Alok Industries: Style & substance

Mileta buy gives Alok Inds foothold in the fashion-conscious European market

Alok Industries' acquisition of 60 per cent in Czech company Mileta International will help it come up the value chain and get a foothold in the highly competitive and fashion-conscious European market.

Mileta makes quality shirting fabrics, bed and table linen, and handkerchiefs but given the high cost of manufacturing, the operating margins are very low.

By 'offshoring' the manufacturing activity to India and then selling the finished fabric to designers and private label retailers in Europe, Alok can improve operating efficiencies.

All Mileta's brands""Erba, Cottonova, Lord Nelson, Osaka and licensee rights for Daks""will be owned by Alok and therefore, it should be able to maintain relationships that Mileta has built up over the years with designers and private label manufacturers. Relationships with the buyers is what Alok will need the most if it has to extract value from this acquisition.

To be able to do that it has restricted itself to 60 per cent stake, with an option to buy more at a later stage. It will retain the current management and give them an incentive to stay back, which is the right way to do it. Mileta has been losing customers because many of them have switched to Chinese manufacturers.

However, with the quality of Chinese fabric not quite up to the mark, many of them could switch back to Mileta if it can retail at a slightly lower price.

That would not hurt margins because the cost of manufacturing would have come down. To begin with Alok will export the grey fabric and the processing will be done overseas.

However, as buyers overseas become comfortable with the "Made in India" tag, Alok will start processing fabrics here.

The acquisition has been done on reasonable terms of just one times current year sales of 22 million euros for CY06 (Alok has paid 13.96 million euros for 60 per cent) given that Alok is getting all Mileta's brands. At the current price of Rs 64, the stock trades at 8 times estimated FY07 earnings and is attractively valued.

Mysore Cem: Concrete gains

The first thing German major Heidelberg Cement has done after infusing Rs 359.1 crore in Mysore Cements through a preferential allotment is to repay debt to banks and financial institutions, and make the company debt-free. At the end of FY06, the company had long-term debt of over Rs 250 crore.

Mysore Cements has been ailing with accumulated losses of nearly Rs 350 crore. Even in FY06, which has been a reasonably good year for other cement companies, the company increased its loss to Rs 36.3 crore as compared with a loss of Rs 24.1 crore in the previous year.

The company, which has a capacity of 2.07 million tonne a year faced sluggish demand in central India till Q4 FY06. At the operating level, it faced cost pressures owing to a rise in fuel and power charges, higher freight costs and loading restrictions.

Heidelberg will own 50.57 per cent in the company through preferential allotment (42.09 per cent) and the SK Birla group's sale of shares (8.48 per cent). Its open offer to the public would also increase Heidelberg's shareholding further.

Mysore Cements is operating at full capacity, and the reduction of about Rs 30 crore as interest on long-term funds should help the company return to profitability.

In Q1 FY07, the company made a profit before tax of Rs 4.2 crore after an interest charge of Rs12.64 crore. Net sales also improved by 27.5 per cent and operating profit margin went up by 950 basis points to 15.45 per cent, which is impressive. The company is expected to increase capacity to about 3 million tonne a year.

Going forward, high cement demand, cash infusion and improved productivity should result in a much better performance.

At the current price, the stock trades at a 10 per cent discount to the open offer price of Rs 58, but with solid prospects for both the cement industry and the company, shareholders will benefit by staying with the company.