The sun is rising for Suryalakshmi

PENNY WISE: Suryalakshmi Cotton Mills

Suryalakshmi Cotton Mills' shift in focus to denim and fashion garments may just be the beginning of its success story.

Hyderabad-based Suryalakshmi Cotton Mills, which is into spinning and denim manufacturing, is increasingly focusing on its denim business apart from venturing into garment manufacturing.

Both areas promise better margins. Suryalakshmi clocked gross sales of Rs 252 crore crore last fiscal and now has lined up a Rs 200 crore capex plan to tap the growing textiles market, both in India and abroad.

Driven by the strong momentum in textiles stocks, the stock price of Suryalakshmi touched a 52-week high of Rs 435 last week, before coming off its peak to close the week at Rs 395.

Based on its trailing 12-month price-earnings ratio of 6.75x, the stock looks attractive.

According to analysts, textiles exports to US have picked up substantially post-quota regime and India's competitive strengths are well known.

Even as exporters have been facing margin pressures for some time, capacity addition is happening on expectations of sustained demand from US and EU.

Some analysts predict India to capture over 15 per cent of US clothing market by 2008.

Suryalakshmi recently increased its denim capacity to 30 million metres per annum from 20 million metres last year.

Expansion up to 25 million metres was mostly through internal accruals, while beyond that it was partly through borrowing.

Overall margins in denim are expected to be better due to a fall in raw material cost and value addition. Indian companies are also capable of supplying small and flexible batches of apparel to foreign markets, along with a larger variety of casual/leisure wear at significantly lower costs.

Suryalakshmi executive director, Paritosh Agarwal, says, "Currently denim prices are stable and international demand for Indian denim is expected to improve with the closure of units in the West. In fancy denims, we have achieved over 90 per cent efficiency."

However, he adds that at present, realisations are slightly better in domestic market, which is growing at 20-25 per cent per annum. The prices of fancy denim in domestic market are ruling at Rs 90-100 per metre.

The Rs 200 crore capex plan is for the expansion of its facilities in the next one year. It hopes to reap the benefits, partly during the next two years.

Of this amount, Rs 180 crore would go into Suryalakshmi, with Rs 130 crore coming in as term loans and Rs 50 crore by way of internal accruals and/or equity.

The remaining Rs 20 crore will be spent on its upcoming garments subsidiary, Suryakiran International, with Rs 13.5 crore by way of term loans and Rs 6.5 crore through equity/internal accruals.

Obviously, the company is taking on the additional interest burden with expectations of greater operating profits.

The production at Suryakiran will commence from October 2005. The company plans to expand production at the unit further post-April 2006, after judging the initial response.

Demand for garments has been growing in foreign markets since January 2005 "� when the quota regime was abolished "� and is expected to grow further.

Even in this labour intensive business, the company expects to improve margins through value addition. By FY07-08, it hopes to achieve a turnover of Rs 1,000 crore.

Suryalakshmi exports to vendors of foreign retail majors like JC Penney and Walmart. "We plan to approach these players directly for our garments business."

At present 30 per cent of Suryalakshmi's denim is exported, and this accounts for less than 10 per cent of the total denim exported from India.

To further increase its exports, the company has acquired a trading firm based in northern India, through Suryakiran.

Global trade in textiles and clothing is envisaged to reach about $356 billion by 2010. The government aims to increase the value of textile and apparel exports to $50 billion by 2010.

Suryalakshmi's spinning business has a capacity of 16,032 spindles after the recent demerger of its spinning unit in Mahbubnagar into a separate company, Rajvir Industries.

The demerger seems to be in line with its growing focus on denim. After the forward integration through an entry into the garments business, it is planning a backward integration by increasing the captive spinning capacity in denim division in Ramtek from 25 tonnes to 50 tonnes.

Suryalakshmi posted net sales of Rs 54.1 crore for the June 2005 quarter compared to 62.5 crore for the previous June quarter, while the net profit increased to Rs 8.7 crore from Rs 3.8 crore.

The 12 months trailing P/E of Suryalakshmi as in March 2005 quarter is 15.8 compared with Arvind Mills (19.73), Raymonds (29.55), Alok Industries (9.32), Abhishek Industries (14.09) and Bombay Dyeing (51.87).

Observers expect the Indian textile industry to benefit from IT knowhow, especially in supply chain and by locating operations in places of competitive advantage.

Cotton production is expected to increase this year as compared to Rs 220 million bales last year. Thus, cotton prices would remain under control.

India accounts for 15 per cent of world's total cotton crop production. The textile industry "� delicensed in 1991 "� is self-reliant in production of raw materials as well as delivery of final products with considerable value addition at each stage.

India has a large pool of skilled low-cost textile workers, experienced in technology skills. The government aims to increase cotton productivity by at least 50 per cent and upgrade quality to international standards.

While the DEPB (duty entitlement pass book) scheme is being phased out, textile companies are banking on substitutes like advance license and duty drawback for import of raw materials like chemicals.

Players expect the exemption on excise duty on yarn and fabric, introduced in last budget to continue.

The textile industry, which provides direct employment to over three crore people, occupies an important place in the economy due to its contribution to industrial output, employment generation and forex earnings.

According to numbers released by the government, its contribution to GDP is about 4 per cent.