Weaving success

INVESTMENT COUNTER/ PENNY WISE

The Alok Industries scrip has blazed a hot trail in the stock markets of late. - from Rs 9.7 levels in March 2003 to Rs 61 on January 5, 2004.

The scrip has also whipped up buying interest, gaining 157 per cent from September 2003. The galloping stock markets seem to be an easy reason for the rise, but analysts beg to differ.

They say the real reason for the rise may be the gains that would accrue to the stock after the textile and clothing industry breaks free from the quota regime on January 1, 2005.

Presently almost 50 per cent of this trade is restricted by quota. Talks about a huge order from Wal-Mart have also fueled the hike in the stock price.

The world textile and clothing market is estimated at $365 billion (Rs 16,42,500 crore) and is growing at 4-5 per cent per annum. The market is presently governed by the Agreement on Textiles and Clothing (ATC).

Under this agreement, textile and clothing products are segmented into tops and yarns, fabrics, made-ups and clothing.

Countries from the developed market impose quantitative restrictions on imports of these products. These restrictions are to be phased out gradually in a four-stage process spanning 10 years.

Established in 1985, Alok Industries has state-of-the-art manufacturing facilities for weaving, knitting, processing, garmenting and made-ups.

That, along with its status of being a fully integrated producer, will stand the company in good stead when international demand rises after the quota system is abolished, say analysts.

Currently, about 95 per cent of the company's sales come from the domestic market. More than half of this came from garment exporters and the remaining from job works, texturised yarns and garment sales.

Exports constitute only 5 per cent of total sales. Alok's direct exports include those to producers in USA, Europe, Africa, Sri Lanka, Bangladesh and Mauritius.

"Exports currently account for Rs 35 crore of total sales," says Abhijeet Kundu, analyst at Pioneer Intermediaries.

"The company is expected to increase this to Rs 100 crore in 2004 and Rs 300 crore next year. In fact, the percentage of exports to total sales will go up to 33 per cent by 2006," adds Kundu.

Dilip Jiwrajka, managing director, Alok Industries, expects 80 per cent of the demand to come from the US and the rest to be spread among the other markets.

The company claims to have been preparing for the abolition of the quota regime since 1996. Says Jiwrajka, "We have been taking steps to augment our capacity since 1996 and have made capex of Rs 450 crore between 2001 and 2004".

The capex has been used for upgrading and modernising the company's plants. The plants are equipped with state-of-the-art effluent treatment facilities and comply with various certification standards. In fact, analysts say these certifications would enable the company to make easy inroads into the developed market.

"The only bottleneck in the post-2005 scenario is that volumes are not going to be enough to meet the demand," adds Jiwrajka. "We are also planning to double our capacity in the next two years," he adds.

Analysts say Alok enjoys a unique advantage in making three-metre-width fabrics amongst domestic players, which makes its position in the made-ups segment (comprising mainly of home textiles) strong.

In fact, margins in home textiles are huge as there is no further value addition to be made in them. Presently, 50 per cent of the home textiles used in the US is sourced from India, China and Pakistan, and going forward, analysts see a lot of potential in the segment for India in general and Alok in particular.

The fragmented nature of the industry and the demand for quality fabrics, prints and designs, consistency and timely delivery have made Alok a preferred customer for various exporters.

Analysts are also kicked about the company's present relations with major international labels. Currently it supplies to major garment manufacturers and exporters who cater to high-profile international labels like Marks & Spencer, The Gap, Tommy Hilfiger, JC Penney, Macy's, Wal-Mart, Banana Republic and DKNY.

However, competitors abound for the burgeoning international demand, especially from China, Pakistan and Bangladesh. However, Rajee Lodha, analyst at Pranav Securities, says India has an advantage over China in the form of cheap labour and lesser capital intensive nature of business, which would result in the cost factor in India being lesser than China's.

"Others like Pakistan and Bangladesh do not have the same capacities as India and would be stuck with lower-end orders," adds Lodha.

Technological upgradation of facilities and ramping up of capacities came at a cost which puts the company's debt-equity ratio on the higher side.

However, analysts say the company's high margins and consistent performance in growing its sales and bottomline augur well.

"The company has been consistently growing its topline and bottomline by about 30 per cent CAGR," says Kundu.

"Besides, it has never defaulted on a single repayment of its debt and has been paying dividend consistently for the last 12 years," he adds.

In June, the International Finance Corporation, Washington, sanctioned financial assistance of $17.5 million (Rs 78.8 crore) to the company.

"The loan will be primarily utilised to retire high cost debt and repay loans," says Jiwrajka.

However, some analysts remain cautious on the company's prospects. They say Alok may face some hiccups in the form of rising prices of key inputs like cotton going forward and, hence, it needs to fine-tune logistics.

Analysts say Alok lacks the finesse of being a major export player like Arvind Mills, but the lack of experience may not be a hindrance for long.

Also, given the fact that most export orders are expected to be in the timeframe of one-two years, getting repeat orders will be the key. Anti-dumping measures by countries may also be a blot on the horizon.

Analysts, however, say Alok's modern manufacturing facilities, high integration levels in a fragmented industry and sizeable capacity would see the company reap rewards in the post-quota scenario.

"Historically, fabrics have contributed to over 80 per cent of the sales. However, the proportion of the value-added segment is expected to go up, which would reflect favourably on margins," adds Kundu.

At the current market price of Rs 61, the stock is quoting at 7.5 times FY04 earnings. Though the stock is not trading very cheap compared to the average P/E of 6-8 prevalent in the industry, the outsourcing potential and future revenues from exports present a great growth potential for the company. "We could see the stock touch the Rs 100 levels in a year," says Lodha.