Stock Reivew: Shri Lakshmi Cotsyn

THE stock of Shri Lakshmi Cotsyn has fallen sharply in the past three months compared with the drop in the ET Textile index. This could be because of a muted revenue growth in the past two quarters and falling profitability due to rising cotton prices. The situation is not likely to change in at least the next two quarters but the focus on the terry towels segment, defence orders and expected higher export demand for technical textiles will be the key growth drivers for the company in the long term.

   Shri Lakshmi Cotsyn produces suiting and shirting, cotton interlinings, denim, linen cushioning, terry towels and technical textiles for defence purpose. It has expanded the suiting and shirting capacity four times to 24 million metres per annum since its inception in 1993. The company's ongoing1,000-crore capacity expansion across denim, bed linen, cotton interlinings, terry towels and technical textiles will be a major growth driver in the coming quarters. While the expanded terry towel capacity will be commissioned by this month end, the other additional capacities will be on stream by December.

   The company's entry into branded home textiles market could be another growth area. It has launched its Dyfi brand in Kolkata and Punjab. The brand will be launched in Delhi by the fiscal end. But intense competition in the segment may force the company to go for aggressive promotion, which may increase expenses.

   Shri Lakshmi Cotsyn's subsidiary Shri Lakshmi Defence Solutions is looking at defence's need for armoured mine-protected vehicles. But it will take a few more quarters for the division to significantly add to the company's overall performance.

   The company expects . 2,500 crore in revenue by the time it ends its year in June 2011. This is an expected annual increase of 61%. Its margins will, however, be depressed due to the burgeoning cost of cotton, its major raw material.

   The company plans to raise 200 crore through the qualified institutional route in the next 10 months. This will dilute its earnings per share. Considering the outlook and at an expected average net margin of 5%, the company's stock trades at a forward P/E of four after equity dilution. This is at a discount to the P/Es of 6-8 for some other textile companies.