ALOK INDUSTRIES--BUY

November 12, 2011:

A varied product mix, backward integration, strong export standing and low valuations make the stock of Alok Industries a good bet in the textile space for investors with a 2-3 year perspective. At Rs 20, the stock trades at four times trailing four-quarter earnings, at a steep discount to closest comparable Bombay Rayon Fashions.

Ranged presence: Over the past two years, Alok has gradually brought polyester yarn into its product offering to diversify out of its cotton concentration. In international markets, man-made textiles have a stronger presence than natural fibres such as cotton. In the first six months of this financial year, polyester accounted for as much as 36 per cent of revenues. It also deepened product lines; for instance, it introduced terry towels in the home textiles segment. Alok's product range includes apparel fabric, garments, home textiles, and polyester and cotton yarn.

Alok derives about a third of sales from exports. While the biggest consumer markets of the US and Europe are troubled, Alok's large capacities serve it well. As global retailers look to contain costs, they may consolidate suppliers and source more from fewer vendors. Those able to ramp up production to meet higher demand could thus benefit.

During the previous recessionary phase, Alok had been able to grow exports by virtue of its capacities. In the six months ended September 2011, exports have expanded a healthy 28 per cent. As fresh capacity expansion across product categories comes on stream by the end of December, revenues could see better growth. It also plans to deepen presence in domestic retail; however, with its franchise route of expansion, extensive capital will not be required. Further, retail accounts for less than one per cent of revenues.

Debt and interest: Revenues for the first half of this financial year have grown by 48 per cent, helped by price and volume growth. Operating margins stood at 26 per cent, down from the 29 per cent in the year-ago period on a higher contribution of low-margin polyester in revenues. With prices of inputs such as cotton cooling off over the past several months, the earlier margin pressures from material costs have lightened. Backward integration into spinning of yarn has also helped it record better margins than peers.

However, with debt-equity at 3.1 times, interest costs have hurt Alok. Net profits grew by 10 per cent for the first half of this financial year; interest outgo rose 35 per cent during this period. Still, some of the debt comes under government schemes which have long repayment periods. It has also begun to dispose of its real estate, raising about Rs 100 crore thus far. It aims to collect about Rs 1,400 crore through such sales by the end of 2012 which will significantly reduce interest burden.