Stock Review: Sangam India

 

Company Likely To Maintain Momentum Due To Price Control, Demand Traction

 

BHILWARA-BASED mid-sized textile company, Sangam India, reported robust numbers during the December 2010 quarter. The company is expected to report a double-digit growth for the March 2011 quarter and for FY11 without taking a hit on margins on account of improved capacity utilisation and sustained demand.

   The textile sector has witnessed a demand revival in the last nine months. The growth phase follows a lull of almost three years when companies were unable to reap the benefits of capacity expansion due to a slack in demand. Sangam India is among the companies to benefit from the cyclical reversal.

   In the last five quarters, the company's year-on-year revenue growth has improved from 10% to 35%. Profitability has also expanded from 14% to 19%, reflecting a better per unit realisation. In the December 2010 quarter, the company reported a net profit of 18.45 crore — a four-fold growth from the year-ago levels. Its revenue rose by 35% to 289 crore. Around 68% of the revenue came from polyester viscose dyed yarn and denim fabric business, while the remaining was from polyester fabric (including technical fabric for Indian military uniform). The pace of growth is likely to be maintained in the March 2011 quarter since there is buoyancy in demand and capacity utilisation is also better. A stable trend in raw material prices has worked in favour of Sangam India. According to data from the Office of the Textile Commissioner, in the past year, viscose fibre prices have increase by 5% while prices of viscose yarn, which is Sangam's major output, have shot up by 38%. This is unlike cotton yarn makers who could raise average yarn prices by only 41% against the 54% jump in average cotton prices. Another major advantage for Sangam India is that over half of its polyester dyed yarn revenues comes from sales in the local Bhilwara market, which saves it transportation and other costs.

   For FY12, the company is planning to double its denim weaving capacity by investing 171 crore. It would be funded through internal accruals and debt. It expects sales growth of 25% at an operating margin of 19% for FY12.

   One concern is the rising cost of debt since the government's interest rate rebate policy under the Technology Upgradation Fund has expired. The company has a long-term debt of 430 crore.

   The company's stock has outperformed in the past year. At Thursday's close of 43.6, it was traded at a trailing four quarter P/E of four. The company is expected to maintain the momentum in the coming quarters due to better price control and demand traction.

SPINNING PROFITS

In the last five quarters, the company's year-onyear revenue growth has improved from 10% to 35%. Profitability has also expanded from 14% to 19%
A stable trend in raw material prices has worked in favour of Sangam India.