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Wednesday, April 1, 2009

Alok Industries Ltd:-Buy/sell/hold/future potential/outlook-what?

Scripscan:Alok Industries Ltd
Traded in:Nse-bse

Introduction: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. However, like its peers, the net profit has been burdened by interest payment and depreciation allowance attributable to the growing debt-financed capex.The company recently announced a rights issue to mop up to Rs 450 crore. A total of 409 million shares will be issued at a price of Rs 11 a share in a ratio of 83:40 or 2.075:1 (83 shares for every 40 shares held by the shareholders). The record date will be March 31.

Business:Alok has a vertically integrated business model, with five core business divisions. These business divisions include cotton spinning, polyester yarn (POYpartially 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 45% in FY 2008. It exports to more than 70 countries, with the US, Europe, Africa, Latin America and UAE being the major markets.

Financials:The company has registered a strong top line CAGR (compounded annual growth rate) of 22% in the past five financial years, while it posted a 10% gain for the year ended December 2008. The operating profit saw a CAGR of 38% in the five fiscal years, but remained in the 22-26 % range in the past twelve quarters. The net profit margin was 6-9 % during the twelve quarters as interest costs saw a CAGR of 34% in the past five financial years.

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.

Risks / concerns:A nearly 78% rise in interest costs in the year ended December 2008 has put a pressure on profitability. The firm has substantial debts in its books and needs to improve on its debt/equity ratio in order to reap the benefits of a healthy cash flow from operations.

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; but the amount has been stagnant for the past five years. Although the rights issue is aimed at raising working capital, the proceeds may be partly used to prepay debt and thereby improve the debt/equity ratio.With the issue’s record date drawing near, the stock price has already declined to the offer price level and may fall further on that day. It doesn’t make sense for the retail investors to exercise their rights option as they may get the stock cheaper in the secondary market.

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