Alok Industries Ltd

Alok Industries Ltd

Enhancing investment decisions

Initiating coverage

© CRISIL Limited. All Rights Reserved.

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process –

Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental

grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The

valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to

grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade

Assessment CRISIL Valuation Grade

Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest

that can bias the grading recommendation of the company. Disclaimer: This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable by CRISIL

(Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for

any errors or omissions or for the results obtained from the use of Data / Report. The Data / Report are subject to change without

any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes

investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold

any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this

Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be

reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially outside India or

published or copied in whole or in part, for any purpose.

June

© CRISIL Limited. All Rights Reserved. CRISIL RESEARCH | 1

July 26, 2011 Fair Value Rs 31.0 CMP Rs 24.8

Fundamental Grade 4/5 (Strong fundamentals)

Valuation Grade 5/5 (CMP has strong upside)

Industry Information technology

Polaris Software Limited

Business momentum remains intact

Fundamental Grade 3/5 (Good fundamentals)

Valuation Grade 4/5 (CMP has upside)

Industry Textiles, Apparel & Luxury Goods

Alok Industries Ltd Weaving a success story

Alok Industries Ltd (Alok) has evolved from a trading business into one of

India’s largest integrated textiles player. The company is present across

various verticals of the textile value chain - from yarn manufacturing to

garmenting - thereby enabling it to offer a wide range of products. We assign

Alok a fundamental grade of 3/5, indicating that its fundamentals are good

relative to other listed securities in India.

Expansion to cater to growing domestic and international demand

In the past few years, Alok has set up large-scale capacities in all divisions –

polyester yarn, apparel fabrics and home textiles - to cater to the global and

domestic markets. Its investments have resulted in a diversified product mix

and have also made the company a beneficiary of global vendor consolidation.

Due to its sizeable capacities and presence across the entire value chain, Alok

has become a preferred vendor for several international clients.

A balancing act: Integration + optimum capacity utilisation

Alok backward integrated into spinning to assure steady yarn supplies and to

help mitigate raw material price volatility. Further, Alok has balanced capacity

across the value chain, enabling it to operate at optimum utilisation.

Exit from real estate business a monitorable

Alok is planning to exit its real estate business completely; the proceeds from

the sale will be used for repaying debt. The company has a high debt-equity

ratio of 3.2x (as of FY11). We believe that the exit will lower the gearing to

2.3x by FY13. However, any delays or change of plans could hamper financial

flexibility.

Revenues to register a CAGR of 28%; margins to decline

With most of the capacities already commissioned, we expect Alok’s top line to

grow at a CAGR of 28%, from Rs 75 bn FY11 to Rs 113 bn in FY13E. However,

its EBITDA margins are likely to decline from 24.5% in FY11 to 23.6% in

FY13E due to the increasing share of partial oriented yarn (POY) business.

Valuations: Current market price has upside

We have used the discounted cash flow method to value Alok and arrived at a

fair value of Rs 31. At this value, the implied P/E multiples are 4.6 FY12E and

3.1 FY13E earnings.

KEY FORECAST

(Rs mn) FY09 FY010 FY11# FY12E FY13E

Operating income 31,115 44,202 75,200 95,521 113,533

EBITDA 8,017 12,704 18,434 22,013 26,731

Adj PAT (834) 927 3,307 5,001 7,780

Adj EPS-Rs (4.2) 1.2 4.2 6.3 9.9

EPS growth (%) (57.9) (58.9) 169.6 33.0 70.6

Dividend yield (%) 7.0 1.3 1.8 1.1 2.3

RoCE (%) 6.9 8.4 9.5 11.0 13.8

RoE (%) (4.9) 4.0 11.4 15.1 19.8

PE (x) (3.0) 18.9 5.3 3.5 2.2

P/BV (x) 0.1 0.6 0.6 0.5 0.4

EV/EBITDA (x) 8.4 7.8 6.3 5.3 4.2

#FY11 numbers are based on abridged financials

NM: Not meaningful; CMP: Current market price

Source: Company, CRISIL Research estimate

CFV MATRIX

KEY STOCK STATISTICS NIFTY/SENSEX 5680/18871

NSE/BSE ticker ALOKTEXT/

ALOKIND

Face value (Rs per share) 10

Shares outstanding (mn) 788.0

Market cap (Rs mn)/(US$ mn) 19,857/446

Enterprise value (Rs bn)/(US$ bn) 114 /2.6

52-week range (Rs) (H/L) 35/18

Beta 1.7

Free float (%) 71.7%

Avg daily volumes (30-days) 22,903,061

Avg daily value (30-days) (Rs mn) 600.8

SHAREHOLDING PATTERN

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-m

Alok Industries 2% -4% -4% 25% NIFTY 4% -3% 0% 4%

ANALYTICAL CONTACT Sudhir Nair (Head) [email protected]

Arun Vasu [email protected]

Vinay Chhawchharia [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fu

nd

am

en

tal G

rad

e

Poor Fundamentals

ExcellentFundamentals

Str

on

gD

ow

nsi

de

Str

ong

Upsi

de

28.4% 28.4% 28.4% 28.4%

4.9%13.9% 16.9% 16.5%

30.9%21.5% 13.8% 13.4%

35.8% 36.3% 40.9% 41.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-10 Sep-10 Dec-10 Mar-11

Promoter FII DII Others


Alok Industries Ltd

Alok: Business environment

Product / Segment Cotton yarn Apparel Fabric HT Polyester

Revenue contribution

(FY11)

9% 47% 15% 26%

Revenue contribution

(FY13)

1% 42% 14% 43%

Product / service

offering

Company has 0.3 mn spindles,

around 90% of the yarn is used

for captive consumption

Surplus yarn is sold in

domestic/export market based

upon the price realisation and

government regulation

In-house production provides

cost advantage and assured

supply for fabric production

Alok is engaged in the

manufacturing of

apparel and knitted

fabric

It produces different

fabrics such as twills,

voiles, cambrics,

poplins, satin, jacquard

Alok produces a wide

range of sheet sets,

comforters, blankets,

quilts, curtains, dobbies,

jacquards, printed and

embroidered of various

thread counts and

widths. Alok is also

present in the terry

towel business

Alok offers DTY, FDY,

dyed yarn and yarn

used for technical

purposes

Presence Local and export International and

domestic brands,

domestic convertors

who in turn sell to local

and global brands

90% of production is

exported to 70 countries

(40%- USA, 28%- Asian

countries, 14%- South

America, 13%- Europe)

Exports to Latin

America and

domestic weavers

Market position Largest player (single location) in

the fragmented cotton yarn

industry in India

Alok is one of the larger manufacturers of all

types of fabric

Alok is poised to

become the second

largest manufacturer

of POY in India after

RIL

It accounted for ~1% of the total

cotton yarn production in India in

FY11. Vardhman Textiles, the

largest player in the cotton yarn

industry, accounted for 2.1% of

the total cotton yarn production

during the same period

The company also has adequate processing

capacity for fabric, giving it an edge over the

unorganised processing and weaving industry

With DTY and FDY

capacity, Alok is

moving towards

value-added products

Industry growth

expectations

CRISIL Research expects

domestic cotton yarn demand to

grow at a CAGR of 6% from FY11

to FY16

CRISIL Research expects

domestic RMG and

export demand to grow

at a CAGR of 10% and

7% over FY11-FY16

CRISIL Research

expects domestic HT

and export demand to

grow at a CAGR of 8-

9% and 6-8% over

FY11-FY16

CRISIL Research

expects POY demand

to grow at a CAGR of

8.5% over FY11-

FY16

Sales growth (FY08-

FY11 – 3-yr CAGR)

25% 49% 36% 50%

Sales forecast (FY11-

FY13 – 2-yr CAGR)

-2% 17% 22% 60%

Demand drivers Healthy growth expected in the

domestic RMG and HT segments.

Tight supply of cotton in the

global markets will boost cotton

yarn exports from India in the

short term

Demand from readymade

garments in the domestic

as well as export market,

quality product and bulk

quantity to also support

demand of its products

Revival in export

demand from the US

and EU, vendor

consolidation in export

market to benefit

integrated players

Demand from RMG,

home textile and

technical textile in

domestic and export

markets

Margin drivers Ability to pass on hikes in cotton prices, economies of scale, balanced capacity and presence into value-

added products (processes fabric, dyed yarn, FDY)

POY business traditionally has been a low-margin business. Expansion of the POY business is expected to

drag margins down; the retail business may impact margins marginally

Key competitors Vardhman Textiles, Welspun India, Reliance Industries, Abhishek Industries, Arvind Ltd, Indorama

Synthetic Ltd, JBF industries

Source: Company, CRISIL Research


Alok Industries Ltd

Grading Rationale

Largest integrated textile manufacturer in India

Alok, boasting a vintage of two decades, is India’s leading textile manufacturer.

It is present across the entire textile value chain - from spinning to

manufacturing of home textiles and garments, and retailing. Alok’s modern

equipment, integrated plants and manufacturing flexibility coupled with an

efficient product development team give it a competitive advantage over its

peers. In addition, the product, customer and market diversification due to its

integrated business model ensures risk mitigation and stability of earnings.

Table 1: Balance capacity

UNITS FY11 Post expansion Position

Spinning (Tonnes) 69,040 80,000 Largest at single location

HOME TEXTILE

Processing mn. mtrs 83 105 Largest player

Weaving mn. mtrs 68 92 Largest player

Terry Towel (Tonnes) 6,700 13,400 Top 4 player

APPAREL FABRICS

Processing Woven mn. mtrs 105 126 Largest player

Weaving mn. mtrs 93 120 3rd largest player

Knitting (Tonnes) 18,200 25,000 Top 5 player

Knitting processing* (Tonnes) 18,200 25,000 -

Yarn dyeing* (Tonnes) 5,000 5,000 -

GARMENTS mn. pcs 22 22 Top 15 player

POLYESTER YARN

DTY (Tonnes) 114,000 170,000 Top 3 player

FDY (Tonnes) 65,700 65,700 Top 3 player

POY (Tonnes) 200,000 500,000 Top 3 player


Table 2: Export–domestic break-up

Rs mn FY06 FY07 FY08 FY09 FY10 FY11 CAGR

Domestic 10262 11830 22671 19224 27522 41594 32.3%

Export 3946 6417 10369 10545 15590 22066 41.1%

Total 14207 18247 33039 29769 43112 63660 35.0%

Export % 27.8% 35.2% 31.4% 35.4% 36.2% 34.7%


Table 3: Diversified product portfolio

FY06 FY07 FY08 FY09 FY10 FY11 CAGR

Cotton yarn 0% 5% 14% 4% 8% 9% 62%

Apparel fabric 51% 49% 41% 54% 45% 47% 32%

Home textile 22% 18% 18% 17% 16% 15% 26%

Polyester 26% 26% 23% 21% 28% 26% 35%

Others 1.0% 1.6% 4.6% 4.7% 3.3% 2.7% 64%

Total sales (Rs mn) 14207 18247 33039 29769 43112 63660 35%


India’s largest integrated

player with presence across

the value chain


Alok Industries Ltd

Domestic market to continue to record robust growth

The Indian textile industry recovered in FY10 following a recession-led slump in

demand in FY09. Domestic consumption picked up and exports too recovered,

albeit gradually, in H2FY10. The momentum was maintained in FY11 - the

domestic textile industry grew 8.5% and exports grew 6.5%. Going forward,

CRISIL Research expects the domestic market to grow at a robust 10% CAGR

over the next five years, while exports are likely to log ~7% CAGR during the

same period.

Vendor consolidation in export market to benefit integrated players

The domestic textile industry is characterised by a high level of fragmentation,

which makes the supply of large volumes of assured quality fabrics a challenge.

Being the largest and integrated player in the industry, Alok is able to supply

consistent quality fabrics in large volumes to global and local manufacturers

only due to sheer size.

Vendor consolidation in the global retail industry will further benefit Alok. Major

global retailers are attempting to reduce the number of vendors in order to

lower their logistics and procurement costs. To illustrate, major retailers such as

JCPenney and Walmart have reduced their sourcing locations by 30% between

2004 and 2010 and aim to reduce more in the next few years. By doing so, the

company is expecting to reduce the cost of its textile imports. Although, China

is the major beneficiary of this shift, it is becoming more expensive primarily

due to the rising Yuan and increase in manufacturing costs. India has abundant

raw material supply; China though a larger producer of cotton is still a net

importer. India also has good designing capabilities and can provide end-to-end

textile solutions. Hence, it is increasingly becoming a preferred sourcing

destination for global retailers.

Segmental growth drives overall performance

Alok, which is the largest player in woven and knitted apparel fabrics, and an

established player in home textiles is further expanding its capacity in these

divisions in order to cater to growing demand.

Fabrics: Increasing presence to consolidate position

The demand for cotton fabrics is expected to increase at a CAGR of 7% over

FY12-FY16; growth will mainly be driven by domestic demand for cotton-based

apparels and home textiles. A revival in world economies will boost textile

exports as well.

Under its apparel fabrics division, Alok has a total manufacturing capacity of

93 mn metres of woven fabric and 18,200 tpa of knitted fabric. Alok is planning

to increase the capacity of woven fabric to 110 mn metres and of knitted

fabric to 25,000 tpa by FY12. For further value addition, Alok has 105 mn

metres processing capacity for woven fabric. It is expected to add another 21

mn metres by FY12.

Large capacities to benefit

Alok as customers opt for

vendor consolidation


Alok Industries Ltd

Alok also has a presence in the work wear fabric segment (20 mn meters per

annum). Work wear is clothing worn in specialised areas like hospitals, defence,

extraction etc. Alok produces different products under this category like clothing

that are flame retardant, high visibility, oil resistant, anti-static finish and infra

red finish. Alok has executed orders from military of different countries.

Table 4: Apparel fabric - capacities

FY08 FY09 FY10 FY11 FY12 E

Apparel fabrics Units

Processing woven mn. mtrs 83 105 105 105 126

Weaving mn. mtrs 64 70 93 93 110

Knits Tonnes 18200 18200 18200 18200 25000

Knits processing Tonnes 18200 18200 18200 18200 25000

Yarn dyeing Tonnes 3000 5000 5000 5000 5000


Table 5: Apparel fabric - competitive position

FY10 Unit Alok Industries Ltd Arvind Mills Ltd Vardhman Textiles Ltd

Woven fabric

Capacity Looms 1018 931 1084

Knitted fabric

Capacity Machines 171 116

Alok Industires capacity is for FY11


Home textiles: Large-scale operations to help compete with international players

Alok manufactures a wide range of products such as bed sheets, duvets,

comforters, blankets, quilts, curtains and towels. The home textiles division

commands 16% of total sales. This division is also the largest export revenue

generator for the company with 43% of total exports in FY11. Alok managed to

increase its revenues from the division faster than total export growth in FY11.

The home textile segment’s export revenues grew by around 39% in FY11 as

against India’s home textile exports to the US, which grew by 12% for the same

period.

Table 6: Home textile revenues

(Rs mn) FY06 FY07 FY08 FY09 FY10 FY11 CAGR

Domestic 8 16 101 35 171 398 121%

Export 3088 3330 3890 4950 6901 9465 25%

Total 3096 3346 3890 4985 7073 9863 26%


Alok intends to expand its wider width weaving capacity (for the bed linen

segment) of 68 mn metres to 92 mn metres in FY12. Further, the company

plans to add 22.5 mn metres to the existing fabric-processing capacity of 82.5

mn metres.


Alok Industries Ltd

Table 7: Home textile – capacities

FY08 FY09 FY10 FY11 FY12 E

Home textile Units

Processing mn mtrs 60 82.5 82.5 82.5 105

Weaving mn mtrs 45.2 47.05 68 68 92

Terry towel Tonnes - 6,700 6,700 6,700 13,400


Table 8: Home textiles - competitive position

FY10 Alok Industries Welspun India Ltd Indo Count Ind Ltd

Installed capacity Mn mtrs 68 45 36


Table 9: Terry towel - competitive position

FY10 Alok Industries Welspun India Ltd Abhishek Industries

Installed capacity Tonnes 6,700 41,500 30,000


While Alok has largely focused on the bed linen market, it has also ventured into

terry towels in the home textiles segment by setting up a 6,700 tpa plant. It

plans to add another 6,700 tpa, which will take its total capacity to 13,400 tpa.

Increased cotton yarn capacities will give better control over costs and assured supply

Alok increased its spinning capacity from 150,912 spindles in FY08 to 251,712

spindles in FY09. The company has increased this further to 343,840 spindles in

the current fiscal. Bulk of the manufactured yarn caters to in-house production

of cotton fabrics and made-ups, while the balance is sold locally and exported.

Alok has about 1% of the total industry capacity, and is among the top five

spinners in the country.

Table 10: Cotton yarn – capacities

FY07 FY08 FY09 FY10 FY11 FY12 E

Cotton yarn Units

Yarn Tonnes 7250 20500 33300 58500 69040 80000

Spindles Numbers - - - 300096 343840 411840

Source: Company, CRISIL Research Table 11: Cotton yarn - Competitive position

Market share (FY10) by capacity % Alok Industries Vardhman Textiles Nahar Spinning Mills Super Spinning Ltd

Spindles 343840 736168 346098 177408

Market share by capacity % 0.9 2.0 0.9 0.5

Alok Industires capacity is for FY11


Benefitting from pick-up in cotton yarn demand

Alok stands to gain from the recent pick-up in demand for cotton yarn, which

declined by ~2.8% during the FY09 economic slowdown; post captive

consumption, the company sells yarn in the open market. Robust demand in the

domestic market and gradual revival in export markets are largely responsible

Alok will have better control

over costs as compared to

standalone weavers


Alok Industries Ltd

for the turnaround. After 6% growth in FY10, and around 10% in FY11, demand

for cotton yarn is expected to grow at 6% CAGR during FY12-FY16. The

domestic market, accounting for 56% of the total yarn demand in FY11, has

been driving overall demand over the years and will continue to be the main

driver for the next five years.

POY business marks entry into commodity business

Alok had backward integrated into the POY business to control costs for its

texturised yarn business and to be assured of raw material supplies. It

expanded its texturising capacities from 77,000 tpa in FY07 to 114,000 tpa by

FY11, and POY capcity from 54,000 tpa in FY07 to 200,000 tpa in FY11. Over

the next five years, demand for PFY or texturised yarn is expected to grow at a

CAGR of 9-10%. Demand for PFY will be driven by rising consumption of non-

cotton fabrics used in technical and home textiles, besides being supported by

rising consumption of synthetic fabrics. The higher consumption of synthetic

fabrics is supported by high cotton and cotton yarn prices, and use of polyester

in fabrics.

Currently, the POY segment is dominated by Reliance Industries Ltd that

accounted for 40% of the domestic installed capacity, followed by Indo Rama

Synthetics with 13% in FY11. With the expected capacity additions of 300,000

tpa in FY12, Alok is poised to become the second largest player after RIL.

Currently, the company consumes bulk of its POY production for in-house

texturising and for FDY production. Going forward, with expansion in POY, the

company will sell more than 50% of its POY production in market.

Consequently, the commoditised POY business is expected to contribute 40-

45% of the total revenues in FY13, resulting in improvement of asset turnover

and RoCE, however company’s overall EBITDA margins would decline from

current level.

Table 12: POY – capacities

POLYESTER YARN FY07 FY08 FY09 FY10 FY11 FY12E

DTY (sub capacity) Tonnes 77000 77000 77000 114000 114000 170000

FDY (sub capacity) Tonnes 65700 65700

POY Tonnes 54000 54000 182500 200000 200000 500000

Source: Company, CRISIL Research Table 13: POY - Competitive position

POY (FY10) Reliance

Industries

Alok

Industries

Indo Rama

Synthetics

Garden Silk

Mills

J B F

Industries

Capacity Tonne 822,725 200,000 259,000 162,450 201,200

Capacity share Per cent 40 10 13 8 10



Alok Industries Ltd

Intentions to exit from non-core realty business a positive but challenges remain

Alok ventured into the real estate sector through its 100% subsidiary, Alok

Infrastructure Pvt Ltd, in FY07. So far, it has completed three real estate deals.

The foray into real estate was to capitalise on the possible opportunities of

capital profits and/or perpetual lease rental income. It acquired two prime

commercial properties in Lower Parel, Mumbai i.e. one tower in Peninsula

Business Park admeasuring 641,580 sq. ft. and Ashford Centre admeasuring

60,000 sq. ft. The company also entered into a 50% joint venture to develop

the residential project Ashford Royale at Nahur, Mumbai. The total committed

investment in these projects was about Rs 15,000 mn to be financed with a mix

of debt and equity. In January 2010, the company announced its intentions to

exit this business completely and gave mandate to Cushman & Wakefield of the

US to execute the same. The proceeds from the sale shall be used for

repayment of debt in an effort to reduce interest cost.

Of the 60,000 sq. ft. space (eight floors) smaller commercial space, the

company has sold three floors (21,500 sq. ft.) at the rate of Rs 22,000/sq.ft.,

the company is in the process of selling one more floor and the remaining four

floors would be consumed by Alok. For the Peninsula business park property (20

floors), the company has been able to lease out 5 floors and is in the process of

selling the property. For our projections, we are assuming Alok will be able to

sell this property in FY12. If the company is unable to sell the property, it will

have an adverse impact on its financial flexibility. CRISIL Research analysis

suggests that though prices in Lower Parel are higher than Alok’s investment

value, excess supply and lower demand for commercial real estate will make it

difficult for Alok to sell its property.

The third project is in Nahur, Mumbai (Maharashtra) where the company is in

joint venture with Ashford Housing Corporation. It plans to construct residential

towers on the 7 acre land it has purchased. We have not factored in the impact

of the same in our projections.


Alok Industries Ltd

Figure 1: Structure of the real estate business


Alok’s retail plans a concern

Alok also has a presence in the retail sector, through its wholly-owned

subsidiary Alok H&A Ltd, which manages its domestic retail brand ‘H&A’ at 291

outlets (as of March 31, 2011). The company expects to reach 500 stores by

next two years. Alok forayed into retailing in FY07 for front-ending its products

in the domestic market and to take advantage of the growing organised retail

sector.

Although the prospects of value retailing in India are good and Alok has

competitive advantage over other retailers in the form of a) integrated textile

manufacturing capacity and b) wide textile experience, its growth plans appear

to be aggressive in the medium term. Competition in domestic retail industry

has intensified in recent years leading to major retail players booking thin

margins. For example, PAT margins for typical value retailers merely ranges

between 1% and 3%. Under a competitive scenario and thin margins, we do not

see the domestic retail segment adding significant revenue or profitability to the

company. Nevertheless, the cash-and-carry business contributes less than 1%

to the company’s consolidated top line and hence no major impact is expected

in the operations of Alok.

Realty

Alok Infrastructure Pvt Ltd & (100% Subsidiary)

Alok Realtors Pvt Ltd

(100% Subsidiary) Peninsula Business park

Ashford Royale

(50% JV)Nahur Residential Project

Alok Industries Ltd

Alok’s retail venture will

create demand for its

textile products


Alok Industries Ltd

Financial Outlook

The commissioning of capacity in FY11 and higher realisations in fabrics, home

textile, polyester and cotton yarn resulted in 67% growth in revenues over

FY10. Going forward, with capacity expansion in polyester, apparel fabric and

home textile divisions, revenues are expected to grow by 30% in FY12 over

FY11. Contribution from the polyester business is expected to go up to 40% in

FY12 from 26%.

Figure 2: Revenue and growth


Figure 3: EBITDA and EBITDA margin


EBIDTA margin is expected to decline from 24.5% in FY11 to 23% in FY12. This

decline is due to higher contribution from the polyester business which has

relatively lower margins (18-20% EBIDTA margin) vis-à -vis other products.

22,899 31,115 44,202 75,200 95,521 113,533

25%

36%

42%

70%

27%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

20,000

40,000

60,000

80,000

100,000

120,000

FY08 FY09 FY10 FY11E FY12E FY13E

(Rs mn)

Revenue Revenue Growth(RHS)

5,391 8,017 12,704 18,434 22,013 26,731

23.5%25.8%

28.7%

24.5% 23.0% 23.5%

0%

5%

10%

15%

20%

25%

30%

35%

0

5,000

10,000

15,000

20,000

25,000

30,000


(Rs mn)

EBITDA EBITDA Margin(RHS)


Alok Industries Ltd

Figure 4:PAT and PAT margin


Figure 5: RoCE and RoE


Figure 6: Debt-equity


728 -834 927 3,307 5,001 7,780

3.2%

-2.7%

2.1%

4.4%

5.2%

6.9%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


(Rs mn)

PAT PAT Margin(RHS)

5.9

-4.9

4.0

11.4

15.1

19.8

6.4

6.98.4

9.511.0

13.8

-6

-2

2

6

10

14

18

22


(%)

RoE Roce

4.0

3.6 3.5 3.5

3.0

2.3

0

1

1

2

2

3

3

4

4

5


(times)

Gearing

Debt-equity ratio to improve

with exit from real estate,

healthy cash flow and limited

capex in next two years


Alok Industries Ltd

Key Risks

Volatile raw material prices

The company derived around 26% of revenue from polyester business in FY11.

With polyester segment expanding in the next two years, revenue is expected to

increase to around 40%. Purified terephthalic acid (PTA) and mono ethylene

glycol (MEG) are two key raw materials for polyester manufacturing, which

account for ~75% of the total operating costs. Historically, PTA and MEG prices

have remained volatile and are currently on an upward trend following a rise in

crude oil prices (PTA and MEG are crude oil derivatives). PTA prices are directly

linked to naphtha prices, while MEG prices are linked to ethylene prices, both of

which are volatile in nature.

Hence, the company’s EBITDA margins are sensitive to the movement in raw

material prices especially in a down cycle.

Competition in the fragmented fabric segment

Alok operates in a highly fragmented fabric industry with competition from both

organised and unorganised players. The entry barriers in the fabric market are

limited and the branded segment business has seen the launch of an array of

brands vying for attention. Additionally, in order to maintain a significant

competitive edge, the company will also have to invest in research and

development, and constantly upgrade production facilities. These factors could

put a strain on its margins.


Alok Industries Ltd

Management Evaluation

CRISIL's fundamental grading methodology includes a broad assessment of

management quality, apart from other key factors such as industry and

business prospects, and financial performance.

Well-experienced management

Alok has a well-experienced management headed by Mr Ashok Jiwrajka along

with his two brothers Mr Dilip Jiwrajka and Mr Surendra Jiwrajka. All the three

brothers have more than two decades of experience in the textiles business, and

have played an important role in growing Alok from a trading company into the

largest integrated textile player in India.

CRISIL Research believes that Alok’s growth is driven by management’s

strategic prowess - the ability to spot business opportunities arising due to

opening up of quotas and ensuring continuous product innovation – which has

enabled the company to be a leader in the domestic textile business. The

management has also been able to develop strong relationships with leading

global vendors.

Strong second level of management

The second level of management (the sons of the three promoters) is currently

being groomed. Further, they are ably supported by key professionals at the

middle management level, who have been with the company for a relatively

longer duration.

Venture into other businesses

CRISIL Research believes that the management’s foray into the real estate

business was opportunistic with no clear roadmap. However, on the retail

business front, the management has laid down specific business plans.

Management: experienced

and aggressive


Alok Industries Ltd

Corporate Governance

CRISIL’s fundamental grading methodology includes a broad assessment of

corporate governance and management quality, apart from other key factors

such as industry and business prospects, and financial performance. In this

context, CRISIL Research analyses the shareholding structure, board

composition, typical board processes, disclosure standards, and related-party

transactions. Any qualifications by regulators or auditors also serve as useful

inputs while assessing a company’s corporate governance.

Alok’s board represents a fair mix of experienced people with the presence of a

large number of nominee directors of various financial institutions namely, IFCI,

IDBI, EXIM bank and LIC.

Overall, Alok’s corporate governance conforms to regulatory requirements

supported by reasonably good board practices and an independent board.

Board composition

Alok’s board consists of 12 members, eight of whom are independent directors,

which is in line with the requirements under Clause 49 of SEBI’s listing

guidelines. The board includes several nominee independent directors; given the

background of the directors, we believe the board is well experienced.

The audit committee is chaired by an independent director. Further, the position

of the chairman is independent from that of the managing director/CEO.

Corporate governance

practices at Alok

conform to the regulatory

requirement


Alok Industries Ltd

Valuation Grading Grade: 4/5

We have used the DCF (discounted cash flow) method to value the consolidated

cash flows of Alok’s textile, retail and infrastructure businesses. Based on our

DCF approach, we have arrived at a fair value of Rs 31 per share. At this fair

value, the implied P/E multiples are 4.9x FY12E and 3.1x FY13E EPS.

Consequently, we initiate coverage on Alok with a valuation grade of 4/5

implying that the CMP (Rs 24.8 as on July 26, 2011) has upside from the

current levels.

Key DCF assumptions

• We have considered the discounted value of the firm’s estimated free cash

flow from FY13 to FY22.

• We have assumed maintenance capex of Rs 8,000 mn in the terminal year.

• We have assumed a terminal growth rate of 3% beyond the explicit

forecast period.

WACC computation

FY13-22 Terminal value

Cost of equity 18.8% 18.8%

Cost of debt (post tax) 5.4% 6.7%

WACC 8.3% 14.0%

Terminal growth rate 3.00%

Sensitivity analysis to terminal WACC and terminal growth rate

Terminal Growth rate

Term

inal

WA

CC

1.0% 2.0% 3.0% 4.0% 5.0%

12.0% 38 45 52 62 74

13.0% 29 34 40 47 56

14.0% 23 26 31 36 43

15.0% 17 20 23 27 32

16.0% 12 14 17 20 24

Source: CRISIL Research estimates


Alok Industries Ltd

One-year forward P/E band One-year forward EV/EBITDA band

Source: NSE, Company, CRISIL Research Source: NSE, Company, CRISIL Research

P/E – premium / discount to NIFTY P/E movement

Source: NSE, Company, CRISIL Research Source: NSE, Company, CRISIL Research

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1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev


Alok Industries Ltd

Company Overview

Alok, established in 1986 as a private limited company, commenced operations

with yarn texturising. It has subsequently grown into a multi-divisional textiles

company, engaged in weaving, knitting, processing home textiles and

readymade garments. The company has a presence across the textile value

chain, from spinning to home textiles, garments and retailing

Key milestones

FY89 Set up manufacturing facilities for texturising at Silvassa (with one texturising machine)

FY91 Commenced weaving operation at Bhiwandi, Thane

FY94 Expansion of weaving capacity (50 Cimmco looms) at Bhiwandi and texturising capacity (three texturising machines) at Silvassa

FY95 Financial and technical collaboration with Albert Grabher Gesellshaft GmbH & Co of Austria for manufacturing embroidered products through a JV, Grabal Alok Impex Ltd

FY96 Set up knitting division at Silvassa (eight machines) and a state-of-the-art eco-friendly process house at Navi Mumbai (three stenters)

FY97 Expansion of texturising capacity (five texturising machines) at Silvassa

FY98 Modernisation and expansion of weaving (24 Sulzer Projectile looms) at Silvassa

FY99 Expansion of weaving (28 Sulzer Projectile Looms) and knitting capacities (20 machines) at Silvassa

FY01 Undertook expansion of weaving and processing capacities under TUFS at an aggregate cost of Rs1,900 mn

FY02 Completion of modernisation and expansion of weaving project (88 air jet /Rapier Sulzer Looms) at Silvassa Expansion of knitting capacities (28 machines) at Silvassa

FY03 Completion of modernisation and expansion of processing project at Vapi (two stenters)

Expansion of texturising capacity at Silvassa (10 machines) Set up garment unit at Navi Mumbai (100 stitching machines)

FY04 Expansion of texturising capacity at Silvassa (30 machines)

Expansion of knitting capacity at Silvassa (40 machines)

Expansion of weaving capacity at Silvassa (170 air jet/Rapier Looms) Foray into home textiles (bed sheets) for direct exports

FY05 Expansion of weaving capacity at Silvassa (170 Air jet/Rapier Looms)

FY06 Completion of wider width weaving and processing project Set up new plant for processing of knitted fabric at Vapi and a POY plant at Silvassa

FY10 Successfully completed rights issue of 400 mn shares at 2075 :1 at Rs 11 per share

FY11 The company has shown intention of getting out of the real estate business

Source: Company

It is also present across various verticals in the textiles value chain. These

include apparel fabrics (woven and knitted), cotton fabric and cotton yarn,

made-ups (bed linen) and garments. The company is also involved in the

texturised yarn business, and supplies POY to standalone weavers in and around

Silvassa. It has separate in-house modern facilities for the spinning, yarn

processing, texturising, weaving, knitting, processing, garments and made-ups

segments.

Since FY04, the company has embarked on a huge capital expenditure

programme to add capacities and integrate into producing cotton yarn and POY.

In FY07, the company acquired an 80% stake in Mileta International, a Czech-

based fabric maker.

Alok has one of the largest

integrated textile capacities in

India


Alok Industries Ltd

Annexure: Financials

#FY11 numbers are based on abridged financials


Income statement Balance Sheet

(Rs mn) FY09 FY10 FY11# FY12E FY13E (Rs mn) FY09 FY10 FY11# FY12E FY13E

Operating income 31,115 44,202 75,200 95,521 113,533 Liabilities

EBITDA 8,017 12,704 18,434 22,013 26,731 Equity share capital 1,970 7,878 7,878 7,878 7,878

EBITDA margin 25.8% 28.7% 24.5% 23.0% 23.5% Reserves 17,280 19,482 22,807 27,490 35,412

Depreciation 2,402 3,718 5,874 6,502 7,089 Minorities - - - - -

EBIT 5,616 8,986 12,560 15,511 19,642 Net worth 19,250 27,360 30,685 35,368 43,290

Interest 5,489 6,812 7,704 8,349 8,258 Convertible debt - - - -

Operating PBT 127 2,174 4,856 7,162 11,384 Other debt 69,565 96,726 108,726 106,726 99,726

Other income 97 40 423 302 228 Total debt 69,565 96,726 108,726 106,726 99,726

Exceptional inc/(exp) 1,669 444 388 (88) 602 Deferred tax liability (net) 3,064 4,030 4,778 5,024 5,216

PBT 1,893 2,657 5,667 7,376 12,213 Total liabilities 91,879 128,115 144,189 147,118 148,232

Tax provision 1,058 1,286 1,972 2,463 3,832 Assets

Minority interest - - - - - Net fixed assets 38,586 62,703 67,829 76,669 72,580

PAT (Reported) 834 1,371 3,695 4,913 8,381 Capital WIP 23,770 16,914 15,914 914 914

Less: Exceptionals 1,669 444 388 (88) 602 Total fixed assets 62,356 79,617 83,743 77,584 73,494

Adjusted PAT (834) 927 3,307 5,001 7,780 Investments 4,233 3,812 3,812 3,812 3,812

-2.7% 2.1% 4.4% 5.2% 6.9% Current assets

Ratios Inventory 10,687 15,678 24,311 30,881 35,771

FY09 FY10 FY11# FY12E FY13E Sundry debtors 9,305 11,561 20,076 25,501 30,310

Growth Loans and advances 6,320 8,526 15,040 19,104 21,571

Operating income (%) 35.9 42.1 70.1 27.0 18.9 Cash & bank balance 4,274 14,107 10,059 7,588 4,939

EBITDA (%) 48.7 58.5 45.1 19.4 21.4 Marketable securities 526 460 460 460 460

Adj PAT (%) (214.6) (211.1) 256.7 51.2 55.6 Total current assets 31,113 50,332 69,947 83,535 93,051

Adj EPS (%) (208.9) (127.8) 256.7 51.2 55.6 Total current liabilities 6,805 7,699 15,366 19,865 24,178

Net current assets 24,308 42,633 54,581 63,670 68,873

Profitability Intangibles/Misc. expenditure 983 2,053 2,053 2,053 2,053

EBITDA margin (%) 25.8 28.7 24.5 23.0 23.5 Total assets 91,879 128,115 144,189 147,118 148,232

Adj PAT Margin (%) (2.7) 2.1 4.4 5.2 6.9

RoE (%) (4.9) 4.0 11.4 15.1 19.8 Cash flow

RoCE (%) 6.9 8.4 9.5 11.0 13.8 (Rs mn) FY09 FY10 FY11# FY12E FY13E

RoIC (%) 7.1 8.3 9.9 10.7 12.3 Pre-tax profit 224 2,213 5,279 7,464 11,612

Total tax paid (97) (321) (1,224) (2,217) (3,640)

Valuations Depreciation 2,402 3,718 5,874 6,502 7,089

Price-earnings (x) (3.0) 18.9 5.3 3.5 2.2 Working capital changes (4,844) (8,559) (15,996) (11,560) (7,852)

Price-book (x) 0.1 0.6 0.6 0.5 0.4 Net cash from operations (2,315) (2,948) (6,066) 190 7,208

EV/EBITDA (x) 8.4 7.8 6.3 5.3 4.2 Cash from investments

EV/Sales (x) 2.2 2.3 1.5 1.2 1.0 Capital expenditure (24,160) (22,050) (10,000) (343) (3,000)

Dividend payout ratio (%) 20.7 16.8 8.5 4.0 4.7 Investments and others (3,069) 487 - - -

Dividend yield (%) 7.0 1.3 1.8 1.1 2.3 Net cash from investments (27,229) (21,563) (10,000) (343) (3,000)

Cash from financing

B/S ratios Equity raised/(repaid) 1,000 8,743 - - -

Inventory days 188 202 174 169 165 Debt raised/(repaid) 11,225 27,161 12,000 (2,000) (7,000)

Creditors days 94 75 85 85 88 Dividend (incl. tax) (173) (230) (316) (230) (459)

Debtor days 111 96 97 96 96 Others (incl extraordinaries) 4,715 (1,330) 335 (88) 602

Working capital days 200 196 175 190 191 Net cash from financing 16,767 34,344 12,019 (2,317) (6,858)

Gross asset turnover (x) 0.8 0.7 0.9 1.0 1.1 Change in cash position (12,777) 9,832 (4,048) (2,471) (2,649)

Net asset turnover (x) 0.9 0.9 1.2 1.3 1.5 Closing cash 4,274 14,107 10,059 7,588 4,939

Sales/operating assets (x) 0.6 0.6 0.9 1.2 1.5

Current ratio (x) 4.6 6.5 4.6 4.2 3.8 Quarterly financials

Debt-equity (x) 3.6 3.5 3.5 3.0 2.3 (Rs mn) Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11

Net debt/equity (x) 3.4 3.0 3.2 2.8 2.2 Net sales 1,471 1,099 1,452 1,613 2,203

Interest coverage 1.0 1.3 1.6 1.9 2.4 Change (q-o-q) 36% -25% 32% 11% 37%

EBITDA 428 327 416 465 558

Per share Change (q-o-q) 33% -24% 27% 12% 20%

FY09 FY10 FY11# FY12E FY13E EBITDA margin 29.1% 29.7% 28.6% 28.9% 25.3%

Adj EPS (Rs) (4.2) 1.2 4.2 6.3 9.9 PAT 95 47 80 91 160

CEPS 8.0 5.9 11.7 14.6 18.9 Adj PAT 95 47 80 91 160

Book value 97.7 34.7 39.0 44.9 55.0 Change (q-o-q) 64% -51% 72% 13% 77%

Dividend (Rs) 0.9 0.3 0.4 0.3 0.5 Adj PAT margin 6.5% 4.2% 5.5% 5.6% 7.3%

Actual o/s shares (mn) 197.0 787.8 787.8 787.8 787.8 Adj EPS 0.6 0.3 0.5 0.6 1.02


CRISIL Research Team

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Alok Industries Ltd

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