Sultej Industries, a leading exporter in the textile sector, is expected to notch up significant profitability over the next 2-3 years on the back of impressive volume growth driven by expansion & margin improvement. Enhanced focus on the garment export sector & improved product-mix towards higher margin products would become visible in the bottomline of the company over the next 2 years. In addition, with an investment value of Rs 174 per share, the company offers limited downside side risk coupled with substantial upside potential due to the growing core business.
Company background
Sutlej Industries was incorporated in 1963 & belongs to the KK Birla group of companies, one of the leading business houses in India . It has world-class machinery at its three plants Bhawanimandi (Rajasthan), CTM at Kathua (J&K) and DGF at Bhilad ( Gujarat ). The company produces synthetic and blended yarns and 100% yarns with spinning, weaving and processing facilities of 140,000 spindles and 48 projectile looms. SIL offers fabrics in plain, twill, drill, satin, gabardine and jacquard weaves. The company presently is a leading Government recognized Golden Trading House exporting to 52 countries. The company exports to countries such as East European Countries (EEC), Middle East , East Africa , East Europe , North Africa and Far East .
Investment Rationale
Exponential industry growth ahead .....The phasing out of Multi Fiber Arrangement (MFA) in 2005 offers significant growth opportunity to developing economies like India . The demand for fabrics and yarn will increase in the months to come, as exports of textiles and apparel from the country are set to jump post-quota, which would eventually benefit the company. Indian capacities are also coming up and a lot of capacity build up will happen by 2006. The country’s export growth is expected to remain around 23-25 per cent this year, which has been the growth during the first four months of 2005. In 2006, however, the growth would be much higher. In addition, recent levy of anti dumping duty on cheaper Chinese imports augurs well for the domestic textile industry. Indian exporters will gain not just in higher orders, but also by way of more equal competition. The revaluation of Chinese currency is future would also make India much more competitive vis-à-vis China
Improved product-mix
Sutlej Industries is shifting its focus to cater to the garment export sector as a part of its strategy to ensure better product-mix and improved realizations. The company is already producing Lycra-based fabrics, the demand for which is growing in the Middle East . It has also been successful in marketing Modal and Modal blends within the country, the turnover of which is set to double in the next two years. The company in the previous fiscal, started production of Tencel yarns, which helped it to further widen its product basket. SIL has already achieved good amount of success with varied applications in apparels, bed-sheets, bath-rugs, terry-towels, denim, socks, innerwear, nightwears and sportswear. With all the major international tags such as Lycra, Teflon, Coolmax, Modal and now Tencel, in its product basket, Sutlej is all set to establish itself as a brand with presence across the country as well as overseas
Expansions to drive growth
The company plans to invest Rs 62 crore in the current fiscal to diversify into value added products by setting up facilities to manufacture garment and home textiles at its Gujarat fabric plant. Home textiles and garments business are the fastest growing segments in the textile industry. These projects will be implemented within one year and would help it to expand its presence in the textile chain. The company recently expanded its capacity to 156128 spindles in FY05 and has laid emphasis on regularly modernizing its plants with the latest technology so as to survive in the highly competitive and liberalized global business environment. The full effect of company’s expansion will be reflected in FY06. We expect SIL to report revenue growth of 26% & 22% in FY06 & FY07 at Rs 667 crore & Rs 812 crore, respectively. The bottomline on the other hand would witness a jump 76% & 34% in FY06 & FY07 to Rs 27.65 crore and 37.20 crore as a result of margin expansion on the back aggressive diversification into value added products
Big investment portfolio limits downside
SIL has a sound & fairly large investment portfolio the market value of which amounts to Rs 185 crore. The prominent holding of the company include 40.58 lakh shares of Zuari industries, 290 lakh shares of Chambal Fertilisers, 20.67 lakh shares of Oudh Sugar Mills, 3.6 lakh shares of Century Textiles & 4.3 lakh shares of Upper Ganges sugar. In addition, the company holds 0.82% (Rs 16 crore) in Pilani investments which is stated to value around Rs 2000 crore. These investments translate into per share value of Rs 174 as against current market price of Rs 199. Thus the core value of the business is valued at mere Rs 25 per share, which we believe is highly undervalued. These huge investments should cushion the investors from any downside risk while the growing core business would further unlock value
Sutlej Industries reported a 34.79 per cent rise in net profit to Rs 15.69 crore during 2004-05, as against Rs 11.64 crore in the previous fiscal. The company achieved a turnover of Rs 528.77 crore, showing a rise of 13.77 per cent over previous year. The operating margins improved by 138 basis points to 8.85% due to better economies of scale and tightening of string on margins as it continues to move up the value chain.
Outlook
We expect SIL to post strong growth in revenues and operating profits on account of capacity expansions and rising exports. The capacity expansion at Kathua ( Jammu and Kashmir ) unit by 28416 spindles would add to the topline & bottomline in FY06. In addition, this new unit will be eligible for special packages of incentives announced by the Central and State governments. SIL is also expected to witness significant net profit margin improvement to 4.5% from current 3% on the back of operational improvement, improved domestic realizations and better product mix. We expect SIL’s revenues to grow to Rs 812 crore by FY07, while bottomline would grow even more aggressively to Rs 37.2 crore
Valuations
Sultej Industries is expected to notch up significant profitability over the next 2-3 years on the back of impressive volume growth driven by expansion & margin improvement. Enhanced focus on the garment export sector & improved product-mix towards higher margin products would become visible in the bottomline of the company over the next 2 years. In addition, with an investment value of Rs 174 per share, the company offers limited downside side risk coupled with substantial upside potential due to the growing core business.
On all valuation parameters, the company is attractive. The market cap / sales ratio is a meager 0.40 while the price to book-value ratio is 1.10. The stock trades at 7.64 x FY06E EPS of Rs 26.06 & 5.67x FY07E EPS of Rs 35.06
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