CMP: 21

General Outlook of Indian Economy:

Last week Moody's have assigned stable rating to India and the rating is likely to continue for the short term (next 12-18 months), unless any significant change happens. India is showing early sign of revival similar to some other Asian economies and is well positioned for the cyclic recovery. India is less exposed to the downturn and thus recovery could be faster. T he current fiscal deficit was factored in the present ratings and did not pose any immediate risk.

Sector: Textiles

The Indian textile Industry is growing because of burgeoning domestic demand for textile products driven by rapidly increasing middle class with higher disposable incomes, increased retail penetration and growth in housing, healthcare, and hospitality units that need furnishing and specialty fabrics. Production capacities are shifting from the US and Europe to Asian nations, especially India , as international customers perceives India as not only a low cost producer but also as vendors capable of supplying quality products and design capabilities on time and in large quantities. With the depreciating Rupee, Indian textiles will become even more competitive.

Alok Industries Limited

Alok Industries is a leading textile manufacturer and among the few companies to demonstrate sustained growth in revenues and operating profit in the past few years following the buoyant exports.

Business:

Alok has a vertically integrated business model, with five core business divisions. These business divisions include cotton spinning, polyester yarn (POY - partially oriented yarn and texturising ), garments, apparel fabric and home textiles. Alok also has a presence in the domestic retail segment through its branded ‘H&A' stores.

There are currently 70 H&A stores under the retail division, which is being hived off into a wholly owned subsidiary called Alok Retail ( India ). Alok has increased its product range and hiked the contribution of exports to net sales from 20% in FY 2005 to nearly 48% in FY 2009. It exports to more than 70 countries, with the US , Europe, Africa, Latin America and UAE being the major markets.

Financials:

• Alok's net sales rose 37% to Rs 908 crore in the March '09 quarter from the year-ago level whereas net profit increased by 17% to Rs 71.19 crore.

• EBITDA = 778.31 cr

• PAT = Rs182 cr

• Networth = Rs.1431 cr

• Earnings = Rs.9.877 per share

• Book Value = Rs.70 per share

Growth drivers:

The Company has created huge production capacities within five years and intends to extract value from this in the next two years. It has no capex plans for two years. This is expected to reduce the interest and depreciation costs, and thereby improve profitability on a growing topline. While the slowdown could hit its exports revenues, Alok caters to retailers such as Wal-mart and Target that offer high and medium end products and are looking at consolidating sourcing to support sustained sales growth.

Valuations:

Alok has lost over 80% in market capitalisation in 2008 owing to a high beta of 0.99. Its P/E is less than three-fourth of its five-year average. The dividend distribution has been steady. It has an attractive book value of Rs.70 per share.

Future Ready :

The company has already commissioned its polyester chips plant while production of fully drawn yarn and texturised yarns is expected to begin by May '09. This is likely to improve margins of its polyester business.

The company currently has Rs 750 crore worth of orders of which nearly 53% are export orders. It expects to grow its business by 35% in FY10 fuelled by vendor consolidation and a shift in demand from value added to basic products in the international market.

We recommend you to buy shares of this company with a target price of Rs.30 per share.

Thanks and Regards,

PMS Team