EASTERN SILK

FIIS N MUTUAL FUNDS TOGETHER HAVE 19% OF THE EQUITY.

ESI is targeting a turnover of over 320 crores for 05-06 with profits in the range of 36 crores (conservtive estimate). The EPS on the current equity should be more than 50. However, the company is in the process of a merger with 2 group companies which will take the equity to 14 crores. Even on this enhanced equity on can expect an EPS of more than 27.The company has undertaken a massive expansion and modernization plan whereby handmade fabrics are manufactured by machines. This transition had led to the reduction in turnover and profits for the qtr ended March 05.The company has already disbursed an interim dividend of 15% and is likely to declare a final dividend as soon as the merger process is complete.The existing qtr results are expected to be above market expectations. The NPM during the last qtr increased to an all time high of 9.6% and is sure to increase going forward.HSBC securities has bought a large chunk of shares recently from the promoters thru a market transaction in the range of 250-260 levels. The management went through this exercise to increase the liquidity. The effect was evident from the very next day of this placement when the volumes went up 10 fold. This liquidity has opened the intrinsic value of the scrip to some extent.If the scrip is compared to its peers, it is grossly underpriced. Fair value of this scrip is 320 levels on a very conservative estimate.

Eastern Silk Industries is an established player in the exports of silk fabrics and made-ups, it is likely to have a competitive advantage in the post-quota regime.The lifting of quota regime in global textiles trade is a huge growth opportunity for Indian companies with a presence in specialised products. ESI Limited (formerly Eastern Silk Industries) is a Rs 270-crore company with 80% revenues from exports of silk fabrics and garments.The company's revenues are almost double the topline of its nearest competitor - Himatsingka Seide - in the silk fabrics segment even as its equity capital is less than half of Himatsingka Seide's equity base. On a valuation basis, ESI appears to be much more attractively priced than its better-known counterpart.A major trigger for the re-rating of the company's value could come from a recent decision to merge two other silk fabric exporters - Sstella Silk and Eastern Jingying- into it. Both these companies have a foothold in overseas markets in the area of silk fabrics and made-ups.This move should further strengthen the operations of Eastern Silk Industries at a time when quota dismantling for WTO countries in the textiles sectorhas happened . This should create a huge opportunity for ESI to improve its earnings per share (EPS) to a significantly higher level.Dismantling of quotaThe biggest trigger which the company had been awaiting and preparing for a long time . This would be the end of the multi-fibre agreement following which the quota system for textile exports would be dismantled.Textile exports would become more competitive and leading exporters from various WTO countries would start enjoying the edge. Since Eastern Silk Industries has been an established player in export of silk fabrics and made-ups, it is likely to grab the competitive advantage.FinancialsESI has performed consistently over the past year-and-a-half. The company has been expanding operations throughout North America, Europe and other countries for presence in the markets for silk fabrics and made-ups. It earns as much as 80-85% of its annual revenues from exports to these markets.In the current financial year, the company has sustained its strong momentum. Its performance on various financial parameters like sales and profitability has shown healthy growth in the first quarter of the current year. Since silk exports are prone to swing with weather cycles, the company's performance too takes an upswing in the later half of its financial year.Therefore, even on a conservative basis, the company should turn out much better numbers than in the previous financial year. Great future ahead