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Alok Industries Ltd Buy
Alok Industries Ltd, one of the largest textile companies in India, is a
vertically integrated company having operations from spinning to
garmenting and home textiles stage to retailing stage. It operates in
cotton as well as polyester segment with a balanced revenue mix to
garner opportunities in the optimistic demand scenario of textile sector.
Reaping the benefits of the aggressive expansion undertaken in the last
six years, Alok Industries is in a sweet spot to benefit from global vendor
consolidation.Growth Drivers
Buoyant Textile and Apparel (T&A) industry scenario
According to Technopak, the global T&A trade is expected to reach USD
1trilllion in 2020 from USD 510bn in 2009, a CAGR of 6.3%. India has
the potential to achieve market share of 8% in 2020 from the current
4.5% in the global trade. This translates into 12% CAGR in Indian textile
exports over 2009-20E period taking the Indian T&A industry to USD
220bn from USD 70bn in 2009. This growth would be driven by higher
domestic consumption led by favourable demographics and increased
outsourcing from India.
Reaping the benefits of aggressive expansion
Alok Industries has been expanding its capacities since last six years to
become one of the largest players in Indian textile industry. Its huge
capacities enable to cater the large international buyers thereby reaping
benefits of vendor consolidation in the post quota era. We expect the net
sales of the company to grow at 27.4% CAGR over FY10-13E driven by
higher production base.
Debt profile to improve over next few years
We expect the debt profile of the company to improve going forward due
to higher EBITDA levels, repayment of long term debt and slower pace of
expansion. With EBITDA of Rs 24559.1mn at the end of FY13E, Debt to
EBITDA of the company is expected to reach 3.9x from 7x in FY10. This
signifies that the company would be able to service its debt obligations
from its internal accruals considering 63.5% of debt is long term. Debt to
equity is likely to improve to 2.3x in FY13E from 3.1x in FY10. This has a
potential to be become better in the event of realization from the real
estate business.
Improving return ratios
With improving profitability and slower pace of expansions going
forward, the return ratios are expected to improve. We expect the return
on capital employed (ROCE) to reach 14.4% in FY13E from 7.6% in
FY10; while return on equity (RoE) is likely to reach 19.7% in FY13E
from 9.1% in FY10.
Valuation and recommendation
With buoyant Indian textile industry scenario, Alok Industries is best
placed to leverage on the opportunity due to its ability to cater to large
volume requirements. Its focus on backward integration would result in
sustainable EBITDA margin above 25%. Slower pace of expansion going
forward is expected to result in higher PAT margins of 9.3% in FY13E
and PAT growth of 49.7% CAGR over FY10-13E. At the CMP of Rs 28.7,
the stock trades at 4.8x and 2.7x its FY12E and FY13E earnings of Rs 6.0
and Rs 10.5 respectively. We value the company at 6x its FY12E
earnings, which is the historical average of the last 5 years, to arrive at
the target price of Rs 36 per share. We recommend BUY Alok Industries
for a potential upside of 25%.
Investment Argument
Global Textile and Apparel Industry on a growth trajectory
Global textile industry has undergone spectacular change post quota abolition in 2005. The production in USA and
European Union (EU) declined post 2005 and shifted to Asian countries due to better raw material availability, lower
cost of production and huge capacities. Global trade in textile and apparel (T&A) grew at 8% CAGR during 2005-2008
due to increased demand at lower prices. However, on account of global recession led by financial crisis, the global
trade in textile and apparel de-grew by 16.7%YoY in FY09 due to lower demand coupled with lower prices. The trade
value fell below 2006 levels signifying the severity of global recession. With global economies recovering from second
half of 2009, the demand for textile and apparel products has started improving. According to Technopak, the global
T&A trade is expected to reach USD 1trilllion in 2020 from USD 510bn in 2009, a CAGR of 6.3% over the period. The
trade is likely to be higher in apparel products at 7% CAGR due to many companies opting for vertical integration
selling value added products.
Indian T&A trade expected to triple by 2020
Indian T&A industry is expected to triple to reach USD 220bn in 2020 from USD 70bn in 2009. This 11% CAGR is likely
to be driven by higher exports at 12% CAGR while domestic industry would also grow at a healthy rate of 10.4%
CAGR.
Indian T&A Exports to grow 3.5x by 2020
Though China is likely to maintain its leadership position in global T&A industry with 35% market share in 2020, rising
cost and domestic consumption would limit its export potential. This would give additional opportunity to India to
export USD 50bn as it is a major alternative to China for sourcing products. According to Technopak, India’s share in
global T&A industry is expected to grow 3.5 times by 2020 to reach USD 80bn from USD 23bn in 2009, 12% CAGR.
Indian Domestic T&A industry to approximately triple on higher consumption
According to Technopak, Indian domestic T&A industry is expected to reach USD 140bn in 2020 from USD 47bn in
2009, 10.4% CAGR. The main drivers of domestic growth are increasing population, increasing income levels, rapid
urbanization, improving demographics, increased organized players and increasing penetration of retailers into smaller
cities. High growth categories include Women’s casual wear, Innerwear, Active wear, Kids wear, Women’s Western
wear, Plus Size Apparel, Lingerie, Work wear & Uniforms, Technical Textiles and Home Textiles
Alok Industries amongst the biggest beneficiaries of vendor consolidation
Post Quota abolition, the buyers can source unlimited quantities from any number of suppliers and from any country.
Due to high cost of production in textile consumption countries like US and EU, the buyers are looking at sourcing from
low cost South Asian countries. They are consolidating their vendor base to few suppliers with capabilities to serve
huge quantities and high quality products. Alok Industries is among the largest textile players in India having a
balanced mix of products in the entire textile value chain. It is among the biggest beneficiaries of the vendor
consolidation due to huge capacities created over the last six years across the value chain.
Reaping benefits of aggressive expansion
Alok Industries has been on an expansion spree over last six years due to huge potential in Indian Textile industry. The
company has spent approximately Rs 75bn on expanding its capacities from FY05 to FY10 to garner the benefits of
growing opportunities. It is a vertically integrated company having presence across the value chain from yarn to
garments and home textiles and further integrated to retailing. It is present in cotton as well as polyester segment
maintaining a balanced mix mitigating the demand variation risk as polyester is considered as a substitute for cotton.
Thus, Alok Industries is a one-stop solution provider in India for all the major requirements of retailers and buyers
across the world.
Alok Industries has highest EBITDA margin and revenue among major textile players in India. Alok Industries is adding
further capacities across value chain especially in the polyester segment leading to further increase in revenues. It has
a planned capex of Rs 14.7bn over the next two years which is likely to be financed through a mix of debt and internal
accruals. Thus the leadership position of the company is expected to be maintained over foreseeable future.
Creating a balanced revenue mix
Cotton and Polyester are two major fibres used in the textile industry. Polyester is generally considered as a substitute
for cotton and drives the demand for the industry in case of rising cotton prices. Globally the usage of polyester: cotton
is 70:30 whereas in India it is in the reverse ratio of 55:45. Due to limited potential of cotton to increase production,
polyester would be driving the growth of the Indian textile sector. To mitigate the risk of changing preferences of
consumers due to better durability and pricing of polyester based fabric and to derive the benefits from growth of both
the fibre bases, Alok Industries is expanding aggressively in polyester based products. We expect the revenues from
polyester segment to reach 41.6% in FY13E from 28.9% in FY10. The management is targeting 50% contribution from
polyester segment over the next few years.
Improving debt profile over the next few years
Alok Industries has very high gross debt of Rs 85096.8mn. However, most of the debt with the company is long-term
in nature. Of the total debt in FY10, loan from Technological Upgradation Funds Scheme (TUFS) stood at 63.4%, which
are repayable over a period of 10 years. The management is conscious of high debt on the balance sheet and is
constantly working on reducing the same. The company is exiting its real estate business to generate cash flows. It
has 2 commercial and 1 residential properties and 500 acres of land at Silvassa which can be sold off for debt
repayment. This would be a potential upside to our estimates as we have not taken it into consideration. With EBITDA
of Rs 24559.1mn at the end of FY13E, Debt to EBITDA of the company is expected to reach 3.9x from 7x in FY10. This
signifies that the company would be able to service its debt obligations from its internal accruals. CARE rating of A+ to
the long term facilities indicates adequate safety for timely servicing of debt obligations. Debt to equity is likely to
improve to 2.3x in FY13E from 3.1x in FY10. We expect the long term debt of the company to decline while the
working capital loans to increase on account of higher scale of operations.
Company Background
Alok Industries Ltd, incorporated in 1986 by Jiwrajka family, is one of the largest textile companies in India. Having
begun its operations as a texturiser in the polyester segment, the company is a vertically integrated unit having
presence in the cotton as well as polyester segment. Its operations include spinning to garment and made-ups stage to
retailing stage. It operates its domestic retail stores through its wholly owned subsidiary, Alok H&A Ltd, offering home
textiles, menswear, women wear, kids wear and accessories like ties, handkerchiefs, cuff lings, etc. Currently, 205
stores on franchise basis and 65 shop-in-shop outlets are operational under “H&A” stores with a plan to roll out 500
stores pan India in two years. Alok Industries has 41.6% stake in Grabal Alok (UK) Ltd, which operates 215 “Store
Twenty One” stores in UK offering apparels and accessories. It operates in realty sector through its wholly owned
subsidiary, Alok Infrastructure Ltd, with 2 commercial projects and 1 residential project. The company is planning to
exit the realty business and focus on its core business of textiles
Financial Analysis
Increasing capacities drive sales growth; 27.4% CAGR over FY10-13E
The net sales of the company grew at a CAGR of 33.2% over FY07-10 to reach Rs 43111.7mn in FY10 from Rs
18246.8mn in FY07. Despite global slowdown in FY09, the company was able to report revenue growth of 37.2% YoY
in FY09. This was mainly driven by higher capacities commencing operations and vendor consolidation happening
world-wide. We expect the company to grow at a CAGR of 27.4% over FY10-13E period driven by aggressive capex
undertaken. Due to aggressive expansion in the polyester segment, the share of polyester segment is likely to reach
41.6% in FY13E as compared to 28.9% in FY10.
EBITDA margin sustainable above 25%
Backward integration has been the focus of Alok Industries while expanding capacities. It entered into spinning of
cotton yarn and set up continuous polymerisation plant in the polyester segment to improve the profitability of the
company. With increasing capacities at the higher end of the value chain, the economies of scale are also contributing
to the profitability of the company due to better sourcing capabilities and vendor consolidation. Consequently, the
EBITDA margin of the company which stood at 22.3% in FY07 improved to 28.0% in FY10. However, EBITDA margin is
expected to decline to 25.9% in FY12E on account of higher raw material prices and a lag in pass-on of the prices to
the customers. We expect the EBITDA margin sustainable above 25% to reach 27.5% in FY13E on account of higher
contribution from polyester segment.
PAT to grow at 49.7% CAGR over FY10-13E
Due to continuous expansions and higher debt, the PAT margin of the company had been under pressure. It declined
329bps over FY07-FY10 to reach 5.7% in FY10 from 9% in FY07. With the expansion plans of the company slowing
down and earlier expansions contributing to the revenues, we expect the PAT margin to improve going forward. We
expect the PAT margin of the company to reach 9.3% in FY13E led by higher EBITDA margin and relatively lower
growth in depreciation and interest cost. Consequently, net profit is expected to grow at a CAGR of 49.7% over FY10-
FY13 to reach Rs 8291.3mn from Rs 2473.4mn in FY10.
Return ratios show impressive improvement
The return ratios of the company have been under pressure over the last 5 years on account of aggressive expansions.
However, with improving profitability and slower pace of expansions going forward, the return ratios are expected to
improve. We expect the return on capital employed (ROCE) to reach 14.4% in FY13E from 7.6% in FY10; while return
on equity (RoE) is likely to reach 19.7% in FY13E from 9.1% in FY10.
Valuation
With buoyant Indian textile industry scenario, Alok Industries is best placed to leverage on the opportunity due to its
ability to cater to large volume requirements. Its focus on backward integration would result in sustainable EBITDA
margin above 25%. Its presence in cotton as well as polyester segment mitigates the risk of demand variation on
account of raw material price volatility. Slower pace of expansion going forward is expected to result in higher PAT
margins of 9.3% in FY13E and PAT growth of 49.7% CAGR over FY10-13E. At the CMP of Rs 28.7, the stock trades at
4.8x and 2.7x its FY12E and FY13E earnings of Rs 6.0 and Rs 10.5 respectively. We value the company at 6x its FY12E
earnings, which is the historical average of the last 5 years, to arrive at the target price of Rs 36 per share. We
recommend BUY Alok Industries for a potential upside of 25%.
We have also build a scenario analysis wherein considering the demand scenario, we have increased our average
selling price by 10% for the best case and decreased average selling price by 5% for worst case. Our worst case EPS
for FY12E is Rs 3.6 per share while the same for best case is Rs 8 per share. At our target multiple of 6x, the worst
case price is Rs 21.4 and best case price is Rs 48 per share.
Risk Factors
• High debt is a major risk for the company. If the company is not able to generate enough internal accruals and / or is
unable to sell its real estate properties, it may impact the profitability adversely.
• Equity dilution has been very frequent with the company on account of aggressive expansion plan leading to
shareholder wealth erosion. Though the management does not intend any further equity dilution, any attempt to
dilute equity in future would lead to de-rating of the stock.
• Due to buoyant demand in textile sector, the companies have been able to pass-on the rise in raw material prices to
the buyers. However, as the demand scenario changes, it may be difficult for the companies to pass through this
rising cost. This may impact the profitability of companies, including Alok Industries. However, Alok Industries is
comparatively better placed than other players in the industry against raw material price increases as the company is
vertically integrated with huge capacities.
• Textile and Apparel sector is highly competitive sector with huge number of players globally. Any improvement in the
competitiveness of any of the competing countries may result in diversion of demand from India affecting the
performance of Indian textile companies.
• Appreciation of rupee may impact the profitability of the company as exports constitute 33.5% of the revenue.
• Any delay in the commencement of the capacities would lead to postponement of revenues leading to lower than
expected growth in near term.
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