Sunday, December 20, 2009
Investors with a long-term perspective and a high-risk appetite can buy the stock of textile player Alok Industries. At Rs 21, the stock is at 6.1 times its trailing 12-month per share earnings. Investors should limit portfolio exposure to this small-cap stock.
Sustained exports, increased per client revenues and efforts to tap domestic markets, wide-ranged product lines and capacity expansion suggest strong prospects for the company over the medium term. The company's planned exit from its realty arm to refocus on textiles may help trim its massive debt, which has been the key reason for the stock's depressed valuations.
The company's revenues are derived from apparel fabrics (54 per cent), followed by polyester yarn (21 per cent) and home textiles (17 per cent),cotton yarn (4 per cent) and garments (5 per cent). Individual product lines are varied within as well. Fabrics include poplins, lawns, voiles, canvases, satins and so on. Yarns include dyed yarn and organic cotton, among others, while home textiles include bed and bath linen.
Alok supplies fabric and garments for work wear and fashion wear to manufacturers and retailers such as Zodiac, Gap, and so on, in domestic and international markets. Technical and speciality fabrics such as fire-retardant fabrics, wrinkle-free and stain-free fabrics, tarpaulins, and so on, find growth markets in sectors such as Defence, automotives, hotels and hospitals. Alok has set up research and product development facilities to boost sales of technical fabrics.
Such broad-basing gives Alok the ability to capitalise on healthy prospects in some segments even as others may flag. Alok's list includes repeat clients, and some of the bigger names such as Gokaldas, Walmart, JC Penny, and so on, which help mitigate the risk of drying up of orders.
Even as textile exports flagged from the September 08 quarter onwards on waning consumer demand overseas, Alok's exports managed a 2 per cent growth. Alok actually added clients during FY-09, as global retailers looked to consolidate suppliers to control costs. Alok's diversified offerings and capacity expansions allowed it to meet client requirements, resulting in increased revenues per client.
For instance, JC Penny, which was sourcing only apparel fabric, began sourcing home textiles as well. Exports hovered at 40-45 per cent of sales over the past three years, with the exception of FY-09, when it dipped to 33 per cent. Alok plans to hold exports at 45 per cent levels. Global retailers and manufacturers are looking to source from India to cut their costs as consumer demand hints at staging a revival.
With domestic consumer demand on an upswing and retailers seeing healthy sales, the domestic market holds bright prospects too. Alok's distribution channel, its retail arm H&A, will serve to improve supplies to domestic retailers.
Formerly, H&A retailed home textiles, apparel and accessories to the value-for-money consumer market. H&A isnow changed to a wholesale value-for-money, cash-and-carry model, supplying smaller retailers and garment manufacturers. This move could enable foreign investments compliant with FDI norms, help bring in smaller clients, and spread the company's reach over a wider geography.
The current store count is at 152, concentrated in north and west India. Planned count for end-FY-10 is 250 across metros, Tier-I and II cities pan-India, with a target of adding 250 stores per year after that. Though a tad ambitious, especially in the light of troubles faced by like-minded retailers, Alok plans to expand through franchisees. Capital requirement and store expenses such as rent will thus be minimal and risks muted to an extent.
The company's sales clocked a three-year CAGR of 26.5 per cent, while net profits clocked a growth of 20.5 per cent in the same period. Sales growth has held at 40 per cent for the first half of FY10; net profits have grown 25 per cent.
Acquiring primary raw material cotton during season time as well as forex hedging strategies have helped operating margins improve steadily from 21.5 per cent in 2006-07 to 30.2 per cent in 2008-09. However, 50 per cent-plus growth in interest costs and depreciation have left net margins at a low 6.4 per cent.
Debt and interest
Alok's debt is at Rs 6,910 crore, translating into a post-rights issue debt-equity ratio of 3.2 times, taken on to fund capacity expansion and working capital. Interest costs have wiped out almost half the operating margins of 30 per cent in FY-09 and 28 per cent in the first half of FY-10.
However, Rs 3,000 crore has been taken under the Technology Upgradation Fund Scheme floated by the Textiles Ministry. These loans carry a low 6 per cent interest rate and 10-year repayment frame.
Going forward, Alok's debt requirement will be minimal with expansion complete by the end-FY10, and franchise mode of H&A store ramp-up. As sales step up to match capacity expansion, interest costs and debt load are likely to come down.
Further, Alok's exit from its three commercial and residential realty projects will help trim debt. Exit will be complete, at the latest by end-FY11.
Realty player Anant Raj Industries could be a prime beneficiary of the recovery in the real-estate market in the National Capital Region, including Delhi. This is especially so in view of the Common Wealth Games 2010 to be held there , .
A de-leveraged balance-sheet, comfortable cash position for execution of projects, focussed strategy of leasing assets and de-risked business model in segments such as hotels augur well for the company's earnings growth over the next couple of years.
Investors with a high-risk appetite can consider limited exposure to the stock of Anant Raj Industries with a two-year perspective.
At the current market price of Rs 132, the stock trades at 11 times its likely per share earnings for FY-11. High concentration in Delhi and the NCR areas, as well as in the commercial realty segment , are risk factors, which if handled well, could benefit the company.
Anant Raj Industries follows an asset-heavy model, which means that the company owns a good part of what it builds and chooses to lease most of them.
Lease of prime commercial and retail space in Delhi and the rest of the NCR and other cities adjoining Delhi, occasional offloading of such assets owned through stake sale, apart from sale of residential properties, are the key sources of revenue for the company.
Anant Raj holds 982 acres of fully paid land bank . The land was procured at low cost and as and when the Delhi Development Authority made allocations. Anant Raj has traditionally focused on commercial space lease, with a good 55 per cent of its saleable area coming under this segment.
In its recent venture, it pre-leased 70 per cent of its IT SEZ in Manesar, a fast growing industrial town in Gurgaon . Nevertheless, the NCR region, as demonstrated in 2008, is prone to sharp spells of correction. That said, the region was also among the first to recover.
Besides, studies show that the NCR region stands second in the country in terms of demand for commercial space. While Anant Raj faces risk by concentrating its commercial projects in NCR, the region lends itself well for companies wanting to build a rental-yield revenue model. Going by the company's track record of handling office space leasing, the company may well continue to build on the lease model.
It has nevertheless, realised the need to diversify further and has about 33 per cent of its saleable area in the residential space. While it is developing a few mid-income housing projects in the outskirts, its flagship premium projects in the heart of Delhi, with capital values upwards of Rs 25,000 per sq. ft now, is likely to yield good returns. The company's cash-rich position and in-house construction do not leave much doubt on execution delays.
De-risked hotel segment
Anant Raj has an interesting business model in the hotel segment. In its two properties near the Delhi airport, for instance, it has transferred the occupancy risks to third-parties in return for fixed rental income over six years, with escalation clauses after three years.
Similarly, in its hotel property forming part of the Manesar IT Park, it has tied up with the Hilton group on a per sq. ft, basis (not based on occupancy), with escalation clauses every three years.
Transferring occupancy risks to third parties would provide steady revenue streams, which would otherwise be writ with the volatility faced by the hospitality industry.
With a net cash balance of Rs 550 crore, post its negligible debt, Anant Raj is certainly among the cash-rich realty companies, a rare feature in the industry. Apart from lease revenue, it resorts to occasional land/stake sale in projects, thus monetising its assets. This strategy comes in handy, especially during periods of fund crunch.
As a result, revenue flow tends to be lumpy when the company resorts to sale of property. The company's consolidated revenues have grown 56 per cent compounded annually over the last three years to Rs 251 crore in FY-09. Rental income close to doubled in the first half of FY-10 as more properties became operational.
The company's operating profit margin tends to vary as a result of its sale-cum-lease model and is as high as 90 per cent in quarters when expenses on construction are low, even as the steady lease income flows.
Investors with a medium-to-long time investment horizon can consider buying the stock of Eveready Industries. With power-hungry rural regions and a rising number of battery-powered gadgets, Eveready Industries, which holds a 51 per cent share of the Indian battery market, has strong growth prospects. At Rs 67 the stock is trading at 10 times its trailing one-year earnings.
The valuation is at a premium to Nippo Batteries which is trading at a PE of 8 times. However, the company's size and prospects justify it. The battery industry, which had fallen prey to rising zinc prices, has shown improved growth on Zinc prices receding from their peaks of last year.
Apart from batteries, Eveready also sells torches, tea and mosquito repellents. The sales mix: 70 per cent batteries, 20 per cent torches, 9 per cent tea and less than one per cent contribution from insect repellents.
The battery business
Eveready manufactures ‘AA, ‘AAA', ‘D' and rechargeable batteries used in electrical appliances and gadgets. Replacement demand for batteries tends to be non- cyclical, but a high exposure to rural markets limits pricing power.
For instance, in November 2006, when zinc prices rose to all time highs ($4,580 per tonne on the LME),price increases by the company met with stiff resistance and battery sales fell by 600 lakh units (5 per cent) in 2006-07; overall margins (operating) dipped six percentage points. The company's enduring efforts towards improving product mix have, however, been strengthening the company's margins since then.
Eveready's battery sales picked up in FY08 (volumes up 12 per cent) with higher market penetration. But sales suffered again in the economic downturn of 2008-09; volumes plunged 8 per cent. Even in the June ended quarter there was a slip in turnover. However, renewed recovery signals are evident now. The September-ended quarter has seen battery sales volumes rise 7 per cent.
Eveready's September quarter sales were up 20 per cent and operating profit margins were up 3 percentage points to 13 per cent.
Eveready had, in April, launched a new class of LED (light emitting diode) lanterns. Pegged as an energy saver, this product has taken off well in the rural areas in the North and East and is replacing kerosene lamps in homes. Eveready's total flashlight sales for the September '09 quarter grew 16 per cent with LED lamp sales alone bringing in Rs 21.33 crore (8 per cent of the total sales). The company's extensive distribution network will help it garner a large pie in this market dominated by unorganised players. The company's lighting division is performing very well with the range of the newly launched GLS (General Lighting Service) lamps; the existing CFL lamps are also witnessing higher demand. The lighting division's sales in the September '09 quarter were Rs 25.30 crore (against Rs 9.42 crore in the same quarter, previous year).
Apart from conventional zinc carbon and alkaline batteries, Eveready is also focussing on developing its rechargeable battery business. It had, in May this year, taken controlling stake in the French rechargeable battery maker Uniross for a consideration of Rs 41.10 crore. With roots in Europe, Uniross has presence across the globe. Eveready already sells batteries, flashlights and mosquito coils under the brand ‘LAVA' in the markets of Sudan, Egypt and Sri Lanka.
Eveready's tea business holds a 5 per cent domestic market share. Sales growth has been flat over the last five years. In the September'09 quarter the segment's turnover was Rs 17 crore against the Rs 20.4 crore in the same quarter last year.
Risks to business
After cooling from the highs of FY07 zinc prices have risen again from their lows; from $1,549/tonne in June to $2,300/tonne now. The prospects for zinc largely depend on how steel offtake shapes up this year, with the recovery in the global economy. However, even if prices do rise from current levels, they may not go back to last year's bubble-driven peaks. An appreciating rupee is a positive for the company as it cuts input costs.
Eveready's sales have been growing at an annualised rate of 7 per cent in the last five years.
After reporting net losses for two years in sequence in FY07 and FY08, the company returned to profits in FY09 on the cooling-off in input prices and higher price realisations. FY10 can be expected to be a good year for the company with the half-year numbers already showing a 13 per cent increase in sales and operating profits almost doubling.
After tax profits were reported at Rs 40.04 crore against the Rs 5.9 crore in the same period last year.
The current year may also see a one-time cash flow equivalent to Rs 115 crore due to the company transferring its leasehold premises at Navi Mumbai to HDIL.
The income will be shown in the books once the company finishes the formalities. Eveready's debt burden too stands reduced from Rs 401.7 crore in FY08 to Rs 296.39 crore by FY09-end.
Lower interest rates may aid better profitability in the quarters ahead.
Do you wish to build an equity portfolio in a mutual fund? If so, you can now choose between lump investments and the popular systematic investment plan (SIP).
A recent addition to the menu is the value averaging investment plan (VIP). For investors having a one-time surplus on their hands, their obvious choice will be the lump sum investment. However, for salaried individuals, who are likely to retain some amount of surplus every month, the option to build the wealth is naturally to invest through monthly instalments either by way of the SIP or VIP, where investment is made based on their financial goals or the target they wish to achieve.
Now let us consider a case where an individual plans to build a portfolio. By investing a monthly sum of Rs 10,000, he wishes to invest for 36 months in an index fund to reach a target of Rs 4.5 lakh.
We have assumed index funds to avoid any fund-specific risks. The assumed equity returns we consider here is 15 per cent. Here we take a look at whether SIPs or VIPs would have more beneficial for such an individual, in terms of maturity value and how much money he needs to meet the target.
First an overview of how the two options will work.
Systematic investment plan (SIP): Under this option, one invests the same sum without worrying about market movements. By investing regularly over a period of time, market volatility will be evened out. As units are acquired at different NAVs, more units are bought when markets are down.
At the time of selling, an investor sells all the units at the prevailing NAV and takes out his profits.
Under systematic investment plan, one optimises the returns rather than maximising them.
For instance, if you start an SIP close to the market peak, you will continue to buy units at higher levels all the way down to the bottom.
Value averaging investment plan (VIP): Under the VIP the sum invested (and not the number of units) varies based on market levels. The investor sets a target return from the portfolio at the outset, say 15 per cent per annum. The VIP then ensures that you invest a larger monthly sum when the market falls and a lower sum when the market is high.
Assuming you can spare a minimum monthly amount of Rs 10,000. At the start of the investment assume the NAV of the scheme is quoting at Rs 35. If the NAV shoots up to Rs 39 next month, your portfolio value will be Rs 11,142. The plan will measure this against your target portfolio value. If it falls short, the fund will deduct only the remaining sum from your account and buy a lesser number of units.
How VIP compares to SIP
Let's take an example here. Suppose you have started an SIP in December 2006 and are contributing a monthly sum of Rs 10,000 to be invested in a CNX 500 index fund for the past 36 months. Currently your investment of Rs 3,60,000 stands at Rs 4,40,000.The annualised return on your cash flows works out to 12.7 per cent. Assume you made the same investment in a VIP for 36 months. In VIP, because your monthly instalment will tend to vary, you need to mention both the minimum monthly commitment as well as the maximum that you can set aside. If you have opted for maximum of 10 times of the monthly commitment, calculations show that the actual deduction could have varied very widely from Rs 10,000 to as high as Rs 84,700 a month.
In periods where your portfolio value was higher than you targeted, the fund would have not debited any sum from your account. But in all you have paid Rs 4.8 lakh towards the investment but your current value stands at Rs 6.8 lakh.
That works out to an annual return of about 22.5 per cent (based on a monthly return of 1.87 per cent), much higher than the SIP returns.
The VIP may be a good method to invest for the long term because it ensures that you commit large sums to equity funds when markets are at a low. It also automatically “rebalances” your portfolio when its value rises or falls.
However, the key disadvantage of the VIP is that the sum you invest each much will be highly unpredictable.
A salaried individual whose income is constant may find it difficult to commit to a VIP knowing that the sums debited to his account may vary so widely. This may prompt him to commit to a low monthly investment. Therefore, investors who have the flexibility to overshoot their investment targets significantly can consider the VIP.
The second factor is that investing through a VIP is most effective when the market is not moving in one direction.
If on starting the VIP the market is in a steady decline for many months, investors in a VIP would find themselves committing larger and larger sums to the equity fund, even while the investment loses value. Such a course may be difficult to stick to, as the absolute loss to the investor can be very high.
This suggests that even in a VIP, investors need to set a portfolio target on which they will book profits.