Siyaram Silk Mills – Creating Brands, Remains Ignored :: Emkay

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Siyaram Silk Mills – Not Rated – Market Cap Rs4.1 bn – Creating Brands, Remains Ignored

We met the management of Siyaram Silk Mills in Mumbai. We met Director Mr. Ashok Jalan and CFO Mr. Suresh Shetty. The key highlight of the discussion is ‘SSML is a combination of branded textile play with eye on capital efficiency, which remains ignored’. The key takeaways from our discussion with the management are as under.

Takeaways On Business

n    SSML operates in fragmented textiles business, but remains a formidable and profitable player in branded textiles business.

n    SSML is present from Fabric to Garments – has strong brands like Siyaram, Mystair, J Hampstead and Oxemberg.

n    SSML has suiting range in the Poly Viscose, whereas shirtings range in Cotton and Cotton Viscose. Though, company is planning to diversify into Wool, Terry Wool and Cotton to offer full-product portfolio.

n    Pan India players remain few in the segment – like Raymond, Reid & Taylor, Arvind, and Century Textiles. Owing to large and consistent expenditure on brand creation, entry of new Pan-India player is less likely.

n    SSML is largely domestic driven business with 95% of revenues from domestic market. Further, large part of revenues comes from Tier 2 and Tier 3 towns.

n    Has strong distribution network with 1500 dealers and presence in 65000 retail outlets.

n    ‘Brand’ remains core of operations and strategy – created and nurtured successful brands by investing in A&P since last 10 years. Annual expenditure budget is Rs200-250 Mn until FY11; already expended Rs2.0 bn to Rs2.5 bn in A&P spends.

n    Achieved critical scale in business, clocked revenues of Rs8.6 bn and Ebidta of Rs1.2 bn in FY11. Also, scale of business has driven expansion of Ebidta margins from 8.1% in FY08 to 12.7% in FY11. Fixed costs in operations like A&P spends combined with improving scale have resulted in operating leverage.

n    Unlike other textiles and garments brands, which have own brand outlets- SSML abstains from investing in own brand outlets instead prefers franchisee route or multi brand retail shops. No investment in retail outlets thereby remaining capital efficient.

n    Keen focus on capital efficiency- leverage remains under check at 1.3X with debt of Rs2.8 bn in FY11. Deploys a judicious mix of own manufacturing (60%) and outsourcing (40%) to remain asset light. Manages tight working capital with net working capital cycle of 60-65 days.

n    Seen significant improvement in return ratios – ROCE improved from 8% in FY09 to 20% in FY11.

n    Has paid dividend for last ten years. Has issued 70% dividend in FY11 with dividend payout of 11%.

Outlook and Valuation

n    Sole growth driver remains aspiration and affordability – an aspiration to own branded textiles in Tier 2 and Tier 3 towns and narrowing gap between regional non-branded products and branded textiles thereby leading to affordability. These are strong growth drivers to generate compounded growth in business in ensuing years. Consequently, SSML is eyeing 20% revenue growth in ensuing years- led by combination of affordability and demand for branded textiles and increasing distribution network.

n    Though, Ebidta margins at 12.7% remain highest so far, same have been clocked in inflationary scenario for Viscose and Polyester prices. Hence, there is high probability for sustenance of Ebidta margins.

n    Consensus estimates for Siyaram Silk Mills on consolidated basis for FY12E are (1) Revenue of Rs9.9 bn (+15%) and APAT of Rs650 mn (+15%). This translates into earnings of Rs72/Share and CMP of Rs440 discounting FY12E earnings at 6X. We believe that PER valuations do not truly discount the strong brand, growth opportunity and capital efficiency.