An investment can be considered in the stock of Mudra Lifestyle. This recently listed textile company continues to trade well below its offer price of Rs 90. The stock, on Friday, reacted sharply to the strong earnings reported by the company; Mudra reported a 57-per-cent increase in revenues and a 90-per-cent growth in profits for FY07.
With significant capacities likely to come on stream in the first half of FY08, revenue and earnings growth is likely to be robust for the current year as well. At the current market price, the stock trades at less than 10 times its likely FY08 per-share earnings, assuming its expansion plans are commissioned as per schedule.
Textile stocks have been under pressure as a competitive export market, scaling-up challenges, and an appreciating rupee continue to weigh on performance. In this context, we favour companies such as Mudra Lifestyle that have a domestic market focus. The stock could serve as an indirect play on the domestic consumption theme.
Mudra has been a supplier of finished fabrics to garment manufacturers. It recently forayed into garments with the aim of supplying to local branded garment outfits. It appears to have garnered some orders from leading garment manufacturers, judging by the early traction in the garments business.
Mudra, with the help of offer proceeds, is tripling its garment capacities to more than 10 million pieces a year. It is simultaneously ramping up its weaving and processing capacities as well. Its garments division is likely to be operational in June. The long-term prospects for this business model appear bright.
Local branded players such as Madura Garments (Aditya Birla Nuvo) and Raymond are focusing on expanding their retail presence and are likely to look to outsourcing production to players such as Mudra. The bigger story is the demand from retailers such as Reliance and Bharti Wal-Mart as they look to stock stores with private labels.
It might take a year or two for the company to ramp up utilisations, with the new entrants yet to foray into garment retailing. Competition from exporters looking to diversify into the domestic market is also a risk. Any cooling off in prices following the sharp movement on Friday could be used as an entry point. Buy with a two-year perspective.