Shri Lakshmi Cotsyn (SLC) is a leading manufacturer of quality textile
products like fusible interlining, fabric, suiting, shirting, terry towel,
home furnishing, garments, quilt fabric and comforters. It also
manufactures specialized products like fire retardant, waterproof, nuclear
bio chemical and camouflage printed fabric. It exports to reputed clients
like IKEA, Wal-Mart and J C Penny among others. It has successfully
diversified into defense products like bullet proof jackets, helmets and
protected armored vehicles which are bulletproof and blast proof. Due to
expansions in technical textiles and focus on higher margin defense
business we expect PAT of SLC to grow at CAGR of 24.4% from FY10 to
FY12E. At the current market price of Rs.154 SLC is trading at very
attractive valuation of 3.3x FY12E fully diluted EPS of Rs.46.6. We are
positive on the medium to long term growth prospects of SLC. Therefore,
we are initiating coverage with a BUY recommendation on SLC with a
price target of Rs.220 (43% upside potential) over a 12-month horizon.
This is based on the DCF method of valuation, with 12.6% WACC and
4.0% terminal growth rate.
Key Investment Rationale
q Strong growth in textile sector - both domestic and exports. As per
EXIM bank the Indian textile industry is estimated at $67 bn with 33% being
exported. The export of textile products from India is expected to grow from
$22 bn in 2009 to $55 bn in FY12E. The domestic textile market is expected
to grow from $45 bn in 2009 to $60 bn in FY12E.
q Diversified textile player with reputed client list. SLC is technology
driven, multi-product textile player and it serves its diverse set of customers
through more than 1000 distributors and its five manufacturing units. Some
of its customers in the textile segment are IKEA, Wall Mart, Shopco, J C
Penny, MRC and Kappa among others.
q Market leader in fusible interlining and focus on branded sales. SLC is
market leader with over 35% market share in the organized fusible interlining
business and it is marketed under the brand name of Star Track. Some of the
other brands of SLC are SVL for zippers; ALISHA for clothing accessories,
GALAXY for embroidery products, DYFI for garments and eco-friendly brand
WEAVES for home furnishing to health conscious families.
q Focus on innovative high margin textile products. SLC has developed research
based innovative textile products like sensor based smart textiles, water
repellent, mosquito repellent, fire retardant, anti ageing, Vitamin E enriched
fabric vests and bed sheets. These are sold under own brand called
Weaves and these are sold through 950 multi brand outlets. Going forward
there are plans to ramp up to 1500 multi brand retail outlets by June 2011.
q Preferred supplier to Defense and Para Military forces. In order to address
the huge defense opportunity in India it manufactures and sells safety
textiles such as bio- chemical fabric, high altitude fabric, bullet proof jackets,
bullet proof helmets, camouflage fabric, uniform fabric, IR fabric and carbon
fabric to Indian defense establishments. Some of its customers are Indian
Army, Navy and Air Force, Central paramilitary forces, state police forces and
Indian Railways.
q Protected armored vehicles - major growth trigger. Under its wholly
owned subsidiary i.e. Shri Lakshmi Defense Solutions Ltd. (SLDS). SLC has developed
expertise in designing and making 360 degree protected armored vehicles
which are used by army and mining companies. These are unique vehicles
with bulletproof and blast proof capabilities. It has bagged orders for
supply of four specialized mine protection vehicle amounting to Rs.40 mn from
Nepal government under UN mission. Going forward, we expect order for 100-
300 vehicles over next three years. This being a higher margin business than
textiles is a likely game changer for SLC as it would give a significant boost to
the financial performance of the company.
q Capacity expansion to lead to high growth. Over last few years the company
has consistently been operating at near peak capacities. Thus to continue
the growth it is in middle of major expansion at a capex of Rs.9.9 bn. The
project would be funded through Debt and Equity in the ratio of 2.3:1. The
debt under TUF scheme has been tied up with Central Bank of India (CBI) and
equity component has been partly funded through the issue of warrants to
promoter @Rs.150 and balance through internal accruals.
q Robust past financials - high growth is sales and profits. Over last five
years i.e. from FY05 to FY10, the revenues of SLC have grown at CAGR of
40.3% and PAT has grown at CAGR of 54.9%.
q Profits to grow faster then revenues over next two years. Over FY10 to
FY12E, while revenues are expected to grow at CAGR of 20.9% the profits are
expected to grow faster at CAGR of 24.4%. This is primarily due to expansion
of high margin technical textiles business and focus of the company on the
higher margin defense solutions business. The contribution of high margin
technical textiles business is expected to go up from 21.6% in FY10 to 27.7%
of total revenues by FY12E.
q Attractive valuation. At the current market price of Rs.154, the stock is trading
at attractive valuations of 0.5x P/BV, 3.3x earnings, 2.5x cash earnings, 7.2x
EV/EBIDTA, 1.0x EV/sales and RoE of 18.1% based on FY12E estimates with
fully diluted equity. We feel the valuation is attractive due to higher earning visibility
on the back of expansion in technical textiles with reputed client list and
promising future potential in the higher margin defense solutions business.
Key Risks
q Delay in expansions. SLC is aggressively expanding capacities in the textiles
segment. Although we have accounted for minor delays, any major delay in
commencement of operations would lead to lower then expected revenues
and profitability.
q Lower then expected contribution of the high margin technical textile
segment. SLC is expanding its high margin technical textiles capacities that are
expected to increase the share of high margin business in total revenues from
21.6% in FY10 to 27.7% of total revenues by FY12E. Its inability to do the
same would result into lower then expected operating margins.
q Recession in US and UK. SLC directly or indirectly exports to countries like US
and UK. Any macro economic slowdown or recession in these countries can
impact the volumes and profitability for SLC.
q Raw material prices. Cotton and cotton yarn are the key raw material for SLC
and recently the cotton prices have increased. Inability of the company to pass
on the further cotton price hikes can impact the profitability of the company in
short term. We have assumed the cotton prices to remain stable on the back of
expectation of good cotton crop going forward.
q Currency risk due to rising exports. Direct exports account for ~10% of the
total revenues of SLC. Thus, the rising rupee can impact the revenues and more
importantly its profits. Although the company would look to hedge it currency
risk we feel this is a risk to the profits of the company. We have assumed exchange
rate of US$ = Rs.46.
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