Alok industries -_icra

1

ICRA EQUITY RESEARCH SERVICE

ALOK INDUSTRIES LIMITED Initiating Coverage Industry: Textiles September 19, 2011

Fundamental and Valuation Grades ICRA Online has assigned the Fundamental Grade ‘3’ and the Valuation Grade ‘A’ to Alok Industries Limited (Alok). The Fundamental Grade “3” assigned to Alok implies that the company has “good fundamentals” relative to other listed securities in India. The Valuation Grade ‘A’ assigned to Alok implies that the company is “significantly undervalued” on a relative basis (as on the date of the grading assigned). Alok Industries Limited (Alok), promoted by the Jiwrajka family, is a vertically integrated leading textile manufacturer having presence across the value chain from cotton spinning, polyester yarn, apparel fabrics, home textiles and garments manufacturing to retailing of garments and accessories. The company has 16 manufacturing plants located at Silvasa, Vapi and Navi Mumbai. Besides textile operations in India, Alok holds 100% stake in ‘Mileta a.s.’, an integrated textile company with established distribution network in Czech Republic. On completion of the recently approved merger with ‘Grabal Alok Impex Limited’, Alok would hold ~90% stake in ‘Grabal Alok (UK) Limited’ - a garments and accessories retailing chain having 219 stores across England, Scotland and Wales. Besides, Alok has also made one time investments into commercial and residential real estate business through its wholly owned subsidiary, ‘Alok Infrastructure Limited’. Although the retail investments of the company may take time to yield results, we expect the company to actively monetize its investments in real estate business to improve the capital structure and the return indicators over the medium term. Grading Positives The key grading positives in our view are: 1) Well diversified client base and strong domestic business 2) Aggressive capacity expansions and strong domestic consumption demand could result in healthy volume growth going forward 3) Efforts to move up the value chain could further improve realizations 4) Vertically integrated operations leads to operational efficiencies; focus on improving capacity utilisation and asset turnover to help maintain profitability margins 5) Potential exit from the non-core businesses (Real Estate & Retail) to improve capital structure and return indicators over the medium term Grading Sensitivities The key grading sensitivities in our view are: 1) Sustainability of the global economic revival remains to be seen 2) Vulnerability to regulatory policies and foreign exchange rates 3) Steep decline in cotton prices could impact margins in near term due to high cost inventories 4) Competitive pressures from other low cost destinations could worsen incase of relapse in global demand outlook 5) Consolidation of UK retail business to moderate margins and weaken capital structure in near term 6) Delays in monetization of non-core assets could impact the capital structure and return indicators of the company. Table 1: Alok’s key financials indicators (Consolidated)

FY10A FY11A FY12E FY13E FY14E

Operating Income (Rs. crore) 4,423 6,612 9,038 11,203 13,888

EBITDA Margin (%) 28.7% 27.4% 23.2% 22.9% 22.0%

PAT Margin (%) 3.1% 6.6% 4.8% 7.0% 7.7%

EPS (Rs.) 1.75 5.39 5.55 9.89 13.66

EPS Growth (%) 86.0% 208.1% 3.1% 78.1% 38.1%

P/E (x) 10.50 3.41 3.30 1.86 1.34

P/BV (x) 0.53 0.52 0.43 0.36 0.29

RoE 5.9% 15.7% 14.1% 20.9% 23.8%

RoCE 9.5% 10.3% 11.1% 14.0% 16.8%

EV/EBITDA 7.71 6.88 5.93 4.85 4.08

Source: Company, ICRA Online estimates

ICRA Online Grading Matrix

Valuation Assessment

Fu

nd

am

en

tal

Ass

ess

me

nt

A B C D E

5

4

3

2

1

Fundamental Grading of ‘3/5’ indicates “Good Fundamentals”

Valuation Grading of ‘A’ indicates “Significantly Undervalued” on a relative basis

Key Stock Statistics

Bloomberg Code Alok In

Current Market Price (Rs.) 18.4

Shares Outstanding (crore) 78.8

Market Cap (Rs. crore) 1445.6

52-Week High (Rs.) 35.0

52-Week Low (Rs.) 15.6

Free Float (%) 70.6%

Beta 1.2

6 Month Avg Daily Volumes (Rs Cr) 22.6

Source: Bloomberg, as on 16th September, 2011 Alok Industries: Current Valuations

Shareholding Pattern (30th June, 2011)

Share Price Movement (18 months)

Source: Bloomberg, ICRA Online Estimates

3.4 3.3

1.91.3

6.95.9

4.94.1

-

2.00

4.00

6.00

8.00

FY11a FY12e FY13e FY14e

Price/Earnings EV/EBITDA

Promoters29%

FIIs21%DIIs

12%

Non-Institutions

38%

50%

75%

100%

125%

150%

175%

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun

-11

Jul-

11

Aug

-11

Sep

-11

Alok Industries Ltd Nifty index

ICRA Equity Research Service Alok Industries Limited

2

INVESTMENT SUMMARY

Diversified and integrated nature of operations with strong domestic business

Source: Company; ICRA Online Estimates

While the near term outlook for the domestic textile industry remains uncertain due to renewed fears of global

economic slowdown, volatility in cotton prices and exchange rate fluctuations; we expect the large diversified players

like Alok to be better placed due to integrated operations and relatively strong domestic business. Alok’s textile

operations are vertically integrated with in-house spinning, weaving, knitting, designing, processing and garmenting

units making it one of the few large scale organised players in India. For its apparel fabrics and home textiles segment,

backward integration into manufacturing of cotton yarn (spinning) and in-house processing of grey fabric for fashion

wear / technical textiles has enabled the company to garner higher operating margins. Apart from presence across the

cotton value chain, the company also has presence in synthetic fibre through its polyester texturising capacity,

backwardly integration into Partially Oriented Yarn (POY). Further, large scale of operations enables procurement

efficiency through bulk raw material purchases and diversified client base enables stable demand and better

realizations even during uncertain times.

Capacity expansions and strong domestic consumption demand could result in healthy revenue growth;

Improving capacity utilisation / asset turnover and focus on value-added products to maintain profitability

Alok is currently undergoing capacity expansions accoss its spinning, apparel fabric and home textiles segments.

Besides, we expect the company to aggressively expand its polyester yarn capacity from ~200,000 MTPA in FY11 to

~500,000 MTPA in FY12e and ~900,000 MTPA in FY14e; inorder to leverage upon the rapidly increasing manmade

fibre demand due to limited land availability for cultivation of natural fibres, high dependence on agro-climatic

conditions and higher domestic spending in the price sensitive rural markets. As a result, polyester division will

emerge as the largest revenue contributor for Alok with revenues increasing from 25% of Alok’s overall sales in FY11

to 42% of sales in FY14e. Overall, aggressive capacity expansions across business segments (more so in polyester

division) along with continuing strong domestic consumption demand are expected to result in a healthy 28% CAGR

in the consolidated revenues for the company over the FY11-FY14e period.

Spinning & Trading

9%

Apparel Fabric47%

Home Textiles

15%

Polyester26%

Garments3%

Alok Industries : Revenue Break-up (FY11)

Domestic Sales %

65%

Exports Sales %

35%

Alok Industries : Revenue Break-up (FY11)


3

Exhibit 1: Installed Capacities

Units FY09a FY10a FY11a FY12e FY13e FY14e

Spinning '000 MT 33.3 58.5 69.0 80.0 80.0 80.0

('000 Spindles) 252.1 300.1 343.8 411.8 411.8 411.8

Rotors 936 3,792 3,792 5,680 5,680 5,680

Apparel Fabrics

Processing Woven Mn. Mtrs 105.0 105.0 105.0 126.0 126.0 126.0 Weaving Mn. Mtrs 70.0 93.0 93.0 170.0 170.0 170.0 Knits '000 MT 18.2 18.2 18.2 25.0 25.0 25.0

Home Textiles

Processing Mn. Mtrs 82.5 82.5 82.5 105.0 105.0 105.0 Weaving Mn. Mtrs 47.0 68.0 68.0 92.0 92.0 92.0 Terry Towels '000 MT - 6.7 6.7 13.4 13.4 13.4

Polyester Yarn

Drawn Texturised yarn (DTY) '000 MT 77.0 114.0 114.0 170.0 170.0 170.0 Fully Drawn Yarn (FDY) '000 MT - - 70.0 70.0 70.0 70.0 Partially Oriented Yarn (POY) '000 MT 182.5 182.5 200.0 500.0 700.0 900.0

Garments Mn. Pcs. 15.0 22.0 22.0 22.0 22.0 22.0


Although the company has industry leading operating margins, the company plans to further improve capacity

utilizations and optimise product portfolio by focusing on higher value-added products such as yarn-dyed fabrics and

technical textiles. Yarn-dyed fabrics are used in fashionable shirting / womenswear and command better prices than

its current range of products, while technical textiles owing to their specialised nature carry higher margins than the

conventional textiles. Besides, competition is relatively moderate in the technical textiles segment as there are few

established domestic players in this import dependent segment. In polyester yarn segment, Alok’s fresh capacity

additions are aimed at higher value-added yarns such as cationic, dope-dyed, bright and black-dyed yarns. Overall,

despite the steep correction in raw material prices, we expect the company to maintain ~34% EBITDA margins in

apparel fabrics, ~28% in home textiles and ~18% polyester segments. With increasing contributions from polyester

business, overall EBITDA margins are expected to decline by ~4% over the next three years, although the return

indicators are expected to improve considerably due to higher asset turnover and RoCEs in polyester segment.

Potential exit from the non-core businesses (Real Estate & Retail) could improve capital structure; return

indicators to get futher fillip from with increasing contribution from polyester segment

Alok had entered the real estate business and invested ~Rs. 1,500 crore in FY07 to take advantage of the real estate

boom witnessed during 2004-2008. These investments however did not yield desired results and the management is

now pursuing monetisation of these investments and exit the real estate business to improve the capital structure of

the company going forward. Besides, the retail ventures (‘H&A’ & ‘Store Twenty One’) too being B2C businesses have

different and complex business models from Alok’s core spinning, weaving, processing based B2B businesses. These

investments, although require significant management time and energy, currently contribute little to the overall

profitability. Hence, the management may look at exiting the retail ventures too at an appropriate time, inorder to

improve the financial profile and focus on the core profitable businesses of apparel fabrics, home textiles and

polyester yarn. Besides, the large capital expenditures incurred across segments over past five years are expected to

stabilize and improve the return indicators for the company going forward. Again, the overall return indicators are

expected to improve with increasing contribution from polyester segment, as the latter is less working capital

intensive and higher asset turnover (~2.5 times) in comparison to cotton based businesses (~0.5 times).


4

Competition remains intense across segments; international competition could worsen incase of renewed

economic slowdown

In the apparel fabric segment, Alok is present in mid to premium segment where price competition pressures remain

high owing to fragmented nature of industry and consumer price consciousness in the domestic markets. In the home

textiles segment, Alok is mainly present in the exports markets (>95% revenues) where it continues to face stiff

competition from Chinese manufacturers with higher economies of scale and from manufacturers based out of other

low cost destinations like Pakistan. In the polyester yarn segment, domestically the company faces competition from

larger and fully integrated players like Reliance Industries; while internationally Alok faces stiff competition from

chinese manufacturers that account for close to 70% of global production capacity. While increasing domestic

demand, rising finance cost and reducing labour cost arbitrage in China are likely to aid long-term prospects for

leading Indian manufacturers like Alok; faultering global economic growth and weakening discretionary spendings

could intensify competitive pressures due to lower capacity utilizations over the near term.

Exhibit 2: Intense competitive pressures across segments

Key Segments Key Competitors

Apparel Fabrics Competitors from the organized segment include Arvind Mills, Vardhman Textiles, Nahar

Industrial Enterprises and Bombay Rayon Fashions

Home Textiles

Abhishek Industries, Indo Count Industries, Himatsingka Seide, Bombay Dyeing and Welspun

India are some of the major Indian players in the bed linen segment.

Stiff competition with manufacturers based out of China and Pakistan

Polyester Yarn

Competition from established domestic players like Reliance Industries, JBF Industries, Indo

Rama Synthetic, Garden Silk Mills, Futura Polyesters and Century Enka

Competition from Chinese polyester yarn manufacturers that dominate the global polyester

market with ~ 70% market share


Besides, the merger of Grabal Alok Impex Ltd and thereby consolidation of Grabal Alok UK (retail business)

could moderate margins and weaken capital structure at the consolidated level Exhibit 3: Estimated Merger Impact

FY12e

Alok (Ex Grabal Alok UK)

Revenues (Rs Cr) 8,012

EBITDA (Rs Cr) 2,057

EBITDA Margin (%) 25.7%

Grabal Alok UK


EBITDA (Rs Cr) 41


Alok (Consolidated)


EBITDA (Rs Cr) 2,098


EBITDA Margin Impact -2.5% Source: Company; ICRA Online Estimates

Alok’s board of directors have recently approved the

proposal for amalgamation of Grabal Alok Impex Limited

(GAlok), engaged in manufacturing wide range of

embroidered fabrics. GAlok had reported ~Rs. 235 crore

revenues with ~21% EBITDA margins in FY11. Besides,

since GAlok holds 48.7% in Grabal Alok (UK) Limited

(GAUKL), Alok’s effective shareholding in this UK based

retail chain will increase from ~41.3% to ~90%, making it a

subsidiary of Alok Industries.

We expect the consolidatation of GAUKL to adversely impact

the financials of Alok industries in near term, as the retail

chain has recently achieved EBITDA breakeven and is yet to

breakeven at net profit levels. Considering the weak outlook

for retail sales in UK, we have assumed ~9% revenue growth

and ~4% EBITDA margins for GAUKL in FY12e. Overall, the

merger is expected to reduce the consolidated EBITDA

margins by ~2.5% and weaken the capital structure by

additional debt burden of ~Rs. 600 crore, in the near term.


5

Valuation seems quite attractive even after factoring the near term headwinds

Despite the near term headwinds faced by the textile industry, Alok’s current valuation multiples (~3.3 times FY12

earnings, ~0.43 times FY12 book value) seems quite attractive considering Alok’s integrated and diversified business

model with lower dependence on textile exports. The valuation multiples are are expected to further moderate

rapidly from the FY12e levels due to strong earnings growth over the next three years contributed by large capacity

additions and improvement in the capital structure through exit from non-core businesses. Overall, we expect the

company to report a robust 28% CAGR revenue growth and 36% CAGR EPS growth over the FY11a-FY14e period,

aided by robust capacity expansions and healthy domestic consumuption demand going forward. Hence, we assign a

valuation grade of “A” to Alok on a grading scale of ‘A’ to ‘E’, which indicates that the company is “significantly

undervalued” on a relative basis.

Exhibit 4: Relative Valuations Vs Equity Indices:

ICRA Estimates Alok

Industries Ltd

NIFTY

INDEX

CNX 500

INDEX

CNX MIDCAP

INDEX

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Price/Earnings 3.30 1.86 13.98 11.88 13.27 11.09 11.31 9.39

EV/EBITDA 5.93 4.85 9.48 8.22 9.35 7.92 9.70 7.91

Price /Sales 0.16 0.13 1.58 1.43 1.30 1.16 0.82 0.74

Price /Book Value 0.43 0.36 2.32 2.03 2.09 1.81 1.51 1.31

Price/Cash Flow 1.36 0.99 10.26 8.85 9.53 8.00 7.01 5.76

Source: Bloomberg, ICRA Online Estimates * Bloomberg Consensus Estimates as on 16th September, 2011

Exhibit 5: Relative Valuations Vs Industry Peers:

ICRA Estimates Alok

Industries Ltd

S. Kumars

Nationwide Ltd

JBF

Industries Ltd

Provogue

(India) Ltd

Vardhman

Textiles Ltd

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Price/Earnings 3.30 1.86 3.61 2.43 2.68 2.21 7.96 6.85 3.49 3.38

EV/EBITDA 5.93 4.85 3.94 3.32 3.24 2.88 10.87 9.39 4.57 4.77

Price /Sales 0.16 0.13 0.23 0.19 0.13 0.12 0.57 0.51 0.28 0.29

Price /Book Value 0.43 0.36 0.44 0.36 0.57 0.49 0.46 0.43 0.45 0.41

Price/Cash Flow 1.36 0.99 2.69 NA 1.85 1.62 5.69 4.89 1.89 1.90



6

OPERATING PROFILE

Snapshot:

One of the largest integrated textile companies in India with presence across the value chain from cotton spinning

to manufacturing polyester yarn, apparel fabrics, home textiles and ready-made garments. The company has 16

manufacturing plants located at Silvasa, Vapi and Navi Mumbai.

Besides, Alok holds 100% stake in Mileta a.s., an integrated textile company with established distribution network

in Czech Republic and will hold ~90% stake in Grabal Alok UK Ltd., a leading garments and accessories retailing

chain having 219 stores across England, Scotland and Wales.

Alok also made onetime investments into commercial and residential real estate business through its wholly

owned subsidiary, Alok Infrastructure Limited.

Alok’s textile operations comprise of five divisions that span the entire textile value chain. The company is vertically

integrated with in-house spinning, weaving, processing and garmenting units making it one of the few large scale

integrated and organised players in India. Besides, the company, through its subsidiaries and joint ventures have

entered into retailing of garments and accessories as well as real estate construction businesses. The table below

gives break up of operating revenues and EBITDA margins by business segment on consolidated basis:

Exhibit 6: Segment-wise revenues and margins

Revenues (Rs Cr) FY08a FY09a FY10a FY11a FY12e FY13e FY14e

Spinning & Trading 294 111 327 574 402 409 430

Apparel Fabric 895 1,610 1,943 2,967 3,107 3,585 4,008

Home Textiles 389 499 707 986 1,087 1,263 1,442

Polyester 493 619 1,193 1,664 2,592 3,905 5,864

Garments 100 139 141 175 175 191 210

Others 123 136 111 212 1,675 1,849 1,936

Total 2,294 3,113 4,423 6,578 9,038 11,203 13,888

Revenues Contributions (%) FY08a FY09a FY10a FY11a FY12e FY13e FY14e

Spinning & Trading 13% 4% 7% 9% 4% 4% 3%

Apparel Fabric 39% 52% 44% 45% 34% 32% 29%

Home Textiles 17% 16% 16% 15% 12% 11% 10%

Polyester 21% 20% 27% 25% 29% 35% 42%

Garments 4% 4% 3% 3% 2% 2% 2%

Others 5% 4% 3% 3% 19% 17% 14%

Total 100% 100% 100% 100% 100% 100% 100%

EBITDA Contributions (%) FY08a FY09a FY10a FY11a FY12e FY13e FY14e

Spinning & Trading 5% 1% 3% 4% 2% 2% 1%

Apparel Fabric 54% 66% 56% 57% 50% 47% 44%

Home Textiles 22% 19% 20% 16% 15% 14% 13%

Polyester 16% 13% 18% 17% 22% 27% 33%

Garments 3% 3% 3% 2% 2% 1% 1%

Others -1% -2% 0% 4% 9% 9% 7%

Total 100% 100% 100% 100% 100% 100% 100%



7

Spinning / Cotton Trading Divison

Snapshot:

Alok’s Cotton Spinning business has lower revenue contribution (~9% in FY11a) as 80-85% cotton yarn

manufactured is utilized for captive consumption by the fabric and home textiles divisions of the company.

Alok has the largest spinning facility in India at a single location (Silvassa); further capacity expansion planned

from 343,840 to 441,840 spindles (58,750 tons) and 3,792 to 5,424 rotors (20,210 tons) in FY12 to support

expansions at the in-house weaving and knitting capacities in the fabric and home textiles segment

Procurement of raw cotton in bulk and during harvest remains crucial to the division’s overall profitability; steep

volatility in cotton prices driven by global demand-supply scenario could squeeze operating margins

Cotton Trading business remains opportunistic as it gains from temperory mispricings in the market, however

EBIDTA margin remain lower due to the trading nature of business

Lower revenue contribution as 80 to 85% of cotton yarn produced is used for captive consumption; EBIDTA

margins lowered by cotton trading activity

Alok has an in-house spinning unit for cotton yarn, which not only mitigates the risk of reliance on outside supplier

but also enhances margins through the value chain. Besides, the division also trades in raw cotton and cotton yarn to

leverage upon the managment’s deep understanding of domestic and international demand-supply conditions and

gain from temperory mispricings seen the market.

In FY11, the spinning and cotton trading division accounted for Rs. 574 crore or ~9% of operating income for the

company. Volumes and hence revenue generated by spinning & cotton trading activity increased by ~75% in FY11,

primarily on account of low base effect in the previous years and increase in cotton trading activity to encash upon the

rise in cotton prices in the open market. Exhibit 7: Spinning & Cotton Trading Division – Key Operating Indicators

Product mix Compact yarn, dyed yarn, blended yarn and organic cotton from coarse to fine counts

Target segment

Primarily captive consumption by fabric and home textiles division (~75 to 80%)

18 to 25% of cotton yarn production is sold to traders, distributors and manufacturing units in

the domestic as well as export markets

Highlights Largest capacity at a single location in India (Silvassa)

Industry Scenario

Volatility in raw cotton costs due to uncertain demand-supply situation

Sustained high prices could result in further substitution by polyester

Steep fall could result in company left holding high cost inventories

Competition

The company does not generate significant revenue from sale of cotton yarn as large part of the

produce is utilized for captive consumption.

Cotton trading operations of the company are opportunistic, primarily to benefit from spurt in

cotton prices and the company remains a very small player in the said segment.

Thus competition from other spinning mills and cotton traders is not applicable to the company

Current Capacity 44,980 tons ring spun yarn (343,840 spindles)

13,520 tons open-ended yarn (3,792 rotors)

Future plans

Capacity expansion for ring spun yarn to 58,750 tons (411,840 spindles) and open-ended yarn

to 22,250 tons (5,680 rotors) at total cost of Rs. 400 crore in a phased manner till FY12.

Expansion to be funded through term loans Rs. 315 crore and internal accruals of Rs. 85.0 crore.

Expanded capacity too will be used primarily for captive consumption for fabric and home

textiles segment

Source: Company; ICRA Online Research


8

Bulk buying during harvest season leads to high inventories risks; however, trading operations gains in case

of favourable price movements

Alok mitigates the risk of cotton price fluctuations to an extent by purchasing cotton in bulk quantities during the

buying season; when the quality, availability and costs are favourable. Alok procures raw cotton from the open

market, primarily from states of Gujarat, Maharshtra and Andhra Pradesh; though there are no long-term contracts. It

maintains an average nine months inventory of raw cotton primarily for yarn manufacturing resulting in high

inventory holding period. In rising cotton price scenario, the company gains as the benefits of low cost inventory may

not be completely passed on to the customers; however the situation reverses and margins decline if the raw cotton

prices fall steeply in short duration leading to high cost inventories.

Capacity expansions to aid growth in spinning reveneus in FY12, Cotton trading revenues and margins are

expected to moderate after a strong performance over the last two years

Alok is expanding its spinning capacity for manufactring ring-spun yarn to 58,750 tons (411,840 spindles) and open-

ended yarn to 22,250 tons (5,680 rotors) at total cost of Rs. 400 crore in a phased manner till FY12. The expanded

capacities too are expected to be used primarily for captive consumption, while open market sales may continue upto

the tune of ~10-15% annually. Besides, we expect the growth in cotton trading revenues and overall margins for the

division to moderate marginally, after a strong performance over the last two years.

Exhibit 8: Spinning & Cotton Trading Division – Key Financial Indicators

Key Estimates

FY09a FY10a FY11a FY12e FY13e FY14e

Spinning Capacity MT 33,300 58,500 69,040 80,000 80,000 80,000

Cotton Yarn Sales* MT 8,348 10,259 10,356 9,600 8,000 8,000

Cotton Yarn Revenues* Rs Cr 59.1 71.6 101.1 70.3 61.5 64.6

Growth %

21% 41% -30% -13% 5%

Trading Revenues Rs Cr 52.0 255.5 473.2 331.2 347.8 365.2

Growth %

392% 85% -30% 5% 5%

Total Revenues Rs Cr 111.1 327.1 574.3 401.6 409.3 429.8

Growth %

194% 76% -30% 2% 5%

Source: Company; ICRA Online Research * Cotton Yarn Sales refers to open market sales post captive consumption


9

Fabric Division

Snapshot:

Key business segment for the company contributing ~45% to revenues and ~57% to EBDITA in FY11

One of the largest and most profitable fabric manufacturer in the country with revenues of ~Rs. 2,967 crore and

EBITDA of Rs. 1,080 crore in FY11

Higher value addition through processing of grey fabric, with inputs from in-house designing team, differentiates

the company’s fashion wear and technical textile product range; presence in high-end fabric effectively eliminates

competition from unorganised market

Growth momentum to continue going forward due to the planned increase in annual weaving capacity to 170.0

million meters, knitting capacity to 25,000 MT and processing capacity to 126.0 million meters by FY12

While the dependence on the fabric division is expected to reduce going forward in the wake of large capacity

enhancement in the polyester division, it is estimated to remain the largest EBIDTA generating segment for Alok

Exhibit 9: Fabric Division – Key Operating Indicators

Product mix Diversified product mix with cotton / cotton blends of yarn-dyed / piece-dyed fabrics in knits /

woven for daily wear, fashion wear, industrial or technical textiles

Target segment

Garment converters in India who in turn sell in the domestic as well as export markets

Wholesalers, retailers and traders in the domestic market

Garmenting companies and large format retailers in export market

Institutions/corporate customers for technical textiles

Highlights

One of the largest players in the apparel fabric segment

Alok’s largest revenue segment (47% of FY 11 sales) with high EBDITA margin of 36% on account of

in-house spinning, designing and processing capacities; increasing share of value added fabric range;

diversified and quality conscious customer base

Industry Scenario

India’s fabric production was estimated at 54,966 million sq. meters in 2009, strong growth in recent

years as the Indian fabric industry is becoming increasing more competitive globally

The current market size for technical textiles in India is estimated at close to Rs. 40,000 crore with

demand estimated to grow at 11% CAGR to reach about Rs. 66,000 crore by FY 2013

Competition

The unorganized / largely fragmented nature of industry makes estimation of market share difficult

Competitors from the organized segment include Arvind Limited, Vardhman Textiles, Nahar

Industrial Enterprises and Bombay Rayon

Current Capacity

(p.a.)

Processing Capacity of 105.0 million meters

(segregated into three continuous processing lines and one batch processing line)

Weaving capacity of 93.0 million meters (808 weaving looms)

Knitting capacity of 18,200 tones

Yarn Dyeing Capacity of 5,000 tones

Future plans

(capacity p.a.)

Processing capacity – 126.0 million meters

Weaving capacity – 170.0 million meters

Knitting capacity – 25,000 tones

Capacity expansion to be completed in FY12 at an estimated cost of Rs. 225.0 crore through external

debt (~80%) and internal accruals (~20%)

Source: Company; ICRA Online Research


10

One of the largest fabric manufacturer in India with high end processing capabilities

Alok, one of the largest player in the apparel fabric segment, has presence in yarn-dyed fashion wear fabrics and

technical textile fabrics. The company has an in-house weaving capacity of close to 93.0 million meters (to be

increased to 170.0 mn meters) per annum and knitting capacity of 18,200 tones (to be increased to 25,000 tonnes)

per annum. Entire processing of grey fabric (output from weaving and knitting operations) is carried out at its in-

house facility at Vapi which has an annual processing capacity of 105.0 million meters (to be increased to 126 Mn

meters) per annum. The value addition through processing of grey fabric and the company’s in-house designing team

are crucial high margin generators and differentiator for the company’s fashion wear and technical textile product

range. Besides, Alok has benefited in terms of technology absorption for high-quality yarn-dyed fabrics, which are

used for fashionable shirting and high end women’s wear and command premium prices in the market, through its

acquisition of Mileta.

High competitive pressures due to fragmented nature of industry and price consciousness in the domestic

markets; however, presence in value-added fabrics mitigates competition from the unorganised segment

In the apparel fabric segment, Alok is present in mid to premium segment where price competition pressures remain

high owing to fragmented nature of industry and consumer price consciousness in the domestic markets. Alok

competes with organised players like Vardhaman, Arvind, JCT, Nahar Industries and Bombay Rayon. However,

presence in value-added fabrics mitigates competition from the unorganised players that mainly cater to the

commodity fabric or the economy end of the fabric segment. Current installed weaving and processing capacities of

some of the major competitors is given below:

Exhibit 10: Fabric Division – Competitve Scenario

Company Installed capacity (FY10) Actual production (FY10)*

Alok Industries Limited

Weaving Capcity: 93 million meters (808 weaving looms)

Knitting Capacity: 18,200 tonnes Processing Capacity: 105 million

meters

192.3 million meters of woven fabric 7,200 tons of knitted fabric

Nahar Industrial Enterprises

Weaving capacity: 52.8 million meters (with 453 looms)

Processing Capacity: 58.4 million meters

83.5 million meters of grey and processed fabric

Arvind Limited

Weaving Capacity: 34 million meters of woven shirting fabric, 21 million meters of Khakhi fabric, 33 million meters of voiles

Knitting Capacity: 10,000 tonnes

29 million meters of woven fabric 38 MT of grey fabric

Vardhman Textiles Limited

Weaving Capacity: 82 million meters of fabrics (900 looms)

Prcessing Capacity: 90 million meters

108 million meters processed fabric

Bombay Rayon Fashions Weaving Capacity: 220 million

meters 78.2 million meters (large part of capacity was

under commissioned in FY10)

Source: Company Websites; ICRA Online Research *Actual production includes production through third party contractors outsourced production)


11

Technical textiles to gain focus in wake of increasing demand and potential for higher EBIDTA margin

Unlike conventional textile industry, the technical textile industry (market size estimated to reach Rs. 66,000 crore by

FY13e) is an import intensive industry with few companies in India having 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, marine, medical, construction, transportation and high technology applications. Alok is

in talks with several international players for technology tie-ups and plans to considerably increase exposure to this

segment to gain from the lower competitive pressures and garner higher margins from the same.

Reputed and diversified customer base helps mitigate client specific risks; strong backward integration helps

minimize the impact of yarn price fluctuations

The apparel fabric division has a highly diversified and reputed customer base which includes garmenting companies

like Shahi Exports and Madura Garments in domestic market (~65-70%), garmenting companies in international

market (~15-20%), institutional sales to armed forces and government organisation (~5-7%) and work wear or

technical textiles (~5-10%). The company manufactures fabric primarily against orders which helps mitigate the risk

of unsold inventory, while the pricing takes into account prevailing market price of raw material (yarn) and foreign

currency rate for exports. Besides, strong backward integration with in-house cotton and polyester yarn production

helps minimize the impact of any adverse fluctuations in yarn prices.

Strong revenue growth expectations on account of healthy domestic demand and capacity augmentation;

margins expected to be maintained through migration to high value-added and fashion fabrics

The apparel fabric division has witnessed strong growth over the years driven by increase in volumes on the back of

healthy demand and capacity augmentation. The segment generates EBDITA margin of close to 36% on account of

backward integration into yarn production, high-end processing and increasing presence in the fashion wear and

technical fabric. Going forward, the shifting production base to Asian countries like India, along with increasing

demand for higher quality fashion apparel and ready-to-wear apparels in India, is likely to benefit established textile

majors like Alok. Besides, the focus on technical textiles along with increasing share of yarn-dyed fashion wear fabrics

is likely to drive realizations and revenue growth for the company. Operating margins too are estimated to remain

strong despite volatile raw material prices as the company, being a large integrated player, benefits from economies of

scale and has demonstrated its ability to pass on increase in input costs to its customers. Overall, we expect the

division to report ~11% CAGR revenue and 34-35% EBITDA margins over the FY12e-FY14e period.

Exhibit 11: Fabric Division – Key Financial Indicators

Key Estimates


Installed Capacities

Processing Woven Mn Mtrs 105 105 105 126 126 126

Weaving Mn Mtrs 70 93 93 170 170 170

Knits MT 18,200 18,200 18,200 25,000 25,000 25,000

Production

Woven fabrics Mn Mtrs 168 205 240 275 306 331

Knitted fabric MT 6,693 6,802 9,135 12,789 16,625 19,950

Total Revenues Rs Cr 1,610 1,943 2,967 3,107 3,585 4,008

Growth %

21% 53% 5% 15% 12%

Source: ICRA Online Research


12

Home Textiles Division

Snapshot

Home Textiles division accounted for ~15% of overall revenues and 16% of EBITDA in FY11; Integrated

operations & presence in mid-premium export segment enables high margins (31% EBITDA margin in FY11)

Alok is mainly present in the exports markets (>95% revenues) where it continues to face stiff competition from

Chinese manufacturers with higher economies of scale and from manufacturers based out of other low cost

destinations like Pakistan

Presence in the relatively high end home textiles (300 to 500 counts product category) enable higher price

realisation and helps mitigate competition from other low cost manufacturing locations and domestic companies

Established and reputed multinational clientele results in strong customer profile; periodic pricing resets to

protect marings in case increase in input costs

Integrated operations with spinning / processing capabilities enables better control over product quality

Planned increase in processing capacity to 105.0 million meters and terry towel capacity to 13,400 MT to drive

revenue growth going forward

Exhibit 12: Home Textiles Division – Key Operating Indicators

Product mix Alok produces wide range of bed sheets sets, comforters, blankets, quilts, curtains and terry towels. Bed sheets

account for close to 80% of the division’s sale while bed spreads and terry towel account for 10% each

Target

segment

Export to overseas retailers and brands like Walmart, J.C. Penny, Kohl and Target (exports accounting for ~

95% of overall division’s sales and 45% of total exports of Alok)

Domestic retailers and brands

Highlights

Largest Indian player in export of bed sheets (Received various export awards from Government of India)

Top five player for terry towels

Strong integration with Alok’s spinning division, which supplies close to 80% of its raw material (cotton

yarn) requirement and in-house processing unit enabling control over end product quality

Industry

Scenario

Home Textiles segment is estimated at around US$ 22 - 27 billion, accounting for 5-6% of the total global

textile market

India currently the largest supplier of terry towels and bed sheets

Spend on home textiles is price sensitive in nature with demand vulnerable to economic slowdowns;

however, demand may shift to lower value segment within home textiles

Competition

Abhishek Industries, Indo Count Industries, Himatsingka Seide, Bombay Dyeing and Welspun India are some

of the major Indian players in the bed linen segment.

Stiff competition with manufacturers based out of China and Pakistan

Current

Capacity

Bed sheets – 17.5 million pieces

Processing - 105.0 million metres

Weaving - 68.0 million metres

Terry towels - 6,700 tons

Future plans

Capacity expansion for processing of fabric to 105.5 million meters, weaving of fabric to 93.0 million metres

and terry towels to 13,400 tons at a cost of Rs. 175.0 crore, to commissioned by FY12.

The capacity expansion will be funded through Rs. 140.0 crore external debt & balance through internal

accruals

Source: Company Websites; ICRA Online Research


13

Largest home textiles exporter from India with significant presence in high count bed sheets and terry towels

Alok is the largest manufacturer and exporter home textiles from India with Rs. 986 crore in sales in FY11, growing at

36% CAGR over the last three years on account of increase in capacities, diversification in product mix and improved

realisation per unit on account of higher value add products. The product mix consists of 80% bed sheets, while 10%

is bed spreads and rest are terry towels. Around 10% of terry towel products of Alok are yarn-dyed providing higher

margins while the rest is solid or piece dyed. Alok has limited presence in the domestic market mainly consisting of

economy segment (less than 300 thread counts) and dominated by large number of unorganised players. The

company mainly focuses on export markets (>95% of products are exported) with 300 to 500 thread count products,

where competition is moderate and realizations / margins are relatively higher.

Stiff competition from other low cost destinations; however, presence in the relatively higher count helps

mitigate competition

In the home textiles segment, Alok is mainly present in the exports markets (>95% revenues) where it continues to

face stiff competition from Chinese manufacturers with higher economies of scale and from manufacturers based out

of other low cost destinations like Pakistan. However, presence in the relatively high-end home textiles (300 to 500

counts product category) enable higher price realisation and helps mitigate competition from other low cost

manufacturing locations and domestic companies (products from Pakistan are estimated at 8-12 USD/unit FOB value

while that from Alok are priced at 15-20 USD/unit). Besides, the shift in procurement strategy of large global retailers

from high cost US / European destinations to low cost destinations like India and increasing demand for textile

products in China’s domestic market augurs well for the large Indian players like Alok. The installed capacity of

certain organised players is given below:

Exhibit 13: Home Textiles Division – Competitive Scenario

Company Installed Capacity (p.a)

Hanung Toys & Textiles Bed Sheets - 6.85 million pieces

Himatsingka Seide Bed Sheets - 2.96 million Pieces, Weaving Capacity - 15.7 million metres, Processing Capacity - 20.9

million metres

Abhishek Industries Terry Towels -41,500 tons

Alok Industries Bed Sheets - 17.5 million pieces, Terry towel - 6,700 tons

Weaving capacity – 92.0 million meter and processing capacity – 105.0 million meters

Welspun Industries Weaving capacity – 45.0 million metres, Terry Towel - 41,500 tons


Established and reputed multinational clientele results in strong customer profile; periodic pricing resets to

protect marings in case increase in input costs

The customer portfolio for the home textiles division includes retail giants like Walmart, Target, Kohl’s and JC Penney

in the export market and Pantaloons in the domestic market. The client portfolio for the company is quite diversified,

with top four to five customers accounting only 40% of revenues for the division. In terms of geographies North &

South American markets comprise ~80% of the total sales, Europe contributing ~15% and domestic customers

accounting for balance 5% of the segment’s revenue. Besides, ~95% of products are sold as private labels in these

markets and only 5% are sold as branded products.


14

The company’s customer base consists primarily of organised retailers in the US and European market, where average

spend on and replacement of home textile products is relatively higher than that in the other parts of the world, thus

making it a steady business for retailers. This generates steady order book for large integrated companies like Alok

who can deliver large quantities of higher value add home textile products at reasonable rates and meeting stiff

delivery schedules. Besides, the company has volume-based contracts with its customers where prices are negotiated

every three months based on the input (cotton yarn) prices, thus allowing Alok to hedge its raw material risk.

Capacity enhancements to drive volume growth going forward; however, realizations and margins remain

vulnerable due to significant uncertainities in global demand outlook over the near term

Alok is expanding its Terry Towels capacity, a relatively new segment for the company, from 6,700 MT to 13,400 MT

in FY12. Besides, the company is increasing its in-house weaving capacity from 68.0 to 92.0 million meters per annum

and processing capacity from 82.5 to 105.0 million meters per annum in FY12, inorder to maintain the quality of

finished product. While capacity enhancements are expected to result in robust volume growth going forward, we

expect the operating margins of the division to remain vulnerable to renewed uncertainities over global demand

outlook in the near term. The revenue growth could also be impacted by declining cotton prices and resulting lower

realisations.

However, we expect the price corrections to be buffered by presence in higher count products and high value addition

(i.e. lower raw material costs / realizations) by the division. Besides, the impact on operating margins are expected to

be somewhat mitigated by operating efficiencies resulting from higher economies of scale, integrated nature of

operations, high-end designing capabilities and diversified client base of the company. Overall, we have assumed the

contribution from terry towels to increase to from ~10% in FY11 to ~20% in FY14e and the division to report ~13%

CAGR revenue and 28-29% EBITDA margins over the FY12e-FY14e period.

Exhibit 14: Home Textiles Division – Key Financial Indicators

Key Estimates



Processing Mn. Mtrs 82.5 82.5 82.5 105 105 105

Weaving Mn. Mtrs 47 68 68 92 92 92

Terry Towels MT 0 6700 6700 13400 13400 13400

Production

Made-ups '000 Sets 4,073 4,948 5,690 6,401 7,041 7,569

Made-ups '000

Pieces 2,456 3,737 4,297 4,835 5,318 5,717

Terry towels MT - 1,703 2,555 3,704 5,186 7,001

Total Revenues Rs Cr 499 707 986 1087 1263 1442

Growth %

42% 39% 10% 16% 14%



15

Polyester Yarn Division

Snapshot

Polyester Yarn division is the second highest revenue generating segment, with close to 25% revenue

contribution and 17% EBITDA contribution in FY11, the division is expected to become highest revenue

contributor by FY14e on the back of large capacity enhancement being undertaken by the company

Demand scenario likely to remain robust due to increasing substitution of natural fibres; considerable increase in

capacity across sub-segments to meet captive & open market demand to drive volumes growth going forward

Strong competition from Chinese manufacturers, large Indian peers & unorganised domestic texturisers; however

large scale of operations enables supporting high volumes at competitive prices

Relatively moderate EBDITA margins due to commodity nature of business; significant volatility in raw material

(MEG & PTA) prices may dampen profitability margins if not hedged or passed through adequately; however

RoCE is expected to remain relatively healthy due to lower working capital intensity and capex requirements

Exhibit 15: Polyester Yarn Division – Key Operating Indicators

Product mix Present mainly in commodity segment; manufactures Partially Oriented Yarn (POY), Fully Drawn Yarn

(FDY), Drawn Texturised yarn (DTY)

Target segment Domestic power loom weavers, Direct exports

Highlights Among top three polyester yarn manufacturing company in India

Competition

Competition from established domestic players like Reliance Industries Ltd, JBF Industries Ltd,

Garden Silk Mills Ltd, Futura Polyesters Ltd, Indo Rama Synthetic Ltd., Century Enka

Competition from Chinese polyester yarn manufacturers that dominate the global polyester market

with ~ 70% market share

Industry Scenario

The global production of Polyester fibre grew by 5.3% in CY10, Polyester Filament Yarn recorded

strong growth of 5.7% to 19.3 million tons and Polyester Staple Fibre grew by 4.6% to 12.6million

Tons. On the other hand, cotton fibre showed a de-growth of 4.8%.

Current Capacity* POY : 200,000 tons, FDY : 70,000 tons, DTY : 114,000 tons

Future plans Capacity expansion for DTY to 170,000 tons per annum and to 500,000 tons for POY at an estimated cost

of ~Rs. 860 crore by FY12e

Source: Company; ICRA Online Research *POY - Partially Oriented Yarn; FDY- Fully Drawn Yarn (FDY), DTY - Drawn Texturised yarn;

Strong competition from Chinese manufacturers, large Indian peers & unorganised domestic texturisers;

however large scale of operations enables supporting high volumes at competitive prices

The polyester yarn segment faces competition from larger & fully integrated players like Reliance Industries

domestically and stiff competition from chinese manufacturers (that account for close to 70% of global production)

internationally. However, Reliance Industries is mainly present in Polyester Staple Fibres (~62% market share) and

has lower presence in Polyester Filament Yarn (~29% market share) segment catered by Alok. Besides, increasing

domestic demand, rising finance cost and reducing labour cost arbitrage in China are likely to aid long-term growth

rates for leading Indian manufacturers like Alok over the medium term.


16

Source: EmergingTextiles.com

0200400600800

10001200140016001800

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9

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-10

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-10

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10

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-10

No

v-1

0

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-11

Mar

-11

May

-11

Polyester Division - Raw Material Price Trend

PTA (US$ per ton) MEG (US$ per ton)

Exhibit 16: Polyester Yarn Division – Competitive Scenario:

Company Installed Capacity*

Reliance Industries Limited 800,000 tons

Indo Rama Synthetics Limited 303,600 tons

JBF Industries 201,200 tons

Garden Silk Mills Limited 230,400 tons

Alok Industries 200,000 tons


Significant volatility in raw material prices may dampen margins if not hedged or passed through adequately

Purified Terephthalic Acid (PTA) and Mono Ethylene

Glycol (MEG) are the primary raw materials constituting

~50-70% of the total sales value for polyester yarn. Being

petrochemical products, prices of PTA and MEG fluctuate

in line with fluctuations in crude oil prices in the long

term. Domestic refining companies like Reliance and IOC

cater to ~75% of Alok’s PTA requirement while the

balance is imported. MEG is completely imported by the

company. Volatility in raw material prices remain a key

challange for the company in view of the commodity

nature of the business.

Polyester Yarn division is expected to become highest revenue contributor by FY14e on the back of large

capacity enhancement being undertaken by the company

Alok’s Continuous Polymerisation plant with 200,000 TPA POY capacity became full operational in FY11. We expect

the division to further expand aggressively ~500,000 TPA in FY12e and ~900,000 TPA in FY14e; inorder to leverage

upon the rapidly increasing artificial fibre demand due to limited land availability for cultivation of natural fibres, high

dependence on agro-climatic conditions and higher domestic spending in the price sensitive rural markets. Besides,

Alok plans to shift from semi-dull polyester yarn to relatively higher end products like bright black/cationic yarns

currently being produced by Reliance Industries, JBF Industries and Indo Rama Synthetics. As a result, we expect the

polyester yarn division to report a robust ~52% CAGR revenue growth and emerge as the largest revenue contributor

for Alok, with its revenue contribution increasing from 25% of Alok’s overall sales in FY11 to 42% of sales in FY14e.

While the EBITDA margins for the division are expected to remain moderate (around ~18%); the division generates

higher ROCE on account of relatively lower working capital intensity / capex requirements and higher asset turnover

(~2.5 times) in comparison to cotton based businesses (~0.5 times).

Exhibit 17: Polyester Yarn Division – Key Financial Indicators

Key Estimates FY09a FY10a FY11a FY12e FY13e FY14e


DTY '000 MT 77 114 114 170 170 170

FDY '000 MT 0 0 65.7 65.7 65.7 65.7

POY '000 MT 182.5 182.5 200 500 700 900


17


Production

DTY '000 MT 71 104 108 125 131 137

FDY '000 MT - - 16 36 43 49

POY '000 MT 10 28 56 140 279 488


Growth % 93% 39% 56% 51% 50%

Source: ICRA Online Research Note: DTY - Drawn Texturised yarn; FDY- Fully Drawn Yarn (FDY), POY - Partially Oriented Yarn

Garments Division

Snapshot

Currently low level of activities at Alok’s garmenting division; large part of garmenting activity outsourced

Garment division accounted for close to 3% of total operating income and 2% of EBITDA in FY11

Division unlikely to contribute significantly higher revenues due to lower management focus currently

Garments currently a small division

Garment division of Alok is currently the smallest in terms of revenue and capacities. During FY11 the division

recorded sales of Rs. 175 crore, an increase of 24% over the previous year. Exports contributed to the majority share

of sales for this division. The garments division increased production capacity to 22 million pieces per annum from 15

million pieces per annum in FY09. The capacity utilisation at present constrained as availability of workers at current

factory location of Silvassa is a problem due to transportation issues for workers. Hence, further capacity

enhancement (7 million pieces) was done at Daman where there is ample availability of labor which is expected to

improve capacity utilisation of the segment in future.

Though opportunities are available in workwear segment for this division to grow, Alok has no plans to aggressively

expand the garmenting facilities further at present however it is considering outsourcing opportunities especially in

Bangladesh, where quality garments can be produced at competitive prices. However, going forward too, the division

is expected to remain a minor contributor to Alok’s overall sales.

Exhibit 18: Garment Division – Key Financial Indicators

Key Estimates


Installed Capacities Mn. Pcs. 15.0 22.0 22.0 22.0 22.0 22.0

Production Mn. Pcs. 4.7 3.7 4.4 5.1 5.9 6.8


Growth % 39% 2% 24% 9% 10% 11%



18

Real Estate Business

Snapshot

Foray into real estate in FY07, through separate subsidiaries, to be part of the high growth of this sector

Large accumulation of debt on account of projects under implementation, resulting in pressure on capital

structure despite equity infusion from promoters and institution investors (though QIPs)

Commercial complex (Penninsula Business Park) project nearing completion; Joint venture in the residential real

estate segment likely to yield results only in the coming years

Succesful exit from real estate segment likely to aid recovery in overall profitability, capital structure and liquidity

profile of the company

Entry into real estate business to encash the upturn in the real estate industry four years back; looking

actively to exit the business after execution and sale of current projects at hand

Alok had entered the real estate business and invested ~Rs. 1,500 crore in FY07 to take advantage of the real estate

boom witnessed during 2004-2008. The management is aggressively pursuing monetisation of these investments and

exit the real estate business to improve the capital structure of the company going forward. Except the residential

project at Nahur (Mumbai) which may take around three-four years for completion, the company plans to exit from

other real estate ventures by March 2012.

Ashford Center - Four floors to be retained for corporate use, remaining four to be sold by March 2012

Alok, through its subsidiary Alok Infrastructure Limited, had purchased Ashford Center (commercial building, 8

floors, 60,000 sq. ft.) at Lower Parel at ~Rs. 125 crore in 2006. Alok intends to retain four floors for corporate. The

company has recently sold one floor (7,500 sq. ft) at the rate of Rs. 21,000 per sq. ft. while the other three floors is are

expected to be sold at similar rates by March 2012.

Peninsula Business Park - Tower ‘B’: Lease agreements to be signed soon, complete sell off expected later

The company, through its wholly owned step-down subsidiary Alok Realtors Limited, had invested ~Rs. 1,275 crore in

Peninsula Business Park (Tower B, 20 floors, 641,000 sq. ft) in 2006. The site is located at Lower Parel (near Phoenix

Mills) in Mumbai and is being developed by Peninsula Lands Limited with civil work carried on Shapoorji Pallonjee

Group. The building is located in close proximity to the Lower Parel and Currey Road stations, 5-star hotels like ITC

and Four Seasons and other major commercial complexes like Indiabulls, DLF, HDFC Bank House & Ambit RSM. The

proposed project is exposed to market risks on account of significant upcoming commercial space in its vicinity. Alok

is scouting for potential lessees to rent out the premises and plans to sell the property to real estate funds after the

property is completely lease out. The company has recently lease out two floors to an FMCG at a rate Rs. 225 per sq.ft.

We have assumed 50% occupany by March 2012, 100% by H1 FY13e and complete sell-off / exit from the venture at

~17,000 Rs/sq. ft. during FY13e in our projections.

Land at Silvassa (500 acres) – SEZ plans shelved, to be sold at more than five times cost price

Alok had acquired 500 acres of industrial land for at a total cost of Rs. 50 crore (Rs. 10 lakh per acre) at Silvasa in

2006, with the intention of developing Textile SEZ. However, the company has shelved its development plan and

intends to sell the same at Rs. 60-70 lakh per acre. The company in advanced talks to sell around 73 acres for a

consideration of Rs. 50 crore. We have assumed the remaining land to the monitized in various phases for ~Rs 300

crore by FY14e.


19

Ashford Royale Residential Complex : ~1.1 msf to be developed in Nahur by December 2013

The company, through Alok Infrastructure Limited, has entered into 50:50 joint venture for developing a residential

complex on a 7 acre plot (CEAT factory) at Nahur1. The plot is being developed by Ashford group into two 42 storey

and two 37 storey buildings (total 608 flats) with landscaped garden, club house, gymnasium and swimming pool and

a total saleable area of 1.1 mn. Sq.ft.. The civil contract has been awarded to Talati, Panthaki & Associates. The project

is estimated to be completed by December 2014.

Exhibit 19 : Alok’s Real Estate Businesses

Key Projects Major Updates / Expected monitization

1) Ashford Center

(100% Subsidiary)

Commercial building at Lower Parel : Saleable area 60,000 sq. ft.

The company plans to retain ~30,000 sq. ft. for corporate use

We expect remaining ~30,000 sq. ft. to be sold off at ~21,000 Rs/sq. ft. during

the current fiscal year

2) Peninsula Business Park -

Tower B (100% Subsidiary)

Commercial building at Lower Parel: 20 floors, Saleable area 641,000 sq. ft.

Recently leased out two floors at a rate Rs. 225 per sq.ft.; we expect 50%

occupany by March 2012 and 100% by H1 FY13e

We have assumed complete sell-off and subsequent exit from the venture at

~17,000 Rs/sq. ft. during FY13e in our projections

3) Land at Silvassa

(100% Subsidiary)

500 acres industrial land at Silvassa

The company in advanced talks to sell around 73 acres for a consideration of

Rs. 50 crore

We have assumed the remaining land to the monitized in various phases for

~Rs 300 crore by FY14e.

4) Ashford Royale (50:50 Joint Venture)

Residential Project: ~1.1 million sq ft to be developed in Nahur (Mumbai) by Dec 2014

We have assumed sales booking in 8,500 – 10,500 Rs/sq. ft. range; Land cost at Rs. 137 crore, construction costs at ~ 4500 Rs / sq. ft.

Our assumptions regarding sales bookings and revenue / cost recognitions for the complete project are as follows:

FY11a FY12e FY13e FY14e FY15e

Total Area Mn Sq Ft 1.1 1.1 1.1 1.1 1.1

Market Rate Rs/Sq Ft 8500 9000 9500 10000 10500

Sales Booking (%) % 25% 50.0% 75.0% 100.0% 100.0%

Constuction Completion (%) %

25% 50.0% 75.0% 100.0%

Sales / Cost Recognition % 0% 13% 38% 75% 100%

Revenue Recognition Rs. Crore

127.19 254.38 381.56 254.38

Cost Recognition Rs. Crore

79 158 237 158

Source: Company, ICRA Online Research

1 Nahur is a North Eastern suburb of Mumbai and is located between Mulund and Bhandup.


20

UK Retail Business – Grabal Alok UK

With an intention to enter the garment and accessories retail market in the UK, Alok, through its subsidiary acquired

~41.3% equity stake its associate company Grabal Alok Impex, through its subsidiary, acquired close to 48.71% stake

in British retailer, Grabal Alok (UK) Limited (GAUKL) in 2007. Recently, Alok’s board has approved the merger of

Grabal Alok Impex with Alok, which will make GAUKL a 90% subsidiary of Alok Industries.

Rebranding of stores and operational improvement measures to aid turnover of the ailing UK retailer

GAUKL has 219 stores across England, Scotland and Wales, where it retails value-for-money and quality fashion for

women, men, girls, boys and infants. It also sells accessories like artificial jewellery, shoes and leather bags. After

acquiring the company, Alok’s management undertook a re-branding exercise, re-naming the outlets from ‘QS’ to

‘Store Twenty One’. The stores are now being repositioned from being a discount retailer to a value retailer and

opportunities for setting up ‘shop-in-shop’ in large format stores are also being looked upon. A series of other

measures such as shifting of sourcing to Asian countries, improving quality of merchandise, cost reduction initiatives

been initiated to reduce losses and increase operational efficiencies, which has resulted in a cash breakeven in FY11.

Operations of the UK company are yet to achieve break even and are likely to require further financial and operation

support from Alok. Consolidatation of ‘Grabal Alok UK’ post the proposed merger with ‘Grabal Alok Impex’, likely to

adversely impact the financials of Alok in near term. The management considers all real-estate and retail businesses of

the company as non-core businesses and may plan to divest the stake in the UK retailer once the operations turn

positive and the company makes decent returns on its investment.

Domestic Retail Business - Alok H&A Limited

The company, through its wholly owned subsidiary Alok H&A Limited, has ventured into retail of garments, home

textiles and accessories through exclusive brand outlets (EBOs) and is positioned as an affordable lifestyle brand with

presence across 75 cities in 22 different states of India. At the end of March 2011, Alok operated close to 290 H&A

stores in India. The stores are operated on asset-light franchisee model, where the company incurs no capital or rental

cost. Apart from the standard format stores, which are usually 800 square feet to 1,000 square feet in size, the

company is also looking at larger format stores up to 2,500 square feet to accommodate all categories – men’s, ladies,

children’s clothes, home furnishings and accessories such as footwear, sun glasses and perfumes. Though Alok is

looking to expand store count to 500 by March 2012 using the franchiese model, the retail business is not estimated to

account for more than 5% of its overall (consolidated) operating revenues for the company. Besides, the management

may look to spun-off the venture into a separate company incase they turn more aggressive on the domestic retail

business.

Snapshot

Foray into UK retail market through acquisition of ~90% stake in ‘Grabal Alok UK’ through its subsidiary –

‘Alok Industries International Ltd’ and associate company – ‘Grabal Alok Impex Ltd’

Consolidatation of ‘Grabal Alok UK’ post the proposed merger with ‘Grabal Alok Impex’, likely to adversely

impact the financials of Alok industries in near term

Rebranding of stores and operational improvements to aid turnaround of the ailing UK retailer; achieved cash

breakeven in FY11 and expected to achieve net breakeven in FY13e

The management may look to divest it post turnaround, if Alok makes decent returns on the investment


21

OTHER SUBSIDIARIES AND ASSOCIATES

Grabal Alok Impex Limited - Presence in embroidered products; to be merged with Alok in FY12

Grabal Alok Impex Limited (GAlok) was incorporated in 1993 through technical collaboration with Grabal Albert

Grabher GmbH & Co, Austria and is engaged in manufacturing wide range of embroidered fabrics having application

in the home textiles, apparel fabrics and garmenting. GAlok one of the largest domestic manufacturers of embroidered

fabric with a capacity of 34 billion stitches a year. The company has presence in both international and domestic

markets with customers including domestic traders and garment manufacturers, international branded apparel

companies and international home textile retailers. GAlok had reported ~Rs. 235 crore revenues with ~21% EBITDA

margins in FY11. Besides, the company indirectly holds 48.71% in British retailer, Grabal Alok (UK) Limited (GAUKL).

Alok’s board of directors have recently approved the amalgamation of GAlok into Alok though a 1:1 swap ratio. This

will result in ~2.6% equity dilution and marginal increase in promoter holding from 29.37% to 29.71% in Alok. GAlok

has ~Rs. 600 crore external liabilites on its balance sheet, which consists of bank term loans, working capital loans,

FCCBs, Convertible Debentures and redeemable preference shares. Overall, the merger of Grabal Alok Impex Ltd and

thereby consolidation of GAUKL is expected to reduce the consolidated EBITDA margins for the company by ~2.5% in

FY12e and weaken the capital structure by additional debt burden of ~Rs. 600 crore, in the near term.

Mileta a.s –synergies through transfer of advanced yarn dyeing technologies to Alok’s fabric division;

Exhibit 20: Mileta a.s – Operating Profile

Product mix Shirting fabrics, table linen and bed linen

Target segment Exports mainly to Europe, North Africa, the Americas, the Middle East, the Far East and the Asia Pacific regions

Key brands Mileta’s brands – Mileta, Erba, Cottonova, Lord Nelson and Wall Street


Alok holds ~100% stake in Mileta a.s, an integrated textile entity based out of Czech Republic. The acquisition has

benefited by way of technology inputs from the Czech entity, especially in value added yarn dyed fabrics. Post the

acquisition Alok has been able to make quality yarn-dyed fabrics, which are priced at ~Rs. 130-140 per meter, a

significant premium to its earlier realisations, although the same forms less than 10% of its fabric sales currently. Alok

also stands to gain access to Mileta’s well-established distribution network in the USA and Europe. Besides, Alok has

launched some of the Mileta brands – Erba (for handkerchiefs) and Lord Nelson (for premium shirting) – in the Indian

market. Cottonova a home textile brand of Mileta is manufactured in Alok’s home textile plant and being exported.

Alok was able to turnaround Mileta’s performance through production efficiencies, optimising headcount and other

cost rationalisation efforts in FY10. Thus despite the slowdown in the European markets, Mileta generated cash

profits of the company of Euro 0.30mn. (Rs. 1.83 crores) during FY 2010 as against cash loss of Euro 4.17 mn. (Rs.

25.26 crores) during the previous year.


22

Indian Textiles Industry Outlook

Global economic growth outlook weakens, recent rupee depreciation to provide some respite to exporters

After a strong recovery in 2009 and relatively healthy growth in 2010, the US GDP growth rate has again started

slowing signs of a slowdown. Besides, the gradual unwinding of fiscal stimulus, persistantly high unemployment rate,

falling home prices, lower consumer spending and increase in personal savings rate has weakened the medium term

economic growth outlook for US. Moreover, budget cuts / austerity plans by eurozone countries to combat sovereign

debt crisis and high reconstruction costs post massive earthquake / tsunami in Japan could further impact consumer

sentiments and reduce discretionary spends on Textiles & Apparels (T&A) over the medium term.

Source: Bloomberg; ICRA Online Estimates

On the other hand, the domestic currency has been appreciating steadily over the last 18 months due to relatively

stronger domestic growth and interest rate hikes by the reserve bank. While the Indian rupee has appreciated against

the currencies of key target markets (like US, Europe), it had also appreciated against competing currencies (Chinese

Yuan, Pakistan Rupee and Bangladesh Taka) over the last 18 months, as evident in the graphs above. However, the

recent steep rupee depreciation provides some respite and is expected to boost the competitiveness of the Indian

Textiles Exports Industry.

40.00

42.00

44.00

46.00

48.00

50.00

52.00

54.00

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

Indian Rupee Vs. USD

50.00

55.00

60.00

65.00

70.00

75.00 Ja

n-0

9

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

Indian Rupee Vs. Euro

5.80 6.00 6.20 6.40 6.60 6.80 7.00 7.20 7.40 7.60 7.80

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

Indian Rupee Vs. Chinese Yuan

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

Indian Rupee Vs Pakistan Rupee and Bangladesh Taka

INR / PKR INR / BDT

Snapshot Global economic growth outlook weakens, recent rupee depreciation to provide some respite to exporters

Steep decline in raw cotton prices could impact industry margins in near term due to high cost inventories

However, textile & apparel industry expected to grow healthy ~10-12% over the long term due to favourable

demographics domestically and shifting of manufacturing base to lower cost destinations globally


23

Steep decline in raw cotton prices could impact industry margins due to high cost inventories; regulatory

interventions remain key monitorables

Source: EmergingTextiles.com; Bloomberg, ICRA Online Estimates

As shown in the graphs above, international cotton prices had increased significantly from ~75 USD/lb. in June 2010

to ~135 USD/lb. in May 2011 on account of strong recovery in global demand and supply shortages due to

unfavourable climatic conditions in major cotton producing countries like China, Pakistan and United States. In sync

with the global trend, domestic raw cotton prices for the Sankar-6 variety had increased from ~30,000 Rs/candy (1

candy = 355 kg) in June 2010 to ~62,000 Rs/candy in March 2011.

The Government of India (GoI) had initiated several measures in order to ensure cotton availability for the domestic

industry and easing of cotton yarn prices. In April 2010, GoI restricted yarn exports by withdrawing incentives like duty

drawback (4.0%) & Duty Entitlement Pass Book Scheme (7.7%). In December 2010, GoI further restricted yarn exports by

fixing the quantitative export quota of 72.0 crore kgs for FY11 (~22% higher than actual export volume in FY10) and

compressed export window allowing exports only upto 15 January 2011. While there was no export of cotton yarn for over

two-and-a-half months, the industry continued to produce yarn using high-cost cotton in anticipation of strong realisations

from the global markets after the removal of the export ban in April 2011. Besdies, simultaneous closure of several dyeing

units in Tirupur on environmental concerns resulted in a huge pile-up of large unsold cotton yarn stock.

Exhibit 21: Policy Level Changes in CY10

Source: ICRA Research

0

20

40

60

80

100

120

140

160

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

International Cotton Prices (USD/lb.)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Domestic Cotton Prices (Sankar -6; Rs/Candy)

Export benefits on cotton and

cotton yarn withdrawn

April 2010

Export of cotton capped

at 55 lakh bales for 2010-11

cotton season

September 2010

Export of cotton yarn

capped at 72 crore Kg. for

2010-11

December 2010

Aimed at de-incentivizing exports; however, high realisations on

account of strong export demand kept exports attractive

Export restrictions on Indian cotton pushed up the global cotton prices

and in turn yarn realisations

No significant impact due to the quantitative cap; export volume

was hit due to time line restriction to 15 January 2011


24

As anticipated, GoI lifted restrictions on cotton yarn exports effective 1st April 2011. In addition, it was listed under ‘free

list’ category, implying that contracts for cotton yarn exports were required to be registered only with the Directorate

General of Foreign Trade (DGFT) and that shipments could go ahead without verification by the Indian customs. However,

overseas customers had started sourcing cotton yarn from alternate global suppliers when the ban was enforced. Hence,

post removal of the export ban, cotton and cotton yarn prices in export market have crashed due to significant additional

supply on account of accumulated stock and weak global demand scenario.

Exhibit 22: Policy level changes in CY2011

Source: ICRA Research

The fall in cotton prices was accentuated by robust production estimates for the 2011-12 cotton season (runs from

October to September) globally. As per International Cotton Advisory Committee (ICAC), driven by higher prices in

the past one year, global cotton production is expected to increase to 26.9m tons in 2011-12 cotton season, an 8%

increase over previous year. A total surplus of 1.8m tons is expected in 2011-12, helping global stocks to recover by

about 20% to 10.9m tons and boosting the stocks-to-use ratio to 43%, up from 37% in 2010-11. Indian cotton

production too is expected to increase to 35 mn bales (1 Indian bale = 165 kg) in 2011-12 cotton season, an 9%

increase over previous year, aided by higher acreage, better yields on higher Bt cotton adoption & normal monsoons.

We expects the cotton prices to remain near current levels until November / December 2011, as the mills may take time to

consume their current stock of cotton. Subsequently, fresh purchases of cotton are likely to be made at more reasonable

rates upon arrival of fresh cotton in the market. Overall, we expect the steep fall in cotton prices over the last four

months to result in high cost inventories across the industry, the impact of which would have to be partly absorbed by

the domestic textile manufacturers considereing the slackening of global demand recently.

However, lower cotton prices aurgers well for the medium term demand outlook and operating margins for the

domestic textile industry. We expect the demand to improve in the domestic market with the onset of festival season in H2,

2011-12 and in the export markets as well in order to fill the gradually depleting pipeline inventory. Moreover, the recent

decision by GoI to reinstate the DEPB benefits on export of cotton yarn and cotton with retrospective effect from 1 April

2011 and 1 October 2010, respectively; and removal of quantitative cap on cotton exports, may arrest the downward

pressure and help stabilise the prices of cotton and cotton yarn over the near term.

Export restriction on cotton

yarn removed

April 2011

Additional 10 lakh bales

of cotton export

allowed

June 2011

- DEPB benefits on cotton and cotton yarn

restored

- Export restriction on cotton removed

July 2011

Sudden spurt of supply in the global market amidst demand

slowdown led to a crash in cotton yarn prices

No significant impact on cotton prices due to sufficient availability

of cotton and weak demand

Export benefit expected to provide relief to spinners; no significant

impact on cotton prices


25

26%29%

26%

19%

32%30%

22%

16%

38%

26%22%

14%

India China Pakistan Others

Market Share in Bed Sheets by Value

CY 2009 CY 2010 March YTD 2011

Longer term outlook remains healthy due to favourable demographics domestically and shifting of

manufacturing base to lower cost destinations globally

Over the longer term, the domestic growth is expected remain healthy due to increasing population, rising disposable

incomes, rapid urbanization, favorable demographics with a large working class population and increased organized

retail penetration. Additionally, rising disposable income in the hands of rural consumers due to rising agriculture

Income, increased employment generation through National Rural Employment Guarantee Act (NREGA) and Pradhan

Mantri Gram Sadak Yojana (PMGSY) is likely to boost demand for low-ticket items. On the other hand, the exports

markets are expected to grow due to shift of manufacturing bases from developed to low-cost Asian countries as they

are losing their competitiveness for commoditised products to the Asian countries.

Apparel Fabrics – large potential exists for the organised sector in cotton fabrics segment

The Indian fabric market is highly fragmented, comprising of cotton, blended, 100% non-cotton, wool, silk and khadi.

As per the textile ministry, the total fabric production is estimated to be 60,333 mn sq mtrs. Of this, the cotton fabric

market is the largest market estimated at 47.9% of the total fabric market; while the 100% non-cotton, 100% blended

& Khadi, Silk & Wool account for 37.9%, 12.9% & 1.3% respectively. The cotton fabric market has grown at a CAGR of

4.9% over FY05-10, with the organised sector growing at a CAGR of 5.3%. The organised sector in cotton fabrics

accounts for 5.1% of total cotton fabrics production & contributes less than 2.5% of the total fabric production in

India. The share of organised sector is expected to increase with increasing demand for higher quality fashion apparel

and ready to wear apparels in India and Alok is expected to gain owing to its presence in the mid to high value

segment.

Home Textiles - Healthy growth supported by global retailers looking to de-risking their vendor base away

from China and China unable to meet exports demand because of strong domestic growth

Global home textiles market is estimated at around US$ 23 - 26 billion, accounting for 5-6% of the total global textile

market. The home textiles market includes ‘Household textiles’ (Rugs, bed linen, table linen, bathroom and kitchen

linen, etc) and ‘Furnishing textiles’ (Curtains, bedspreads and other furnishing articles for home interiors, etc.). In bed

sheets, quilts and terry towel categories, India faces stiff

competition from Pakistan and China. India and Pakistan

have been gradually gaining ground in the share of US

imports at the expense of China and other smaller

exporting countries such as Israel, Brazil in home textiles.

Growth in share of India’s market share is driven by

decreasing competitiveness of China in low value-added

textiles, strong domestic demand in China causing

business to be partly diverted towards other countries

and global retailers who are looking at de-risking their

vendor base currently concentrated in China. These trends

are expected to continue in future too and we believe

companies such as Alok having large manufacturing

capacities in place are expected to benefit the most.

Source: Office of Textiles and Apparel (OTEXA), USA


26

0

50

100

150

200

250

300

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

10

Jan

11

Ap

r-1

1

Rs.

Pe

r K

g.

Polyester Vs. Other Yarns

Cotton Yarn Polyester yarn Viscose yarn

Cotton61%

Polyester33%

Other fibres (Viscose,

Acrylic, PP, Nylon)

6%

Domestic Fibre consumption breakup

Polyester segment - Significant potential in the domestic market due to current low consumption levels

Source: Saurer, Industry Estimates

Global all fibre per capita final consumer demand in 2010 is estimated at 10.6 kg, while that of India is at 7.1 kg. In

comparison, per capita consumption in China is at 16 kg, North America is 31 kg and West Europe is at 22 kg.

Domestic polyester fibre per capita consumption is half that of world average of 4.7 kg and way below China. We

expect the polyester penetration levels to improve considerably going forward due to 1) Improving spending on

textiles in rural areas 2) Increased non-apparel

applications like automobiles and home furnishing 3)

Versatility & high compatibility with natural fibre 4)

Decline in cultivating land combined with uncertainty of

natural fibre. The proportion of synthetics vs. cotton

fibre in global fibre consumption worldwide is 57:43

whereas it is the opposite in India where cotton accounts

for 61% of the total fibre consumption. Higher

proportion of cotton is mainly because of past

government policies favouring such trend, fiscal policy

such as excise duty de-incentivised man-made fibres.

However, the uniform national fibre policy to be

launched by the government soon is expected to correct

this anomaly.

Source: Industry, Company annual reports

As per various industry reports, PFY is expected to lead

the domestic demand growth in the overall textile chain.

High prices of cotton likely to result in substitution by

man-made fibres. The price gap between polyester and

cotton is widening and good quality cotton is becoming

increasingly difficult to source. Even after a sharp

correction in cotton yarn prices, price gap remains

substantial. On the other hand the price gap between

polyester and other alternate fibre like viscose/ acrylics

are also widening. This may lead to strengthening of

polyester demand going forward.

Source: Emerging textiles

10.6

7.1

0

2

4

6

8

10

12

World India

All fibres per capita consumption (per kg)

4.7

16.5

2.3

02468

1012141618

World China India

Polyester Fibre per capita consumption (per kg)


27

FINANCIAL OUTLOOK

Expansion in Polyester Yarn division to drive revenue and EBITDA growth going forward

We expect Alok to remain a leading intergrated player in the domestic textile industry with strong presence across

product segments. We expect the company to exit its non-core real estate and retail ventures in due course and

remain focussed on apparel fabric and home textiles division, along with significant thrust on the rapidly growing

polyester yarn division. While the fabric division is estimated to grow at 11% CAGR over the FY11-FY14e period,

home textiles is expected to growth at 13% CAGR and polyester yarn division to grow at a robust 52% CAGR during

the period, backed by significant capacity expansions planned by the company. As a result, the revenue contribution

from polyester division is expected to rise from ~25% in FY11 to ~42% in FY14e, making it the largest revenue

contribution segment for Alok. Although the EBITDA margin of the polyester segment is expected to remain moderate

at ~18%, significant increase in scale of polyester operations is expected to reduce the dependence on apparel fabric

divisin, whose EBITDA contribution is expected to decline from ~57% in FY11 to ~44% in FY14e.

Source: Company ICRA Online Estimates;

Aggressive capacity expansions to drive revenue growth; however higher polyester contribution and

consolidation of UK retail business to reduce margins going forward

Aggressive capacity expansion across business segments (more so in polyester division) along with relatively stable

realisations are expected to result in a healthy 28% CAGR in the consolidated revenues for the company over the

FY11-FY14e period. Despite the steep correction in raw material prices, we expect the company to maintain ~34%

EBITDA margins in apparel fabrics, ~28% in home textiles and ~18% polyester segments. With increasing

contributions from polyester business, overall EBITDA margins are expected to decline by ~4% over the next three

years. Besides, the EBITDA margins are expected to be further impacted by ~2.5% due to the consolidation of UK

based retail business, which has only recently achieved cash breakeven. However, with higher operating leverage,

non-operating incomes stemming from exit of real estate ventures and debt-repayments post exit from non-core

39% 52% 44% 45%34% 32% 29%

17% 16% 16% 15%

12% 11% 10%

21% 20% 27% 25%

29% 35% 42%

0%

20%

40%

60%

80%

100%

FY

08

a

FY

09

a

FY

10

a

FY

11

e

FY

12

e

FY

13

e

FY

14

e

Alok Industries: Revenue Contributions

Others

Garments

Polyester

Home Textiles

Apparel Fabric

Spinning & Trading

54% 66% 56% 57%50% 47% 44%

22% 19% 20% 16%15% 14% 13%

16% 13% 18% 17%22% 27% 33%

-20%

0%

20%

40%

60%

80%

100%

FY

08

a

FY

09

a

FY

10

a

FY

11

e

FY

12

e

FY

13

e

FY

14

e

Alok Industries: EBI TDA Contributions

Others

Garments

Polyester

Home Textiles

Apparel Fabric

Spinning & Trading

Snapshot Robust revenue growth over the past five years; growth momentum likely to continue on account of

aggressive capital expansions planned in certain segments going forward.

Healthy EBDITA margins on the back of integrated operations and diversified product portfolio; however

margins expected to moderate with increasing contribution from polyester yarn business;

However, ROCE likely to witness improvement as polyester segment is relatively less capital intensive when

compared with cotton based segments


28

businesses, the consolidated EBIT is expected to report 22% CAGR growth and consolidated net profits are expected

to report a robust 36% CAGR growth over the same period (consolidated net margins for the company are expected to

improve from ~6.6% in FY11 to ~7.7% in FY14e).

Source: Company ICRA Online Estimates

Profitability indicators to improve from the lows in FY11a; gearing to moderate from FY14e onwards

While the polyester division has lower EBITDA margins, it has higher RoCE due to lower capex and working capital

requirements and higher asset turnover for the business. Hence, even through the consolidated EBITDA margins are

expected to moderate from ~28% in FY11 to ~22% in FY14e, consolidated RoCE for the company is expected to

improve from ~10% in FY11 to ~17% in FY15e and consolidated RoE to improve from ~16% to ~24% during the

same period. The improvement in RoCE is also accentuated by exit from the non-core and capital intensive real estate

ventures of the company, which along with healthy cash accruals are expected to reduce the consolidated debt /

equity for the company from ~4.4 times in FY11 to ~2.1 times in FY14e. Overall, we expect a robust 36% CAGR

growth in EPS for the company over the FY11a-FY14e period, aided by robust capacity expansions and our relatively

stable pricing / realizations assumption going forward.

Source: Company ICRA Online Estimates

0%

10%

20%

30%

40%

0

1,000

2,000

3,000

4,000

FY

10

a

FY

11

a

FY

12

e

FY

13

e

FY

14

e

Rs

Cro

re

AIL's Trend in Profitability Margins

EBITDA PAT

EBITDA Margin (RHS) PAT Margin (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

02,0004,0006,0008,000

10,00012,00014,00016,000

FY

10

a

FY

11

a

FY

12

e

FY

13

e

FY

14

e

Rs

Cro

re

AIL's Consolidated Revenue Growth

Total net revenue Revenue Growth % (RHS)

0%

50%

100%

150%

200%

250%

0.02.04.06.08.0

10.012.014.016.0

FY

10

a

FY

11

a

FY

12

e

FY

13

e

FY

14

e

Rs

/ Sh

are

AIL's EPS Growth

EPS EPS Growth (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

0%

5%

10%

15%

20%

25%

FY

10

a

FY

11

a

FY

12

e

FY

13

e

FY

14

e

Ret

urn

ind

icat

or

(%)

AIL's Return Indicators & Gearing

RoE ROCE Debt/ Equity (RHS)


29

COMPANY PROFILE

Alok Industries Limited (Alok), promoted by the Jiwrajka family, is a vertically integrated and a leading textile

manufacturer having presence across the value chain from cotton spinning, polyester yarn, apparel fabrics, home

textiles and garments manufacturing to retailing of garments and accessories. The company has 16 manufacturing

plants located at Silvasa, Vapi and Navi Mumbai. At present, apparel fabrics is the largest segment of the company,

accounting for 46.6% of Alok’s standalone sales, followed by polyester yarn (26.1%), home textiles (15.5%), cotton &

cotton yarn trading (9.0%) and balance share(2.7%) comprised by garments.

Alok has international presence through two companies, Mileta a.s. located in Czech Republic in which it holds 100%

stake and Grabal Alok UK Ltd. in which it has 41.7% stake. Mileta a.s. is an integrated textile company with established

distribution network in Europe, North Africa, USA, the Middle East, the Far East and the Asia Pacific regions. The

Mileta acquisition has proved synergistically beneficial for Alok by way of technology inputs for producing value-

added yarn dyed fabrics. Grabal Alok UK Ltd is a leading garments and accessories retailing chain having 216 stores

across England, Scotland and Wales. Alok is also present in domestic retail through its wholly-owned subsidiary, Alok

H&A Limited under which it retails apparel and accessories and home textiles through 291 franshisee stores.

Besides, Alok has also diversified into commercial and residential real estate business through its wholly owned

subsidiary, Alok Infrastructure Limited. Although the retail investments of the company may take time to yield results,

we expect the company to actively monetize its investments in real estate business to improve the capital structure

and the return indicators of the company.

Exhibit 23: Company Factsheet

Name of the Company Alok Industries Limited (Alok)

Year of Incorporation 1986

Registered Office Village Rakholi /Sayli, Silvassa, Union Territory of Dadra and Nagar Haveli

Nature of Businesses Textiles– Spinning, Weaving & Garmenting

Products Apparel fabrics, home textiles, polyester yarn, cotton yarn and garments. Retail, real estate and embroidery

through subsidiary companies

Manufacturing Locations Silvasa, Vapi and Navi Mumbai

Auditors Gandhi & Parekh

Board of Directors

Mr. Ashok B. Jiwrajka - Executive Chairman

Mr. Dilip B. Jiwrajka - Managing Director

Mr. Surendra B Jiwrajka - Joint Managing Director

Mr. Chandrakumar Bubna - Executive Director

Mr. Ashok Rajani - Non-Executive Director (Independent)

Mr. K R Modi - Non-Executive Director (Independent)

Ms. Thankom. T. Mathew - Non-Executive Director (LIC Nominee)

Ms. Ms. Maya Chakravorty - Non-Executive Director (IDBI Nominee)

Mr. M.V. Muthu - Non-Executive Director (IFCI Nominee)

Mr. Debashish Mallick - Non-Executive Director (IDBI Nominee)

Mr. David Rasquinha - Non-Executive Director (EXIM Nominee)

Mr. Timothy Ingram - Non-Executive Director (Independent)

Key subsidiaries/ Joint

Ventures/ associate companies

Alok Infrastructure Limited

Alok H&A Limited

Alok Industries International Ltd.

Alok Land Holdings Private Limited

Mileta, a.s.(incorporated in the Czech Republic)

Grabal Alok (UK) Ltd.

Grabal Alok Impex Limited



30

Governance structure:

Alok is managed by a 12 member Board, which includes seven independent directors, one non-executive director and

three members from the Jiwar family. While the Jiwarajka family is closely involved in running Alok’s business, the

company has a professional management structure across the company. The promoter group holds 29% equity stake

in the company and the rest is widely held and includes institutional investors with . The disclosures in Alok Annual

Report are adequate and have been broadly in line with that followed by the industry.

Alok’s Corporate Structure (March 2011):


Alok Industries Limited

Apparel Fabrics

Polyester Yarn Home Textiles Other Holdings

Market Share: ~14%

Plant Location: Vapi, Silvassa

Capacity: Weaving -93.0 mn. Mtrs., Processing – 105.0 mn. Mtrs. Planned Expansion: Processing -21.0 mn. Mtrs., Weaving – 77.0 mn. Mtrs. Key Competitors: Vardhaman Textiles, Nahar Industrial Enterprises, SKumars’ Nationwide Limited

Plant Locations: Silvassa Capacity: 270,000 tonnes per annum Planned Expansion: 300,000 tonnes Key Competitors: Reliance Industries, Indo Rama Synthetics, JBF Industries, Garden Silk Mills

Plant Location: Vapi, Silvassa Capacity: Weaving -68.0 mn. Mtrs., Processing – 82.5 mn. Mtrs. Planned Expansion: Processing – 22.5 mn. Mtrs, Weaving – 24.0 mn. Mtrs. Key Competitors: Welspun, Himatsingka Seide, Hanung Toys & Textiles

Subsidiaries: Alok H&A Limited Alok Infrastructure Limited Alok Realtors Private Limited Alok Land Holdings Limited Mileta a.s. Alok Industries International Limited Springdale Information and Technologies Private Limited Kesham Developers & Infotech Private Limited

Joint Ventures: Ashford Royale Residential Complex

Associates: Grabal Alok (UK) Limited Grabal Alok Impex Limited

Integrated Textiles Manufacturer

Alok H&A Limited (Domestic Retailing)

Sales: Rs. 80 crore Store Count: 291 Products: Apparels and accessories Planned expansion: 500 stores by FY 2012, mainly working capital funding

Alok Realtors Pvt Ltd (Comercial Real Estate)

Total saleable area: 641,000 sq.ft. Total cost: Rs. 1,275 crore Status: Possesion by June, 2011 Future plan: Exit in near-term

Grabal Alok (UK)Limited-Associate

Store Count: 216 Products: Value retailing of apparels and accessories Planned expansion: 20 stores per year Exit plan: Broken even, plan to exit by FY 2013 at cost

Ashford Royale Residential Complex- JV

Total saleable area: ~1 mn.sq.ft. Total Cost: ~Rs. 600 crore, Alok’s share ~ Rs. 300 crore Project Status: Excavation started, Expected completion: December, 2014

Ashford Centre, Lower Parel

Total saleable area: 60,000 mn.sq.ft. (8 floors) Total Cost: ~Rs. 125 crore, Project Status: Occupancy certificate received Future plan: Sell half the area and retain the rest for its corporate office


31

VALUATION GRADING

In assessing a company's valuation, various parameters are looked at including the company's earnings and growth

prospects; its ability to generate free cash flows and its capacity to generate returns from the capital invested. The

valuation is also benchmarked against an appropriate peer set or index. The opinion on a company's relative valuation

is expressed using the following five-point scale as follows:

Exhibit 24: ICRA Equity Research Service—Valuation Grades

While assessing a company's relative valuation,

the historical price volatility exhibited by the

stock, besides its liquidity, is also taken into

account. The extent of overvaluation or

undervaluation is adjusted for the relative

volatility displayed by the stock.


Despite the near term headwinds faced by the textile industry, Alok’s current valuation multiples (~3.3 times FY12

earnings, ~0.43 times FY12 book value) seems quite attractive considering Alok’s integrated and diversified business

model with lower dependence on textile exports. The valuation multiples are are expected to further moderate

rapidly from the FY12e levels due to strong earnings growth over the next three years contributed by large capacity

additions and improvement in the capital structure through exit from non-core businesses. Overall, we expect the

company to report a robust 28% CAGR revenue growth and 36% CAGR EPS growth over the FY11a-FY14e period,

aided by robust capacity expansions and healthy domestic consumuption demand going forward. Hence, we assign a

valuation grade of “A” to Alok on a grading scale of ‘A’ to ‘E’, which indicates that the company is “significantly

undervalued” on a relative basis.

Exhibit 25: Relative Valuations Vs Equity Indices:

ICRA Estimates Alok

Industries Ltd

NIFTY

INDEX

CNX 500

INDEX

CNX MIDCAP

INDEX

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Price/Earnings 3.30 1.86 13.98 11.88 13.27 11.09 11.31 9.39

EV/EBITDA 5.93 4.85 9.48 8.22 9.35 7.92 9.70 7.91

Price /Sales 0.16 0.13 1.58 1.43 1.30 1.16 0.82 0.74

Price /Book Value 0.43 0.36 2.32 2.03 2.09 1.81 1.51 1.31

Price/Cash Flow 1.36 0.99 10.26 8.85 9.53 8.00 7.01 5.76


Exhibit 26: Relative Valuations Vs Industry Peers:

ICRA Estimates Alok

Industries Ltd

S. Kumars

Nationwide Ltd

JBF

Industries Ltd

Provogue

(India) Ltd

Vardhman

Textiles Ltd

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Price/Earnings 3.30 1.86 3.61 2.43 2.68 2.21 7.96 6.85 3.49 3.38

EV/EBITDA 5.93 4.85 3.94 3.32 3.24 2.88 10.87 9.39 4.57 4.77

Price /Sales 0.16 0.13 0.23 0.19 0.13 0.12 0.57 0.51 0.28 0.29

Price /Book Value 0.43 0.36 0.44 0.36 0.57 0.49 0.46 0.43 0.45 0.41

Price/Cash Flow 1.36 0.99 2.69 NA 1.85 1.62 5.69 4.89 1.89 1.90


Valuation Grade Grade Implication

A Significantly Undervalued

B Moderately Undervalued

C Fairly Valued

D Moderately Overvalued

E Significantly Overvalued


32

ANNEXURES

Alok Industries Limited – P&L Estimates (Consolidated)

Rs. Crores FY10A FY11A FY12E FY13E FY14E

Net sales 4,315.5 6,460.4 8,831.3 10,945.9 13,570.2

Other related income 107.1 151.5 207.1 256.6 318.2

Total net revenue 4,422.6 6,611.8 9,038.3 11,202.6 13,888.3

EBITDA 1,267.9 1,809.8 2,098.0 2,563.1 3,050.8

Depreciation 366.9 531.0 627.2 676.1 707.7

EBIT 901.0 1,278.8 1,470.8 1,887.0 2,343.2

Other Income -37.0 -25.1 116.4 207.7 170.2

Interest Expenses 598.8 737.1 939.7 941.2 920.2

PBT 265.2 516.6 647.5 1,153.5 1,593.2

Tax Expense 128.2 81.2 210.1 374.3 517.0

Minority Interest 0.6 -11.2 0.0 0.0 0.0

PAT 137.7 424.2 437.4 779.2 1,076.2

Number of shares (in Cr) 78.77 78.77 78.77 78.77 78.77

EPS 1.7 5.4 5.6 9.9 13.7

CEPS 6.4 12.1 13.5 18.5 22.6

DPS 0.3 0.3 0.8 1.5 2.0

Alok Industries Limited – Balance Sheet Estimates (Consolidated)

Rs. Crores FY10A FY11A FY12E FY13E FY14E

Net worth 2,732.5 2,792.1 3,400.8 4,063.2 4,977.9

Total Debt 9,744.3 12,200.3 12,151.9 10,754.5 10,356.3

Deferred Tax Liability 403.0 500.3 500.3 500.3 500.3

Trade Creditors 598.3 818.8 1,353.2 1,684.5 2,113.1

Other Current Liabilities and Provisions 171.6 376.1 226.0 280.1 347.2

Total liabilities 13,671.3 16,712.4 17,636.8 17,287.2 18,299.4

Net fixed assets 7,218.6 7,706.0 9,856.8 8,680.7 8,673.0

Capital Work in Progress 948.4 2,263.6 763.6 663.6 563.6

Other Long-Term Investments 416.9 479.0 254.0 254.0 254.0

Cash and Bank Balances 1,410.7 1,202.3 952.3 702.3 452.3

Receivables 1,198.2 2,057.1 2,310.0 2,829.2 3,445.0

Inventories 1,567.8 2,167.1 2,596.4 3,037.2 3,522.7

Loans & Advances 789.8 687.0 903.8 1,120.3 1,388.8

Other Current Assets 120.7 150.4 0.0 0.0 0.0

Total Assets 13,671.1 16,712.4 17,636.8 17,287.2 18,299.4


33

Alok Industries Limited – Cash Flow Estimates (Consolidated) Rs. Crores FY10A FY11A FY12E FY13E FY14E

PAT 137.7 424.2 437.4 779.2 1,076.2

Depreciation 366.9 531.0 627.2 676.1 707.7

Change in net working capital (856.7) (896.3) (342.5) (791.0) (874.2)

Cash flow from operating activities (352.1) 58.9 722.1 664.3 909.7

Investments 47.1 (62.1) 225.0 0.0 0.0

Capital expenditures (2,200.1) (2,333.3) (1,278.2) (700.0) (600.0)

Cash flow from investing activities (2,153.0) (2,395.4) (1,053.2) (700.0) (600.0)

Equity Raised / (Buyback) 762.6 0.0 20.6 0.0 0.0

Loans Raised / (Repaid) 2,701.4 2,455.9 (48.3) (1,397.4) (398.2)

Others (Including Extra-ordinaries) 41.6 (304.9) 197.4 1,300.0 0.0

Dividend (17.3) (22.9) (88.6) (116.9) (161.4)

Cash Flow from Financing activities 3,488.3 2,128.1 81.1 (214.3) (559.7)

Cumulative cash flow 983.2 (208.4) (250.0) (250.0) (250.0)

Opening Cash Balance 427.4 1,410.7 1,202.3 952.3 702.3

Closing Cash Balance 1,410.7 1,202.3 952.3 702.3 452.3

Alok Industries Limited – Key Financial Ratios (Consolidated) Rs. Crores FY10A FY11A FY12E FY13E FY14E

Growth indicators

Sales Growth 43.4% 49.7% 36.7% 23.9% 24.0%

EBITDA Growth 57.9% 42.7% 15.9% 22.2% 19.0%

EPS Growth 86.0% 208.1% 3.1% 78.1% 38.1%

Cash EPS Growth 60.6% 89.3% 11.4% 36.7% 22.6%

Profitability indicators

EBITDA Margin 28.7% 27.4% 23.2% 22.9% 22.0%

EBIT Margin 19.5% 19.0% 17.6% 18.7% 18.1%

PAT Margin 3.1% 6.6% 4.8% 7.0% 7.7%

RoE 5.9% 15.7% 14.1% 20.9% 23.8%

ROCE 9.5% 10.3% 11.1% 14.0% 16.8%

Liquidity ratios

Debtor (days) 100 114 94 93 91

Creditors (days) 71 66 75 75 75

Inventory (days) 208 184 153 144 133

Net working Capital/Sales 67.7% 58.8% 46.8% 44.8% 42.5%

Capitalization Ratios

Total Debt/ Equity 3.6 4.4 3.6 2.6 2.1

Interest coverage 2.1 2.5 2.2 2.7 3.3

Total Debt/EBITDA 7.7 6.7 5.8 4.2 3.4

Valuation Ratios

Price/Earnings 10.50 3.41 3.30 1.86 1.34

EV/EBITDA 7.71 6.88 5.93 4.85 4.08

Price/Sales 0.33 0.22 0.16 0.13 0.10

Price/Book Value 0.53 0.52 0.43 0.36 0.29

Source: ICRA Online Estimates


34

ICRA Limited

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