenues
Growth
17
Real Estate Business
Snapshot
 Foray into real estate in FY07, through separate subsidiaries, to be part of the high growth of this sector
 Large accumulation of debt on account of projects under implementation, resulting in pressure on capital
structure despite equity infusion from promoters and institution investors (though QIPs)
 Commercial complex (Penninsula Business Park) project nearing completion; Joint venture in the residential real
estate segment likely to yield results only in the coming years
 Succesful exit from real estate segment likely to aid recovery in overall profitability, capital structure and liquidity
profile of the company
Entry into real estate business to encash the upturn in the real estate industry four years back; looking
actively to exit the business after execution and sale of current projects at hand
Alok had entered the real estate business and invested ~Rs. 1,500 crore in FY07 to take advantage of the real estate
boom witnessed during 2004-2008. The management is aggressively pursuing monetisation of these investments and
exit the real estate business to improve the capital structure of the company going forward. Except the residential
project at Nahur (Mumbai) which may take around three-four years for completion, the company plans to exit from
other real estate ventures by March 2012.
Ashford Center - Four floors to be retained for corporate use, remaining four to be sold by March 2012
Alok, through its subsidiary Alok Infrastructure Limited, had purchased Ashford Center (commercial building, 8
floors, 60,000 sq. ft.) at Lower Parel at ~Rs. 125 crore in 2006. Alok intends to retain four floors for corporate. The
company has recently sold one floor (7,500 sq. ft) at the rate of Rs. 21,000 per sq. ft. while the other three floors is are
expected to be sold at similar rates by March 2012.
Peninsula Business Park - Tower ‘B’: Lease agreements to be signed soon, complete sell off expected later
The company, through its wholly owned step-down subsidiary Alok Realtors Limited, had invested ~Rs. 1,275 crore in
Peninsula Business Park (Tower B, 20 floors, 641,000 sq. ft) in 2006. The site is located at Lower Parel (near Phoenix
Mills) in Mumbai and is being developed by Peninsula Lands Limited with civil work carried on Shapoorji Pallonjee
Group. The building is located in close proximity to the Lower Parel and Currey Road stations, 5-star hotels like ITC
and Four Seasons and other major commercial complexes like Indiabulls, DLF, HDFC Bank House & Ambit RSM. The
proposed project is exposed to market risks on account of significant upcoming commercial space in its vicinity. Alok
is scouting for potential lessees to rent out the premises and plans to sell the property to real estate funds after the
property is completely lease out. The company has recently lease out two floors to an FMCG at a rate Rs. 225 per sq.ft.
We have assumed 50% occupany by March 2012, 100% by H1 FY13e and complete sell-off / exit from the venture at
~17,000 Rs/sq. ft. during FY13e in our projections.
Land at Silvassa (500 acres) – SEZ plans shelved, to be sold at more than five times cost price
Alok had acquired 500 acres of industrial land for at a total cost of Rs. 50 crore (Rs. 10 lakh per acre) at Silvasa in
2006, with the intention of developing Textile SEZ. However, the company has shelved its development plan and
intends to sell the same at Rs. 60-70 lakh per acre. The company in advanced talks to sell around 73 acres for a
consideration of Rs. 50 crore. We have assumed the remaining land to the monitized in various phases for ~Rs 300
crore by FY14e.
18
Ashford Royale Residential Complex : ~1.1 msf to be developed in Nahur by December 2013
The company, through Alok Infrastructure Limited, has entered into 50:50 joint venture for developing a residential
complex on a 7 acre plot (CEAT factory) at Nahur1. The plot is being developed by Ashford group into two 42 storey
and two 37 storey buildings (total 608 flats) with landscaped garden, club house, gymnasium and swimming pool and
a total saleable area of 1.1 mn. Sq.ft.. The civil contract has been awarded to Talati, Panthaki & Associates. The project
is estimated to be completed by December 2014.
Exhibit 19 : Alok’s Real Estate Businesses
Key Projects
1) Ashford Center
(100% Subsidiary)
Major Updates / Expected monitization




2) Peninsula Business Park Tower B (100% Subsidiary)
3) Land at Silvassa
(100% Subsidiary)






4) Ashford Royale
(50:50 Joint Venture)


Commercial building at Lower Parel : Saleable area 60,000 sq. ft.
The company plans to retain ~30,000 sq. ft. for corporate use
We expect remaining ~30,000 sq. ft. to be sold off at ~21,000 Rs/sq. ft. during
the current fiscal year
Commercial building at Lower Parel: 20 floors, Saleable area 641,000 sq. ft.
Recently leased out two floors at a rate Rs. 225 per sq.ft.; we expect 50%
occupany by March 2012 and 100% by H1 FY13e
We have assumed complete sell-off and subsequent exit from the venture at
~17,000 Rs/sq. ft. during FY13e in our projections
500 acres industrial land at Silvassa
The company in advanced talks to sell around 73 acres for a consideration of
Rs. 50 crore
We have assumed the remaining land to the monitized in various phases for
~Rs 300 crore by FY14e.
Residential Project: ~1.1 million sq ft to be developed in Nahur (Mumbai) by
Dec 2014
We have assumed sales booking in 8,500 – 10,500 Rs/sq. ft. range; Land cost at
Rs. 137 crore, construction costs at ~ 4500 Rs / sq. ft.
Our assumptions regarding sales bookings and revenue / cost recognitions for
the complete project are as follows:
FY11a
FY12e
FY13e
FY14e
FY15e
Total Area
Mn Sq Ft
1.1
1.1
1.1
1.1
1.1
Market Rate
Rs/Sq Ft
8500
9000
9500
10000
10500
Sales Booking (%)
%
25%
50.0%
75.0%
100.0%
100.0%
Constuction Completion (%)
%
25%
50.0%
75.0%
100.0%
Sales / Cost Recognition
%
13%
38%
75%
100%
0%
Revenue Recognition
Rs. Crore
127.19
254.38
381.56
254.38
Cost Recognition
Rs. Crore
79
158
237
158
Source: Company, ICRA Online Research
1
Nahur is a North Eastern suburb of Mumbai and is located between Mulund and Bhandup.
19
UK Retail Business – Grabal Alok UK
Snapshot
 Foray into UK retail market through acquisition of ~90% stake in ‘Grabal Alok UK’ through its subsidiary –
‘Alok Industries International Ltd’ and associate company – ‘Grabal Alok Impex Ltd’
 Consolidatation of ‘Grabal Alok UK’ post the proposed merger with ‘Grabal Alok Impex’, likely to adversely
impact the financials of Alok industries in near term
 Rebranding of stores and operational improvements to aid turnaround of the ailing UK retailer; achieved cash
breakeven in FY11 and expected to achieve net breakeven in FY13e
 The management may look to divest it post turnaround, if Alok makes decent returns on the investment
With an intention to enter the garment and accessories retail market in the UK, Alok, through its subsidiary acquired
~41.3% equity stake its associate company Grabal Alok Impex, through its subsidiary, acquired close to 48.71% stake
in British retailer, Grabal Alok (UK) Limited (GAUKL) in 2007. Recently, Alok’s board has approved the merger of
Grabal Alok Impex with Alok, which will make GAUKL a 90% subsidiary of Alok Industries.
Rebranding of stores and operational improvement measures to aid turnover of the ailing UK retailer
GAUKL has 219 stores across England, Scotland and Wales, where it retails value-for-money and quality fashion for
women, men, girls, boys and infants. It also sells accessories like artificial jewellery, shoes and leather bags. After
acquiring the company, Alok’s management undertook a re-branding exercise, re-naming the outlets from ‘QS’ to
‘Store Twenty One’. The stores are now being repositioned from being a discount retailer to a value retailer and
opportunities for setting up ‘shop-in-shop’ in large format stores are also being looked upon. A series of other
measures such as shifting of sourcing to Asian countries, improving quality of merchandise, cost reduction initiatives
been initiated to reduce losses and increase operational efficiencies, which has resulted in a cash breakeven in FY11.
Operations of the UK company are yet to achieve break even and are likely to require further financial and operation
support from Alok. Consolidatation of ‘Grabal Alok UK’ post the proposed merger with ‘Grabal Alok Impex’, likely to
adversely impact the financials of Alok in near term. The management considers all real-estate and retail businesses of
the company as non-core businesses and may plan to divest the stake in the UK retailer once the operations turn
positive and the company makes decent returns on its investment.
Domestic Retail Business - Alok H&A Limited
The company, through its wholly owned subsidiary Alok H&A Limited, has ventured into retail of garments, home
textiles and accessories through exclusive brand outlets (EBOs) and is positioned as an affordable lifestyle brand with
presence across 75 cities in 22 different states of India. At the end of March 2011, Alok operated close to 290 H&A
stores in India. The stores are operated on asset-light franchisee model, where the company incurs no capital or rental
cost. Apart from the standard format stores, which are usually 800 square feet to 1,000 square feet in size, the
company is also looking at larger format stores up to 2,500 square feet to accommodate all categories – men’s, ladies,
children’s clothes, home furnishings and accessories such as footwear, sun glasses and perfumes. Though Alok is
looking to expand store count to 500 by March 2012 using the franchiese model, the retail business is not estimated to
account for more than 5% of its overall (consolidated) operating revenues for the company. Besides, the management
may look to spun-off the venture into a separate company incase they turn more aggressive on the domestic retail
business.
20
OTHER SUBSIDIARIES AND ASSOCIATES
Grabal Alok Impex Limited - Presence in embroidered products; to be merged with Alok in FY12
Grabal Alok Impex Limited (GAlok) was incorporated in 1993 through technical collaboration with Grabal Albert
Grabher GmbH & Co, Austria and is engaged in manufacturing wide range of embroidered fabrics having application
in the home textiles, apparel fabrics and garmenting. GAlok one of the largest domestic manufacturers of embroidered
fabric with a capacity of 34 billion stitches a year. The company has presence in both international and domestic
markets with customers including domestic traders and garment manufacturers, international branded apparel
companies and international home textile retailers. GAlok had reported ~Rs. 235 crore revenues with ~21% EBITDA
margins in FY11. Besides, the company indirectly holds 48.71% in British retailer, Grabal Alok (UK) Limited (GAUKL).
Alok’s board of directors have recently approved the amalgamation of GAlok into Alok though a 1:1 swap ratio. This
will result in ~2.6% equity dilution and marginal increase in promoter holding from 29.37% to 29.71% in Alok. GAlok
has ~Rs. 600 crore external liabilites on its balance sheet, which consists of bank term loans, working capital loans,
FCCBs, Convertible Debentures and redeemable preference shares. Overall, the merger of Grabal Alok Impex Ltd and
thereby consolidation of GAUKL is expected to reduce the consolidated EBITDA margins for the company by ~2.5% in
FY12e and weaken the capital structure by additional debt burden of ~Rs. 600 crore, in the near term.
Mileta a.s –synergies through transfer of advanced yarn dyeing technologies to Alok’s fabric division;
Exhibit 20: Mileta a.s – Operating Profile
Product mix
Shirting fabrics, table linen and bed linen
Target segment
Exports mainly to Europe, North Africa, the Americas, the Middle East, the Far East and the Asia Pacific regions
Key brands
Mileta’s brands – Mileta, Erba, Cottonova, Lord Nelson and Wall Street
Alok holds ~100% stake in Mileta a.s, an integrated textile entity based out of Czech Republic. The acquisition has
benefited by way of technology inputs from the Czech entity, especially in value added yarn dyed fabrics. Post the
acquisition Alok has been able to make quality yarn-dyed fabrics, which are priced at ~Rs. 130-140 per meter, a
significant premium to its earlier realisations, although the same forms less than 10% of its fabric sales currently. Alok
also stands to gain access to Mileta’s well-established distribution network in the USA and Europe. Besides, Alok has
launched some of the Mileta brands – Erba (for handkerchiefs) and Lord Nelson (for premium shirting) – in the Indian
market. Cottonova a home textile brand of Mileta is manufactured in Alok’s home textile plant and being exported.
Alok was able to turnaround Mileta’s performance through production efficiencies, optimising headcount and other
cost rationalisation efforts in FY10. Thus despite the slowdown in the European markets, Mileta generated cash
profits of the company of Euro 0.30mn. (Rs. 1.83 crores) during FY 2010 as against cash loss of Euro 4.17 mn. (Rs.
25.26 crores) during the previous year.
21
Indian Textiles Industry Outlook
Snapshot
 Global economic growth outlook weakens, recent rupee depreciation to provide some respite to exporters
 Steep decline in raw cotton prices could impact industry margins in near term due to high cost inventories
 However, textile & apparel industry expected to grow healthy ~10-12% over the long term due to favourable
demographics domestically and shifting of manufacturing base to lower cost destinations globally
Global economic growth outlook weakens, recent rupee depreciation to provide some respite to exporters
After a strong recovery in 2009 and relatively healthy growth in 2010, the US GDP growth rate has again started
slowing signs of a slowdown. Besides, the gradual unwinding of fiscal stimulus, persistantly high unemployment rate,
falling home prices, lower consumer spending and increase in personal savings rate has weakened the medium term
economic growth outlook for US. Moreover, budget cuts / austerity plans by eurozone countries to combat sovereign
debt crisis and high reconstruction costs post massive earthquake / tsunami in Japan could further impact consumer
sentiments and reduce discretionary spends on Textiles & Apparels (T&A) over the medium term.
Indian Rupee Vs. USD
54.00
Indian Rupee Vs. Euro
75.00
52.00
70.00
50.00
48.00
65.00
46.00
60.00
44.00
50.00
Indian Rupee Vs. Chinese Yuan
0.80
0.75
0.70
0.65
0.60
0.55
0.50
0.45
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
7.80
7.60
7.40
7.20
7.00
6.80
6.60
6.40
6.20
6.00
5.80
Indian Rupee Vs Pakistan Rupee and
Bangladesh Taka
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
40.00
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
55.00
42.00
INR / PKR
INR / BDT
Source: Bloomberg; ICRA Online Estimates
On the other hand, the domestic currency has been appreciating steadily over the last 18 months due to relatively
stronger domestic growth and interest rate hikes by the reserve bank. While the Indian rupee has appreciated against
the currencies of key target markets (like US, Europe), it had also appreciated against competing currencies (Chinese
Yuan, Pakistan Rupee and Bangladesh Taka) over the last 18 months, as evident in the graphs above. However, the
recent steep rupee depreciation provides some respite and is expected to boost the competitiveness of the Indian
Textiles Exports Industry.
22
Steep decline in raw cotton prices could impact industry margins due to high cost inventories; regulatory
interventions remain key monitorables
International Cotton Prices (USD/lb.)
Jul-11
May-11
Jan-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Mar-11
0
0
Nov-10
10,000
20
Sep-10
20,000
40
Jul-10
30,000
60
May-10
40,000
80
Mar-10
50,000
100
Jan-10
60,000
120
Nov-09
70,000
140
Jul-09
160
Sep-09
Domestic Cotton Prices (Sankar -6; Rs/Candy)
Source: EmergingTextiles.com; Bloomberg, ICRA Online Estimates
As shown in the graphs above, international cotton prices had increased significantly from ~75 USD/lb. in June 2010
to ~135 USD/lb. in May 2011 on account of strong recovery in global demand and supply shortages due to
unfavourable climatic conditions in major cotton producing countries like China, Pakistan and United States. In sync
with the global trend, domestic raw cotton prices for the Sankar-6 variety had increased from ~30,000 Rs/candy (1
candy = 355 kg) in June 2010 to ~62,000 Rs/candy in March 2011.
The Government of India (GoI) had initiated several measures in order to ensure cotton availability for the domestic
industry and easing of cotton yarn prices. In April 2010, GoI restricted yarn exports by withdrawing incentives like duty
drawback (4.0%) & Duty Entitlement Pass Book Scheme (7.7%). In December 2010, GoI further restricted yarn exports by
fixing the quantitative export quota of 72.0 crore kgs for FY11 (~22% higher than actual export volume in FY10) and
compressed export window allowing exports only upto 15 January 2011. While there was no export of cotton yarn for over
two-and-a-half months, the industry continued to produce yarn using high-cost cotton in anticipation of strong realisations
from the global markets after the removal of the export ban in April 2011. Besdies, simultaneous closure of several dyeing
units in Tirupur on environmental concerns resulted in a huge pile-up of large unsold cotton yarn stock.
Exhibit 21: Policy Level Changes in CY10
April 2010
Export benefits
on cotton and
cotton yarn
withdrawn
Aimed at de-incentivizing exports;
however, high realisations on
account of strong export demand
kept exports attractive
September
2010
Export of
cotton capped
at 55 lakh bales
for 2010-11
cotton season
Export restrictions on Indian cotton
pushed up the global cotton prices
and in turn yarn realisations
December
2010
Export of
cotton yarn
capped at 72
crore Kg. for
2010-11
No significant impact due to the
quantitative cap; export volume
was hit due to time line restriction
to 15 January 2011
Source: ICRA Research
23
As anticipated, GoI lifted restrictions on cotton yarn exports effective 1st April 2011. In addition, it was listed under ‘free
list’ category, implying that contracts for cotton yarn exports were required to be registered only with the Directorate
General of Foreign Trade (DGFT) and that shipments could go ahead without verification by the Indian customs. However,
overseas customers had started sourcing cotton yarn from alternate global suppliers when the ban was enforced. Hence,
post removal of the export ban, cotton and cotton yarn prices in export market have crashed due to significant additional
supply on account of accumulated stock and weak global demand scenario.
Exhibit 22: Policy level changes in CY2011
April
2011
Export
restriction
on cotton
yarn
removed
Sudden spurt of supply in the
global market amidst demand
slowdown led to a crash in cotton
yarn prices
June
2011
Additional
10 lakh bales
of cotton
export
allowed
No significant impact on cotton
prices due to sufficient availability
of cotton and weak demand
July 2011
- DEPB
benefits on
cotton and
cotton yarn
restored
- Export
restriction
on cotton
removed
Export benefit expected to provide
relief to spinners; no significant
impact on cotton prices
Source: ICRA Research
The fall in cotton prices was accentuated by robust production estimates for the 2011-12 cotton season (runs from
October to September) globally. As per International Cotton Advisory Committee (ICAC), driven by higher prices in
the past one year, global cotton production is expected to increase to 26.9m tons in 2011-12 cotton season, an 8%
increase over previous year. A total surplus of 1.8m tons is expected in 2011-12, helping global stocks to recover by
about 20% to 10.9m tons and boosting the stocks-to-use ratio to 43%, up from 37% in 2010-11. Indian cotton
production too is expected to increase to 35 mn bales (1 Indian bale = 165 kg) in 2011-12 cotton season, an 9%
increase over previous year, aided by higher acreage, better yields on higher Bt cotton adoption & normal monsoons.
We expects the cotton prices to remain near current levels until November / December 2011, as the mills may take time to
consume their current stock of cotton. Subsequently, fresh purchases of cotton are likely to be made at more reasonable
rates upon arrival of fresh cotton in the market. Overall, we expect the steep fall in cotton prices over the last four
months to result in high cost inventories across the industry, the impact of which would have to be partly absorbed by
the domestic textile manufacturers considereing the slackening of global demand recently.
However, lower cotton prices aurgers well for the medium term demand outlook and operating margins for the
domestic textile industry. We expect the demand to improve in the domestic market with the onset of festival season in H2,
2011-12 and in the export markets as well in order to fill the gradually depleting pipeline inventory. Moreover, the recent
decision by GoI to reinstate the DEPB benefits on export of cotton yarn and cotton with retrospective effect from 1 April
2011 and 1 October 2010, respectively; and removal of quantitative cap on cotton exports, may arrest the downward
pressure and help stabilise the prices of cotton and cotton yarn over the near term.
24
Longer term outlook remains healthy due to favourable demographics domestically and shifting of
manufacturing base to lower cost destinations globally
Over the longer term, the domestic growth is expected remain healthy due to increasing population, rising disposable
incomes, rapid urbanization, favorable demographics with a large working class population and increased organized
retail penetration. Additionally, rising disposable income in the hands of rural consumers due to rising agriculture
Income, increased employment generation through National Rural Employment Guarantee Act (NREGA) and Pradhan
Mantri Gram Sadak Yojana (PMGSY) is likely to boost demand for low-ticket items. On the other hand, the exports
markets are expected to grow due to shift of manufacturing bases from developed to low-cost Asian countries as they
are losing their competitiveness for commoditised products to the Asian countries.
Apparel Fabrics – large potential exists for the organised sector in cotton fabrics segment
The Indian fabric market is highly fragmented, comprising of cotton, blended, 100% non-cotton, wool, silk and khadi.
As per the textile ministry, the total fabric production is estimated to be 60,333 mn sq mtrs. Of this, the cotton fabric
market is the largest market estimated at 47.9% of the total fabric market; while the 100% non-cotton, 100% blended
& Khadi, Silk & Wool account for 37.9%, 12.9% & 1.3% respectively. The cotton fabric market has grown at a CAGR of
4.9% over FY05-10, with the organised sector growing at a CAGR of 5.3%. The organised sector in cotton fabrics
accounts for 5.1% of total cotton fabrics production & contributes less than 2.5% of the total fabric production in
India. The share of organised sector is expected to increase with increasing demand for higher quality fashion apparel
and ready to wear apparels in India and Alok is expected to gain owing to its presence in the mid to high value
segment.
Home Textiles - Healthy growth supported by global retailers looking to de-risking their vendor base away
from China and China unable to meet exports demand because of strong domestic growth
Global home textiles market is estimated at around US$ 23 - 26 billion, accounting for 5-6% of the total global textile
market. The home textiles market includes ‘Household textiles’ (Rugs, bed linen, table linen, bathroom and kitchen
linen, etc) and ‘Furnishing textiles’ (Curtains, bedspreads and other furnishing articles for home interiors, etc.). In bed
sheets, quilts and terry towel categories, India faces stiff
competition from Pakistan and China. India and Pakistan
Market Share in Bed Sheets by Value
have been gradually gaining ground in the share of US
38%
32%
imports at the expense of China and other smaller
29%30%
exporting countries such as Israel, Brazil in home textiles.
26%
26%
26%
22%22%
Growth in share of India’s market share is driven by
19%
16%14%
decreasing competitiveness of China in low value-added
textiles, strong domestic demand in China causing
business to be partly diverted towards other countries
and global retailers who are looking at de-risking their
vendor base currently concentrated in China. These trends
India
China
Pakistan
Others
are expected to continue in future too and we believe
CY 2009
CY 2010
March YTD 2011
companies such as Alok having large manufacturing
capacities in place are expected to benefit the most.
Source: Office of Textiles and Apparel (OTEXA), USA
25
Polyester segment - Significant potential in the domestic market due to current low consumption levels
Polyester Fibre per capita consumption (per kg)
All fibres per capita consumption (per kg)
12
10.6
10
7.1
8
6
4
2
0
World
16.5
18
16
14
12
10
8
6
4
2
0
4.7
2.3
World
India
China
India
Source: Saurer, Industry Estimates
Apr-11
Jan 11
Jul-10
Oct 10
Jan-10
Apr-10
Oct-09
Jul-09
Jan-09
Apr-09
Jul-08
Oct-08
Apr-08
Jan-08
Rs. Per Kg.
Global all fibre per capita final consumer demand in 2010 is estimated at 10.6 kg, while that of India is at 7.1 kg. In
comparison, per capita consumption in China is at 16 kg, North America is 31 kg and West Europe is at 22 kg.
Domestic polyester fibre per capita consumption is half that of world average of 4.7 kg and way below China. We
expect the polyester penetration levels to improve considerably going forward due to 1) Improving spending on
textiles in rural areas 2) Increased non-apparel
Domestic Fibre consumption breakup
applications like automobiles and home furnishing 3)
Versatility & high compatibility with natural fibre 4)
Other fibres
(Viscose,
Decline in cultivating land combined with uncertainty of
Acrylic, PP,
natural fibre. The proportion of synthetics vs. cotton
Nylon)
6%
fibre in global fibre consumption worldwide is 57:43
whereas it is the opposite in India where cotton accounts
Polyester
for 61% of the total fibre consumption. Higher
33%
proportion of cotton is mainly because of past
Cotton
61%
government policies favouring such trend, fiscal policy
such as excise duty de-incentivised man-made fibres.
However, the uniform national fibre policy to be
launched by the government soon is expected to correct
this anomaly.
Source: Industry, Company annual reports
Polyester Vs. Other Yarns
As per various industry reports, PFY is expected to lead
300
the domestic demand growth in the overall textile chain.
250
High prices of cotton likely to result in substitution by
200
man-made fibres. The price gap between polyester and
150
cotton is widening and good quality cotton is becoming
100
increasingly difficult to source. Even after a sharp
50
correction in cotton yarn prices, price gap remains
0
substantial. On the other hand the price gap between
polyester and other alternate fibre like viscose/ acrylics
are also widening. This may lead to strengthening of
Cotton Yarn
Polyester yarn
Viscose yarn
polyester demand going forward.
Source: Emerging textiles
26
FINANCIAL OUTLOOK
Snapshot
 Robust revenue growth over the past five years; growth momentum likely to continue on account of
aggressive capital expansions planned in certain segments going forward.
 Healthy EBDITA margins on the back of integrated operations and diversified product portfolio; however
margins expected to moderate with increasing contribution from polyester yarn business;
 However, ROCE likely to witness improvement as polyester segment is relatively less capital intensive when
compared with cotton based segments
Expansion in Polyester Yarn division to drive revenue and EBITDA growth going forward
We expect Alok to remain a leading intergrated player in the domestic textile industry with strong presence across
product segments. We expect the company to exit its non-core real estate and retail ventures in due course and
remain focussed on apparel fabric and home textiles division, along with significant thrust on the rapidly growing
polyester yarn division. While the fabric division is estimated to grow at 11% CAGR over the FY11-FY14e period,
home textiles is expected to growth at 13% CAGR and polyester yarn division to grow at a robust 52% CAGR during
the period, backed by significant capacity expansions planned by the company. As a result, the revenue contribution
from polyester division is expected to rise from ~25% in FY11 to ~42% in FY14e, making it the largest revenue
contribution segment for Alok. Although the EBITDA margin of the polyester segment is expected to remain moderate
at ~18%, significant increase in scale of polyester operations is expected to reduce the dependence on apparel fabric
divisin, whose EBITDA contribution is expected to decline from ~57% in FY11 to ~44% in FY14e.
Alok Industries: Revenue Contributions
100%
80%
21% 20% 27% 25%
Garments
80%
60%
29% 35% 42%
17% 16% 16% 15%
Polyester
60%
40%
12% 11%
10%
Home Textiles
40%
34% 32% 29%
Apparel Fabric
FY14e
FY13e
-20%
Others
Garments
Polyester
Home Textiles
Apparel Fabric
0%
FY12e
FY14e
FY13e
FY12e
FY11e
FY10a
FY09a
FY08a
0%
54% 66% 56% 57% 50%
47% 44%
FY11e
Spinning & Trading
20%
FY10a
20%
39% 52% 44% 45%
16% 13% 18% 17%
22% 27% 33%
22% 19% 20% 16%
15% 14%
13%
FY09a
Others
FY08a
100%
Alok Industries: EBI TDA Contributions
Spinning & Trading
Source: Company ICRA Online Estimates;
Aggressive capacity expansions to drive revenue growth; however higher polyester contribution and
consolidation of UK retail business to reduce margins going forward
Aggressive capacity expansion across business segments (more so in polyester division) along with relatively stable
realisations are expected to result in a healthy 28% CAGR in the consolidated revenues for the company over the
FY11-FY14e period. Despite the steep correction in raw material prices, we expect the company to maintain ~34%
EBITDA margins in apparel fabrics, ~28% in home textiles and ~18% polyester segments. With increasing
contributions from polyester business, overall EBITDA margins are expected to decline by ~4% over the next three
years. Besides, the EBITDA margins are expected to be further impacted by ~2.5% due to the consolidation of UK
based retail business, which has only recently achieved cash breakeven. However, with higher operating leverage,
non-operating incomes stemming from exit of real estate ventures and debt-repayments post exit from non-core
27
businesses, the consolidated EBIT is expected to report 22% CAGR growth and consolidated net profits are expected
to report a robust 36% CAGR growth over the same period (consolidated net margins for the company are expected to
improve from ~6.6% in FY11 to ~7.7% in FY14e).
Total net revenue
Rs Crore
4,000
AIL's Trend in Profitability Margins
40%
3,000
30%
2,000
20%
1,000
10%
FY14e
FY13e
FY10a
EBITDA
EBITDA Margin (RHS)
Revenue Growth % (RHS)
FY12e
0%
FY11a
0
FY14e
FY13e
FY12e
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
FY11a
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
FY10a
Rs Crore
AIL's Consolidated Revenue Growth
PAT
PAT Margin (RHS)
Source: Company ICRA Online Estimates
Profitability indicators to improve from the lows in FY11a; gearing to moderate from FY14e onwards
While the polyester division has lower EBITDA margins, it has higher RoCE due to lower capex and working capital
requirements and higher asset turnover for the business. Hence, even through the consolidated EBITDA margins are
expected to moderate from ~28% in FY11 to ~22% in FY14e, consolidated RoCE for the company is expected to
improve from ~10% in FY11 to ~17% in FY15e and consolidated RoE to improve from ~16% to ~24% during the
same period. The improvement in RoCE is also accentuated by exit from the non-core and capital intensive real estate
ventures of the company, which along with healthy cash accruals are expected to reduce the consolidated debt /
equity for the company from ~4.4 times in FY11 to ~2.1 times in FY14e. Overall, we expect a robust 36% CAGR
growth in EPS for the company over the FY11a-FY14e period, aided by robust capacity expansions and our relatively
stable pricing / realizations assumption going forward.
AIL's EPS Growth
1.0
0%
0.0
RoE
FY12e
ROCE
Debt/ Equity (RHS)
100%
50%
0%
EPS
FY14e
5%
150%
FY13e
2.0
200%
FY12e
10%
250%
FY11a
3.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
FY10a
15%
Rs / Share
4.0
FY14e
20%
FY13e
5.0
FY11a
25%
FY10a
Return indicator (%)
AIL's Return Indicators & Gearing
EPS Growth (RHS)
Source: Company ICRA Online Estimates
28
COMPANY PROFILE
Alok Industries Limited (Alok), promoted by the Jiwrajka family, is a vertically integrated and a leading textile
manufacturer having presence across the value chain from cotton spinning, polyester yarn, apparel fabrics, home
textiles and garments manufacturing to retailing of garments and accessories. The company has 16 manufacturing
plants located at Silvasa, Vapi and Navi Mumbai. At present, apparel fabrics is the largest segment of the company,
accounting for 46.6% of Alok’s standalone sales, followed by polyester yarn (26.1%), home textiles (15.5%), cotton &
cotton yarn trading (9.0%) and balance share(2.7%) comprised by garments.
Alok has international presence through two companies, Mileta a.s. located in Czech Republic in which it holds 100%
stake and Grabal Alok UK Ltd. in which it has 41.7% stake. Mileta a.s. is an integrated textile company with established
distribution network in Europe, North Africa, USA, the Middle East, the Far East and the Asia Pacific regions. The
Mileta acquisition has proved synergistically beneficial for Alok by way of technology inputs for producing valueadded yarn dyed fabrics. Grabal Alok UK Ltd is a leading garments and accessories retailing chain having 216 stores
across England, Scotland and Wales. Alok is also present in domestic retail through its wholly-owned subsidiary, Alok
H&A Limited under which it retails apparel and accessories and home textiles through 291 franshisee stores.
Besides, Alok has also diversified into commercial and residential real estate business through its wholly owned
subsidiary, Alok Infrastructure Limited. Although the retail investments of the company may take time to yield results,
we expect the company to actively monetize its investments in real estate business to improve the capital structure
and the return indicators of the company.
Exhibit 23: Company Factsheet
Name of the Company
Alok Industries Limited (Alok)
Year of Incorporation
1986
Registered Office
Village Rakholi /Sayli, Silvassa, Union Territory of Dadra and Nagar Haveli
Nature of Businesses
Textiles– Spinning, Weaving & Garmenting
Products
Apparel fabrics, home textiles, polyester yarn, cotton yarn and garments. Retail, real estate and embroidery
through subsidiary companies
Manufacturing Locations
Silvasa, Vapi and Navi Mumbai
Auditors
Gandhi & Parekh
Board of Directors
Key subsidiaries/ Joint
Ventures/ associate companies
Mr. Ashok B. Jiwrajka
- Executive Chairman
Mr. Dilip B. Jiwrajka
- Managing Director
Mr. Surendra B Jiwrajka
- Joint Managing Director
Mr. Chandrakumar Bubna
- Executive Director
Mr. Ashok Rajani
- Non-Executive Director (Independent)
Mr. K R Modi
Ms. Thankom. T. Mathew
- Non-Executive Director (LIC Nominee)
Ms. Ms. Maya Chakravorty
- Non-Executive Director (IDBI Nominee)
Mr. M.V. Muthu
- Non-Executive Director (IFCI Nominee)
Mr. Debashish Mallick
- Non-Executive Director (IDBI Nominee)
Mr. David Rasquinha
- Non-Executive Director (EXIM Nominee)
Mr. Timothy Ingram
Alok Infrastructure Limited
Alok H&A Limited
Alok Industries International Ltd.
Alok Land Holdings Private Limited
Mileta, a.s.(incorporated in the Czech Republic)
Grabal Alok (UK) Ltd.
Grabal Alok Impex Limited
29
Governance structure:
Alok is managed by a 12 member Board, which includes seven independent directors, one non-executive director and
three members from the Jiwar family. While the Jiwarajka family is closely involved in running Alok’s business, the
company has a professional management structure across the company. The promoter group holds 29% equity stake
in the company and the rest is widely held and includes institutional investors with . The disclosures in Alok Annual
Report are adequate and have been broadly in line with that followed by the industry.
Alok’s Corporate Structure (March 2011):
Integrated Textiles
Manufacturer
Apparel Fabrics
Market Share: ~14%
Plant Location: Vapi, Silvassa
Capacity: Weaving -93.0 mn.
Mtrs., Processing – 105.0 mn.
Mtrs.
Planned Expansion:
Processing -21.0 mn. Mtrs.,
Weaving – 77.0 mn. Mtrs.
Key Competitors:
Vardhaman Textiles,
Nahar Industrial Enterprises,
SKumars’ Nationwide Limited
Polyester Yarn
Plant Locations: Silvassa
Plant Location: Vapi, Silvassa
Capacity: 270,000 tonnes per
annum
Capacity: Weaving -68.0 mn.
Mtrs., Processing – 82.5 mn.
Mtrs.
Planned Expansion: 300,000
tonnes
Key Competitors:
Reliance Industries,
Indo Rama Synthetics,
JBF Industries,
Garden Silk Mills
Other Holdings
Home Textiles
Planned Expansion: Processing
– 22.5 mn. Mtrs, Weaving – 24.0
mn. Mtrs.
Key Competitors:
Welspun,
Himatsingka Seide,
Hanung Toys & Textiles
Subsidiaries:
Alok H&A Limited
Alok Infrastructure Limited
Alok Realtors Private Limited
Alok Land Holdings Limited
Mileta a.s.
Alok Industries International Limited
Springdale
Information
and
Technologies Private Limited
Kesham Developers & Infotech Private
Limited
Joint Ventures:
Ashford Royale Residential Complex
Associates:
Grabal Alok (UK) Limited
Grabal Alok Impex Limited
Alok H&A Limited
(Domestic Retailing)
Grabal Alok (UK)LimitedAssociate
Alok Realtors Pvt Ltd
(Comercial Real Estate)
Ashford Royale
Residential Complex- JV
Ashford Centre, Lower
Parel
Sales: Rs. 80 crore
Store Count: 291
Products: Apparels and
accessories
Planned expansion: 500
stores by FY 2012, mainly
working capital funding
Store Count: 216
Products: Value retailing of
apparels and accessories
Planned expansion: 20
stores per year
Exit plan: Broken even,
plan to exit by FY 2013 at
cost
Total
saleable
area:
641,000 sq.ft.
Total cost: Rs. 1,275 crore
Status: Possesion by June,
2011
Future plan: Exit in nearterm
Total saleable area: ~1
mn.sq.ft.
Total Cost: ~Rs. 600 crore,
Alok’s share ~ Rs. 300 crore
Project Status: Excavation
started,
Expected
completion:
December, 2014
Total saleable area: 60,000
mn.sq.ft. (8 floors)
Total Cost: ~Rs. 125 crore,
Project Status: Occupancy
certificate received
Future plan: Sell half the
area and retain the rest for
its corporate office
30
VALUATION GRADING
In assessing a company's valuation, various parameters are looked at including the company's earnings and growth
prospects; its ability to generate free cash flows and its capacity to generate returns from the capital invested. The
valuation is also benchmarked against an appropriate peer set or index. The opinion on a company's relative valuation
is expressed using the following five-point scale as follows:
Exhibit 24: ICRA Equity Research Service—Valuation Grades
Valuation Grade
Grade Implication
A
Significantly Undervalued
B
Moderately Undervalued
C
Fairly Valued
D
Moderately Overvalued
E
Significantly Overvalued
While assessing a company's relative valuation,
the historical price volatility exhibited by the
stock, besides its liquidity, is also taken into
account. The extent of overvaluation or
undervaluation is adjusted for the relative
volatility displayed by the stock.
Despite the near term headwinds faced by the textile industry, Alok’s current valuation multiples (~3.3 times FY12
earnings, ~0.43 times FY12 book value) seems quite attractive considering Alok’s integrated and diversified business
model with lower dependence on textile exports. The valuation multiples are are expected to further moderate
rapidly from the FY12e levels due to strong earnings growth over the next three years contributed by large capacity
additions and improvement in the capital structure through exit from non-core businesses. Overall, we expect the
company to report a robust 28% CAGR revenue growth and 36% CAGR EPS growth over the FY11a-FY14e period,
aided by robust capacity expansions and healthy domestic consumuption demand going forward. Hence, we assign a
valuation grade of “A” to Alok on a grading scale of ‘A’ to ‘E’, which indicates that the company is “significantly
undervalued” on a relative basis.
Exhibit 25: Relative Valuations Vs Equity Indices:
Alok
ICRA Estimates
Industries Ltd
NIFTY
INDEX
CNX 500
INDEX
CNX MIDCAP
INDEX
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Price/Earnings
3.30
1.86
13.98
11.88
13.27
11.09
11.31
9.39
EV/EBITDA
5.93
4.85
9.48
8.22
9.35
7.92
9.70
7.91
Price /Sales
0.16
0.13
1.58
1.43
1.30
1.16
0.82
0.74
Price /Book Value
0.43
0.36
2.32
2.03
2.09
1.81
1.51
1.31
Price/Cash Flow
1.36
0.99
10.26
8.85
9.53
8.00
7.01
5.76
Exhibit 26: Relative Valuations Vs Industry Peers:
Alok
S. Kumars
ICRA Estimates
Industries Ltd
Nationwide Ltd
JBF
Industries Ltd
Provogue
(India) Ltd
Vardhman
Textiles Ltd
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Price/Earnings
3.30
1.86
3.61
2.43
2.68
2.21
7.96
6.85
3.49
3.38
EV/EBITDA
5.93
4.85
3.94
3.32
3.24
2.88
10.87
9.39
4.57
4.77
Price /Sales
0.16
0.13
0.23
0.19
0.13
0.12
0.57
0.51
0.28
0.29
Price /Book Value
0.43
0.36
0.44
0.36
0.57
0.49
0.46
0.43
0.45
0.41
Price/Cash Flow
1.36
0.99
2.69
NA
1.85
1.62
5.69
4.89
1.89
1.90
31
ANNEXURES
Alok Industries Limited – P&L Estimates (Consolidated)
Rs. Crores
FY10A
FY11A
FY12E
FY13E
FY14E
Net sales
4,315.5
6,460.4
8,831.3
10,945.9
13,570.2
107.1
151.5
207.1
256.6
318.2
Total net revenue
4,422.6
6,611.8
9,038.3
11,202.6
13,888.3
EBITDA
Other related income
1,267.9
1,809.8
2,098.0
2,563.1
3,050.8
Depreciation
366.9
531.0
627.2
676.1
707.7
EBIT
901.0
1,278.8
1,470.8
1,887.0
2,343.2
Other Income
-37.0
-25.1
116.4
207.7
170.2
Interest Expenses
598.8
737.1
939.7
941.2
920.2
PBT
265.2
516.6
647.5
1,153.5
1,593.2
Tax Expense
128.2
81.2
210.1
374.3
517.0
0.6
-11.2
0.0
0.0
0.0
PAT
137.7
424.2
437.4
779.2
1,076.2
Number of shares (in Cr)
78.77
78.77
78.77
78.77
78.77
EPS
1.7
5.4
5.6
9.9
13.7
CEPS
6.4
12.1
13.5
18.5
22.6
DPS
0.3
0.3
0.8
1.5
2.0
Minority Interest
Alok Industries Limited – Balance Sheet Estimates (Consolidated)
Rs. Crores
FY10A
FY11A
FY12E
FY13E
FY14E
Net worth
2,732.5
2,792.1
3,400.8
4,063.2
4,977.9
Total Debt
9,744.3
12,200.3
12,151.9
10,754.5
10,356.3
Deferred Tax Liability
403.0
500.3
500.3
500.3
500.3
Trade Creditors
598.3
818.8
1,353.2
1,684.5
2,113.1
Other Current Liabilities and Provisions
171.6
376.1
226.0
280.1
347.2
Total liabilities
13,671.3
16,712.4
17,636.8
17,287.2
18,299.4
Net fixed assets
7,218.6
7,706.0
9,856.8
8,680.7
8,673.0
Capital Work in Progress
948.4
2,263.6
763.6
663.6
563.6
Other Long-Term Investments
416.9
479.0
254.0
254.0
254.0
Cash and Bank Balances
1,410.7
1,202.3
952.3
702.3
452.3
Receivables
1,198.2
2,057.1
2,310.0
2,829.2
3,445.0
Inventories
1,567.8
2,167.1
2,596.4
3,037.2
3,522.7
Loans & Advances
789.8
687.0
903.8
1,120.3
1,388.8
Other Current Assets
120.7
150.4
0.0
0.0
0.0
13,671.1
16,712.4
17,636.8
17,287.2
18,299.4
Total Assets
32
Alok Industries Limited – Cash Flow Estimates (Consolidated)
Rs. Crores
FY10A
FY11A
FY12E
FY13E
FY14E
PAT
Depreciation
Change in net working capital
Cash flow from operating activities
137.7
366.9
(856.7)
(352.1)
424.2
531.0
(896.3)
58.9
437.4
627.2
(342.5)
722.1
779.2
676.1
(791.0)
664.3
1,076.2
707.7
(874.2)
909.7
Investments
Capital expenditures
Cash flow from investing activities
47.1
(2,200.1)
(2,153.0)
(62.1)
(2,333.3)
(2,395.4)
225.0
(1,278.2)
(1,053.2)
0.0
(700.0)
(700.0)
0.0
(600.0)
(600.0)
Equity Raised / (Buyback)
Loans Raised / (Repaid)
Others (Including Extra-ordinaries)
Dividend
Cash Flow from Financing activities
762.6
2,701.4
41.6
(17.3)
3,488.3
0.0
2,455.9
(304.9)
(22.9)
2,128.1
20.6
(48.3)
197.4
(88.6)
81.1
0.0
(1,397.4)
1,300.0
(116.9)
(214.3)
0.0
(398.2)
0.0
(161.4)
(559.7)
Cumulative cash flow
Opening Cash Balance
Closing Cash Balance
983.2
427.4
1,410.7
(208.4)
1,410.7
1,202.3
(250.0)
1,202.3
952.3
(250.0)
952.3
702.3
(250.0)
702.3
452.3
Alok Industries Limited – Key Financial Ratios (Consolidated)
Rs. Crores
FY10A
FY11A
FY12E
FY13E
FY14E
Growth indicators
Sales Growth
EBITDA Growth
EPS Growth
Cash EPS Growth
43.4%
57.9%
86.0%
60.6%
49.7%
42.7%
208.1%
89.3%
36.7%
15.9%
3.1%
11.4%
23.9%
22.2%
78.1%
36.7%
24.0%
19.0%
38.1%
22.6%
Profitability indicators
EBITDA Margin
EBIT Margin
PAT Margin
RoE
ROCE
28.7%
19.5%
3.1%
5.9%
9.5%
27.4%
19.0%
6.6%
15.7%
10.3%
23.2%
17.6%
4.8%
14.1%
11.1%
22.9%
18.7%
7.0%
20.9%
14.0%
22.0%
18.1%
7.7%
23.8%
16.8%
Liquidity ratios
Debtor (days)
Creditors (days)
Inventory (days)
Net working Capital/Sales
100
71
208
67.7%
114
66
184
58.8%
94
75
153
46.8%
93
75
144
44.8%
91
75
133
42.5%
3.6
2.1
7.7
4.4
2.5
6.7
3.6
2.2
5.8
2.6
2.7
4.2
2.1
3.3
3.4
10.50
7.71
0.33
0.53
3.41
6.88
0.22
0.52
3.30
5.93
0.16
0.43
1.86
4.85
0.13
0.36
1.34
4.08
0.10
0.29
Capitalization Ratios
Total Debt/ Equity
Interest coverage
Total Debt/EBITDA
Valuation Ratios
Price/Earnings
EV/EBITDA
Price/Sales
Price/Book Value
Source: ICRA Online Estimates
33
ICRA Limited
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Ph: +91-124-4545300, 4545800
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Mobile: 9845022459
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Mobile: 9940648006
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Disclaimer: Although reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any
warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of
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34

Alok Industries Limited

Transcription

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