independent equity research...the indian fabric market – comprising cotton, blended, 100%...

Siyaram Silk Mills Limited

Independent Equity Research Enhancing investment decisions

In-depth analysis of the fundamentals and valuation

Business Prospects Financial Performance

Corporate Governance

Management Evaluation

Explanation of CRISIL Fundamental and Valuation (CFV) matrix The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process – Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade)

Fundamental Grade CRISIL’s Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective of the size or the industry they operate in. The grading factors in the following:

Business Prospects: Business prospects factors in Industry prospects and company’s future financial performance Management Evaluation: Factors such as track record of the management, strategy are taken into consideration Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms

The grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals)

CRISIL Fundamental Grade Assessment 5/5 Excellent fundamentals 4/5 Superior fundamentals 3/5 Good fundamentals 2/5 Moderate fundamentals 1/5 Poor fundamentals

Valuation Grade CRISIL’s Valuation Grade represents an assessment of the potential value in the company stock for an equity investor over a 12 month period. The grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Valuation Grade Assessment 5/5 Strong upside (>25% from CMP) 4/5 Upside (10-25% from CMP) 3/5 Align (+-10% from CMP) 2/5 Downside (negative 10-25% from CMP) 1/5 Strong downside (<-25% from CMP) Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person – especially outside India or published or copied in whole or in part, for any purpose.

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Coming into its own Industry: Textile Date: September 8, 2010

Independent Research Report – Siyaram Silk Mills Ltd

Siyaram Silk Mills Limited (SSML) is an integrated textile manufacturer with a domestic focus. The company has successfully used branding to differentiate itself from competition. Its vast distribution network, low gearing and efficient operations ensured revenue growth and profitability during the tough FY07-09 period and margin expansion in FY10. We assign SSML a fundamental grade of 4/5, indicating that its fundamentals are ‘superior’ relative to other listed equity securities in India. We assign a valuation grade of ‘3/5’, indicating that the current price is ‘aligned’ with our fair value. Effective branding is a vital differentiator in a fragmented market Despite operating in a highly fragmented market, SSML has been able to differentiate itself from unorganised and organised competition. Sustained brand-building efforts have helped the company build strong brands in the fabric and readymade garment (RMG) segments. As a result, SSML has been able to garner higher realisations than local players and consistently clock better volume growth than its competitors over the past five years. A network that’s tough to break SSML’s distribution network consists of ~ 1,500 dealers and 500 agents. Its products are sold in over 40,000 outlets. A network this extensive has a definite competitive advantage as it helps make early inroads, with new product lines and styles, before competition can bring similar products to the market. Better utilisation and planned capex to aid in capturing robust demand growth With an improvement in economic conditions, SSML is witnessing robust demand in all its divisions. We believe that better utlisation in the yarn (75% peak utlisation in FY12) and RMG segments (90% peak utlisation in FY11), and planned capex in the fabric segment (Rs 500 mn in phases I and II) will help the company cater to this demand. Realisation growth, change in product mix and profitable yarn unit to drive margins A gradual increase in Siyaram’s realizations (CAGR 1.5% during FY10-FY13 period), a change in product mix towards higher-margin products like Mistair, furnishings and Oxemberg, and the turnaround of the yarn division are expected to expand SSML’s margins in the medium term. Competitive industry with limited pricing flexibility SSML operates in a highly competitive and price-sensitive market. Hence, the company has limited pricing flexibility and is unable to pass on an increase in key raw material prices or operating costs. This has strained its margins in the past. Valuations - aligned with the current levels We initiate coverage on SSML with a fair value of Rs 340. The current market price of the stock is Rs 369. We assign SSML a valuation grade of ‘3/5’, indicating that the current price is ‘aligned’ with our fair value.

Key forecast (consolidated financials) (Rs mn) FY09 FY10 FY11E FY12E FY13E Operating income 6,525 8,005 9,492 10,702 11,816 EBITDA 497 746 912 1,082 1,210 Adj Net income 103 319 428 512 585 EPS-Rs 10.9 34.0 45.7 54.7 62.4 EPS growth (%) 24.5 194.8 27.0 19.6 14.1 PE (x) 4.7 4.8 8.1 6.7 5.9 P/BV (x) 0.3 0.9 1.7 1.4 1.2 RoCE (%) 8.2 15.7 18.4 18.7 18.8 RoE (%) 7.4 20.4 22.9 22.6 21.3 EV/EBITDA (x) 5.2 4.1 5.8 5.0 4.5

Source: Compan y, CRISIL Equi t ies est imate

CFV matrix

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Fundamental grade of '4/5' indicates superior fundamentals

Valuation grade of '3/5' indicates aligned market price

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Key stock statistics NSE Ticker SIYSILFair value (FV - Rs 10) 340Current market price* 369Shares outstanding (mn) 9.4Market cap (Rs mn) 3,456Enterprise value (Rs mn) 5,09352-week range (Rs) (H/L) 397.8/105.4P/E on EPS estimate (FY11E) 8.1Beta 0.9Free float (%) 35Average daily volumes 32281* as on report date Share price movement

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SSML Nifty

-Indexed to 100 Analytical contact Sudhir Nair (Head, Equities) +91 22 3342 3526 Arun Vasu +91 22 3342 3529 Arjun Gopalakrishnan +91 22 3342 3503 Email: [email protected] +91 22 3342 3561

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Table: 1 SSML: Business environment

Parameter Textiles

Fabrics RMG Dyed yarn

Net Sales

contribution (FY10) 83% 11% 4%

Net Sales

contribution (FY13E) 81% 11% 7%

Brands within each segment

Siyaram, J Hampstead, Mistair

MSD and Oxemberg B2B products sold under the

Siyaram brand

Brand revenue

contribution to

segment

Siyaram – 76%

J Hampstead – 8%

Mistair – 16%

MSD – 16%

Oxemberg –84%

Yarn –100%

Geographic

presence • 95% domestic revenues, 5% international revenues

• Within domestic revenues, 75% rural (Tier II and Tier III) and 25% urban

Market position • Highly fragmented industry. SSML is a reputed textile manufacturer which is supplying branded fabrics and RMG to the

rural areas

Industry growth

expectations • Textile industry poised to grow at 5-6% pa

Sales growth (FY07-FY10 – 3-yr CAGR)

12% 34% 3%

Sales forecast

(FY10-FY13E – 3-yr

CAGR)

13% 13% 35%

Demand drivers • Increase in per capita income

• Cheaper to buy fabric and get

clothes stitched

• Consumers have become more fashion

conscious due to variety in design, fabric

and styles

• Boom in organised retail

• Demand for specialised dyed

yarn is increasing with an

increase in demand for textiles

• Better capacity utilisation

Key competitors • Highly fragmented market, the competition varies from state to state and at times from city to city. Only a handful of

branded players with pan - India presence.

• Comparable players – Raymond, Sangam, Donear, Arvind, RSWM, OCM

Source: Compan y, CRISIL Equi t ies

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Grading Rationale Branding drives SSML’s overall growth Fabrics - an established player in a fragmented market

SSML is one of the few textile companies that reported consistent growth in revenues

and remained profitable right through the tough FY07-FY09 period and FY10. This was

possible due to the performance of its fabric division, which contributed 83% of net

sales and 89% of net profits in FY10. SSML operates in the blended category of the

fabric market. Its fabric division’s revenues grew at a CAGR of 17% during the FY05-

FY10 period, outpacing the organised sector’s 14% growth within the blended fabric

market.

The Indian fabric market – comprising cotton, blended, 100% non-cotton, khadi, wool

and silk – is extremely fragmented. The textile ministry estimates the total fabric

production in FY10 to be 59,765 mn sq mts.

SSML primarily operates in the blended fabric market, which is estimated to be 12% of

the total fabric market, producing 7,769mn sq mts of fabrics in FY10. It grew at 5.2%

CAGR during the FY05-FY10 period. The blended fabric market is divided into

organised and unorganised sectors. The growth in volumes was driven by the

organised sector, which grew at a CAGR of 14.3%, outpacing the unorganised sector’s

4.7% growth. This bodes well for SSML as it shows that companies like itself have

been able to consolidate their position and effectively tackle unorganised competition in

this space.

The organised sector in blended fabrics accounts for ~6% market share (475 mn sq

mts of fabrics) of total blended fabrics production; it contributes less than 1% of the

total fabric production in India. SSML had a market share of ~11% in the organised

blended fabric market in FY10.

Chart 1: Fabric market produced 59,766 mn sq mts in 2010E

Cotton28791 mn sq mt

100% Non Cotton 22438 mn sq mt

Khadi, Wool & Silk 768 mn sq mt

Organised 475 mn sq mt

Unorganised 7293 mn sq mt

Blended 7769 mn sq mt

Source: Office of the Textile Commissioner

SSML’s target market is the population in Tier II and Tier III cities, which constituted

~75% of FY10 revenues. This market prefers fabrics to RMG because stitching fabrics

gives consumers a personalised fitting and low stitching costs renders the final product

SSML’s fabric division grew at a CAGR of 17%, outpacing both the organised blended fabrics market (CAGR 14%) and the blended fabrics market as a whole (CAGR 5.2%) during the FY05-10 period

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cheaper than a RMG product. Due to the price sensitive nature of the market,

manufacturers have flooded it with a homogenous product and compete only on price.

SSML realised that it might not always be possible to produce the cheapest product in

the market. Hence, it changed its strategy and focussed on branding its products. This

was done with a view of garnering better realisations than the local players and driving

volumes through better brand recall. SSML has three brands in its fabric stable –

Siyaram, J Hampstead and Mistair.

Chart 1: Positioning of SSML’s fabric brands

Siyaram

Mistair

J Hampstead

Low Value for money Premium

Source: CRISIL Equities

Siyaram – the flagship brand

The company sells suiting, shirting and furnishing products under its 30-year-old

flagship brand - Siyaram. The brand is well-established locally and has a strong hold in

Tier II and Tier III cities. Positioned as a value-for-money brand Siyaram uses sub-

brands to cater to the changing trends in fabric material and design. Siyaram’s

realisations are higher than that of local players in the unorganised market. The

unorganised players sell fabrics at an average of Rs 50-60 per sq meter and could go

as low as Rs 40 per sq meter. In the organised sector, Sangam is cheaper than peers.

Within its products, suiting and shirting fabrics are well established and have been in

the market for a long time.

SSML extended its operations, within Siyaram, to furnishing products in FY06. The lack

of many branded players in the market and SSML’s ability to exploit its vast distribution

network have propelled gross sales of furnishing products from Rs 6 mn in FY06 to Rs

104 mn in FY10.

Siyaram’s revenues have grown at a CAGR of 15% during the FY05-10 period due to

high growth in shirting (CAGR of 23% during FY05-10) and entry into the furnishing

market.

J Hampstead – the premium brand

J Hampstead is SSML’s product offering in the premium segment. The brand has

witnessed high revenue growth, CAGR of 20% during the FY05–FY10 period, largely

owing to a growth in volumes. However, the premium segment is dominated by

Raymonds, which has managed to maintain its leadership despite having significantly

In a market with a homogenous product, SSML has differentiated itself through branding

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higher realisations than J Hampstead.

Mistair – the in-between brand

Mistair was originally launched with a view of increasing shelf space in stores - a brand

positioned between Siyaram and J Hampstead. Dealers responded positively to this

move as they preferred dealing with one company to get products that were positioned

across the value chain. The strategy resulted in a reduction of shelf space of

competitor brands and ultimately helped SSML corner more sales for itself. Mistair’s

revenues have grown at a CAGR of 24% during the FY05-10 period driven largely by

volume growth (CAGR 22% during FY05-10) and marginally due to an increase in

realisations (CAGR 2% during FY05-10). Table 1: Snapshot of brands in the fabrics division (FY10) Parameter/Brand Siyaram J Hampstead Mistair

Positioning Value-for-money brand Premium Higher-end value-for-money brand

Gross sales Rs 4,731 mn Rs 483 mn Rs 1,020 mn Products and contribution to brand sales Suiting – 75%

Shirting – 22% Furnishing – 2%

NA NA

Contribution to fabric sales 76% 8% 16% Volume growth (CAGR FY2005-10) 14% 19% 22% Realisation growth (CAGR FY2005-10) 0.4% 1.2% 2.0% Realisations per sq mt (vs. competitors) Siyaram – Rs 78

Sangam – Rs 75* Alok – Rs 86*

J Hampstead – Rs 236 Raymond – Rs 325

Mistair – Rs 119 Donear – Rs 90

*Note: FY09 realisations used for Sangam and Alok Source: Compan y, CRISIL Equi t ies

We expect a marginal change in the product mix towards higher-margin products in the

medium term. New product lines in Siyaram shirting as well as Mistair and the

management’s focus on leveraging its network for the furnishings segment are

expected to drive volume growth. Siyaram suiting and J Hampstead are estimated to

register stable growth. Additionally, we expect the Siyaram brand to log a gradual

realisation growth of CAGR 1.5% during the FY10-FY13 period.

Figure 9: Contribution to fabric sales FY10 Figure 10: Contribution to fabric sales FY13E

Siyaram suiting57%

Siyaram shirting17%

Siyaram furnishing

2%

Mistair16%

J Hampstead8%

Siyaram suiting54%

Siyaram shirting18%

Siyaram furnishing

2%

Mistair18%

J Hampstead8%

Source: Company, CRISIL Equities Source: Company, CRISIL Equities

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RMG – building a strong platform for the future Akin to the textile industry, its sub-segment - RMG - will also benefit from an increase

in textile spending. Additionally, a gradual shift in consumer preferences towards

ready-to-wear apparel due to a gamut of choice in design, colour and sizes being

offered by RMG manufacturers, coupled with a boom in organised retailing will drive

RMG demand. The RMG market is expected to outpace the broad textile industry and

grow from Rs 1,155 bn in 2009 to Rs 1,649 bn in 2014 at a CAGR of 7.4%. Despite

deriving ~83% of its revenues from fabrics, we do not believe SSML will be adversely

affected by a shift in consumer preference to RMG in the short to medium term. This is

because SSML can shift its model from business to consumer (B2C) to business to

business (B2B), where it will supply fabrics to large RMG brands across the nation.

Also, SSML has a strong presence in the RMG segment through its MSD (Monday to

Sunday Dressing) and Oxemberg brands. Initially, after the launch of MSD in FY07

both brands were producing formal and casual product lines. However, in H2FY10 the

company changed its strategy and divided the RMG market amongst its brands to

avoid cannibalisation of sales. Currently, Oxemberg operates in the formals and semi

formals space while MSD focuses on casuals. The RMG segment’s gross sales grew

at a CAGR of 28% during the FY05-FY10 period.

Chart 1: SSML’s RMG brand positioning

Oxemberg

MSD

Low Value for money Premium


Oxemberg – the legacy brand in casuals and semi formals

Oxemberg entered the RMG market over 15 years back. It is priced marginally higher

than its peers Peter England and John Players. During FY05-FY10, Oxemberg sales

grew at a CAGR of 24%. The brand’s sales volumes have picked up over the past four

years, largely due to a decrease of 6% and 15% in realisations in FY07 and FY08

respectively.

MSD – the causal brand

MSD was launched in 2007 and saw strong growth over the next two years. However,

volumes dipped by 26% in FY10 owing to a 14% increase in realisations and a change

in market segmenting strategy.

Relatively insulated to changing dynamics as it is an established player in both the fabric and RMG markets

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Table 2: Snapshot of brands in the RMG division (FY10) Parameter/Brand Oxemberg MSD

Positioning Value-for-money brand Value-for-money brand Gross sales Rs 770 mn Rs 149 mn Products Formals and semi formals Casuals and semi formals Oxemberg contribution to fabric sales 84% 16% Volume growth (CAGR FY2005-10) 23% 73.3%* Realisation growth (CAGR FY2005-10) 0.4% 17%* Realisations per piece Rs 405 Rs 585

Note: MSD CAGR is measured for FY07-FY10, as it was launched in FY07 Source: Compan y, CRISIL Equi t ies

We expect Oxemberg to continue its strong growth and outpace MSD in the medium

term. Strong demand for the brand will push its contribution in RMG gross sales to 85%

by FY13.

Dyed yarn - turnaround time Dyed yarn is an unbranded industrial product. Captive consumption accounts for ~ 25%

of FY10 production. SSML increased yarn dyeing capacity in 2009 by 1,500 tonnes per

annum to 6,000 tonnes per annum. The company had initially considered setting up

manufacturing and packaging operations at different locations. However, the

management decided against it and the company started building an integrated facility

at its factory in Tarapur in FY09. The construction activity has overrun time and has

adversely affected utilisation levels. SSML has been unable to reach peak utilisation

levels and the yarn division has been making losses over the past two years. We

expect the construction activity to be completed by Q2FY11 and expect a turnaround in

the division’s profitability in subsequent quarters. The yarn division breaks even at 53%

capacity utilisation. We forecast the division to breach this level in FY11 (57%) and

reach peak levels (75%) in FY12. This will add to the bottom line of the company.

Extensive distribution network – a definite asset SSML has an extensive distribution network comprising ~ 500 agents, 1,500 dealers

and 40,000 retailers spread across the nation. Dealers and agents have grown at a

CAGR of 24% and 23%, respectively, over the FY05 - FY10 period. SSML has built

strong relations with its agents and dealers over the years. Mutually beneficial

decisions like launching Mistair, which benefit a majority of dealers as they get fabric

products spread across the value chain from the same company, have only served to

further strengthen ties. In addition to its reach, this network is advantageous to SSML

as its time to market for a new sub-brand/theme launch is minimal. This is crucial as

competitors take minimal time to launch similar designs and adapt their products to the

latest trends in the market. Any new branded player entering this segment would find it

tough to match this reach and scale. It is SSML’s good relations with its network that

enabled it to implement a change in working capital policy during the FY08-09 period.

Vast distribution network gives SSML an advantage over competitors

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Figure 9: Historical growth in number of dealers Figure 10: Historical growth in number of agents

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Working capital efficiencies – facilitate debt repayment A disciplined approach to debtor collection and inventory management has improved

debtor and inventory days. Debtor days have improved from 82 in FY08 to 53 in FY10.

Inventory days have improved from 67 in FY08 to 41 in FY10. These efficiencies help

free up cash that was previously unavailable and pay back short-term debt, saving the

company interest expenses. The improvements have been possible due to a change in

working capital policy during the 2007-2009 period. The company has taken a strong

stance against extending credit over 30 days and charges an 18% interest rate for any

extension in payment. Additionally, it also offers 2% discount for any cash transactions.

We believe that the company would find it difficult to improve its working capital

position; we expect current levels to be maintained in the medium term.

Chart 1: Trend in SSML’s debtor and inventory days

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Prudent working capital policy has helped the firm reduce debtor and inventory days

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Adding capacities in a phased manner A change in the quota regime in 2005 coupled with the government offering subsidised

loans under the Technology Upgradation Fund (TUF) scheme saw many players

expand capacities during the 2005-07 period to cater to international demand. SSML,

on the other hand, chose to focus on the domestic market and consequently increased

its capacities to cater to buoyant domestic demand.

Table 3: SSML – Segment wise licensed and installed capacity and production FY09 FY10 FY11E FY12E FY13E Looms (Nos) 409 479 479 600 714 - Fabrics (mn mts) 42 53 55 62 69 Stitching Machine (Nos) 643 645 645 645 645 - RMG (mn nos) 1.5 1.7 2.2 2.2 2.2 Yarn Dyeing Capacity (Tons) Per Annum 6000 6000 6000 6000 6000 - (mn kgs) 2.0 2.5 3.4 4.5 4.5 Source: Company, CRISIL Equities

Currently, the company has a capacity of 479 looms, 645 stitching machines and yarn

dying capacity of 6,000 tonnes per annum. The loom capacity is set to increase over

the next two years as the management has planned capital expenditure in two phases.

In phase I, the company will invest ~Rs 500 mn in FY11 to increase the number of

looms at the Tarapur plant by 121 looms and increase production capacity by

approximately 7.2 mn mts of fabric per annum. The capacities are expected to be

commissioned by the end of Q4FY11. In phase II, the management plans to invest

another ~Rs 500 mn in FY12. The plant will be commissioned by the end of Q4FY12.

The proceeds for the capital expenditure are expected to be raised partly through debt

and partly through internal accruals. The government has temporarily stopped

disbursing TUF loans and the scheme is currently under review. However, we believe

the revised TUF scheme would still be available to textile companies in weaving and

processing. We expect the government to resume disbursement in the second half of

calendar year 2010. Hence, we believe that SSML will avail the TUF scheme to partly

fund its capital expenses and use the rest to retire its higher interest rate debt.

Better utilisation expected in RMG and Yarn divisions SSML is currently operating at 73% of its RMG capacity. We expect the utilisation level

to go up to 90% over the next three years as the company would have to increase its

utilisation to meet the growing demand for its RMG products. In the yarn division, the

company is expected to conclude construction activity in the 2QFY10. Hence, we

expect capacity utilisation level to increase in yarn dyeing. We expect SSML to reach

peak utilisation levels of 75% in FY12, the nature of work restricts the company from

attaining higher utilisation levels.

Utilisation levels are going to increase in the yarn and garment segments

Capacity expansion planned in two phases. Both phases will require an investment of Rs 500 mn

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Table 4: SSML – capacity utilisation % FY10 FY11E FY12E FY13E Cloth 96 100 98 98 Yarn 42 57 75 75 Garment 73 90 90 90 Source: Company, CRISIL Equities

Also, SSML had invested in adding capacities in looms last year which it was unable to

fully utilise as it was commissioned only in H2FY10. We believe that SSML will improve

capacity utilisation to 100% in FY11. Post capacity expansion in FY11 and FY12 we

expect SSML to maintain high utilisation levels of above 95%. We expect future

capacity additions by Q4FY11 and Q4FY12, giving it marginal benefits in that quarter

but full benefits for the next financial year.

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Key risks Intensifying competition in textile industry SSML operates in a highly fragmented industry with competition from both organised

and unorganised players. The entry barriers in the fabric market are limited and the

branded garments business has seen the launch of an array of brands vying for

attention. To survive in such a business environment, the company has to incur large

selling and advertising costs. Additionally, in order to maintain a significant competitive

edge the company would also have to invest in research and development, and

constantly upgrade production facilities. These factors would put a strain on its

margins.

Limited pricing flexibility As SSML operates in a highly competitive and price sensitive market which allows it

limited pricing flexibility. In FY08, when PV yarn prices moved up 28%, the company’s

profitability in terms of margins and growth was hit. SSML was unable to pass on the

price increase in its key raw material to its customer and its EBITDA fell by 14.2% yoy

to Rs 354 mn and EBITDA margin fell by 180 bps to 6.0% from 7.8% in FY07. An

increase in the prices of its key raw materials would put a strain on SSML’s margins.

Project implementation risk We note that the yarn dyeing business has operated at a capacity utilisation level of

less than 50% despite having installed capacity over two years back. This is due to a

shift in the plant venue and because of construction activity taking place within the

plant. Any such delay in scaling up operations in the yarn division and future capacity

additions in the fabric division would adversely affect revenue growth and margins of

the company.

Siyaram operates in a fragmented industry with high competition and limited flexibility to pass on higher raw material costs

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Financial Outlook Robust demand aided by higher utlisation and planned capex to drive revenue growth at a three-year CAGR of 14% to Rs 11.7 bn in FY13 We estimate SSML’s gross revenues to grow at a three-year CAGR of 14% to Rs

11,660 mn in FY13. This growth would be aided by better capacity utilisation in all three

segments and an increase in capacity in the fabric segment in FY11 and FY12.

- The fabric division (12.8% three-year CAGR) is expected to report stable

growth over the next three years. We believe Mistair, shirting and furnishing

will log higher growth than suitings and J Hampstead during this period. While

new product lines will give a shot in the arm to shirting and Mistair, we expect

the company to leverage its distribution network and drive sales in the

furnishings segment.

- The RMG division (13.1% three-year CAGR) is expected to grow at a higher

rate than fabrics. Oxemberg volumes have picked up over the past three

years (CAGR of 30.5%). We expect it to continue to outpace MSD over the

next three years, albeit at a slower pace.

- The yarn division (35% three-year CAGR) is expected to record high growth

owing to better capacity utilisation.

Figure 7: Revenues expected to grow at three-year CAGR of 14%

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Source: Company, CRISIL Equities

Realisation growth, change in product mix and turnaround of yarn division to drive margin expansion We estimate EBITDA to grow at a three-year CAGR of 17.5% to Rs 1,210 mn in

2013E. We expect a gradual increase in realisations of Siyaram (CAGR 1.5% FY10-

FY13) to contribute directly to the top line of the company as this brand accounts for

over 60% of SSML’s gross sales. Additionally, a change in product mix owing to high

growth in higher-margin products Mistair, furnishings and Oxemberg, and a turnaround

of the yarn division owing to better capacity utilisation would drive SSML’s margin

expansion in the medium term.

Better utilisation and capital expenditure in FY11 and FY12 will cater to robust demand and drive gross sales to Rs 11.7 bn in FY13

Realisation growth in Siyaram and turnaround in the yarn division to directly contribute to both top line and bottom line

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Figure 8: EBITDA and EBITDA margins

8.80%

9.00%

9.20%

9.40%

9.60%

9.80%

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EBITDA EBITDA margins (RHS)

Source: Company, CRISIL Equities

Adjusted PAT to grow at a three-year CAGR of 20% We estimate SSML’s consolidated adjusted PAT to grow from Rs 337 mn in FY10 to

Rs 585 mn in FY13 due to strong growth in revenues and improvement in EBITDA

margins. We believe SSML would avail low cost debt through the TUF scheme to fund

its capacity expansion plans and use internal accruals to pay off its existing loans over

the next three years. Hence, we expect interest costs to marginally fall in FY11 and

subsequently increase in FY12 and FY13.

Adjusted EPS to increase from Rs 36 in FY10 to Rs 62 in FY13 The company’s EPS is expected to increase from Rs 36 in FY10 to Rs 62 in FY13.

Better profitability over the next three years is expected to improve the RoCE and RoE

from 15.7% and 20.4% in FY10 to 18.8% and 21.3% in FY13 respectively.

Figure 9: Strong growth in EPS Figure 10: RoCE and RoE

0

10

20

30

40

50

60

70

2010 2011E 2012E 2013E

Rs

EPS

10

12

14

16

18

20

22

24

2010 2011E 2012E 2013E

%

ROCE ROE


Strong bottom-line growth on account of revenue growth, margin improvement and low interest costs

CRISIL Equities

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Management Overview CRISIL's fundamental grading methodology includes a broad assessment of

management quality, apart from other key factors such as industry and business

prospects, and financial performance.

Experienced management SSML has an experienced management headed by Mr Ramesh D. Poddar, Vice

Chairman and Managing Director, who has more than three decades of experience in

the textile business. Mr Poddar is a second generation promoter of the group. Although

family-driven, SSML’s management has a professional approach towards managing

the company.

Pragmatic decision making saw the company through tough phases SSML’s management has always been pragmatic in its approach towards running the

business. During FY05-07, when most textile companies chose to increase capacities

in a big way to cater to the international market, SSML opted for steady growth and

continued concentrating on the domestic market. The company commits capital

expenses only if demand for the product warrants it. If not, the company prefers to

focus on branding and opt for outsourcing the production activities. Also, it continued

investing in its brands and streamlined operations, which resulted in a drastic

improvement in both debtor and inventory days. These decisions paid rich dividends

during the FY07-09 as SSML was relatively unaffected by the slowdown and witnessed

consistent revenue growth and remained profitable.

Second line of management Based on our interactions, we believe the company’s second line has a good

understanding of the business and industry dynamics. Key managerial personnel have

more than 25 years of experience in their respective fields and have been with the

company for over two decades.

Siyaram has an experienced management, which is pragmatic in its decision making

CRISIL Equities

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Corporate Governance

CRISIL’s fundamental grading methodology includes a broad assessment of corporate

governance, apart from other key factors such as industry and business prospects, and

financial performance. In this context, CRISIL Equities analyses the shareholding

structure, board composition, typical board processes, disclosure standards and

related-party transactions. Any qualifications by regulators or auditors also serve as

useful inputs while assessing a company’s corporate governance.

Overall, corporate governance at SSML meets the desired levels supported by

reasonably good board practices and an independent board.

Board composition SSML’s board comprises 14 members, of whom seven are independent directors,

which is in line with the requirements under Clause 49 of SEBI’s listing guidelines. The

independent directors have strong industry experience and most of them have been

associated with the company for a long time. Given the background of directors, we

believe the board is rich in experience. The independent directors have a fairly good

understanding of the company’s business and its processes.

Board’s processes The company’s quality of disclosure can be considered good judged by the level of

information and details furnished in the annual report, websites and other publicly

available data. We believe that all of SSML’s operations with related parties are done

at market determined prices which the board reviews once a year.

The company has all the necessary committees – audit, remuneration and investor

grievance - in place to support corporate governance practices. The audit committee

consists wholly of independent directors and is chaired by Mr Brijmohan L. Sarda, a

chartered accountant with over 30 years experience in statutory and internal audit and

taxation. The committee meets at timely and regular intervals. In FY10 the committee

met five times and all the committee members attended the meetings.

Corporate governance practices at SSML are good

CRISIL Equities

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Valuation Grade: 3/5 We have used the discounted cash flow (DCF) method to value SSML and arrived at a

fair value of Rs 340 per share. This fair value implies a forward P/E of 7.4x of its FY11E

EPS of 45.7 and 6.2x of its FY12E EPS of 54.7. Currently, the stock trades at Rs 369.

We initiate coverage on SSML with a valuation grade of ‘3/5’, indicating that the stock

is ‘aligned’ with our fair value of Rs 340.

Table 5: Key assumptions of our valuations Explicit project period FY11-FY16 Terminal growth rate 3% Risk free rate 7% Risk premium 6% Cost of equity 15%

Table 6: Sensitivity analysis Terminal growth rate 340 1.00% 2.00% 3.00% 4.00% 5.00% 7.40% 570 699 888 1,188 1,745

WACC 9.40% 371 437 525 645 819 11.40% 252 292 340 402 483 13.40% 175 200 230 267 312 15.40% 121 138 158 182 210

Table 7: Peer valuation

Companies M Cap. (Rs mn) EPS Price/Earnings (x) ROE(%)

FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12ESiyaram Silk Mills Limited 3236 10.9 34.0 45.7 54.7 4.7 4.8 8.1 6.7 7.4 20.4 22.9 22.6( CRISIL Equities estimates ) Consensus estimates Raymonds 25065 -18.6 6.0 6.5 13.7 NA 62.8 43.9 26.7 -17.1 -3.8 2.5 4.7Sangam 1699 -4.1 4.4 NA NA NA 6.8 NA NA -8.6 9.4 NA NADonear 1622 -4.3 -3.5 NA NA NA NA NA NA -23.3 NA NA NAArvind 10300 -4.1 2.2 3.2 3.9 NA 15.6 12.3 9.6 -8.5 4.2 NA NARSWM 3472 -34.3 13.9 22.4 29.6 NA 8.2 6.7 5.1 -25.2 13.9 15.0 17.0Vardhman 18760 5.3 46.2 50.9 46.8 9.1 5.7 6.6 6.7 12.9 17.5 15.4 12.5Mean 9.1 19.8 16.2 11.4 -11.6 9.7 9.7 10.9Median 9.1 8.3 9.6 8.4 -12.9 12.6 10.7 11.0

Source: CRISIL Equi t ies, Industr y es t imates

Fair value per share of Rs 340 based on the DCF

CRISIL Equities

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Company Overview Incorporated in 1978, SSML belongs to the Siyaram-Poddar group. The company

initially forayed into textile trading and eventually moved to manufacturing in 1981.

SSML’s production facilities are located at Tarapur, Daman and Silvassa. Its production

capacity consists of a yarn dyeing capacity of 6000 metric tonnes per annum, weaving

capacity of 4 mn meters per month and garments capacity of 2.4 mn pieces per

annum. In addition, the company also has an R&D facility with dedicated designers

who keep it up to date with the latest trends in the fashion industry.

SSML has a comprehensive distribution network consisting of ~ 1,500 dealers, 500

agents and its products are sold in over 40,000 outlets. SSML operates through three

segments - fabrics, RMG and yarn. The fabric segment has historically been the

highest revenue contributor and currently accounts for 83% of SSML’s net sales. The

company has a domestic focus and generates only ~5% of its revenues from exports.

Within India, SSML focuses on Tier II and Tier III cities, which constitute ~75% of its

sales.

Net sales break-up

Segment wise FY10 Geographic distribution

Fabrics 81%

RMG11%

Yarn 7%

Others1%

Domestic 95%

International5%

Source: Company

CRISIL Equities

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Annexure: Financials Table 12: FINANCIAL STATEMENTS

Income Statement (Rs Mn) FY09 FY10 FY11E FY12E FY13E Net sales 6,444 7,899 9,367 10,561 11,660 Operating Income 6,525 8,005 9,492 10,702 11,816 EBITDA 497 746 912 1,082 1,210 Depreciation 192 202 232 272 297 Interest 190 120 114 129 133 Other Income 20 48 57 64 71 PBT 135 472 623 746 851 PAT 103 319 428 512 585 No. of shares 9 9 9 9 9 Earnings per share (EPS) 11 34 46 55 62 Balance Sheet (Rs Mn) FY09 FY10 FY11E FY12E FY13E Equity capital (FV - Rs 10) 94 94 94 94 94 Reserves and surplus 1,329 1,605 1,956 2,392 2,900 Debt 2,135 1,686 1,976 2,146 2,106 Current Liabilities and Provisions 721 1,013 1,199 1,346 1,484 Deferred Tax Liability/(Asset) 180 183 183 183 183 Minority Interest - - - - 0 Capital Employed 4,459 4,581 5,408 6,161 6,767 Net Fixed Assets 2,019 1,980 2,250 2,497 2,592 Capital WIP 18 5 5 5 5 Intangible assets 31 22 22 22 22 Investments 0 328 328 328 328 Loans and advances 260 157 186 210 232 Inventory 972 893 1,131 1,356 1,586 Receivables 1,138 1,168 1,450 1,708 1,967 Cash & Bank Balance 21 29 37 36 36 Applications of Funds 4,459 4,581 5,408 6,161 6,767


CRISIL Equities

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Cash Flow (Rs Mn) FY09 FY10 FY11E FY12E FY13E Pre-tax profit 135 472 623 746 851 Total tax paid (27) (150) (195) (233) (266) Depreciation 192 202 232 272 297 Change in working capital 347 444 (363) (360) (372) Cash flow from operating activities 646 968 297 425 509 Capital expenditure (197) (140) (502) (519) (392) Investments and others 2 (328) - - - Cash flow from investing activities (195) (468) (502) (519) (392) Equity raised/(repaid) - - - - - Debt raised/(repaid) (399) (449) 290 170 (40) Dividend (incl. tax) (55) (66) (77) (77) (77) Others (incl extraordinaries) 12 22 (0) (0) - Cash flow from financing activities (442) (492) 213 93 (117) Change in cash position 10 8 8 (1) 0 Opening Cash 11 21 29 37 36 Closing Cash 21 29 37 36 36 Ratios FY09 FY10 FY11E FY12E FY13E Growth ratios Sales growth (%) 10.0 22.7 18.6 12.8 10.4 EBITDA growth (%) 40.4 50.1 22.2 18.6 11.8 EPS growth (%) 24.5 194.8 27.0 19.6 14.1 Profitability Ratios EBITDA Margin (%) 7.6 9.3 9.6 10.1 10.2 PAT Margin (%) 1.6 4.0 4.5 4.8 4.9 Return on Capital Employed (RoCE) (%) 8.2 15.7 18.4 18.7 18.8 Return on equity (RoE) (%) 7.4 20.4 22.9 22.6 21.3 Dividend and Earnings Dividend per share (Rs) 5.8 7.0 7.0 7.0 7.0 Dividend payout ratio (%) 47.9 19.5 15.4 12.8 11.2 Dividend yield (%) 11.4 4.3 2.0 2.0 2.0 Earnings Per Share (Rs) 10.9 34.0 45.7 54.7 62.4 Efficiency ratios Asset Turnover (Sales/GFA) 2.1x 2.5x 2.7x 2.6x 2.6x Asset Turnover (Sales/NFA) 3.3x 4.0x 4.5x 4.5x 4.6x Sales/Working Capital 3.6x 5.6x 6.8x 6.1x 5.6x Financial stability Net Debt-equity 1.5 0.9 0.9 0.8 0.6 Interest Coverage 1.6 4.5 6.0 6.3 6.9 Current Ratio 3.3 2.3 2.4 2.6 2.7 Valuation Multiples Price-earnings 4.7x 4.8x 8.1x 6.7x 5.9x Price-book 0.3x 0.9x 1.7x 1.4x 1.2x EV/EBITDA 5.2x 4.1x 5.8x 5.0x 4.5x


CRISIL Equities

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Focus Charts

Fabrics - product-wise sales contribution RMG – product-wise sales contribution

82% 81% 78% 78% 76% 76%

12% 13% 16% 16% 16% 16%

7% 5% 6% 6% 8% 8%

0%

20%

40%

60%

80%

100%

120%

FY05 FY06 FY07 FY08 FY09 FY10

(%)

Siyarams Mistair J Hampstead

100% 100% 95%82% 76%

84%

5%18% 24%

16%

0%

20%

40%

60%

80%

100%

120%

FY05 FY06 FY07 FY08 FY09 FY10

(%)

MSD OXEMBERG

Source: Company Source: Company

PAT profitability of each division in FY09 and FY10 EPS and EPS growth

-50

0

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150

200

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300

350

Fabrics Garment Yarn

Rs mn

FY09 FY10

0

10

20

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40

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60

70

2010 2011E 2012E 2013E

Rs

EPS

Source: Company Source: Company, CRISIL Equities

SSML PE band chart SSML 1yr fwd PER

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

1-Apr-04 1-Apr-05 1-Apr-06 1-Apr-07 1-Apr-08 1-Apr-09 1-Apr-10

Rs

Price PER 1 PER 3 PER 6 PER 9

0.0

5.0

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20.0

25.0

30.0

2-Apr-04 2-Apr-05 2-Apr-06 2-Apr-07 2-Apr-08 2-Apr-09 2-Apr-10

PER multiple

1 yr fwd PER


CRISIL Independent Equity Research Team Mukesh Agarwal [email protected] +91 (22) 3342 3035 Director Tarun Bhatia [email protected] +91 (22) 3342 3226 Director- Capital Markets Analytical Contacts Chetan Majithia [email protected] +91 (22) 3342 4148 Sudhir Nair [email protected] +91 (22) 3342 3526 Sector Contacts Nagarajan Narasimhan [email protected] +91 (22) 3342 3536 Ajay D'Souza [email protected] +91 (22) 3342 3567 Manoj Mohta [email protected] +91 (22) 3342 3554 Sachin Mathur [email protected] +91 (22) 3342 3541 Sridhar C [email protected] +91 (22) 3342 3546 Business Development Contacts Vinaya Dongre [email protected] +91 99 202 25174 Sagar Sawarkar [email protected] +91 98 216 38322 CRISIL’s Equity Offerings The Equity Group at CRISIL Research provides a wide range of services including:

Independent Equity Research IPO Grading White Labelled Research Valuation on companies for use of Institutional Investors, Asset Managers, Corporate

Other Services by the Research group include

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