icicidirect s kumarnationwide management meet

March 23, 2010

ICICIdirect.com | Equity Research

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Weaving a success story… S Kumars Nationwide Ltd (SKNL) is one of the fastest growing textile companies in the country focusing on branded textiles. Growing through organic and non-organic routes, the company is tapping the domestic as well as international markets. Its recent two acquisitions, Hartmarx Corporation (US) and Leggiuno SPA (Italy), provide an international client base and synergies with Indian manufacturing capacities, going forward. Having exited the CDR, the company is well poised to weave its success story, going forward.

• Well established brands in portfolio With a portfolio of 47 textile brands, the company is focusing on catering to the branded segment of the textile sector. Some of the strong brands of the company include S Kumars, Reid and Taylor, Belmonte, Carmichael House, Stephen Brothers, Hicky Freeman, Hart Schaffner Marx and Bobby Jones among others. The branded products enable better pricing to the company rendering high operating margin.

• Synergies from acquisitions to improve margin The brands of HMX (erstwhile Hartmax Corporation) and Leggiuno having access to high-end shirting fabric clientele would create synergies with SKNL through shifting of the manufacturing base to low-cost Indian facilities. This would enable the company to improve the margin as the price point of both the companies’ clientele is at the high end.

• Capex plans to further strengthen integration SKNL has chalked a capex plan of Rs 615 crore to expand its capacities in premium blended fabric, suiting, stitching and spinning (backward integration) segments. This would strengthen the level of integration rendering better growth visibility and higher operating margin.

Valuations At the CMP of Rs 61.5, the stock is trading at 7.8x its FY09 earnings of Rs. 7.9 per share. With the presence of 47 brands in its portfolio, SKNL would be able to maintain its operating margin. Sales growth of 36.5% CAGR with 21% CAGR profit growth over FY06-FY09 proves the execution capabilities of SKNL. Historically, SKNL has traded at an average one year forward P/E of 8x and above. It leaves significant room for upside as it is currently trading at 5.9x its consensus FY11E earnings estimate of Rs 10.4 per share.

Exhibit 1: Key Financials Y/E March 31 FY05 FY06 FY07 FY08 FY09Net Sales 344.5 889.7 1229.5 1748.6 2260.4Net Profit after MI -202.3 99.8 107.5 205.6 176.6Shares in issue (crore) 15.5 15.5 19.3 21.0 22.3EPS (Rs) -13.1 6.5 5.6 9.8 7.9P/E (x) NA 9.5 11.0 6.3 7.8Price/Book (x) 7.9 3.0 2.0 1.3 0.8EV/EBIDTA 75.9 14.8 10.3 7.0 6.7RoNW (%) NA 31.1 17.8 21.1 10.8RoCE (%) 0.9 7.3 10.9 14.8 12.0Adj. ROCE (%) 0 8.7 14.3 20.5 19.5

Source: Company, ICICIdirect.com Research Note: Adj. ROCE excludes Capital WIP in Capital Employed calculation

S Kumars Nationwide (SKUMAR) Rs 61.5

Rating Matrix Rating : Unrated

Target : -

Target Period : -

Potential Upside : -

YoY Growth (%) FY06 FY07 FY08 FY09

Net Sales 29.1 38.2 42.2 29.3

EBITDA 386.5 70.1 67.0 19.7

Net Profit LP 7.7 91.3 -14.1

Stock Data Bloomberg Code SKNL INReuters Code SKMK.BOFace Value (Rs) 10Promoter's Holding 49.8Market Cap (Rs Cr) 137452 week H/L 66.7/13Sensex 17410Average Volumes 948295

Comparative return matrix (%) 1M 3M 6M 12M

SKNL 30.9 58.1 21.4 312.8Raymond 7.6 26.6 7.1 225.2Donear Inds -15.9 -6.4 -9.8 68.7

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Analyst’s name

Bharat Chhoda [email protected]

Prerna Jhunjhunwala [email protected]

Jehangir Master [email protected]

S Kumars Nationwide (SKUMAR)


Company Background

S Kumars Nationwide (SKNL), the flagship company of the SKNL group, is a vertically integrated company from yarn to garments. The company also operates in the home textile segment. SKNL is the market leader in uniforms with 30% market share. The company is in the business of selling branded products through its vast distribution network of 400 wholesale dealers, 30,000 retail points of sale and 726 exclusive brand outlets (EBOs). The company operates 47 well established textile brands including brands like Reid and Taylor, Belmonte, S Kumars, Carmichael House, Stephen Brothers, Hicky Freeman, Hart Schaffner Marx, Bobby Jones among others.

The company operates through six major strategic business units (SBUs), namely, consumer textiles, total home expressions, total wardrobe solutions, luxury textiles, high value fine cotton (HVFC) and international businesses. Consumer textile contributes approximately 50% to sales and has been the major revenue driver for the company. Total wardrobe solutions and total home expressions have been increasingly gaining pace over the past four years. Luxury textiles enjoy the highest margin among all SBUs within the company.

SKNL acquired Leggiuno in Q3FY09 and Hartmarx Corporation (now renamed as HMX) in Q2FY10. Leggiuno, an Italian company, is among the top three Italian high-end shirting fabric manufacturers. It provides access to the readily available clientele for SKNL’s HVFC capacity of 12.75 million metres, which is expected to be fully commissioned in March 2010. HMX, a US company, is the largest manufacturer and distributor of men’s suits and formal wear aimed at the mid and upper end of the US apparel market. HMX operates 34 brands (23 owned and 11 licensed) including brands such as Hicky Freeman and Hart Schaffner Marx.

Share holding pattern (Q3FY10)

Shareholder Holding (%)Promoters 49.8Institutional Investors 23.4Other Investors 16.9Public 9.9

Promoter & Institutional holding trend (%)

46.9 49.8 49.849.8

23.425.926.525.8

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Business Model

▪ S Kumars ▪ Reid and Taylor ▪ Benetton ▪ Stephen Brothers ▪ HMX* ▪ 100% Natural Fiber (Work Wear) (Luxury Textiles) (Super Premium) (Super Premium) ▪ Leggiuno Shirtings ▪ Benlmonte (Premium) ▪ Carmichael House ▪ Reid and Taylor ▪ SKNL UK (Daily Wear) (Natural) (Premium) (Premium) ▪ Uniformity (Fiber Suitings) ▪ Balmoral (Uniform fabrics) (Luxury)

▪ Kruger (Casual)

Consumer Textiles Luxury Textiles Ready to wear International Business HVFC

FY09% of total sales: 48%EBITDA margin: 16.4%

FY09% of total sales: 23.4%EBITDA margin: 37.3%



FY09% of total sales: 2.6%

FY09Partly commisioned

Home Textiles

SKNLFY09 Sales: Rs 2261 cr

9mFY10 Sales: Rs2875.8cr

9mFY10% of total sales: 39.2%EBITDA margin: 20.3%



9mFY10% of total sales: 9.6%EBITDA margin: 21%



Source: Company, ICICIdirect.com Research Note: Assets of HMX has been acquired in August 2009 Organisation structure

74.4% subsidiary 100% subsidiary

SKNL

Consumer Textiles

Home TextilesReady to wear HVFCSKNL International

Operations

Luxury Textiles

Reid and Taylor

LeggiunoItaly

HMXUSA / Canada

Menswear Business of a Global Fashion brand

Premium and Super Premium

Ready to wear

Source: Company, ICICIdirect.com Research



Investment Rationale

Well diversified product profile SKNL’s well diversified product profile is one of the key strengths of the company. It is a vertically integrated company with operations from yarn to branding and retailing (through group company Brandhouse Retail). The major products include fabric, apparel and home textiles across all fibre segments namely cotton, wool, linen, polyester and viscose. It only sells branded products across all price segments enabling the company to command better prices as compared to the unorganised segment. Exhibit 2: SKNL presence in various segments

UnbrandedSegment Economy Mid-price Premium Super Premium LuxuryFabric N Y Y Y Y NReady to wear N N Y Y Y NHome Textiles N N N Y Y Y

Branded


Established brands in portfolio SKNL is in the business of selling branded products primarily in domestic markets. With the acquisition of Hartmarx (brands and assets) and Leggiuno, it obtained access to premium international brands. HMX operates 34 (23 owned and 11 licensed) international brands while Leggiuno caters to premium shirting fabric requirements of brands like Prada, Hermes, Burberry and others. SKNL operates 47 brands (owned and licensed) including Reid & Taylor, Stephen Brothers, Belmonte, Carmichael House and S Kumars in India and Hart Schaffner Marx, Hickey Freeman and Bobby Jones in the US. The presence of such brands enables better pricing to the company rendering better operating margins. Exhibit 3: Brand Portfolio of SKNL Brand ProductsReid and Taylor Worsted Fabrics, Ready to WearS.Kumars, Belmonte Blended fabrics, Workwear, Ready to wear, School UniformCarmichael house Bed linen and bath linen, Table and kitchen linenStephen Brothers Ready-to-wear for men and womenUnited Colors of Benetton Bed linenHart Schaffner Marx, Hickey Freeman Men's tailored clothing, furnshing and sportswearExclusively misook KnitwearAustin Reed Career Apparel and sportswearJag jeans, Christopher Blue Denim and sportswearBobby Jones Sportswear and golfwearMonarchy Men's denim and sportswearaxcess Men's tailored clothingsold exclusively at Kohl's


Capex plans to strengthen vertical integration SKNL has state-of-the-art manufacturing facilities at four locations in India. Its recent acquisitions, Hartmarx and Leggiuno, provide manufacturing capacities in international markets for tailor-made products. The company has been catering to premium products for a long time. Consequently, the company has added capacities in the luxury textiles division of the company serving the premium brands of the company. The company has planned a capex worth Rs 615 crore for the next two years. This includes capacity additions in the cotton spinning segment (for backward integration to HVFC) and increasing the capacities of premium blended

A vertically integrated company across the value chain and diverse fibre segments

SKNL operates 47 brands across price segments rendering better product profile and margins

Capex of Rs 615 crore strengthens vertical integration and improves the revenue visibility of the company



suiting segment for the Belmonte brand. The capex also includes a suiting plant at Bangalore and stitching plant at Jhagadia. This would be financed through a mix of debt (under technology upgradation scheme at a concessional rate of interest) and internal accruals. Capex in backward integration and high-end product segments strengthens the vertical integration and improves the revenue visibility of the company. Exhibit 4: SKNL capacities with product profile Major Plants Location Products Manufactured Current

CapacityExpected Capacity Expansi

Reid & Taylor Worsted Suiting Unit

Mysore, Karnataka

Worsted suiting, Premium P/V blended suiting

8.4 mmpa 4.8 mmpa

S.Kumars Suiting Unit

Dewas, MP Uniforms, Work Wear Fabrics, Polyester and Polyester-Viscose Blended Suitings

15.2 mmpa Weaving - 9.8 mmpaSpinning – 12235 MT

Home Textile Chamunda Standard Mills

Dewas, MP Polyester Blended Yarn, Grey Fabrics (PV, PC, 100% Cotton), Medium Value Cotton

3.6 mmpa

Total Wardrobe Solutions

Bengaluru, Karnataka

Shirts, trousers, blazers, suits and other accessories

1.14 mn pcs pa 3 mn pcs pa

Home Textiles* Jhagadia, Gujarat Home Textiles - Weaving – 8.2 mmpaProcessing – 29.5 mmpa

HVFC* Jhagadia, Gujarat HVFC Weaving – 12.75 mmpaProcessing – 28 mmpa

Spinning - 3380MT

Leggiuno Milano, Italy HVFC 1.5 mmpa

Source: Company, ICICIdirect.com Research Note: MMPA stands for million metres per annum * - Under implementation

Strong marketing and distribution network SKNL operates through a strong distribution network of multi-brand outlets, large format stores and exclusive brand outlets. The company sells its products through 60 agents, 400 wholesalers and 30,000 plus pan-India retailers. The company’s products are also sold through exclusive brand outlets run by its group company, Brandhouse Retail Ltd. The company would be able to distribute its products in the US through the pan-US wholesale distribution network to all leading US departmental stores and men’s specialty stores accessed through HMX. Exhibit 5: FY09 sales break-up through distribution channels

Mutilbrand outlets66%

Large Format Stores6%

Institutional Sales15%

Exports3%

EBOs 10%




Leggiuno acquisition to provide ready clientele SKNL acquired Leggiuno SpA (Leggiuno), rated among the top three Italian shirting fabrics businesses, through its wholly owned subsidiary SKNL International BV. The company is one of the world’s leading high quality shirting fabric enterprises with a legacy of over 100 years. Leggiuno’s products are patronised by leading fashion houses and brands such as Prada, Hermes, Versace, Zegna, Etro, Kenzo, Burberry and Paul Smith, among others. The acquisition enables SKNL to create a ready market for its 12.75 million metres per annum HVFC facility. Thus, SKNL gets access to high-end brands catered by Leggiuno and a readily available European market for its HVFC facility. SKNL acquired Leggiuno for Rs 205 crore in October 2008 funded through a loan of Rs 165 crore while the balance was contributed by the company. Leggiuno sells about 6 million metres of fabric annually of which it produces 1.5 million metres of fabric with utilisation rate of 95%. It is a profit making entity at both operating and net level. For FY09, the company contributed Rs 59.8 crore to total consolidated sales with an EBITDA of Rs 7.6 crore (with effect from date of acquisition). However, margins were far lower as the company sources 75% of its sales from eastern European manufacturers. With the full commissioning of the HVFC plant in Q1FY11, SKNL will be able to substitute the high cost manufactures and yield higher margins. Thus, the SKNL management expects to deliver better margins, going forward, on account of synergies between SKNL and Leggiuno.

Hartmarx acquisition to bring 34 brands under SKNL SKNL acquired the assets of Hartmarx Corporation (Hartmarx), which had filed for Chapter 11 Bankruptcy Protection. Hartmarx’s assets consist of 34 brands (23 owned and 11 licensed) including Hickey Freeman and Hart Schaffner, iconic brands in the tailored clothing segment. Both brands, with over 100 years of legacy and history, can be further leveraged in the US and wholesale expansion. All 34 brands have the potential to be introduced to new markets internationally including India. Exhibit 6: Brand portfolio of Hartmarx Segment Men Women

LuxuryHickey Freeman, Hart Schaffner Marx, Bobby Jones, Monarchy Chrisopher Blues, Bobby Jones, b. chyII

Bridge/BetterTed Baker, Society Brand Ltd, Coppley, Austin Reed

jag jeans, One girl who…, misook, Worn, eye, Austin Reed, Ted Baker

Moderate/mainstreamClaiborne, Palm Beach, Sansabelt, Pusser'sof the West Indies

PopularGolden Bear, Concepts by Claiborne, Naturalife, axcess, Lyle and Scott


Hartmarx is the largest US manufacturer and marketer of men’s suits and formalwear and is based in Chicago and New York. The company operates at the mid to upper end of apparel markets. It offers a wide selection of men’s suits and sports coats, men’s sportswear, trousers, shirts, ties, golf wear and denim products under some of the most highly recognised brands in the industry. It sells to the leading departmental stores of the US including Dillards, Kohls, Bloomingdales, Macys and Barneys, among others.

The Leggiuno acquisition provides a ready clientele to SKNL’s HVFC capacities and improves the feasibility of the investment



The net sales of Hartmarx stood at US$493 million in CY08 (November year ending) with 48% of sales contributed by men’s tailored clothing. With this acquisition, the company plans to improve the gross margin of Hartmarx that is hovering in the range of 30-32%. According to the management, Hartmarx should be able to operate at a gross margin of approximately 45-50%. SKNL plans to improve the gross margin by backward integration of production through its Indian manufacturing units and also through outsourcing from the Far East and Central America. Exhibit 7: Hartmarx gross margin

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SKNL acquired the assets of Hartmarx at an enterprise value of US$120 million. The deal has been financed by an equity contribution of US$25 million by SKNL and a credit facility from Hartmarx’s existing lenders of US$95 million. The lenders have also provided a term loan of US$10 million to fund the acquisition of Hartmarx’s assets and provide for working capital. Further, the company has provisioned US$10 million for additional working capital requirements of Hartmarx. It acquired three out of a total of six factories of Hartmarx in North America. The Hartmarx Corporation acquisition provides high value synergy at the front end and backend of SKNL operations. It would enable the company to cater to high-end brands through its low-cost manufacturing capabilities in India, thus providing a ready clientele for its capacities.

Business model leverages on buoyant domestic market SKNL caters to the domestic market with very insignificant exposure to exports (i.e. 3% in FY09). According to KSA Technopak and Ministry of Textiles, the domestic market has been growing steadily over the past three years at a CAGR of 11% from US$30 billion in 2005 to US$40 billion in 2008. This is expected to reach US$50 billion by 2012 growing at a CAGR of 12.2% over 2008 to 2012. This growth is expected to be driven by the improved demographic profile of the country wherein there will be higher disposable income, higher per capita income, willingness to spend, exposure to western culture and higher proportion of young population.

Synergies between Hartmarx and SKNL will improve the profitability of the company and the size of Hartmarx to provide a significant jump in the revenues of SKNL

The domestic textile industry is expected to grow at 12.2% over the next four years driven by the favourable demographic profile of the country



Exhibit 8: Indian textile sector to grow at 12.2% CAGR

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Source: KSA Technopak – Ministry of Textiles, ICICIdirect.com Research

Focus on international clientele to mitigate dependence on domestic market Global trade in textiles and clothing grew at a CAGR of 9.3% from US$342 billion in 2001 to US$583 billion in 2007, according to KSA Technopak. This is expected to reach US$805 billion by 2015 growing at a CAGR of 4.7% over 2007-2015. The major markets for the industry are US and EU nations accounting for more than 60% of the world imports. Supply from developed economies like EU and US is gradually declining while that from low-cost Asian countries is increasing. With the aim of capturing this opportunity, SKNL made international acquisitions in 2009. It acquired Hartmarx and Leggiuno and created a ready market for its Indian facilities. Both acquisitions would provide the company with high-end and niche clientele in US and EU. This would also mitigate the risk of dependence on the domestic market for its products. Exhibit 9: Global trade in textiles

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Source: KSA Technopak - Ministry of Textiles, ICICIdirect.com Research



Exit from CDR to re-rate the stock The company entered into a corporate debt restructuring (CDR) programme to reduce its interest cost in FY02. However, being under CDR resulted in difficulties in operating the company due to approvals required from lenders for even small decisions. Hence, SKNL spun off its luxury clothing brand Reid & Taylor and created a separate subsidiary Reid & Taylor (India) (RTIL) in January 2008 as a step to exit from CDR. GIC Singapore acquired a 25.6% stake in the new entity, infusing Rs 900 crore via equity through its affiliate Indivest Pte Ltd. Post conversion, SKNL holds 74.4% of RTIL with Indivest Pte Ltd holding the balance. With these funds SKNL decided to exit CDR by paying its dues with the help of Rs 440 crore loan from RTIL. The exit from CDR enables better operational and financial flexibility of the company in manoeuvring the business. This also improves the prospects of the company resulting in better performance in the long run. We believe this will help regain investor confidence in the company, thereby re-rating the stock.

Value unlocking on the cards SKNL is planning to list Reid and Taylor (India) Ltd (RTIL), its 74.4% subsidiary, on the Indian bourses through an IPO of approximately US$100 million in the next six months. It had earlier sold 25.6% stake in RTIL for Rs 900 crore valuing the company at Rs 3540 crore. At the issue price of Rs 659.18 per share, the company was valued at a P/E of 21.4x and EV/EBITDA of 16.4x. Exhibit 10: Financial snapshot of Reid and Taylor Rs Crore FY08 FY09Net Sales 142.9 652.6EBITDA 45.0 218.5Margin (%) 31.5 33.5PAT 27.5 143.8Margin (%) 19.2 22.0EPS (Rs) 54.1 30.8Equity Capital 40.1 52.0Debt 333.3 222.1Cash 2.8 60.1


SKNL is also planning to convert Belmonte into a separate subsidiary and bring in a private equity investor. Belmonte is a mass consumer brand with EBITDA margin in the range of 16-18%. Considering the strong brand profile of both companies and the valuations commanded by Reid and Taylor in the past, the value unlocking would be beneficial for SKNL shareholders.

Exit from CDR will improve the operational and financial flexibility of the company manoeuvring the business



Financials

Strong sales growth of 36.5% CAGR The net sales of SKNL stood at Rs 2260.4 crore in FY09 as compared to Rs 889.7 crore in FY06, an impressive CAGR of 36.5%. This growth was driven by an improved performance from all SBUs of the company on the back of higher capacities. Consumer textiles grew at a CAGR of 22.6% over the period while luxury textiles grew at a CAGR of 31.1%. The total home expressions and total wardrobe solutions grew at a spectacular pace reaching Rs 339.2 crore and Rs 249.4 crore, respectively, in sales in FY09. The two segments grew at a CAGR of 95.7% and 127.6%, respectively. High value fine cotton (HVFC) is expected to be the next growth driver of the company, going forward. Exhibit 11: Impressive sales growth

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Luxury Textiles Overseas companies


Operating margin improves to 20.3% in FY09 Over the past four years, the operating margin of SKNL has improved to 20.3% in FY09 from 15.2% in FY06. This improvement was on account of rising contribution of the high margin luxury textiles segment in total sales over the period. The operating margin in the luxury segment ranges between 37% and 39%, while that of other segments ranges between 16% and 20%. The expansion in the luxury textile segment, introduction of HVFC segment and increased sales to international brands from Hartmarx and Leggiuno is expected to increase the profitability further.

Exhibit 12: SBU wise EBITDA margin

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Exhibit 13: Improving operating margin

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Sales growth of 36.5% CAGR primarily driven by higher capacities

Higher contribution from the high margin luxury segment led to an improvement in the margin



Net profit growth of 25% CAGR Over FY06-FY09, SKNL’s net profit before minority interest has grown at a CAGR of 25% to reach Rs 195.1 crore in FY09 from Rs 100 crore in FY06. The company had managed to maintain its net profit margin in the range of 10-12% between FY06 and FY08. However, the net profit margin post minority interest declined to 7.8% in FY09 from 11.8% in FY08 due to minority interest in FY09 on dilution of 23.03% stake in Reid and Taylor, higher interest cost and tax payments. Interest cost as a percentage of sales remained flat over FY06 to FY08 at 5% and spiked to 6.1% in FY09 due to higher interest rate as a result of exit from CDR and higher term and working capital loan required to maintain the pace of expansion. The effective tax rate over the last two years increased to 44% in FY09 from 8.4% in FY07. Though this was due to one-time taxes for earlier years, this resulted in a decline of the profit margin. The company is in an expansion phase and, as a result, would incur higher fixed costs like depreciation and interest. Tax payments are expected to normalise to corporate tax levels in the near term. Hence, we expect the profitability to return to earlier levels over the next two years. Exhibit 14: Profit before minority interest grow at 25% CAGR

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RoCE improves to 12% in FY09 The RoNW declined to 21.1% in FY07 from 31.1% in FY06 due to lower asset to equity ratio. However, it declined steeply to 10.8% in FY09 due to a 67.7% increase in networth of the company vis-à-vis a 14% decline in net profit after minority interest. The RoCE improved to 12% in FY09 from 7.3% in FY06 due to improved profitability. However, if the adjusted RoCE is taken into consideration, which excludes capital work in progress while calculating capital employed, then there is a tremendous improvement in the ratio to 19.5% in FY09 from 8.7% in FY06. This is because capital work in progress constitutes more than 50% of the total fixed assets, which is yet to contribute to the profitability of the company. With the exit from CDR, improving synergies from international acquisitions, commissioning of new capacities and better product profile, we expect the return ratios to improve in the long run.

The net profit margin declined due to higher interest payments and one-time tax payments



Exhibit 15: RoCE improves by 470 bps

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Source: Company, ICICIdirect.com Research Note: Adj. ROCE excludes Capital WIP in Capital Employed calculation

Improving debt servicing The increase in equity capital (including securities premium) and rising profit of the company over the past three years has led to a decline in the debt to equity levels of the company. Consequently, the debt to equity ratio declined to 1.1x in FY09 from 3.3x in FY06. The debt to EBITDA also stabilised to 4x in FY09 from 7.9x in FY06. As a result, the company is now in a better position to service its debt. Exhibit 16: Improving debt service capability

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Risks & concerns

Delay in synergy creation from acquisitions SKNL acquired Leggiuno in Q3FY09 and Hartmarx in Q2FY10. Leggiuno is profit making with lower margins while Hartmarx is loss making at the net level, though positive at the EBITDA level. The company plans to deliver better profitability over the next three years through synergies from the acquisition. However, if there are any delays in the synergy creation then it may affect the expected profitability in the near term. Delay in implementation of capacity expansion SKNL plans to expand its capacities at the front end and back end level to improve the profitability of the company. The expansion in the front end would improve the sales growth. Any delay in the implementation of expansion plans would impact the topline and bottomline growth of the company.



Valuations

At the CMP of Rs 61.5, the stock is trading at 7.8x its FY09 earnings of Rs. 7.9 per share. With the presence of 47 brands in its portfolio, the company would be able to maintain its operating margin. The capex plans provide revenue growth visibility and strengthen the level of integration across products. Sales growth of 36.5% CAGR with net profit growth of 21% CAGR over FY06-FY09 prove the execution capabilities of the company. With the accrual of synergies from international acquisitions, the profitability of the company is expected to return to original levels on a conservative basis. Historically, the company has traded at an average one year forward P/E of 8x and above. It leaves a significant room for upside as the stock is currently trading at 5.9x its consensus FY11E earnings estimate. Exhibit 17: One year forward P/E

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Source: Company, Bloomberg, ICICIdirect.com Research



Exhibit 18: Profit and Loss Statement Rs Crore FY05(6m) FY06 FY07 FY08 FY09Sales 344.5 889.7 1229.5 1748.6 2260.4Growth (%) 12.0 29.1 38.2 42.2 29.3Op. Expenditure 316.8 754.8 1000.1 1365.6 1801.8EBITDA 27.7 134.9 229.4 383.1 458.5Growth (%) 71.1 386.5 70.1 67.0 19.7Other Income 4.3 6.2 10.3 10.5 15.9Depreciation 20.9 40.9 43.9 42.6 44.2EBIT 11.2 100.2 195.8 351.0 430.2Interest 2.0 45.1 60.9 89.3 138.8PBT 9.1 55.1 134.9 261.6 291.3Growth (%) LP 502.4 144.7 94.0 11.4Tax 0.0 10.4 11.3 56.1 153.4Extraordinary /others -211.5 55.0 -16.1 0.0 57.2Rep. PAT before MI -202.3 99.8 107.5 205.6 195.1Minority interest (MI) 0.0 0.0 0.0 0.0 18.6Rep. PAT after MI -202.3 99.8 107.5 205.6 176.6Adjustments 0.0 0.0 0.0 0.0 0.0Adj. Net Profit -202.3 99.8 107.5 205.6 176.6Growth (%) NA LP 7.7 91.3 -14.1


Exhibit 19: Balance Sheet Rs Crore FY05(6m) FY06 FY07 FY08 FY09Equity Capital 154.7 154.7 192.7 210.0 223.4Preference 35.7 85.2 169.0 169.8 86.9Share Warrants/Others 135.5 188.9 20.0 85.6 0.0Reserves & Surplus -205.9 -108.2 223.7 510.0 1325.3Shareholder's Fund 120.0 320.6 605.5 975.4 1635.6Minority Interest 0.0 0.0 0.0 0.0 230.4Secured Loans 850.5 978.7 871.1 1182.1 1621.7Unsecured Loans 309.1 90.6 321.9 212.9 182.5Deferred Tax Liability 0.0 0.0 0.0 4.1 11.0Source of Funds 1279.6 1389.9 1798.4 2374.6 3681.3Gross Block 610.4 613.8 638.8 561.7 851.7Less: Acc. Depreciation 268.1 310.9 355.6 180.2 217.4Net Block 342.4 302.9 283.2 381.5 634.3Capital WIP 69.5 79.8 295.9 540.4 665.8Net Fixed Assets 411.8 382.8 579.1 921.9 1300.0Intangible asset 0.0 0.0 0.0 0.0 101.1Investments 6.9 7.9 1.4 1.4 3.8Cash 8.0 17.7 14.5 11.2 109.0Trade Receivables 406.9 490.8 608.7 801.4 1204.5Loans & Advances/Others 207.2 231.8 257.0 289.1 634.5Inventory 340.7 379.9 503.7 579.5 808.0Total Current Asset 962.7 1120.3 1383.8 1681.1 2755.9Current Liab. & Prov. 106.1 123.3 166.8 229.8 479.5Net Current Asset 856.6 997.0 1217.0 1451.3 2276.4Miscellaneous Exp. 4.3 2.2 0.9 0.0 0.0Application of funds 1279.6 1389.9 1798.4 2374.6 3681.3




Exhibit 20: Cash Flow Statement Rs Crore FY05(6m) FY06 FY07 FY08 FY09Net Profit Before Tax* 9.1 55.1 134.9 261.6 291.3Other Non Cash Exp 1.2 54.5 -12.4 -47.1 -198.8Depreciation 20.9 40.9 43.9 42.6 44.2Direct Tax Paid 0.1 0.2 0.7 29.7 110.9Net Interest 1.8 44.4 60.1 87.1 129.0CF before change in WC 33.2 195.2 227.1 374.0 376.7Inc./Dec. in Current Liab. 3.6 17.2 34.0 7.3 -15.9Inc./Dec. in Current Assets -102.4 -155.4 -275.5 -279.8 -726.9CF from operations -65.6 57.0 -14.4 101.6 -366.2Purchase of Fixed Assets -1.0 -15.5 -244.3 -389.0 -372.6Others 0.2 -0.2 12.3 6.2 -86.7CF from Investing -0.7 -15.7 -231.9 -382.8 -459.3Inc./(Dec.) in Debt 43.7 -104.6 15.4 202.1 298.1Inc./(Dec.) in Net worth 0.0 102.8 288.6 165.2 706.2Others -2.0 -29.7 -60.9 -89.3 -81.0CF from Financing 41.7 -31.5 243.1 278.0 923.3Opening Cash balance 32.6 8.0 17.7 14.5 11.2Closing Cash balance 8.0 17.7 14.5 11.2 109.0


Exhibit 21: Key Ratios (%) Cost ratios (%) FY05(6m) FY06 FY07 FY08 FY09Raw Material 76.3 70.0 65.1 64.5 64.6Power and Fuel 1.9 1.7 1.6 1.1 1.1Emp 2.4 2.5 2.5 2.4 3.2SG&A 6.9 6.1 8.9 7.6 7.8Average cost of debt 0.2 4.2 5.1 6.4 7.7Effective Tax rate 0.0 9.4 9.5 21.4 44.0Profitability ratios (%)EBITDA Margin 8.0 15.2 18.7 21.9 20.3PAT Margin -58.7 11.2 8.7 11.8 7.8Adj. PAT Margin -58.7 11.2 8.7 11.8 7.8Per share data (Rs)Revenue per share 22.3 57.5 63.8 83.2 101.2EV per share 120.5 114.0 107.2 111.9 121.9Book Value 7.8 20.7 31.4 46.4 73.2Cash per share 0.5 1.1 0.8 0.5 4.9EPS -13.1 6.5 5.6 9.8 7.9EPS (Adj.) -13.1 6.5 5.6 9.8 7.9Cash EPS -11.7 9.1 7.9 11.8 9.9DPS 0.0 0.0 0.0 0.0 0.0 Source: Company, ICICIdirect.com Research



Exhibit 22: Key Ratios Return ratios FY05(6m) FY06 FY07 FY08 FY09RoNW NA 31.1 17.8 21.1 10.8ROCE 0.9 7.3 10.9 14.8 12.0Adj. ROCE* 0.0 8.7 14.3 20.5 19.5ROIC -15.9 7.3 6.0 8.7 4.9* Adj ROCE excludes Capital WIP in Capital Employed calculationFinancial health ratioOperating CF (Rs Cr) -65.6 57.0 -14.4 101.6 -366.2FCF (Rs Cr) -72.0 -29.2 -267.7 -334.4 -810.4Cap. Emp. (Rs Cr) 1268.4 1379.8 1796.1 2373.2 3576.4Debt to equity (x) 9.7 3.3 2.0 1.4 1.1Debt to cap. emp. (x) 0.9 0.8 0.7 0.6 0.5Interest Coverage (x) 5.6 2.2 3.2 3.9 3.1Debt to EBITDA (x) 41.8 7.9 5.2 3.6 3.9DuPont ratio analysisPAT/PBT -22.1 1.8 0.8 0.8 0.7PBT/EBIT -18.1 1.0 0.5 0.6 0.5EBIT/Net sales 0.0 0.1 0.2 0.2 0.2Net Sales/ Tot. Asset 0.2 0.6 0.6 0.7 0.6Total Asset/ NW 11.5 4.7 3.2 2.7 2.5


Exhibit 23: Key Ratios Working Capital FY05(6m) FY06 FY07 FY08 FY09Working cap./Sales (%) 2.5 1.1 1.0 0.8 1.0Inventory turnover 1.0 2.3 2.4 3.0 2.8Debtor turnover 0.8 1.8 2.0 2.2 1.9Creditor turnover 3.2 7.2 7.4 7.6 4.7Current Ratio 9.1 9.1 8.3 7.3 5.7Quick ratio 9.0 8.9 8.2 7.3 5.5Cash to abs. Liab. 0.1 0.1 0.1 0.0 0.2WC (Excl. cash)/sales 2.5 1.1 1.0 0.8 1.0 FCF Calculation (Rs Crore)EBITDA 27.7 134.9 229.4 383.1 458.5Less: Tax 0.0 10.4 11.3 56.1 153.4NOPLAT 27.7 124.5 218.0 327.0 305.1Capex 1.0 15.5 244.3 389.0 372.6Change in working cap. 98.8 138.2 241.5 272.4 742.9FCF -72.0 -29.2 -267.7 -334.4 -810.4 Valuation FY05(6m) FY06 FY07 FY08 FY09PE (adj.)(x) NA 9.5 11.0 6.3 7.8EV/EBITDA (x) 75.9 14.8 10.3 7.0 6.7EV/Sales (x) 6.1 2.3 1.9 1.5 1.4Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0Price/BV (x) 7.9 3.0 2.0 1.3 0.8




RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

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