>Bombay Rayon Fashions (PRABHUDAS LILLADHER)

■ Increasing utilization levels on massive capacity expansion: Bombay Rayon Fashions (BRFL) has enhanced the overall fabric and garment (FY09) processing capacity by 1.9x and 1.2x, respectively (~5x of its FY07 capacity in both segments) during FY10. We believe that the increasing asset turnover ratio from 0.9x in FY10 to 1.6x in FY12 will drive the growth, going forward. BRFL has currently completed its expansion plan. Hence, we believe that there is no risk of raising equity or debt further in the future. We have visited BRFL‟s Tarapur fabric processing plant (constitute ~80% of company‟s total fabric capacity) recently and came back convinced that it has the potential to propel BRFL into new growth trajectory.

■ Expect robust PAT CAGR of ~50% over FY09-12E: BRFL has a strong client list, including DKNY, Guess, Gap, Wal-mart. This, coupled with strong business positioning, convince us to factor in robust sales and PAT growth CAGR of ~36% and ~50%, respectively during FY09-12E. We believe that BRFL‟s operating cash flow would turn positive from FY10 and it would help to reduce the debt/equity ratio from 1.5x in FY09 to 0.6x in FY12E.

■ India’s largest integrated Garment & Fabric player: BRFL has embarked on an aggressive growth path from post quota opportunities and in-house design capabilities via its integrated manufacturing facilities. It would add value and sustain competitiveness, with considerable advantage over peers such as fast-track delivery model of 30-60 days vis-a-vis industry average of 60-90 days. It enhances BRFL‟s ability to quote premium for its products. We believe that rupee appreciation has had a limited impact on BRFL on account of better pricing power, premium to its peers and presence in the fashion garment business.

■ Attractive valuation, initiate with ‘BUY’: We believe that BRFL is well positioned as against its domestic peers, given its in-house designing capabilities, better margin and strong earnings growth along with visibility. BRFL is trading either at par or at discount to peers. Hence, we strongly believe that it should trade at a premium than peers, considering that it‟s well-positioned. Further, stock is trading at near-to-lower end of its historical forward P/E, EV/E and P/B band. We recommend ‘BUY’ the stock on the basis of 11x of FY11E earnings.

To read the full report: BRFL