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Monday, March 23, 2009

Garden Silk:-Enters polyester market,a good bet in the textile segment

Scripscan:Garden Silk Mills
Traded in:Nse-bse

Story:The textile index has declined by 35% in last two months. However, the stock of Garden Silk Mills (GSM) has gained by nearly 40% during the same period.What has triggered this sudden investor interest in the stock?

Business:Garden Silk Mills is one of the oldest players in Indian textile industry, known for pioneering branded (polyester) sarees and dress materials in the country. The company has a vertically integrated business model and its current product portfolio consists of PET (polyethylene terephthalate) or polyester chips, polyester yarn of different variety and woven and finished fabric. The company has reallocated its business lines in the past four years, to emerge as a leading polyester manufacturer. This explains a drop in contribution of the fabric business to sales turn-over from 36% in the year ended June 2003 to 8% in the year ended June 2008. The share of polyester chips in total sales jumped from 1% to 43% in the same period.

Financials:GSM sustained a steady top line growth, of 31% compounded annually, for four years ended June 2008. The operating profit and net profit grew at a compounded annual growth rate (CAGR) of 20% and 1% respectively during this period.While the company's quarterly operating profit margin has ranged between 12% and 10% in the past two years, it experienced pressure of rising raw material cost. PTA (purified terephthalic acid) and MEG (monoethylene glycol) are primary raw materials and are derived from crude oil. Rising crude oil prices thus caused a surge in raw material cost, since March'07. Since mid 2008, with declining oil prices, raw material cost has bettered.The bottom line was weighed down by a rise in interest costs. The combined interest and depreciation costs have risen in tandem with a CAGR of 25% in total debt in the past four years ended June 2008.

While GSM has successfully shifted its focus from fabric to polyester and yarn, it intends to increase penetration in the polyester market. The company recently commenced production at its 600 tonnes per day (TPD) continuous polymerisation polyester project. It is expected to add a capacity of 300 TMD for the production of POY (partially oriented yarn) and FDY (fully drawn yarn) by May 2009.

Risks/concerns:While the company is expected to benefit from floating rate debt, the high interest costs still continue to affect its profitability. Since raw material costs are linked to volatility in crude oil prices, operating margins are affected.

Valuations:Due to the high beta, the company lost more than 60% of its market cap in 2008 against a 50% decline in the Sensex's m-cap. Its dividend distribution has been steady, but the dividend amount has been stagnant for over a decade now. At the current price, the stock offers a dividend yield of around 4% and its price to earning multiple (P/E) is nearly two third of its average in the past five years.

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