Alok Industries

Investors with a long-term perspective and a high-risk appetite can buy the stock of textile player Alok Industries. At Rs 21, the stock is at 6.1 times its trailing 12-month per share earnings. Investors should limit portfolio exposure to this small-cap stock.
Sustained exports, increased per client revenues and efforts to tap domestic markets, wide-ranged product lines and capacity expansion suggest strong prospects for the company over the medium term. The company's planned exit from its realty arm to refocus on textiles may help trim its massive debt, which has been the key reason for the stock's depressed valuations.
Segment spread
The company's revenues are derived from apparel fabrics (54 per cent), followed by polyester yarn (21 per cent) and home textiles (17 per cent),cotton yarn (4 per cent) and garments (5 per cent). Individual product lines are varied within as well. Fabrics include poplins, lawns, voiles, canvases, satins and so on. Yarns include dyed yarn and organic cotton, among others, while home textiles include bed and bath linen.
Alok supplies fabric and garments for work wear and fashion wear to manufacturers and retailers such as Zodiac, Gap, and so on, in domestic and international markets. Technical and speciality fabrics such as fire-retardant fabrics, wrinkle-free and stain-free fabrics, tarpaulins, and so on, find growth markets in sectors such as Defence, automotives, hotels and hospitals. Alok has set up research and product development facilities to boost sales of technical fabrics.
Such broad-basing gives Alok the ability to capitalise on healthy prospects in some segments even as others may flag. Alok's list includes repeat clients, and some of the bigger names such as Gokaldas, Walmart, JC Penny, and so on, which help mitigate the risk of drying up of orders.
Export markets
Even as textile exports flagged from the September 08 quarter onwards on waning consumer demand overseas, Alok's exports managed a 2 per cent growth. Alok actually added clients during FY-09, as global retailers looked to consolidate suppliers to control costs. Alok's diversified offerings and capacity expansions allowed it to meet client requirements, resulting in increased revenues per client.
For instance, JC Penny, which was sourcing only apparel fabric, began sourcing home textiles as well. Exports hovered at 40-45 per cent of sales over the past three years, with the exception of FY-09, when it dipped to 33 per cent. Alok plans to hold exports at 45 per cent levels. Global retailers and manufacturers are looking to source from India to cut their costs as consumer demand hints at staging a revival.
Domestic markets
With domestic consumer demand on an upswing and retailers seeing healthy sales, the domestic market holds bright prospects too. Alok's distribution channel, its retail arm H&A, will serve to improve supplies to domestic retailers.
Formerly, H&A retailed home textiles, apparel and accessories to the value-for-money consumer market. H&A isnow changed to a wholesale value-for-money, cash-and-carry model, supplying smaller retailers and garment manufacturers. This move could enable foreign investments compliant with FDI norms, help bring in smaller clients, and spread the company's reach over a wider geography.
The current store count is at 152, concentrated in north and west India. Planned count for end-FY-10 is 250 across metros, Tier-I and II cities pan-India, with a target of adding 250 stores per year after that. Though a tad ambitious, especially in the light of troubles faced by like-minded retailers, Alok plans to expand through franchisees. Capital requirement and store expenses such as rent will thus be minimal and risks muted to an extent.
Financials
The company's sales clocked a three-year CAGR of 26.5 per cent, while net profits clocked a growth of 20.5 per cent in the same period. Sales growth has held at 40 per cent for the first half of FY10; net profits have grown 25 per cent.
Acquiring primary raw material cotton during season time as well as forex hedging strategies have helped operating margins improve steadily from 21.5 per cent in 2006-07 to 30.2 per cent in 2008-09. However, 50 per cent-plus growth in interest costs and depreciation have left net margins at a low 6.4 per cent.
Debt and interest
Alok's debt is at Rs 6,910 crore, translating into a post-rights issue debt-equity ratio of 3.2 times, taken on to fund capacity expansion and working capital. Interest costs have wiped out almost half the operating margins of 30 per cent in FY-09 and 28 per cent in the first half of FY-10.
However, Rs 3,000 crore has been taken under the Technology Upgradation Fund Scheme floated by the Textiles Ministry. These loans carry a low 6 per cent interest rate and 10-year repayment frame.
Going forward, Alok's debt requirement will be minimal with expansion complete by the end-FY10, and franchise mode of H&A store ramp-up. As sales step up to match capacity expansion, interest costs and debt load are likely to come down.
Further, Alok's exit from its three commercial and residential realty projects will help trim debt. Exit will be complete, at the latest by end-FY11.
via BL