>Alok Industries (FAIRWEALTH)

Alok Industries is a leading vertically integrated textlie palyer of the country with Sales of more than 3000 crore and strong bottom line. We initiate a buy call on the company on basis of its attractive valuation, huge growth in topline over next three years and increased bottom line from higher foreign currency earnings, increased sale of Value added products and Vertical/ backward Integration. We estimate Alok Industries Net Profit to grow at 30% compounded over next 3 yers.Profit margins for FY09 are likey to taper to 6.1% for FY09 and move back to 9-10% by FY11E.

Company is currently trading at 4.5x is FY08 Earnings; At estiated profits of 290 crores and 412 crores for FY10E and FY11E stock is currently valued at 2.9 and 2.1 times its EPS of 4.8 and 6.8 respectively.

Alok Industries has its Cost of Capital lowest in industry at around 10% as company after tax cost of Debt is around 6%.Out of total Debt of 6500 crores 4000 crores has been raised as part of TUF scheme.

Earnings Estimate:
We expect company to post decent set of numbers for Q4 on account of higher Foreign Exchange Earnings. Alok Industries' March quarter sales are expected to go up 20% to Rs 870 crore on yoy basis. The company's net profit is seen flat at Rs. 53 crore on yoy basis.

Company Description
Alok Industries is the largest vertically integrated textile companies in India. Company has commenced massive expnasion plans since 2006 which is expected to be completed by Q1 FY10. As part of the expansion policy Company aims to achieve the following:

1. Integrated Operations and Economies of Scale
2. Become a ‘Nominated Supplier’ to Global Customers
3. Expansion of retail of products manufactured by the company

Divisions
1. Apparel Fabrics
2. Home Textiles
Store 21 in UK with more than 200 stores and H&A in India with more than 53 stores and target of over 100 by end of this year.
3. Cotton Yarn

Outlook and Valuation
Company has total debt of about 6500 crores out of which 4500 crore long term debt has been raised as part of TUF’s at subsidised rates rest 2000 crores is raised as working capital loans.

In view of company’s high net D/E ratio of 3:1 Company has decided to issue rights issue at
83:40 raising around 450 crores. Post right issue company’s total Net worth would reach
around 2300 crores with cash balance of around 1800 crores.

Company’s Long Term Debt: Equity ratio post right issue will be around 1.8 to 2 which
would be much more stable. Another thing in favour of the company is low cost of debt. Long term Debt has been raised as part of the textile promotion scheme, TUF which will provides 5% subsidy on interest cost of debt.

Increased Capacity to sales. Company has almost completed its Phase-IV expansion. Most
of the expansion is likely to be completed with in next 3 months. 90% of the overall capacities is expected to be utilized by 2011 from current levels of around 75%

We expect top line growth of compounded 30-35% over next 3 years, with bulk growth
coming from exports and retail sales. By 2010 exports would contribute about 50 percent of
company’s Net Sales up from current 40%.

Bottomline will get boosted through backward integration steps; company expects to meet
50% of its yarn demand in house and increased margin from dollar depreciation.

We value company at 4.5 x its 2009 expected EPS of 3.1. For FY10E and FY11E we expect company to post PAT of 320 crores and 410 crores respectively giving it a valuation
of 2.6x and 2x its FY10E and FY 11E EPS of 5.4 amd 6.9 respectively.

To see full report: ALOK INDUSTRIES