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o Hospitalsrprise Ltd
Detailed Report
ApollEnte
I
CRISIL IERIndependentEquityResearch
YEARS
Alok Industries Ltd
Detailed Report
Enhancing investment decisions
CRISIL IERIndependentEquityResearch
Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process – Analysis of
Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a
five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-
point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISILFundamental Grade Assessment
CRISILValuation Grade Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)
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Last updated: April 30, 2012
Analyst DisclosureEach member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can
bias the grading recommendation of the company.
Disclaimer:This Company-commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL
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KEY FORECAST
(Rs mn) FY10 FY11 FY12# FY13E FY14EOperating income 44,202 66,114 98,754 120,042 121,257
EBITDA 12,704 18,094 25,380 27,664 27,944
Adj Net income 927 1,935 3,798 5,249 7,001
Adj EPS-Rs 1.2 2.5 4.6 6.4 8.5
EPS growth (%) (58.9) 127.5 (11.5) 18.7 153.2
Dividend Yield (%) 1.3 1.3 1.6 2.7 3.8
RoCE (%) 8.4 9.4 11.8 12.7 13.4
RoE (%) 4.0 7.0 12.8 16.0 18.3
PE (x) 18.9 9.0 4.0 2.9 2.2
P/BV (x) 0.6 0.6 0.5 0.4 0.4
EV/EBITDA (x) 7.8 7.0 5.4 4.6 4.0
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Alok Industries LtdBack to basics
Fundamental Grade 3/5 (Good fundamentals)
Valuation Grade 5/5 (CMP has strong upside)
Industry Textiles, Apparel & Luxury Goods
July 11, 2012
Fair Value Rs 29
CMP Rs 18
YEARS
Alok Industries Ltd (Alok) is one of India’s leading integrated textile players. It is
present across the textile value chain – from yarn manufacturing to garmenting – and
has a wide range of products. Strong capabilities in the textile business and sizeable
capacities have helped it grow by 35% in the past five years and become a preferred
vendor for international clients. W e expect Alok’s financial profile will improve following its
strategy to exit the non- core realty and retail businesses. Hence, we maintain the
fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed
securities in India.
Consolidating its position
Alok is in the consolidation mode and plans to focus on value-added products
and improvement of utilisation across the value chain. In the past few years, Alok has
set up large-scale capacities in all divisions – polyester yarn, apparel fabrics and home
textiles – to cater to the global and domestic markets. A diversified product mix has made it
one of India’s fastest growing textile company.
Domestic textile industry to grow at 5-6%, polyester to drive growth; Alok to benefit
CRISIL Research expects India’s domestic textile industry to record a CAGR of about 5-6%,
CFV MATRIXExcellent
Fundamentals
5
4
3
2
1
PoorFundamentals
1 2 3 4 5
Valuation Grade
expanding to over Rs 3,400 bn by 2016 from Rs 2,653 bn in 2011. Growth in the polyester segment will outpace growth in the cotton segment and we expect Alok to benefit from this. However, capacity addition in the polyester segment in the past two years has resulted in an oversupply situation which will limit pricing flexibility.
Exiting real estate: financial flexibility is a key monitorable
Alok is in the process of monetising its real estate venture to use the proceeds for
repaying debt. CRISIL Research expects it to garner Rs 16-17 bn in the next two years by
exiting the real estate business. During FY12, it sold some portion of its portfolio and will
realise Rs 6-7 bn. Its high debt-equity ratio of 4.1x (as of FY12) is expected to decline to
2.6x by FY14 and will also improve its return indicator. However, any delay or change of
plans could hamper financial flexibility.
Revenues to register a CAGR of 11%; margins to decline
With most capacities already commissioned, we expect Alok’s top line to grow at a two-
year CAGR of 11% to Rs 121.2 bn in FY14. EBITDA margin is estimated to contract from
25.7% in FY12 to 23% in FY13 and FY14 due to higher share of the low-margin polyester
business.
KEY STOCK STATISTICSNIFTY/SENSEX 5306/17489
NSE/BSE ticker ALOKTEXT/ ALOKIND
Face value (Rs per share) 10
Shares outstanding (mn) 826
Market cap (Rs mn)/(US$ mn) 14,538/262
Enterprise value (Rs mn)/(US$ mn) 136/2
52-week range (Rs)/(H/L) 29/16
Beta 1.4
Free float (%) 68.2%
Avg daily volumes (30-days) 4,533,466
Avg daily value (30-days) (Rs mn) 82.4
SHAREHOLDING PATTERN100%
90%
Valuations: Current market price has strong upside
W e continue to use the discounted cash flow method to value Alok and maintain our
fair value at Rs 29. At this value, the implied P/B multiples are 0.7x FY13E and 0.6x FY14E
book value. At the current market price of Rs 18, the assigned valuation grade is 5/5.
80%
70%
60%
50%
40%
30%
20%
10%
38.3% 41.4% 37.6% 41.8%
11.7%11.7%
11.7%11.3%
20.7% 17.0% 20.8% 15.2%
29.4% 30.0% 30.0% 31.8%
0%J un-11 Sep-11 Dec -11 Mar-12
Promoter FII DII Others
PERFORMANCE VIS-À-VIS MARKET
Returns
1-m 3-m 6-m 12-m
Alok -4% -12% -5% -29%
NIFTY 5% 2% 9% -6%
NM: Not meaningful; CMP: Current market price; #consolidated financials not declared
Source: Company, CRISIL Research estimates
ANALYTICAL CONTACTMohit Modi (Director) m ohi t . m odi @c r i s i l . c om
Vinay Chhawchharia v in ay . chh a w c h h a r i a @c r i s il . c o m
Vishal Rampuria vi s h al . r am p u r i a @ c r i s i l . c om
C li e n t s e r v i c i ng d e s k
+91 22 3342 3561 c li ents er vici ng@c risi l.c om
For detailed initiating coverage report please visit: ww w . i e r . c o . i n
CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.
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CRISIL IERIndependentEquityResearch
Table 1: Alok’s - Business snapshot (standalone)
Product / Segment Cotton yarn Apparel fabric Home textile (HT) Polyester
Revenue contribution
(FY12)
Revenue contribution
(FY14)
4% 46% 14% 34%
2% 42% 12% 42%
Product / service
offering
Operates 0.4 mn spindles, ~90%
of the yarn is used for captive
consumption
Surplus yarn is sold in
domestic/export markets based on
the price and government
regulation
Manufactures woven
and knitted fabrics
It produces different kinds
of fabrics such as twills,
voiles, cambrics, poplins,
satin, jacquard
Manufactures a wide
range of sheet sets,
comforters, blankets,
quilts, curtains, dobbies
and jacquards of various
thread counts and widths.
Also present in the terry
towel business
Alok manufactures drawn
texturised yarn (DTY),
fully drawn yarn (FDY),
dyed yarn and yarn used
for technical purposes
Presence Global International and domestic
brands
Global (95% of production
is exported to 70
countries;
40% to US, 13-15% to
Europe and the rest to
Asian countries and
South
America)
Supplies to
domestic weavers;
exports to around 30
countries
Market position Largest player (single location) in
the fragmented cotton yarn industry
in India
One of the large manufacturers of all types of fabric Poised to become the
second largest
manufacturer of POY
in India after RIL
It accounted for ~1% of the total
cotton yarn production in India in
FY12. Vardhman Textiles, the
largest player in the cotton yarn
industry, accounted for 2% of the
total yarn production during the
same period
Has an edge over unorganised processing and
weaving industry due to its fabric processing capacity
Moving towards value-
added products with
DTY, staple fibre and
FDY capacity
Industry growth
expectationsCRISIL Research expects
domestic cotton yarn demand to
grow at a CAGR of 5-6% from
FY12 to FY17
CRISIL Research expects
domestic readymade
garments (RMG) and
export
demand to grow at a CAGR of
8% and 5% over FY12-FY17
CRISIL Research expects
domestic HT and export
demand to grow at a
CAGR of 5-7% over FY12-
FY17
CRISIL Research expects
POY demand to grow at a
CAGR of 7-8% over FY12-
FY17
Sales growth (FY09-
FY12 – 3-yr CAGR)
Sales forecast
(FY12- FY14 – 2-yr
CAGR)
43% 37% 36% 69%
-25% 7% 5% 26%
Demand drivers Healthy growth in the domestic RMG
and HT segmentsDemand from readymade
garments in the domestic and
export markets
W eak rupee and
vendor consolidation in
export market
Demand from RMG,
home textile and technical
textile in domestic and
export markets
Margin drivers Ability to pass on hikes in raw material costs, economies of scale, balanced capacity and presence in value-added products
(processes fabric, dyed yarn, FDY)
Polyester business traditionally has been a low-margin business with higher asset turnover. Expansion of the
polyester business is expected to reduce margins but improve RoE; the retail business will continue to impact
margins
Key competitors Fabric - Vardhman Textiles, Arvind Ltd
HT - W elspun India, Trident Ltd (Abhishek Industries)
Polyester - Reliance Industries, Indo Rama Synthetics Ltd, JBF Industries, Garden Silk Mills Ltd
Source: Company, CRISIL Research
2
IAlok Industries Ltd YEARS
Grading Rationale
Dominant textile manufacturer in India across value chain
Alok is one of India’s leading integrated textile manufacturers. In order to cater to
growing demand both in the domestic and export markets, Alok has expanded its
capacity over the past seven years in all the divisions and had largely funded it
through the Technology Upgradation Fund Scheme (TUFS). It is present across the textile
value chain - from spinning to manufacturing of fabrics, home textiles, garments and
retailing. Alok’s modern equipment, integrated plants, balanced capacities and
manufacturing flexibility coupled with an efficient procurement and product development
team give it a competitive advantage over its peers. Its large scale capacities have helped it
to grow by more than 35% in both domestic and export markets.
Currently, the company is in a consolidation mode, post massive capital expenditure of Rs
75 bn over the past seven years, which has resulted in huge debt and high gearing
(4x). The company has no major plans of adding capacity for the next two years. Also, the
company has planned not to add any more stores in the retail segment, and will monetise
its real estate properties to pay off its debt; we expect this move will improve the company’s
financial health.
Table 2: Large-scale balance capacity across the value chain
One of India’s leading integrated
players with presence across the
value chain
UNITS FY12 Expansion under implementation Position
Spinning (Tonnes) 80,000 3,600 Largest at single location
HOME TEXTILE
Processing mn mtrs 105 - Largest player
W eaving mn mtrs 96 - Largest player
Terry towel (Tonnes) 13,400 - Top 3 player
APPAREL FABRICS
Processing woven mn mtrs 130 - Largest player
W eaving mn mtrs 186 - Top 3 player
Knitting (tonnes) 18,200 6,800 Top 5 player
GARMENTS mn pcs 22 - Top 15 player
POLYESTER YARN
Continuous polymerisation (CP) (Tonnes) 400,000 100,000 Top 3 player
Source: Company, CRISIL Research
Table 3: Strong growth in both the markets
Rs mn FY07 FY08 FY09 FY10 FY11 FY12 CAGR
Domestic 11,830 14,889 19,224 27,522 41,594 58,714 37.8%
Export 6,417 6,815 10,545 15,590 22,066 30,295 36.4%
Total 18,247 21,704 29,769 43,112 63,660 89,009 37.3%
Export % 35.2% 31.4% 35.4% 36.2% 34.7% 34.0%
Source: Company, CRISIL Research
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CRISIL IERIndependentEquityResearch
Domestic market to remain primary demand driver
The Indian textile industry continued the momentum and grew at a healthy rate of 7% in
2011 after growing at 8% in 2010. The domestic market, which forms more than 75%
of India’s textile output in volume terms and 70% in value terms, will continue be a major
growth driver. Going forward, CRISIL Research expects the domestic garment industry to
grow at 7-8% over the next five years. W ith rising income levels, growing population,
favourable demographics along with higher proportion of working women population the
demand for garments will always be there. Rising organised retail, mall culture, higher
usage of credit/debit card along with online retailing also bodes well for the domestic textile
market. The domestic home textile
market is also expected to grow at a similar rate in the future.
Chart 1: Indian textile industry break-up
Indian textile industry
Rs 2653 billion
Domestic - Home textile
Rs 560 billion
Domestic - Garment
Rs 1325 billion
Exports (Garment + Home
textile) Rs 768 billion
Men's
apparel
Rs 612 billion
Women's
apparel
Rs 557 bill ion
Kids
appar
el
Rs 155 bill ion
USA
Rs 222 bill ion
EU
Rs 414 billion
Other
Rs 130 bill ion
46% 42% 12% 29% 54% 17%
Source: CRISIL Research
Figure 1: Domestic RMG market is major growth driver Figure 2: Rising income leads to higher spending on textile
(Rs bn)
1,400
1,200
1,000
800
600
1, 028
122 129
425 430
132
481
143
519
1,325
155
557
(%)
100%
80%
60%
40%
0. 4 0. 6 0.9 1.1 1.2 1. 3
0. 9 1.2 1. 6 1.8 2. 122.6 25. 2
32.5 36.2 38. 7 40.8
76.1 7365
400
200
-
480 496 518 567 612
2007 2008 2009 2010 2011 E
Men's apparel Women's apparel Kids' apparel
20%
0%
60.9 58. 2 55.8
2001-02 2004-05 2007-08 2009-10 2010-11 2011-12 F Households wit h inc ome<= Rs 1 lac p.aHouseholds wit h inc ome Rs 1 lac and Rs 5 lac p.aHouseholds wit h inc ome Rs 5 lac and Rs 10 lac p. aHouseholds wit h inc ome > Rs 10 lac p.a
Source: CRISIL Research Source: CRISIL Research
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Alok Industries Ltd YEARS
Vendor consolidation + favourable currency to strengthen
competitiveness
Major global retailers are focused on vendor consolidation to lower their logistics
and procurement costs. Retailers like JCPenney and W al-Mart have reduced their
sourcing locations post quota removal by the US and the EU. China, India, Bangladesh
and Vietnam are the beneficiaries of this consolidation. China’s market share in the US
and the EU has been on an upward trend (30% in 2006 to 41% in 2011); however, its
business is currently constrained by the rising Yuan and increase in manufacturing
costs. Bangladesh has also gained (6% in 2006 to 8.6% in 2011 in the US and EU
market) due to its least developed country (LDC) status, cheap labour cost and heavy
government incentives to promote textile exports. India’s designing capabilities and the
ability to provide end-to-end textile solutions on account of abundant raw material supply
and labour availability have been its core strength in
the highly competitive export market.
Large capacities to benefit Alok as
customers opt for vendor
consolidation
Figure 3: India’s share has not grown in the US and the EU Figure 4: Re has depreciated more than other currencies
100%
90%
80%
70%
60%
50%
55. 1 50.3 45.8
4.5
40.5 39. 1 39.4
4.7 5.0 5. 4
7.4 7.6 8. 6
130
125
120
115
110
105
100
40%
30%
6. 2
3. 86. 0
6.595
90
41.4 42. 7 41.020%
10%
0%
29. 9 34.4 37.7
5. 6 5. 5 5.5 6.0 5.7 5. 6
2006 2007 2008 2009 2010 2011
India China Bangladesh Vietnam Ot hers
85
80
USD-INR X-RATE USD-BDT X-RATE USD-VND X-RATE USD-CNY X-RATE
Source: CRISIL Research Source: CRISIL Research
India lags in supplying large volumes of quality textile to the export market due
to fragmentation of the industry and obsolete weaving and processing technologies. Alok,
with the help of TUFS, has set up large scale capacities which now enable it to
supply quality fabrics consistently and in large volumes to global and local
manufacturers. TUFS is an interest subsidy (up to 5% interest reimbursement and capital
subsidy of 10% on processing equipments) scheme introduced by the Government of India
to set up/upgrade modern textile units. The scheme has benefited Indian textile players in a
big way to stay competitive in the export market and Alok has been one of the biggest
beneficiaries of the scheme. India’s textile exports have grown at a CAGR of 8% during
FY07-12, while Alok’s export revenue has grown by 36% during the same period. The
company exports to more than 75 countries; 40% to the US, 13-15% to the EU and rest to
Middle East, Latin and South America, Australia and other Asian countries.
The sharp depreciation (~26%) of the rupee against the US$ over the past 15 months
has strengthened its position further. Bangladeshi Taka has depreciated by only 13%;
Vietnamese
Players have to remain cautious
about the volatile currency situation
and hedge their positions
accordingly to mitigate risk and
derive benefits
5
CRISIL IERIndependentEquityResearch
Dong has remained flat while Chinese Yuan has appreciated by 3% during the same period.
A weak currency will not benefit margins significantly but will ensure a strong order book for
the future.
Figure 5: India’s textile exports have grown at 8% CAGR Figure 6: Alok’s export business has grown too
(Rs bn)
1200
1000
800
600
400
200-0.6%
19.3%
5.4%
-0.3%
9. 3%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
(Rs bn)
35. 0
30. 0
25. 0
20. 0
15. 0
10. 0
5. 0 6%
55%
48%
42%37%
60%
50%
40%
30%
20%
10%
739 882 929 927 10130
FY08 FY09 FY10 FY11 FY12E
I ndia's Tex tile export Growth (y -o-y ) (RHS)
-5.0% 0. 06. 8 10.5 15. 6 22.1 30.3
0%FY08 FY09 FY10 FY11 FY12
Alok's ex port rev enue Growth (y -o-y ) (RHS)
Source: CRISIL Research Source: CRISIL Research
All segments to drive growth
Table 4: Diversified product mix to mitigate risk; polyester to lead growth
FY07 FY09 FY11 FY12 CAGR – (FY07-12) FY13E FY14E CAGR – (FY12-14)
Cotton yarn 4.6% 3.7% 9.0% 3.6% 31% 1.2% 1.6% -25.1%
Apparel fabric 49.1% 54.1% 46.6% 46.4% 36% 41.5% 42.0% 7.1%
Home textile 18.3% 16.7% 15.5% 14.0% 30% 12.0% 12.1% 4.7%
Polyester 26.3% 20.8% 26.1% 33.5% 44% 43.0% 42.1% 26.4%
Garments 1.6% 4.7% 2.7% 2.4% 50% 2.3% 2.2% 7.3%
Total sales (Rs mn) 18,247 29,769 63,660 89,009 37% 110,596 113,010 12.7%
Source: Company, CRISIL Research
Polyester to be key focus area
The company remains more buoyant on polyester as compared to cotton:
• Higher demand compared to cotton due to its price competitiveness and versatile nature
• Lower capex and working capital requirement leading to higher return, however EBITDA
margins are low
India currently consumes 55% cotton and 45% polyester. But the company believes India
will soon move to the global consumption mix (65% polyester) and hence is aggressive
on its polyester expansion. Alok has set up a continuous polymerisation (CP) unit of
200,000 tonnes in FY10 for assured supply of partially oriented yarn (POY) for its texturising
capacity, which would also reduce costs for its texturised yarn business. It further, doubled
its CP capacity to
400,000 tonnes in FY12; it plans to add another 100,000 tonnes in H2FY13. Over the next
five years, we believe demand for polyester yarn will be up at a CAGR of 7-8%, more than
the 5-
6% growth in cotton yarn. Rise in the use of non-cotton fabrics for technical and home
textiles, and the increase in substitution of cotton (due to high cotton and cotton yarn prices
as well as
versatile application of polyester) will boost demand for polyester yarn.
With additions of 100,000 tpa, Alok
will be the second largest player
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Alok Industries Ltd YEARS
Figure 7: Improving price competitiveness of polyester Table 5: Share of value-added products to rise
2.2
2.0
1.8
1.6
1.4
1.2
(Tonnes) FY12 FY13 Product type
CP 400,000 500,000
FDY 70,000 70,000 Value added
Chips/POY 210,000 166,000 Commodity
DTY 120,000 170,000 Value added
Cationic yarn - 24,000 Value added
Polyester staple fibre (PSF) - 70,000 Value added
1.0
Cotton yarn/polyes ter
Source: CRISIL Research, Industry Source: CRISIL Research, Company
Currently, the company uses the bulk of its CP for POY production and less than
35% is converted into value-added products such as FDY and DTY. Going forward, the
company will sell ~65% value-added products and will introduce cationic yarn, dyed
yarn and PSF. Contribution from the polyester business is expected to rise to ~43% of total
revenue in FY13 from 33.5% in FY12 resulting in marginal improvement of asset
turnover and RoCE, and lowering the working capital requirement; however, the company’s
EBITDA margin will decline from the current level as the polyester segment generates 15-
16% margin compared to other segments’ 25-30%.
Figure 8: Going aggressive on polyester expansion Figure 9: Polyester to contribute more than 40% in FY13-14
(tonnes)
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50, 000
35%
42%
57%60%
33%
70%
60%
50%
40%
30%
20%
10%
(Rs mn)
60, 000
50, 000
40, 000
30, 000
20, 000
10, 000
28%26%
33%
43% 42%50%
45%
40%
35%
30%
25%
20%
15%
10%
5%54,000 182,500 200,000 200,000 400,000- 0%
FY08 FY09 FY10 FY11 FY12
CP c apacity Value added produc ts (RHS)
11,931 16, 638 29,790 46,500 48, 000- 0%
FY10 FY11 FY12 FY13E FY14E
Poly es ter rev enue Share (%) (RHS)
Source: CRISIL Research Source: CRISIL Research
Polyester industry to witness over-supply in short term
Although Reliance Industries Ltd has the largest CP capacity (28%) for production of POY
in the domestic market, its share has declined as players like Alok, Garden and JBF
have expanded their capacities during the past few years, each commanding ~17% market
share in
terms of capacity.
7
CRISIL IERIndependentEquityResearch
Demand for polyester filament yarn increased by 6.5% during FY07-FY12 and is expected
to grow at a CAGR of 7-8% over the next five years. However, significant capacity
additions by players in the past two years (650-700 mn kg) lowered operating rates to 68%
in FY11 and to
64% in FY12. Going forward, we expect utilisation rates to improve as no major
capacity addition is expected; however, it will take two to three years to cross the 75% level.
Figure 10: Reliance has the largest CP capacity Figure 11: Utilisation levels to improve
Indo RamaSy nt hetic
s9%
J B F Indus tries17%
Others13% Reliance
Indus tries ,28%
(Mn kgs)
2,500
2,000
1,500
1,000
500
72%
69%70%
68%
64%
69%
74% 76%
74%
72%
70%
68%
66%
64%
62%
60%
Garden SilkMills17%
AlokIndust ries
17%
1,450 1,470 1, 550 1,700 1,850 1, 989 2,138-
FY08 FY09 FY10 FY11 FY12 FY13E FY14E
Demand Operating rat e
58%
Source: CRISIL Research Source: CRISIL Research
Apparel fabric: Largest manufacturer of processed fabric
CRISIL Research expects the demand for cotton fabric in the domestic market to increase
at a CAGR of 5-6% over FY12-FY17 mainly driven by demand for cotton-based apparels
and home textiles. A revival in world economies will boost textile exports as well.
Under its apparel fabrics division, Alok has the capacity to manufacture 186 mn
metres of woven fabric ,18,200 tpa of knitted fabric and 22 mn meters of embroidered
fabric. Alok plans to increase the capacity of knitted fabric to 25,000 tpa by FY13.
Integration + value addition have reduced risk from fragmented industry
The Indian weaving and processing industry is highly fragmented and unorganised with
65% of the supply coming from the decentralised powerloom sector. Organised mills
account for less than 5% of total fabric supply. In the fabric segment, Alok is
present in the mid to premium segment; the fragmented nature of this segment and the
price-conscious domestic consumer makes this a highly competitive segment. However,
Alok mitigates competition from the unorganised players with backward integration and
value-added fabrics; it has 130 mn metres processing capacity for woven fabrics.
Alok meets more than 90% of its yarn demand for the fabric department through its
own spinning unit which assures consistent supply of quality yarn. Besides, Alok has
upgraded its yarn dyeing technologies through the acquisition of Mileta a.s. (Mileta), an
integrated textile entity with expertise in yarn dyed fabrics. Post the acquisition, Alok
manufactures quality yarn-
dyed fabrics, which are priced at a significant premium compared to its other processed fabric;
Alok is running its fabric plant at
optimum utilisation and has a
strong order book for 2012
8
IAlok Industries Ltd YEARS
since this high quality dyed yarn forms less than 10% of its fabric sales currently, Alok
will invest further in yarn dyeing facility for more value addition.
Alok also manufactures work wear fabric (20 mn meters per annum). W ork wear is
clothing worn in specialised areas like hospitals, defence, extraction, etc. Under this
category, Alok produces different varieties of clothing that are flame retardant, have
high visibility, are oil resistant, and have anti-static and infra red finishes. It has executed
orders globally for armed forces.
Table 6: Apparel fabric - capacities
FY08 FY09 FY10 FY11 FY12
Apparel fabrics Units
Processing woven mn. mtrs 83 105 105 105 130
W eaving mn. mtrs 64 70 93 93 186
Knits Tonnes 18,200 18,200 18,200 18,200 18,200
Knits processing Tonnes 18,200 18,200 18,200 18,200 18,200
Yarn dyeing Tonnes 3,000 5,000 5,000 5,000 5,000
Source: Company, CRISIL Research
Home textiles: Large-scale operations to help compete with international players
Alok manufactures a wide range of home textile (HT) products such as bed sheets,
duvets, comforters, blankets, quilts, curtains and towels. The HT division comprises
14% of total sales. This division is also the largest export revenue generator for the
company with 41% of total exports in FY12. Alok’s HT business reported 30% CAGR over
the past five years. Alok continues to focus on the export market in the HT division, with
exports comprising more than
95% of HT’s revenue.
Figure 12: India’s HT exports post 7% CAGR Figure 13: Focus on exports and growth continues
(Rs bn)
140
120
100
80
60
40
20
13.1%
7.7%
108
15.0%20%
15%
10%
5%
0%
-5%
(Rs bn)
14. 0
12. 0
10. 0
8. 0
6. 0
4. 0
2. 0
97%
99%
98%
96%
98%
100%
99%
98%
97%
96%
95%
96 108 1170
-7.0% 125-10% 0. 0
4.0 5.0 7.1 9.9 12. 594%
FY08 FY09 FY10 FY11 FY12
India's HT export Growth (y-o-y) (RHS)
FY08 FY09 FY10 FY11 FY12
Total HT rev enue Ex port (%) (RHS)
Source: CRISIL Research Source: CRISIL Research
Alok has expanded its wider width weaving capacity (for the bed linen segment) of 68 mn
metres to 96 mn metres in FY12. The company also added 22.5 mn metres to the existing
9
CRISIL IERIndependentEquityResearch
fabric-processing capacity of 82.5 mn metres, taking it to 105 mn meters. Alok’s share in
India’s total HT exports has increased from 4% in FY08 to 10% in FY12.
Table 7: Home textiles – capacities
FY08 FY09 FY10 FY11 FY12
Home textiles Units
Processing mn mtrs 60 82.5 82.5 82.5 105
W eaving mn mtrs 45.2 47.05 68 68 96
Terry towel Tonnes - 6,700 6,700 6,700 13,400
Source: Company, CRISIL Research
Table 8: Home textiles - competitive position
FY11 - Capacity Alok Industries Welspun India Ltd Indo Count Ind Ltd Trident Ltd
Home textiles Mn mtrs 96 45 37 -
Terry towel Tonnes 13,400 41,500 - 32,000
Source: Company, CRISIL Research
Cotton yarn capacities = better control over costs and supply
Alok owns about 1.1% of the total spindle installed in India and is among the top five
spinners in the country. To ensure that its fabric and HT departments have an assured
supply of quality yarn, Alok has constantly increased its spinning capacity over the
years. It expanded its spinning capacity from 150,912 spindles in FY08 to 411,840
spindles in FY12. The company will add another ~11,000 spindles during FY13.
The yarn, in excess after internal consumption, is sold locally or exported. It also has
yarn dyeing facility to produce premium quality fabric and the company intends to
invest in the same in future. Unlike other players, cotton yarn contributes only 5-10%
of Alok’s revenue which enables the company to generate higher margin compared to
standalone spinners and
weavers.
Alok will have better control over
costs compared to standalone
weavers
Figure 14: Steady capacity addition for internal consumption Figure 15: Share of cotton yarn in revenue lowest
(tonnes)
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0.15
0. 25
0. 30
0.35
0.41
(mn no.)
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
100
90
80
70
60
50
40
30
20
10 4
92
76
53 51
20,500 33,300 58, 500 69,040 80,000-
FY08 FY09 FY10 FY11 FY12
Yarn capac ity Spindles (RHS)
0.000
Alok Vardhman NaharSpinning
% t o total rev enues
SuperSpinning
K P R Mills
Source: CRISIL Research Source: CRISIL Research
10
IAlok Industries Ltd YEARS
Table 9: Cotton yarn - Competitive position
Market share (FY11) by capacity % Alok Industries Vardhman Textiles Nahar Spinning Mills Super Spinning Ltd
Spindles 411,840 736,168 383,296 165,984
Market share by capacity % 1.1 2.0 1.0 0.5
Alok’s capacity is for FY12
Source: Company, CRISIL Research
Technical textile – new area for growth
The nascent technical textiles industry has a great growth potential due to
rising industrialisation and an expanding domestic economy. The abundant availability
of raw materials (natural and synthetic), skilled labour and technical knowhow provides
India with a competitive advantage to become one of the major manufacturers/ exporters
of technical textiles.
Unlike the conventional textile industry, the technical textile industry is import-intensive with
few companies in India having the 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, automobile, medical, construction,
transportation and high technology applications. Alok is planning to set up a research and
development team to carry out innovations and develop new products on similar lines.
Given the huge potential in the business and lower competition in the domestic market,
Alok can benefit by tapping the potential at an early stage and generate higher margins with
a larger market share.
Real estate - a job half done
To expedite exiting the non-core realty business (and use the proceeds to repay debt),
the company gave a mandate to Cushman & W akefield of the US to execute the same;
however, due to a weak macro situation, it could only sell ~40% of its portfolio.
During 2012, the company sold eight floors (out of 20 floors) from its largest real estate
venture, PBP project (estimated deal size of Rs 4-4.5 bn) and three floors (out of the
eight floors) of the Ashford Centre and received a token sum of Rs ~500 mn; we have
assumed that full payment will be received only in FY13. Apart from these two deals,
the company also sold 73 acres of industrial land at Silvassa for Rs 390 mn.
The company is keen on selling the remaining nine floors of the PBP project (three floors
will be used for own use) during FY13 and is positive about the same. Also, it intends to sell
other real estate properties and land by FY14 and expects to raise Rs 20 bn; however,
we have assumed that the company will be able to generate only Rs 16-17 bn due to
weak market conditions. Exit from real estate will improve capital structure and
returns indicators. Its debt/equity ratio will decline from 4.1x in FY12 to 3.6x and
2.6x in FY13 and FY14 respectively; also, its interest burden will come down
significantly as interest coverage ratio
improves to 1.6-2.0x in FY13-FY14 from 1.4x in FY12.
To focus on R&D in the technical
textile space
Debt-equity ratio to improve post
exiting real estate; healthy cash flow
and limited capex in next two years
11
CRISIL IERIndependentEquityResearch
If the company is unable to sell its properties, it will have an adverse impact on its
financial flexibility. CRISIL Research believes that excess supply and lower demand in
Lower Parel for commercial real estate will make it difficult for Alok to sell its property at a
desirable price.
Alok ventured into the real estate sector through its 100% subsidiary, Alok Infrastructure
Pvt Ltd, in FY07. The foray into real estate was to capitalise on the possible
opportunities of capital profits and/or perpetual lease rental income. However, due to
adverse market conditions, exiting from real estate got delayed and has impacted Alok’s
financial health.
Table 10: List of real estate ventures
Expected
Equity Project completion
Project name share (%) type Area Proposed use date
Profit/loss Rs
(mn)
Cash flow
(Rs mn)
FY13 FY14 FY13 FY14
Land at Silvasa 100% Division 538 acres Industrial use Ready 1,400 207 1,800 266
Peninsula Business Park, Commercial - ITES 20-100% SPV 0.6 mn sq.ft. Ready
Lower Parel, Mumbai storey, 600-car parking(2,882) 9,148
Ashford Center, Lower Commercial - office space,100% SPV 60,000 sq.ft. Ready
Parel, Mumbai 8 storeys, 40-car parking(331) 1,050
Land at Vapi (Gujarat) 50% SPV 36 acres Residential Ready 63 81
Lotus Corporate Park,100% SPV 13,500 sq.ft. Commercial Ready
Goregoan, Mumbai50 80
Peninsula Corporate Park,100% Division 40,000 sq.ft. Commercial Ready
Lower Parel, Mumbai600 840
Ashford Royale, Nahur,50% Division 1.1 mn sq.ft. Residential Dec-14
Mumbai580 3,055
Ashford Palazzo, Mumbai 30% SPV 0.1 mn sq.ft. Residential Dec-15 200 320
-1,812 1,699 11,998 4,641
Source: CRISIL Research, Company
Retail segment still in losses
India - Through its wholly-owned subsidiary Alok H&A Ltd, Alok forayed into retailing in
FY07 to push the sale of its own products in the domestic market and to take
advantage of the growing organised retail sector; it had planned to reach 500 stores
by FY14. It currently manages 291 outlets (as of May 31, 2012) under the brand ‘H&A’. It
has presence across 150 cities in 23 states. Majority of the sales come from home textiles,
men’s, women’s and kids’ wear. Recently, the company also launched accessories like ties,
handkerchiefs, sun glasses, etc.
Table 11: Store format
Model No. of stores
Exclusive Brand Outlet (EBO) 137
Shop in Shop (SIS) 154
Total 291
Source: CRISIL Research, Company
12
IAlok Industries Ltd YEARS
However, the company has now put its expansion plan on hold on account of a
challenging macro-economic situation in the domestic market and will focus on its core
manufacturing business. The domestic retail business contributes less than 1% to
the company’s consolidated top line and hence no major impact is expected in Alok’s
operations.
W e have mentioned in our earlier report (dated July 26, 2011) that competition in
domestic retail industry has intensified in recent years leading to major retail players
booking thin margins. PAT margin for typical value retailers ranges between 1% and
3%. Taking the competitive scenario and thin margins into consideration, we do not see
the domestic retail
segment add significant revenue or profitability to the company.
UK - Post amalgamation of Grabal Alok Impex Limited (GAIL) with Alok, Alok’s
effective shareholding in this UK-based retail chain (Store-Twenty One) has increase
from 41.7% to
91% in Grabal Alok (UK) Limited (GAUKL), making it a subsidiary of Alok.
GAIL is engaged in manufacturing a wide range of embroidered fabrics and holds 49.3%
in GAUKL. GAIL had reported revenue of Rs 2,350 mn and 21% EBITDA margin in
FY11. Amalgamation of GAIL into the company was completed in March 2012, with effect
from April
2011. One share of Alok was issued for every one share of GAIL.
W e expect the consolidation of GAUKL to negatively impact Alok’s financials in the near
term, as the retail chain is posting losses at the EBITDA level. Store-Twenty One runs 221
stores as of March 2012 and had a gross turnover of ~GBP 106 mn.
Table 12: Store-Twenty One - snapshot
Exiting retail venture will free
up management time and
strengthen its balance sheet
FY09 FY10 FY11 FY12E FY13E FY14E
Revenue (GBP mn) 91 117 130 106 95 80
Revenue (Rs mn) 6,652 7,494 9,167 7,929 7,780 6,400
EBITDA Negative Negative Negative Negative Breakeven 1%
Source: CRISIL Research, Company
Considering the weak outlook for retail sales in the UK, the company has decided to close its
50 non-profitable stores and reduce the employee cost by cutting salary. Post these
changes, we expect revenue to decline by 10-12% in FY13 and the chain to breakeven at
the EBITDA level. In FY14, we expect revenue to decline by another ~10% under the full
impact of store shutdown and the chain to turn EBITDA positive. Overall, the merger is
expected to reduce
the consolidated EBITDA margin by 200bps and weaken the capital structure.
Consolidation to impact
EBITDA margin by 200bps
13
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g-1
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b-1
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CRISIL IERIndependentEquityResearch
Key Risks
Volatile raw material prices
The company derived around 33.5% of revenue from the polyester business in FY12. W ith
the polyester segment expanding in the next two years, revenue is expected to increase to
~43%. Purified terephthalic acid (PTA) and mono ethylene glycol (MEG) are two key raw
materials for polyester manufacturing, which account for ~75% of the total operating costs.
Historically, PTA and MEG prices are directly linked to naphtha prices, and MEG
prices are linked to ethylene prices, both of which are volatile in nature. Also, PTA
is in tight supply in the domestic market and, hence, adequate raw material tie-ups
hold the key for running an expanded capacity.
Hence, the company’s EBITDA margins are sensitive to the movement in raw material
prices especially in a down cycle. Though the company is completely integrated in
the cotton segment, it buys cotton and converts it into fabric and home textiles.
Cotton prices have remained volatile in the past and resulted in huge amount of inventory
losses for the industry. As cotton forms ~60% of its operating cost, inventory risks remain.
The cotton value chain has higher working capital cycle of 130 days compared to 90 days for
polyester.
Figure 16: Cotton and cotton yarn prices Figure 17: PTA and MEG prices
(Rs/Kg)
280
260
240
220
200
180
160
140
120
100
190
170
150
130
110
90
70
50
(Rs/ Kg)
80
75
70
65
60
55
50
45
40
35
30
Cotton yarn Cotton (RHS) PTA MEG
Source: CRISIL Research Source: CRISIL Research
Exiting real estate
There has been considerable delay in Alok exiting the real estate business, which
has impacted its balance sheet. Its debt levels have increased to Rs 122 bn. W e
expect the company to realise Rs 16-17 bn in the next two years by monetising its
properties. Any delay
from our expectation will further impact its balance sheet.
14
IAlok Industries Ltd YEARS
Financial Outlook
Revenue: Alok’s standalone revenue grew by 40% in FY12, and clocked a CAGR of 37%
for the past five years. The domestic and export markets grew at a similar rate in FY12.
Growth in FY12 was largely supported by polyester and apparel fabric businesses.
The polyester segment grew by 80% mainly due to capacity addition and contributed
more than 50% to incremental revenue. Apparel fabric grew by 40% and contributed
45% to incremental revenue in FY12. W e estimate FY13 standalone revenue to grow at a
healthy rate of ~24%, largely supported by the polyester segment (100,000 tonnes to be
operational in H2FY13). Share of the polyester business rose to 33.5% in FY12 from 26% in
FY11 and is expected to increase to 43% in FY13. FY14 will see moderate revenue
(standalone) growth of ~2.2% as no additional capacity is expected to get commissioned.
Alok’s consolidated revenue (Alok + retail operations) is expected to move in trajectory
similar to standalone revenue, as it contributes more than 90%. Growth will be marginally
lower on account of closure of few retail stores in the UK. W e expect Alok’s consolidated
revenue to grow at 21.6% and 1.0%, respectively, in FY13 and FY14.
Figure 18: Revenue and growth (standalone) Figure 19: Revenue break-down (standalone)
(Rs mn)
120,000
100,000
80,000
44%48%
40%
60%
50%
40%
100%
90%
80%
70%
60%
3% 3% 2% 2% 2%
28% 26% 33%
43% 42%
16% 15%
60,000
40,000
20,000
24%
43,068 63, 845 89,075 110, 596
113,01030%
20%
10%
50%
40%
30%
20%
10%
45% 47%
14%
46%
12% 12%
42% 42%
0 0% FY10 FY11 FY12# FY13E FY14E
8% 9% 1%0%
FY10 FY11 FY12# FY13E FY14E
Revenue Rev enue Growth (RHS) Cott on y arn Apparel fabric Home text ile Polyes ter Garment s
Source: Company, CRISIL Research estimate Source: Company, CRISIL Research estimate
Figure 20: Revenue and growth (consolidated) Figure 21: Other businesses’ revenue to decline
(Rs mn)
140, 000
120, 000
100, 000
80, 000
60, 000
40, 000
20, 000
42%
50% 49%
%
121,257
1%
60%
50%
40%
30%
20%
10%
(Rs mn)
12,500
12,000
11,500
11,000
10,500
10,000
9,500
11,500
12,100
11, 229 11, 330
10,150
44,202 66,114 98, 754 120, 0420 0%
FY10 FY11 FY12E FY13E FY14E
Revenue Rev enue Growt h(RHS)
9,000FY10 FY11 FY12E FY13E FY14E
UK retail + H&A + GAIL
Source: Company, CRISIL Research estimate Source: Company, CRISIL Research estimate
15
8.4
CRISIL IERIndependentEquityResearch
EBITDA: Alok’s standalone EBIDTA margin is expected to decline from 28.7% in FY12 to
25% in FY13 and FY14. This decline is due to higher contribution from the polyester
business which has relatively lower margins (15-16% margin) vis-à -vis other businesses’
25-30%.
Also, with consolidation of the UK retail store chain, consolidated EBITDA is expected
to decline from 27.4% in FY11 to 25.7% in FY12E. W e expect with lower margins on
standalone basis and breakeven for Store-Twenty One, consolidated margin will decline to
23% in FY13.
W e expect margin in FY14 to remain at similar levels.
Figure 22: Polyester business to lower EBITDA margin
(standalone)Figure 23: Retail operations impact consolidated EBITDA
margin
(Rs mn)
30,000
25,000
20,000
15,000
10,000
5,000
30. 0%28.6% 28. 7%
25.0% 24. %
35%
30%
25%
20%
15%
10%
5%
(Rs mn)
30, 000
25, 000
20, 000
15, 000
10, 000
5,000
28. 7%27. 4%
25.7%23.0% 23.0%
35%
30%
25%
20%
15%
10%
5%
12,917 18,275 25, 559 27,609 27,9670 0%
FY10 FY11 FY12# FY13E FY14E
EBITDA EBI TDA Margin(RHS)
12, 704 18,094 25,380 27,664 27, 9440 0%
FY10 FY11 FY12E FY13E FY14E
EBITDA EBITDA Margin(RHS)
Source: Company, CRISIL Research estimate Source: Company, CRISIL Research estimate
Figure 24: Adj. PAT and Adj. PAT margin (consolidated) Figure 25: RoCE and RoE to improve (consolidated)
(Rs mn)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
2.1%
2.9%
3. 8%
4. 4%
7%
5. 8%6%
5%
4%
3%
2%
1%
20. 0
18. 0
16. 0
14. 0
12. 0
10. 0
8.0
6.0
4.0
12.8
9.411.8
7.0
4.0
16.0
12.7
18. 3
13. 4
927 1,935 3,798 5, 249 7, 0010 0%
FY10 FY11 FY12E FY13E FY14E
Adj PAT Adj PAT Margin(RHS)
2.0
0.0FY10 FY11 FY12E FY13E FY14E
RoCE RoE
Source: Company, CRISIL Research estimate Source: Company, CRISIL Research estimate
16
IAlok Industries Ltd YEARS
Figure 26: Debt-equity and interest coverage (consolidated) Figure 27: Cash flow (consolidated) to turn positive in FY13
5.0
4.5
4.0
3.5
3.0
2.5
2.0
3.5
4. 34.1
3. 6
1. 6
2.6
2.0
(Rs bn)
40
30
2034
10
0
2317
2 8 2 9
1.5
1.0
0.5
0.0
1.3 1. 21.4
-10
-20
-30
-3 -1
-22 -24-14 -9 -2 -13
FY10 FY11 FY12E FY13E FY14E
Gearing I nterest coverage
FY10 FY11 FY12E FY13E FY14E
CFO CFI CFF
Source: Company, CRISIL Research estimate Source: Company, CRISIL Research estimate
Figure 28: Working capital days fall as polyester share rises Figure 29: EPS to double in FY14 (consolidated)
(days)
250
200
150
100
50
0
233208
172 176 170
(Rs)
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.01.2
2.5
4. 6
6.4
8.5
FY10 FY11 FY12E FY13E FY14E
Work ing c apit al day s
FY10 FY11 FY12E FY13E FY14E
Adj EPS
Source: Company, CRISIL Research estimate Source: Company, CRISIL Research estimate
17
CRISIL IERIndependentEquityResearch
Integration at all levels results in higher margin than peers
Figure 30: EBITDA margin comparison across players –
spinnersFigure 31: EBITDA margin comparison across players –
fabric and HT
35%
30%
25%
20%
15%
26.1%
16.8%
28.1%
19.1%
30. 0%
22. 2%
17. 0%
28. 6% 28. 7%
25. 3%
21.1%
35.0%
30.0%
25.0%
20.0%
15.0%
10%
5%
0%
13. 5%9. 5% 14.5%
4. 4%
10.0%
5. 0%
0. 0%FY08 FY09 FY10 FY11 FY12
FY08 FY09 FY10 FY11 FY12
Alok Vardhman Text iles Nahar SpinningAlok Sangam SiyaramArvind Wels pun Trident
Source: CRISIL Research Source: CRISIL Research
Figure 32: EBITDA margin comparison across players – polyester
35. 0%
30. 0%
25. 0%
20. 0%
15. 0%
10. 0%
5. 0%
0. 0%
FY08 FY09 FY10 FY11 FY12
Alok Bombay Dy eing Garden Silk I ndo Rama Sy n J B F
Source: CRISIL Research
18
IAlok Industries Ltd YEARS
Earnings Estimates Revised
FY13E FY14E
Particulars Unit Estimate Actual change Old New change
Revenue (Rs mn) 122,687 120,042 -2.2% 123,237 121,257 -1.6%
EBITDA (Rs mn) 28,273 27,664 -2.2% 28,400 27,944 -1.6%
EBITDA margin % 23.0 23.0 0 bps 23.0 23.0 0 bps
Exceptional inc/(exp) (Rs mn) (1,839) (1,812) NM 1,500 1,699 13.3%
PAT (reported) (Rs mn) 3,700 3,436 -7% 8,463 8,700 3%
Adj PAT (Rs mn) 5,539 5,249 -5.2% 6,963 7,001 0.5%
Adj PAT margin % 4.5 4.4 -14 bps 5.7 5.8 12 bps
Adj EPS Rs 6.7 6.4 -5.2% 8.4 8.5 0.9%
Source: CRISIL Research estimate
Reasons for changes in estimates
Line item FY13 FY14
Revenues ■ Marginally lower revenue on account of the retail business,
EBITDA margins ■
expected closure of stores in the UK and no new stores in India.
No change
19
CRISIL IERIndependentEquityResearch
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and business
prospects, and financial performance.
Well-experienced management
Alok has a well-experienced management headed by Mr Ashok Jiwrajka along with his two
brothers Mr Dilip Jiwrajka and Mr Surendra Jiwrajka. The three brothers have more than
two decades of experience in the textile business, and have played an important role in
growing
Alok from a trading company into a leading integrated textile player in India.
CRISIL Research believes that Alok’s growth is driven by the management’s
strategic prowess - the ability to spot business opportunities arising due to opening up of
quotas and ensuring continuous product innovation, which has enabled the company to be a
leader in the domestic textile business. The management has also been able to
develop strong relationships with leading global vendors leading to tremendous
growth in the export business.
Strong second level of management
The second level of management (the sons of the three promoters) is currently
being groomed. Further, they are ably supported by key professionals at the middle
management level, who have been with the company for a relatively longer duration.
Venture into other businesses
CRISIL Research believes that the management’s foray into the real estate business
was opportunistic with no clear roadmap. The management is taking adequate steps to
exit real estate and use the proceeds to reduce debt. They are also evaluating
exiting the retail business so that they can focus on their core business.
.
Experienced and
aggressive management
To focus on core
manufacturing business
20
IAlok Industries Ltd YEARS
Corporate Governance
CRISIL’s fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors such as
industry and business prospects, and financial performance. In this context, CRISIL
Research analyses the shareholding structure, board composition, typical board processes,
disclosure standards, and related-party transactions. Any qualifications by regulators or
auditors also serve as useful inputs while assessing a company’s corporate governance.
Alok’s board represents a fair mix of experienced people with the presence of a large
number of nominee directors of various financial institutions namely, IFCI, IDBI, EXIM Bank
and LIC.
Overall, Alok’s corporate governance conforms to regulatory requirements supported
by reasonably good board practices and an independent board.
Board composition
Alok’s board consists of 11 members, seven of whom are independent directors, which is in
line with the requirements under Clause 49 of SEBI’s listing guidelines. The board
includes several nominee independent directors; given the background of the directors, we
believe the board is well experienced.
The audit committee is chaired by an independent director. Further, the position of
the chairman is independent from that of the managing director/CEO.
List of independent directors/nominees from various institutions:
Corporate governance
practices confirm to the
regulatory requirement
Name of the person Nominee from
Smt. Maya Chakravorty IDBI Bank
Mr M. V. Muthu IFCI Ltd
Smt Thankom Mathew LIC
Mr David Rasquinha Export Import Bank of India
Mr Ashok G Rajani -
Mr K. R. Modi -
Mr Timothy Ingram -
21
Ter
min
al W
AC
CA
pr-
10
Jun
-10
Au
g-1
0
Oc
t-1
0
De
c-1
0
Fe
b-1
1
Ap
r-1
1
Jun
-11
Au
g-1
1
Oc
t-1
1
Jan
-12
Ma
r-1
2
Ma
y -1
2
Jul-
12
Ap
r-1
0
Jun
-10
Au
g-1
0
Oc
t-1
0
De
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0
Fe
b-1
1
Ap
r-1
1
Jun
-11
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Jan
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Ma
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Ma
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Jul-
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CRISIL IERIndependentEquityResearch
Valuation Grade: 5/5
W e continue to use the DCF (discounted cash flow) method to value the consolidated
cash flow of Alok’s textile, retail and infrastructure businesses. W e maintain our fair value of
Rs 29 per share. At the current market price of Rs 18 per share (July 11, 2012), the stock
trades at P/B multiples of 0.44x and 0.36x FY13E and FY14E book value of Rs 41.6
and Rs 51.3, respectively. The fair value of Rs 29 gives implied P/B multiples of 0.7x and
0.57x FY13E and FY14E book value, respectively. At the CMP of Rs 18, the valuation grade
is 5/5.
Key DCF assumptions
• W e have considered the discounted value of the firm’s free cash flow from FY13-22.
• W e have assumed maintenance capex of Rs 7,500 mn in the terminal year.
• W e have assumed a terminal growth rate of 3% beyond the explicit forecast
period.
WACC computation
FY13-22 Terminal value
Cost of equity 19.2% 19.2%
Cost of debt (post tax) 6.7% 7.4%
WACC 9.5% 13.9%
Terminal growth rate 3.00%
Sensitivity analysis to terminal WACC and terminal growth rate
Terminal growth rate
1.0% 2.0% 3.0% 4.0% 5.0%
Ter
min
al W
12.0% 34 38 44 50 59
28 32 36 40 47
24 27 29 34 38
19 22 24 27 30
16 18 20 22 25
13.0%
13.9%
15.0%
16.0%
Source: CRISIL Research estimates
One-year forward P/E band One-year forward EV/EBITDA band
(Rs)
40
35
30
25
20
15
10
5
0
(Rs mn)
160, 000
140, 000
120, 000
100, 000
80,000
60,000
40,000
20,000
0
Alok 3x 4x 5x 6x 7x EV 4x 4. 5x 5x 5. 5x
Source: NSE, CRISIL Research Source: NSE, CRISIL Research
22
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Ap
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8A
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8
Oct
-1
0M
ar-
09
De
c -1
0Ju
l-0
9
Oc
t-0
9F
eb
-11
Fe
b-1
0A
pr-
11
Ma
y -1
0J
un
-11
Se
p-1
0A
ug
-11
Jan
-11
Oct
-1
1A
pr-
11
J a
n-1
2A
ug
-11
Ma
r-1
2D
ec
-11
Ma
y-1
2M
ar-
12
Ju
l-1
2Ju
l-1
2
Ju
l-1
1A
pr-
10
Au
g-1
1Ju
n-1
0
Se
p-1
1A
ug
-10
Oc
t-1
0O
c t-
11
De
c-1
0D
ec
-11
Fe
b-1
1J
an
-12
Ap
r-11
Fe
b-1
2
Jun
-11
Ma
r-1
2
Au
g-1
1A
pr-
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Oc
t-1
1M
ay-
12
Jan
-12
J u
n-1
2
Ma
r-1
2J
ul-
12
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2
Jul-
12
Alok Industries Ltd YEARS
P/E – premium/discount to NIFTY P/E movement
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
(Times)
10
9
8
7
6
5
4
3
2
1
0
-1 s td dev
+1 s td dev
Premium/Dis count to NIFTY Median premium/ dis c ount to NI FTY
1y r Fwd PE (x) Median PE
Source: NSE, CRISIL Research Source: NSE, CRISIL Research
CRISIL IER reports released on Alok Industries Ltd
Date Nature of report
Fundamental
grade Fair value
Valuation
grade
CMP
(on the date of report)
26-Jul-11 Initiating coverage* 3/5 Rs 31 4/5 Rs 26
04-Aug-11 Q1FY12 result update 3/5 Rs 31 5/5 Rs 24
15-Nov-11 Q2FY12 result update 3/5 Rs 29 5/5 Rs 19
05-Mar-12 Q3FY12 result update 3/5 Rs 29 5/5 Rs 21
08-Jun-12 Q4FY12 result update 3/5 Rs 29 5/5 Rs 19
11-July-12 Detailed Report 3/5 Rs 29 5/5 Rs 18
Share price movement Fair value movement since initiation
(Rs mn)
120
100
80
60
40
20
0
(Rs)
35
30
25
20
15
10
5
0
('000)
30, 000
25, 000
20, 000
15, 000
10, 000
5,000
0
-Indexed to 100
Alok NIFTY Traded Quantit y (RHS) CRISIL Fair Value Alok
Source: NSE, CRISIL Research Source: NSE, BSE,CRISIL Research
23
CRISIL IERIndependentEquityResearch
Company Overview
Alok, established in 1986 as a private limited company, commenced operations with yarn
texturising. It has subsequently grown into a multi-divisional textiles company, engaged
in weaving, knitting, processing home textiles and readymade garments. The company
has a presence across the textile value chain, from spinning to home textiles,
garments and retailing.
Key milestones
FY89 Set up manufacturing facilities for texturising at Silvassa (with one texturising machine)
FY91 Commenced weaving operation at Bhiwandi, Thane
FY94 Expansion of weaving capacity (50 Cimmco looms) at Bhiwandi and
texturising capacity (three texturising machines) at Silvassa
FY95 Financial and technical collaboration with Albert Grabher Gesellshaft GmbH & Co of
Austria for manufacturing embroidered products through a JV, Grabal Alok Impex Ltd
FY96 Set up knitting division at Silvassa (eight machines) and a state-of-the-art eco-
friendly process house at Navi Mumbai (three stenters)
FY97 Expansion of texturising capacity (five texturising machines) at Silvassa
FY98 Modernisation and expansion of weaving (24 Sulzer Projectile looms) at Silvassa
FY99 Expansion of weaving (28 Sulzer Projectile Looms) and knitting capacities
(20 machines) at Silvassa
FY01 Undertook expansion of weaving and processing capacities under TUFS at
an aggregate cost of Rs1,900 mn
FY02 Completion of modernisation and expansion of weaving project (88 air jet /Rapier
Sulzer Looms) at Silvassa
Expansion of knitting capacities (28 machines) at Silvassa
FY03 Completion of modernisation and expansion of processing project at Vapi
(two stenters)
Expansion of texturising capacity at Silvassa (10 machines)
Set up garment unit at Navi Mumbai (100 stitching machines)
FY04 Expansion of various capacities in Silvassa:
■ texturising (30 machines)
■ knitting (40 machines)
■ weaving (170 air jet/Rapier Looms)
Foray into home textiles (bed sheets) for direct exports
FY05 Expansion of weaving capacity at Silvassa (170 air jet/Rapier Looms)
FY06 Completion of wider width weaving and processing project
Set up new plant for processing of knitted fabric at Vapi and a POY plant at Silvassa
FY10 Successfully completed rights issue of 400 mn shares at 2075 :1 at Rs 11 per share
FY11 The company has shown intentions of getting out of the real estate business
FY12 Expanded polyester capacity to 400,000 tonnes, also sold a portion of real estate
Source: Company
24
IAlok Industries Ltd YEARS
Annexure: Financials (Consolidated)Incom e s tate m e nt Balance Sheet
(Rs m n) FY10 FY11 FY12# FY13E FY14E (Rs m n) FY10 FY11 FY12# FY13E FY14E
Ope rating incom e 44,202 66,114 98,754 120,042 121,257 Liabilitie s
EBITDA 12,704 18,094 25,380 27,664 27,944 Equity share capital 7,878 7,878 8,263 8,263 8,263
EBITDA m ar gin 28.7% 27.4% 25.7% 23.0% 23.0% Reserves 19,445 20,045 23,083 26,037 34,063
Depreciation 3,718 5,310 7,078 7,500 7,417 Minorities 36 46 46 46 46
EBIT 8,986 12,784 18,301 20,164 20,527 Ne t w or th 27,360 27,969 31,392 34,346 42,372
Interest 6,812 10,413 12,837 12,574 10,372 Convertible debt - - -
Ope rating PBT 2,174 2,371 5,464 7,590 10,155 Other debt 96,726 121,243 129,243 122,243 108,243
Other income 40 1,350 662 244 294 Total de bt 96,726 121,243 129,243 122,243 108,243
Exceptional inc/(exp) 444 1,184 (902) (1,812) 1,699 Deferred tax liability (net) 4,030 5,003 6,353 7,129 8,163
PBT 2,657 4,905 5,224 6,021 12,148 Total liabilitie s 128,115 154,215 166,988 163,718 158,778
Tax provision 1,286 1,786 2,328 2,585 3,448 Asse ts
Minority interes t - - - - - Net f ixed assets 62,703 75,060 101,902 85,592 79,233
PAT (Re por te d) 1,371 3,119 2,896 3,436 8,700 Capital WIP 16,914 22,636 4,636 4,636 5,136
Less: Exceptionals 444 1,184 (902) (1,812) 1,699 Total fixe d as s e ts 79,617 97,695 106,538 90,228 84,368
Adjusted PAT 927 1,935 3,798 5,249 7,001 Inve s tm e nts 3,812 4,532 2,532 2,532 2,532
Ratios
Current assets
Inventory 15,678 21,499 28,409 37,493 37,208
FY10 FY11 FY12# FY13E FY14E Sundry debtors 11,561 18,471 26,194 31,840 32,163
Gr ow th Loans and advances 8,526 7,880 11,770 13,107 12,027
Operating income (%) 42.1 49.6 49.4 21.6 1.0 Cash & bank balanc e 14,107 12,043 8,134 9,793 11,986
EBITDA (%) 58.5 42.4 40.3 9.0 1.0 Marketable securities 460 395 395 395 395
Adj PAT (%) (211.1) 108.7 96.3 38.2 33.4 Total current assets 50,332 60,287 74,902 92,627 93,779
Adj EPS (%) (127.8) 108.7 87.2 38.2 33.4 Total current liabilities 7,699 10,299 18,983 23,669 23,901
Ne t curr e nt as s e ts 42,633 49,988 55,918 68,959 69,878
Pr ofitability Intangibles/M isc. expenditure 2,053 2,000 2,000 2,000 2,000
EBITDA margin (%) 28.7 27.4 25.7 23.0 23.0 Total as s e ts 128,115 154,215 166,988 163,718 158,778
Adj PAT Margin (%) 2.1 2.9 3.8 4.4 5.8
RoE (%) 4.0 7.0 12.8 16.0 18.3 Cas h flow
RoCE (%) 8.4 9.4 11.8 12.7 13.4 (Rs m n) FY10 FY11 FY12# FY13E FY14E
RoIC (%) 8.3 11.5 12.2 12.3 12.6 Pre-tax prof it 2,213 3,721 6,126 7,834 10,449
Total tax paid (321) (813) (978) (1,810) (2,414)
Valuations Depreciation 3,718 5,310 7,078 7,500 7,417
Price-earnings (x) 18.9 9.0 4.0 2.9 2.2 Working capital changes (8,559) (9,484) (9,839) (11,382) 1,275
Price-book (x) 0.6 0.6 0.5 0.4 0.4 Ne t cas h fr om ope r ations (2,948) (1,266) 2,388 2,142 16,727
EV/EBITDA (x) 7.8 7.0 5.4 4.6 4.0 Cas h fr om inve s tm e nts
EV/Sales (x) 2.3 2.0 1.4 1.1 0.9 Capital expenditure (22,050) (23,335) (15,921) 8,811 (1,558)
Dividend payout ratio (%) 16.8 7.4 8.6 12.0 6.6 Investments and others 487 (655) 2,000 - -
Dividend yield (%) 1.3 1.3 1.6 2.7 3.8 Ne t cas h fr om inve s tm e nts (21,563) (23,990) (13,921) 8,811 (1,558)
Cas h fr om financing
B/S r atios Equity raised/(repaid) 8,743 - 816 - -
Inventory days 202 179 156 162 159 Debt raised/(repaid) 27,161 24,517 8,000 (7,000) (14,000)
Creditors days 75 72 88 88 88 Dividend (incl. tax) (230) (230) (289) (482) (674)
Debtor days 96 103 95 95 95 Others (incl extraordinaries) (1,330) (1,095) (902) (1,812) 1,699
Working capital days 233 208 172 176 170 Ne t cas h fr om financing 34,344 23,192 7,625 (9,294) (12,975)
Gross asset turnover (x) 0.7 0.8 0.9 1.0 1.0 Change in cash pos ition 9,832 (2,064) (3,909) 1,659 2,194
Net asset turnover (x) 0.9 1.0 1.1 1.3 1.5 Closing cash 14,107 12,043 8,134 9,793 11,986
Sales/operating assets (x) 0.6 0.7 1.0 1.2 1.4
Current ratio (x) 6.5 5.9 3.9 3.9 3.9 Quar te r ly financials (Standalone )
Debt-equity (x) 3.5 4.3 4.1 3.6 2.6 (Rs m n) Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12
Net debt/equity (x) 3.0 3.9 3.8 3.3 2.3 Ne t s ale s 21,959 16,449 21,275 23,867 25,954
Interest coverage 1.3 1.2 1.4 1.6 2.0 Change (q-o-q) 37% -25% 29% 12% 9%
EBITDA 5,581 4,522 6,751 6,423 7,288
Per share Change (q-o-q) 34% -19% 49% -5% 13%
FY10 FY11 FY12# FY13E FY14E EBITDA m ar gin 25.4% 27.5% 31.7% 26.9% 28.1%
Adj EPS (Rs) 1.2 2.5 4.6 6.4 8.5 A djusted PBT 2557 875 2,889 1,855 2,293
CEPS 5.9 9.2 13.2 15.4 17.4 Re por te d PAT 1,595 578 744 (366) 2,835
Book value 34.7 35.5 38.0 41.6 51.3 Change (q-o-q) 78% -64% 29% -149% -875%
Dividend (Rs) 0.3 0.3 0.3 0.5 0.7 Re por te d PAT m argin 7.3% 3.5% 3.5% -1.5% 10.9%
Actual o/s shares (mn) 787.8 787.8 826.3 826.3 826.3 Re por te d EPS 2.0 0.7 0.9 (0.5) 3.4
#consolidated financials not declared
Source: CRISIL Research
25
Jan
-08
Ap
r-0
8
Au
g-0
8
No
v -0
8
Ma
r-0
9
Jul-
09
Oc
t-0
9
Fe
b-1
0
Ma
y -1
0
Se
p-1
0
Jan
-11
Ap
r-1
1
Au
g-1
1
De
c -1
1
Ma
r-1
2
Jul-
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CRISIL IERIndependentEquityResearch
Focus Charts
Revenue and growth (consolidated) EPS to double in FY14 (consolidated)
(Rs mn)
140, 000
120, 000
100, 000
80, 000
60, 000
40, 000
20, 000
42%
50% 49%
22%
121,257
60%
50%
40%
30%
20%
10%
(Rs)
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0 2.5
4. 6
6.4
8.5
44,202 66,114 98, 754 120, 0420 0%
FY10 FY11 FY12E FY13E FY14E
Revenue Rev enue Growt h(RHS)
0.01.2
FY10 FY11 FY12E FY13E FY14E
Adj EPS
Source: Company, CRISIL Research Source: Company, CRISIL Research
Debt-equity and interest coverage (consolidated) Cash flow (consolidated) to turn positive in FY13
5.0
4.5
4.0
3.5
3.0
2.5
2.0
3.5
4. 34.1
3. 6
1. 6
2.6
2.0
(Rs bn)
40
30
2034
10
0
2317
2 8 2 9
1.5
1.0
0.5
0.0
1.3 1. 21.4
-10
-20
-30
-3 -1
-22 -24-14 -9 -2 -13
FY10 FY11 FY12E FY13E FY14E
Gearing I nterest coverage
FY10 FY11 FY12E FY13E FY14E
CFO CFI CFF
Source: Industry, CRISIL Research Source: Industry, CRISIL Research
Working capital days fall as polyester share rises Share price movement
(days)
250
(Rs mn)
120
200
150
100
50
233208
172 176 170
100
80
60
40
20
0
0FY10 FY11 FY12E FY13E
FY14E Work ing c apit al day s
-Indexed to 100
Alok NI FTY
Source: Company, CRISIL Research Source: Company, CRISIL Research
26
I
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YEARS
CRISIL IERIndependentEquityResearch
CRISIL Research Team
President
Mukesh Agarwal CRISIL Research +91 22 3342 3035 muk es h. ag ar w al@c ris il.c om
Analytical Contacts
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Prasad
Koparkar
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Rahul Prithiani
Senior Director, Capital Markets
Senior Director, Industry & Customised Research
Director, Customised
Research Director,
Customised Research
Director, Customised
Research Director, Equity
Research
Director, Funds & Fixed Income Research
+91 22 3342 3226
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▪ Released company reports on all 1,401 companies listed and traded on the National Stock Exchange; a global first for any stock exchange
▪ First research house to release exchange-commissioned equity research reports in India
▪ Assigned the first IPO grade in India
Our OfficeAhmedabad
706, Venus Atlantis
Nr. Reliance Petrol Pump
Prahladnagar, Ahmedabad, India
Phone: +91 79 4024 4500
Fax: +91 79 2755 9863
Hyderabad
3rd Floor, Uma Chambers
Plot No. 9&10, Nagarjuna Hills,
(Near Punjagutta Cross Road)
Hyderabad - 500 482, India
Phone: +91 40 2335 8103/05
Fax: +91 40 2335 7507
Bengaluru
W-101, Sunrise Chambers,
22, Ulsoor Road,
Bengaluru - 560 042, India
Phone:+91 80 2558 0899
+91 80 2559 4802
Fax: +91 80 2559 4801
Kolkata
Horizon, Block 'B', 4th Floor
57 Chowringhee Road
Kolkata - 700 071, India
Phone: +91 33 2289 1949/50
Fax: +91 33 2283 0597
Chennai
Thapar House,
43/44, Montieth Road, Egmore,
Chennai - 600 008, India
Phone:+91 44 2854 6205/06
+91 44 2854 6093
Fax: +91 44 2854 7531
Pune
1187/17, Ghole Road,
Shivaji Nagar,
Pune - 411 005, India
Phone: +91 20 2553 9064/67
Fax: +91 20 4018 1930
Gurgaon
Plot No. 46
Sector 44
Opp. PF Office
Gurgaon - 122 003, India
Phone: + 91 124 6722 000
CRISIL Limited
CRISIL House, Central Avenue,
Hiranandani Business Park, Powai, Mumbai – 400076.
India Phone: +91 22 3342 3000 | Fax: +91 22 3342 8088
www . c r i s i l . c o m
CRISIL Ltd is a Standard & Poor's company