Valuation & Recommendation
Himatsingka Siede Ltd. (HSL) profitability got impacted in the last four years on
account of delay in commissioning of new bed linen business at Hassan SEZ,
acquisition of 80% stake in Divatex Home Fashions Inc., New York, in July 2007
(distribution company) at peak time, slow down in US economy, volatility in
raw-material prices (raw silk and cotton) and long open derivative contracts.
To combat the crisis, the company had introduced product mix changes,
addition of new customers, enhancing focus on the brands, launching value
added products and higher capacity utilization will lead growth in the sales and
improvement in margins. The last leg of derivative contract also got closed in
August 2012 which we believe will result into the stable financials going
forward. The improvement in drapery and upholstery capacity utilization and
improvement in distribution business will be the key driver of improvement in
margin. We initiate coverage with a ‘BUY’ recommendation and a target of Rs.
54 per share (10xPE FY14E), an upside of 32%.
Investment Rationale
Increase in capacity utilization will lead revenue growth without any
incremental capex: The installed capacity for silk business is 1.8mn square
meters. However, this segment operated at very low utilization of 45% in
FY12. The company will focus on improving the utilization, which would add
revenue growth and margin expansion in the coming years without any
fresh investment.
Financial Leverage set to improve: Company’s PBT/EBITDA ratio stood at
30%, implying higher financials leverage. As the company is looking to
improve the utilization in the coming quarters without any incremental
capex, which would result in strong jump in profitability. On the back of
envelop calculation shows that a 10% jump in EBITDA should result in 33%
jump in PBT. The company is also looking to deleveraging the balance sheet
and therefore we believe the growth in PBT would be higher than 33%.
Operating margin to improve going forward: We have seen wild
fluctuation in company’s key raw-material prices viz, cotton and raw silk
which had impacted the operating margin in last few years. With the stable
outlook for cotton and silk prices in near future the margins for the
company is likely to improve.
Strong Distribution network in US to drive growth with improvement in
US economy: HSL derives 80% of revenue from North America market with
strong distribution network. Its performance got impacted with slowdown
in US economy. The recent initiative by US fed for revival of housing market
and improving retail sales will drive the revenue growth for the company.
Closure of derivative contract on August 2012 will lead to stable
financials: HSL was carrying baggage of exotic currency derivative contracts
entered in the year 2007 and had paid big price of Rs. 70 crores in last five
years. All the contracts got closed with last leg closing in August 2012. With
this company will have more stable financials going forward.
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