Suryalakshmi Cotton Mills

Broking house, Angel Broking is bullish on Suryalakshmi CottonMills...It has maintained a 'buy' rating on the company with a target price ofRs 300.
Key highlights

Q3FY2006 financial performance*"Suryalakshmi Cotton Mills recorded an impressive Q3FY2006 performance on the back of de-merger of the low-margin spinning division at Mehbubnagar andnew capacities coming on stream. As a result of this de-merger, SCMLwitnessed a margin expansion of 14.1% on a YoY basis. However, margins on asequential basis declined on account of lower realizations in denim, whichdeclined from Rs 94 in Q2FY2006 to Rs 90 in Q3FY2006. Going ahead, we do notexpect realizations to further fall significantly. Besides, a sequential384bps increase in other overheads also affected the margins adversely.Positive contribution from new denim capacities*"SCML is implementing its Rs 120 crore (Rs 1.20 billion) capex plan in thecurrent fiscal to expand its denim capacity from 20 million meters per annumto 40 million meters per annum. The company has already commissioned anadditional weaving capacity of 10 million meters in September'05 and thebalance 10 million meters per annum capacity will commence production inApril'06.""With the expanded capacity coming on stream, SCML will become the thirdlargest manufacturer of denim fabric in India. Share of the Denim divisionto total revenues is expected to increase from 60.4% in FY2005 to 75.7% inFY2007 following expansion of capacity."*Value added products to be earnings accretive*"SCML has a wide range of 300 varieties of denim fabrics and its yarn andrope dyed denim capacities are acknowledged to be one of the finest acrossinternational markets. The company's revenues from value-added denim arealso on the rise following increase in capacities.""We expect the share of value-added denim to increase from 40% in FY2005 to80% in FY2007. The company's concentration on value added denim will help itmaintain its realizations and also help improve its margins and profits."*Garments to facilitate growth*"SCML is setting up a fully integrated denim garment capacity from spinning,dyeing, weaving to finishing. This complete integration will enable SCML tohave a stronghold and presence across the entire denim value chain. Thus,SCML has progressed from being a pre-dominantly yarn manufacturer to afabric manufacturer.""The company also commissioned trial production of its 10,000 pieces a daygarmenting facility in September'05. However, major revenues from the samewould get reflected in FY2007. Going forward, SCML has plans to increase itspresence in its garments business. Overall, SCML's conscious efforts toprogress up the value chain will positively reflect in its profits goingforward."*Yarn manufacturing expansion*"Post de-merger, SCML's spindleage stood at 16,032 which it proposes toincrease to 48,088 by end of this fiscal. Post this expansion; SCML willhave a yarn manufacturing capacity of 14,000 tpa. This new capacity willhelp SCML meet increasing demand for yarn."*Sources of funding*"SCML's expansion programme will be funded through a 1:3:1 mix of freshissue, TUFS and internal accruals.""Preferential allotment of 1,428,300 shares aggregating 10.68% of theexpanded capital has been done with UTI Investment Advisory Limited at Rs245 per share (21% premium to the current market price). This equityinfusion of Rs 35 crore (Rs 350 million) by UTI signifies its faith andexpectation of future profitability of the company."*Outlook and valuation*"SCML's Rs 200 crore (Rs 2 billion) capex is expected to yield betterreturns and enable SCML to have a complete command over the denim valuechain. SCML's foray into denim garments through subsidiary Surya Kiran willfurther enhance its competitiveness and improve its margins andprofitability. We believe that SCML is on track to meet our profit estimateof Rs 34 crore (Rs 340 million) for FY2006E and Rs 54.5 crore (Rs 545million) for FY2007E.""*At the CMP of Rs 204, the stock trades at 4.7x FY2007E EPS of Rs 42.9 and1.4x FY2007E book value. We maintain our Buy recommendation on the stockwith a target price of Rs 300*