Alok Industries Ltd:: CRISIL IER -IndependentEquityResearch

Alok Industries Ltd
Pulled down by retail and real estate


Alok Industries Ltd’s (Alok’s) fundamental grade has been revised to 2/5 from 3/5 by CRISIL
Research. The company’s balance sheet has deteriorated more than our expectations. Its
consolidated debt-to-equity has increased to 6.1x in FY12 after adjusting for goodwill. Losses
in the UK retail store, higher than expected working capital levels despite rising share of
polyester business and no further deals in its real estate business have worsened its financial
profile. However, the core textile business continues to do well given Alok’s strong
capabilities and the huge capacity in this business. We expect the core business to help Alok
to improve its financial profile in times of tight liquidity

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Reasons for downgrade:
Debt level increased sharply - Consolidated debt has increased to Rs 158.8 bn in FY12,
with gearing at 6x compared with 4.3x in the previous year on account of huge capacity
expansion, investments in real estate and the retail segment. In our report dated
August 21, 2012, we had assumed debt level to be Rs 133 bn with gearing of 4.5x.
Working capital cycle stretched - Alok’s inventory has increased by 72% to Rs 37 bn
against revenue growth of 48% in FY12. Inventory days have climbed to 204 days in FY12
from 179 in FY11. Inventory has gone up despite rising share of polyester business (which
requires working capital of 80 days vs. cotton’s 170 days). Share of polyester business has
increased from 27% in FY11 to 34% in FY12. Earlier, we had assumed inventory of Rs 28 bn
(154 days).
UK retail losses ballooned - Alok’s UK retail chain continued to post losses in FY12
(~Rs 1.5 bn). Although the company is planning to close its non profitable UK stores within a
year, we believe that with a weak macroeconomic situation in the UK, it will be difficult to
reduce losses.
Delay in real estate exit to hurt - In Q4FY12, it sold eight floors (estimated deal size Rs 5
bn) in Peninsula Business Park (Lower Parel, Mumbai), post which there has been no major
deal. CRISIL Research believes that demand supply mismatch in the Lower Parel area for
commercial real estate and a weak macro situation have made it difficult for Alok to exit.
Earnings estimates revised downwards
We lower our earnings estimates for FY13 and FY14 because of higher interest cost. Higher
debt on account of working capital and the real estate business have pushed up interest cost
by more than 20%, which has lowered earnings estimates to 43% and 16% for FY13 and
FY14.
Valuation: Current market price has strong upside
We continue to use the discounted cash flow method to value Alok and revise our fair value
to Rs 21 per share post downward revision in earnings estimate. At the current market price
of Rs 12, the valuation grade is 5/5.