CRISIL Research Ier Report Alok Industries 2012

o Hospitalsrprise Ltd

Detailed Report

ApollEnte

I

CRISIL IERIndependentEquityResearch

YEARS

Alok Industries Ltd

Detailed Report

Enhancing investment decisions


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

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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

mailto:[email protected]




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.

1

http://www.ier.co.in/


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


domestic HT and export

demand to grow at a

CAGR of 5-7% over FY12-

FY17


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


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%


3

2


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

4

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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


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


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)


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%


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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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)


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


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%


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


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


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


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%


India's HT export Growth (y-o-y) (RHS)


Total HT rev enue Ex port (%) (RHS)


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


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


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


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


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-


Yarn capac ity Spindles (RHS)

0.000

Alok Vardhman NaharSpinning

% t o total rev enues

SuperSpinning

K P R Mills


10


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


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


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


12


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%


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

Ap

r-1

0

J u

n-1

0

Au

g-1

0

Oct

-1

0

De

c -1

0

Fe

b-1

1

Ap

r-11

J u

n-1

1

Au

g-1

1

Oct

-1

1

De

c -1

1

Fe

b-1

2

Ap

r-1

2

Ap

r-1

0

J u

n-1

0

Au

g-1

0

Oct

-1

0

De

c -1

0

Fe

b-1

1

Ap

r-11

J u

n-1

1

Au

g-1

1

Oct

-1

1

De

c -1

1

Fe

b-1

2

Ap

r-1

2


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


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


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


15

8.4


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%


EBITDA EBITDA Margin(RHS)


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%


Adj PAT Adj PAT Margin(RHS)

2.0

0.0FY10 FY11 FY12E FY13E FY14E

RoCE RoE


16


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


Gearing I nterest coverage


CFO CFI CFF


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


Work ing c apit al day s


Adj EPS


17


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


Alok Vardhman Text iles Nahar SpinningAlok Sangam SiyaramArvind Wels pun Trident


Figure 32: EBITDA margin comparison across players – polyester

35. 0%

30. 0%

25. 0%

20. 0%

15. 0%

10. 0%

5. 0%

0. 0%


Alok Bombay Dy eing Garden Silk I ndo Rama Sy n J B F


18


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


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


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

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


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

I

Jan

-08

Ap

r-1

0

Ap

r-0

8J

un

-10

Au

g-0

8A

ug

-10

No

v -0

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-

12

Oc

t-1

1M

ay-

12

Jan

-12

J u

n-1

2

Ma

r-1

2J

ul-

12

Ma

y -1

2

Jul-

12


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


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


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


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

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c -1

1

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r-1

2

Jul-

12


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%


Revenue Rev enue Growt h(RHS)

0.01.2


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


Gearing I nterest coverage


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


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President

Mukesh Agarwal CRISIL Research +91 22 3342 3035 muk es h. ag ar w al@c ris il.c om

Analytical Contacts

Tarun Bhatia

Prasad

Koparkar

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Rahul Prithiani

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Research Director,

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Research Director, Equity

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t a r u n . b h a t i a @c r i s i l . c om

p r a s ad . k o p a r k a r @c r i s i l . c om

bi n aif e r . j e h a n i @c r i s il . c om

m a n oj . m oh t a @c r i s il . c om

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