Despite the pressure on export demand from developed economies, larger players in the Home Textile industry continue to derive the benefits of consolidation. After a few quarters of sluggish textile exports, Alok has been able to profitably capture the incremental growth in volumes and realizations during 9mFY10. While the growth in the company’s apparel business has been relatively slower, thanks to the heightened competition, home textile business continues to remain unaffected. The latter infact has managed to reap better realizations from its marquee clients in global retailing. The volume growth on the other hand was contributed by Alok’s expanded polyester yarn (POY) capacity that is the largest single location capacity in the country.
Alok will be attaining sizeable capacity across segments i.e., spinning, toweling, sheeting and garmenting once the phase-III of the capacity expansion gets fully commissioned by FY10. The incremental 14,000 TPA (tonnes per annum) of spinning capacity will make the company 60% self sufficient as far as its yarn requirement goes. The terry-towel, sheeting and garment capacities will lend the company operating leverage against its peers in the home textile and readymade garment industry.
As per the management, the entire process of converting cotton to finished fabric ensures gross operating margins of around 37%. The conversion of fabric to garment offers additional operating margin of 12%. Thus vertical integration is expected to play an important role in sustenance of the company's operating margins and improvement in net margins.
Although the TUF debt has kept the company's funding costs relatively moderate and most of the capacities have already been commissioned, extended period of lower capacity utilisation may force the company to bear interest costs longer than expected without deriving the benefit of growth in volumes and margins. Having said that the planned equity dilution will help the company lower its debt to equity ratio.
At the current price of Rs 24, the stock is trading at an EV/EBIDTA multiple of 6.2 times FY12 estimates. Synonymous to its chain of retail stores - 'Homes & Apparels', this company's business model is in contrast to most other single-product players in the textile sector. Its integrated structure makes it ideally poised to capture the upsides in terms of margins. Moreover, the higher profits are ploughed back for R&D to achieve better product mix and improved quality.
Armed with sizeable capacity and strengthened overseas presence, the company is set to reap the benefits of higher sales and better realizations over the next 4-5 years. What is more, lower interest and depreciation cost will mean return ratios that will be nearly double of that at the end of FY09. We maintain our positive view on the stock
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