Alok Industries: Weaving ambitious targets

Though the dilution through the proposed rights issue is a worry, savings in interest cost and likely improvement in profitability are a likely positive.

Alok Industries announced Rs 551-crore Rights Issue on September 25. While this is not good news for shareholders as there could be around 30 per cent dilution (assuming the company raises at current market price), it will indirectly benefit the company as there will be savings in interest cost had the company opted to raise more debt.

Accordingly, the stock has outperformed the Sensex in last one week with a gain of 6.6 per cent (including Wednesday’s 3.8 per cent), as compared to nearly one per cent upside in case of the benchmark index. The stock, which touched its nine-year low of Rs 11 on August 28, has moved up 21.5 per cent till now.

Its valuation at 2.3 times FY14 estimated earnings is above the average target multiple of 2 times estimated by analysts. Says Bharat Chodda, analyst, ICICI Direct in his September 26th report, “Shareholders have not benefitted either in the form of dividend or share appreciation as the company has been continuously expanding and perpetually diluting or raising debt.”

In order to improve its bottomline and cash flows, Alok plans to cut debt, boost asset turnover and improve the return on capital employed (ROCE) for the next three years. Till then, the stock will continue to be governed by uncertainty and volatility even as its core business (textile manufacturing) is doing well.

Focus on profitability

The company’s consolidated borrowings-to-equity ratio stood at close to 5 times and interest cost formed 52 per cent of operating profit in FY12, which led to net loss of Rs 28 (on an adjusted basis) compared to net profit of Rs 271.54 crore in FY11.

Raising of Rs 551 crore through debt would have worsened its balance sheet situation and profitability further. Moreover, there is little possibility of raising any further debt, as the company plans to raise money (Rs 2,500 crore in next two years) by exiting non-core businesses namely real estate and reduce debt.

The target is to bring down the ratio to 1.5 times by around 2016, which is aggressive but will be extremely good. However, the company has not announced any asset sale after June 2012 quarter. Analysts expect delay in achieving this goal and this will be a key overhang.

Retail business

The company is closely monitoring the performance of its retail business operated under ‘Homes and Apparels’ brand. It recently announced closing down of 45 non-profitable stores by September end out of its total 137 stores though 154 shop-in-shop formats through franchises is doing well.

It has expressed its intention to gradually unwind this business too if it is not satisfied with the progress. This strategy applies to its loss-making UK retail chain of stores under ‘Store 21’.

By increasing share of polyester business in future (currently 35 per cent) and value added products in case of cotton, the company expects to improve asset turnover ratio, which will lead to better operational performance, return on capital employed (ROCE) and hence cash flows. Says an analyst, “Polyester is a volume game; hence margin is comparatively lower than cotton but ROCE is good.” One can only be hopeful that company achieves success in its objectives.