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Banswara Syntex (Buy)
Current Market Price (Jan 25, 2011): Rs135 12 Month Price Target: Rs245
Banswara Syntex’s move towards value added segment is likely to witness acceleration in the coming
years as it widens the product portfolio of Fabrics and rapidly scales up Garment business. Interestingly,
significant benefits from the capex undertaken across all its segments would start flowing from Q4FY11.
Coupled with hike in prices of fabrics and garments after a lag, the YoY profit growth in H2FY11 is likely
to be higher than H1FY11. Overall, earning CAGR of 45% is expected between FY10-12E and volatility of
profit margins is likely to reduce due to increased contribution from value added segment. Besides,
rerating of the stock is likely on the back of potential increase in Dividend Payouts and gradual
acquisition of stake in the Company by a Private Equity Investor. We expect the stock to nearly double to
Rs245 over the next 12 months at FY12E P/E of 5.5x. Further, downside risk looks capped due to
expected high Dividend Yield of >7% for FY12E. We strongly reiterate BUY.
• The move towards value added segments to witness acceleration. Despite a sharp cyclical upturn in
the yarn business in the current year, the Company has stuck to its long term strategy of increasing the
sales contribution only from value added products viz. Fabrics and Garments. Consequently, it is not
planning to undertake any significant capacity expansion of yarns. Instead it is trying to build business in
segments where profitability would be higher on a sustainable business. It plans to accelerate the growth
of value added segment by scaling up revenues of existing product segments, branding of fabrics and
widening portfolio of fabrics beyond trousers.
o Widening portfolio of fabrics beyond trousers to accelerate growth. While the Company has
historically focused only on supply of fabrics for trousers in unbranded form, it is now
contemplating to diversify into new areas of fabrics for shirting, fabrics for home furnishing
and branding of fabrics. The Company is likely to come up with a Domestic Brand for
superior fabric soon. It is looking at various options including Joint Venture with global players in
some of the segments, acquiring skill set by hiring the requisite talent, etc. Rapid scale up and
entry into new business segments would enable to sustain rapid CAGR of 30-35% in the value
added segments in the coming years. Besides as existing strengths of the Company would be
leveraged, the incremental capex and cost of entry in new segments would be relatively lower.
o Scaling up of the Garment business with CAGR of over 50%. The garment business, which
accounted for only 9% of revenues in FY10, is likely to scale up at a CAGR of > 50% over the
next couple of years. The garment business is likely to get scaled up to Rs90Cr in FY11E and
Rs150Cr in FY12E as against Rs58Cr in FY10.
o Teething problems sorted out; big plans for Technical Textiles. The highly profitable
Technical Textile segment has overcome teething problems in the current year and is likely to
register revenues of over Rs40Cr in FY12E. Besides order from bag maker ‘Coach’ and Defense,
Technical Textiles segment has enormous potential as the Company plans to go in a big way in.
• Benefits of expansion to start flowing from Q4FY11. The second unit of Coal based Thermal Power
Plant is likely to commence with effect from February, 2011. Moreover, the benefits from Rs100Cr capex
in yarn, fabric and garment segment are likely to start from Q4FY11 onwards. Besides, realizations for
fabrics and garments would be higher on account of the price hikes becoming effective. Consequently, as
against an average quarterly sale of Rs185Cr in H1FY11, we expect sales of around Rs250Cr per
quarter starting from Q4FY11. Sustaining this run rate of Rs250Cr / quarter, we expect the Company’s
revenues to increase by 27% to Rs1050Cr in FY12E.
• Profit growth in H2FY11 to be higher. Unlike its peers (Sutlej, RSWM & Sangam) Banswara’s profit
growth was relatively muted at 38% YoY in H1FY11 as the benefits of improvement in margins of yarn
business were offset by pressure on margins of fabric and garment division. Due to relatively longer term
contracts for fabric and garments, the sudden steep increase in prices of raw materials could not be
entirely passed on to customers immediately. However, with the Company having raised prices of fabrics
and garments by around 8% over the last quarter to fully offset raw material price hike, the margins of
fabrics and garment business are likely to improve in H2FY11 and as result profit growth in H2FY11 is
likely to be higher than H1FY11 levels. Besides, as the Company has maintained good forex cover by
hedging export receivables for around 5 months at rate of over Rs46/dollar, its near term profitability is
unlikely to be impacted by the Indian Rupee appreciation.
• Earnings CAGR of 45% till FY12E. We expect Banswara’s PAT to grow at a CAGR of 45% between
FY10-12E driven primarily by increased capacities, improvement in value addition and higher margins of
yarn business compared to historical levels. The net profits are likely to increase to Rs45.5Cr in FY11E
and Rs65.5Cr in FY12E (up 9% compared to our earlier estimates). Interesting, we expect average ROE
to increase from 30% in FY10 to 34% in FY11E and 38% in FY12E (factoring no equity dilution).
• Potential increase in Dividend Payouts would lead to improvement in shareholder wealth. With the
Company not focused on adding significant capacities in the capital intensive yarn segment and absence
of future addition to captive power capacities, we expect the capex in the coming years to be relatively
lower than historical levels. Consequently, the Company stands in a better position to use the lever of
increasing dividend payouts for increasing shareholder wealth. We understand that the Company is
seriously considering a significant increase in dividend payout ration from ~20% in FY10. Assuming that
the Company increases its dividend payout ratio to 30% than the dividends are likely to increase multifold
to Rs8.00 in FY11E and Rs11.50 in FY12E. We believe that based on dividend yield of 5% for FY12E,
the stock should trade at base level of Rs230 in the coming year.
• Rerating from gradual acquisition of stake by a Private Equity Investor. As available from
disclosures to the Exchange and trading volumes, The Royal Bank of Scotland N.V. (London Branch)
has gradually acquired 5.64% stake in Banswara Syntex through market purchases over the last two
months. However, we understand that the real investor behind ‘The Royal Bank of Scotland’ is a Private
Equity Fund promoted by veterans of the Indian Branded Textile Industry. This stake acquisition lends
credence to the growth strategy followed by the Company and sends a strong positive signal regards its
future outlook. Through their long experience in branding of textiles, the PE fund promoters could guide
the Company in its endeavor to move up the value chain. Besides, the continued market purchases by
an institutional investor would cap any significant downside for the stock and lead to rerating.
• Stock likely to nearly double on the back of strong earnings growth and rerating. Banswara
currently trades at an attractive P/E of 4.4x FY11E and 3.0x FY12E. Apart from the strong earnings
growth, we expect rerating of the stock to P/E level of around 6x in the coming year. Consequently, we
expect the stock, which has consolidated between Rs100-130 over the last year, to nearly double to
Rs245 over the next 12 months at FY12 P/E of 5.5x. The following factors would differentiate Banswara
from its peers and enable it to trade at the higher end of valuation range in the sector:
o A gradual move up the value chain enhances inherent profitability of the Company.
o Being more vertically integrated and higher up on the value chain, Banswara’s profit margins are
more sustainable and less volatile compared to peers focused on yarn segment, where margins
are currently near cyclical peak levels.
o Average ROE is likely to increase from 30% in FY10 to 34% in FY11E and 38% in FY12E, which
would be one of the highest for the sector on a sustainable basis.
o A sharp increase in Dividend per share from Rs3.50 in FY10 to say Rs10.0 in FY12E would
translate to a high dividend yield of 7.4%.
o Purchase of meaningful stake in the Company by a Private Equity Fund promoted by veterans of
Textile Industry lends support to the strategy of growth followed by the Company.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Banswara Syntex (Buy)
Current Market Price (Jan 25, 2011): Rs135 12 Month Price Target: Rs245
Banswara Syntex’s move towards value added segment is likely to witness acceleration in the coming
years as it widens the product portfolio of Fabrics and rapidly scales up Garment business. Interestingly,
significant benefits from the capex undertaken across all its segments would start flowing from Q4FY11.
Coupled with hike in prices of fabrics and garments after a lag, the YoY profit growth in H2FY11 is likely
to be higher than H1FY11. Overall, earning CAGR of 45% is expected between FY10-12E and volatility of
profit margins is likely to reduce due to increased contribution from value added segment. Besides,
rerating of the stock is likely on the back of potential increase in Dividend Payouts and gradual
acquisition of stake in the Company by a Private Equity Investor. We expect the stock to nearly double to
Rs245 over the next 12 months at FY12E P/E of 5.5x. Further, downside risk looks capped due to
expected high Dividend Yield of >7% for FY12E. We strongly reiterate BUY.
• The move towards value added segments to witness acceleration. Despite a sharp cyclical upturn in
the yarn business in the current year, the Company has stuck to its long term strategy of increasing the
sales contribution only from value added products viz. Fabrics and Garments. Consequently, it is not
planning to undertake any significant capacity expansion of yarns. Instead it is trying to build business in
segments where profitability would be higher on a sustainable business. It plans to accelerate the growth
of value added segment by scaling up revenues of existing product segments, branding of fabrics and
widening portfolio of fabrics beyond trousers.
o Widening portfolio of fabrics beyond trousers to accelerate growth. While the Company has
historically focused only on supply of fabrics for trousers in unbranded form, it is now
contemplating to diversify into new areas of fabrics for shirting, fabrics for home furnishing
and branding of fabrics. The Company is likely to come up with a Domestic Brand for
superior fabric soon. It is looking at various options including Joint Venture with global players in
some of the segments, acquiring skill set by hiring the requisite talent, etc. Rapid scale up and
entry into new business segments would enable to sustain rapid CAGR of 30-35% in the value
added segments in the coming years. Besides as existing strengths of the Company would be
leveraged, the incremental capex and cost of entry in new segments would be relatively lower.
o Scaling up of the Garment business with CAGR of over 50%. The garment business, which
accounted for only 9% of revenues in FY10, is likely to scale up at a CAGR of > 50% over the
next couple of years. The garment business is likely to get scaled up to Rs90Cr in FY11E and
Rs150Cr in FY12E as against Rs58Cr in FY10.
o Teething problems sorted out; big plans for Technical Textiles. The highly profitable
Technical Textile segment has overcome teething problems in the current year and is likely to
register revenues of over Rs40Cr in FY12E. Besides order from bag maker ‘Coach’ and Defense,
Technical Textiles segment has enormous potential as the Company plans to go in a big way in.
• Benefits of expansion to start flowing from Q4FY11. The second unit of Coal based Thermal Power
Plant is likely to commence with effect from February, 2011. Moreover, the benefits from Rs100Cr capex
in yarn, fabric and garment segment are likely to start from Q4FY11 onwards. Besides, realizations for
fabrics and garments would be higher on account of the price hikes becoming effective. Consequently, as
against an average quarterly sale of Rs185Cr in H1FY11, we expect sales of around Rs250Cr per
quarter starting from Q4FY11. Sustaining this run rate of Rs250Cr / quarter, we expect the Company’s
revenues to increase by 27% to Rs1050Cr in FY12E.
• Profit growth in H2FY11 to be higher. Unlike its peers (Sutlej, RSWM & Sangam) Banswara’s profit
growth was relatively muted at 38% YoY in H1FY11 as the benefits of improvement in margins of yarn
business were offset by pressure on margins of fabric and garment division. Due to relatively longer term
contracts for fabric and garments, the sudden steep increase in prices of raw materials could not be
entirely passed on to customers immediately. However, with the Company having raised prices of fabrics
and garments by around 8% over the last quarter to fully offset raw material price hike, the margins of
fabrics and garment business are likely to improve in H2FY11 and as result profit growth in H2FY11 is
likely to be higher than H1FY11 levels. Besides, as the Company has maintained good forex cover by
hedging export receivables for around 5 months at rate of over Rs46/dollar, its near term profitability is
unlikely to be impacted by the Indian Rupee appreciation.
• Earnings CAGR of 45% till FY12E. We expect Banswara’s PAT to grow at a CAGR of 45% between
FY10-12E driven primarily by increased capacities, improvement in value addition and higher margins of
yarn business compared to historical levels. The net profits are likely to increase to Rs45.5Cr in FY11E
and Rs65.5Cr in FY12E (up 9% compared to our earlier estimates). Interesting, we expect average ROE
to increase from 30% in FY10 to 34% in FY11E and 38% in FY12E (factoring no equity dilution).
• Potential increase in Dividend Payouts would lead to improvement in shareholder wealth. With the
Company not focused on adding significant capacities in the capital intensive yarn segment and absence
of future addition to captive power capacities, we expect the capex in the coming years to be relatively
lower than historical levels. Consequently, the Company stands in a better position to use the lever of
increasing dividend payouts for increasing shareholder wealth. We understand that the Company is
seriously considering a significant increase in dividend payout ration from ~20% in FY10. Assuming that
the Company increases its dividend payout ratio to 30% than the dividends are likely to increase multifold
to Rs8.00 in FY11E and Rs11.50 in FY12E. We believe that based on dividend yield of 5% for FY12E,
the stock should trade at base level of Rs230 in the coming year.
• Rerating from gradual acquisition of stake by a Private Equity Investor. As available from
disclosures to the Exchange and trading volumes, The Royal Bank of Scotland N.V. (London Branch)
has gradually acquired 5.64% stake in Banswara Syntex through market purchases over the last two
months. However, we understand that the real investor behind ‘The Royal Bank of Scotland’ is a Private
Equity Fund promoted by veterans of the Indian Branded Textile Industry. This stake acquisition lends
credence to the growth strategy followed by the Company and sends a strong positive signal regards its
future outlook. Through their long experience in branding of textiles, the PE fund promoters could guide
the Company in its endeavor to move up the value chain. Besides, the continued market purchases by
an institutional investor would cap any significant downside for the stock and lead to rerating.
• Stock likely to nearly double on the back of strong earnings growth and rerating. Banswara
currently trades at an attractive P/E of 4.4x FY11E and 3.0x FY12E. Apart from the strong earnings
growth, we expect rerating of the stock to P/E level of around 6x in the coming year. Consequently, we
expect the stock, which has consolidated between Rs100-130 over the last year, to nearly double to
Rs245 over the next 12 months at FY12 P/E of 5.5x. The following factors would differentiate Banswara
from its peers and enable it to trade at the higher end of valuation range in the sector:
o A gradual move up the value chain enhances inherent profitability of the Company.
o Being more vertically integrated and higher up on the value chain, Banswara’s profit margins are
more sustainable and less volatile compared to peers focused on yarn segment, where margins
are currently near cyclical peak levels.
o Average ROE is likely to increase from 30% in FY10 to 34% in FY11E and 38% in FY12E, which
would be one of the highest for the sector on a sustainable basis.
o A sharp increase in Dividend per share from Rs3.50 in FY10 to say Rs10.0 in FY12E would
translate to a high dividend yield of 7.4%.
o Purchase of meaningful stake in the Company by a Private Equity Fund promoted by veterans of
Textile Industry lends support to the strategy of growth followed by the Company.
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