Stock Review: Alok Industries

 

Expansion will result in better operating and cash profits for the company

 

 

Alok Industries, a Mumbai-headquartered textiles company, has lost over 12% of its value on bourses in the past three weeks despite a robust third-quarter performance. The drop in its share price can be attributed to weakness in the broader market.

The company is in the final stage of its six-year-long capacity expansion phase, which should keep the growth momentum intact in the coming quarters.
In six years, the company has invested around . 7,000 crore in all its business segments ranging from home textiles to garments. This has resulted in a debt burden of . 9,000 crore. Alok spends over 12% of its revenue every quarter to serve this debt, way higher than the 3-5% for some other textile companies. The high interest outgo has shrunk its net margin to 4-6% even though it operates at margins as high as 29%.

Now that its capex cycle is near completion, the interest burden is expected to stabilise while sales are likely to improve. This should result in better net profitability in the coming quarters. The company's net sales have grown at a compounded annual growth rate of 32% in the past three years. From hereon, the growth in turnover, as a result of the expansion, will ensure better operating and cash profits for the company.

To retire its real estate debt of 1,000 crore, the company is planning to sell or long lease two of its commercial properties in Mumbai. This is expected to yield 1,200 crore.

Alok has also chalked out plans to reduce the effect of volatility in the prices of cotton, its major raw material. By FY13, it plans to increase the proportion of revenue from the polyester-based division to 50% from 25%. According to the company's management, polyester-based products yield higher return on capital employed (RoCE) of over 35% than cotton-based products, which have an RoCE of 15%. This is because the working capital cycle for polyester-based products is 70 days, nearly half of that for cotton-based products. This is likely to improve its overall RoCE from 11% to 20% in three years.

The company has a history of equity dilution, which may make investors wary. The management has said it will not raise funds through equity dilution in future. The promoters hold 28.3% in the company. The stock is trading at a trailing P/E of five.