Originally posted by lksingh Alok Industries the fully integrated textile to retail company has reported Rs1,451 crores revenue for the quarter ended September 30. The company’s market capital stood at Rs 2245 crores. It has now put together a strategy to decrease the debt-equity ratio of 1.81 over the next few years. The main strategy is to sell off large amounts of real estate currently being held by the company and generate higher profits through its retail businesses in India and the UK. Two years ago, the company had plans to raise private equity for its retail businesses. Alok Industries primarily manufactures textiles and owns retail stores in India and the UK. The company operates 260 stores called H&A in India through the franchise model.   Also let me know from your view point what is your thoughts on this company.

1. Whole company, to me, looks work-in-process. The frequency at which they keep raising debt and then equity, the cycle looks endless without proper consolidation &  balance sheet management. I would  have liked more stability in a 25 year old company from a sedate sector. 
2. DER of 3:1 does not tell the story. In absolute terms, total debt of Rs 8500 cr is huge. Every form of equity raising - rights, FCCB, QIP is resorted to.
3. Impact of subsidised loans getting phased out (heard TUFS will discontinue from 2012). I wonder if they had gone for similar expansions year after year if subsidised loans were not available in first place?
4. Moreover, interest rate risk. If they have to shell out more than 500 cr as annual interest on sales of Rs 4300 cr, it's time to take a look at the finances.
5. OPMs are decent around 28% but heavily suffer on pat basis for obvious reasons. Trend may not change in near future. Rising rupee doesn't help either.
6. M-cap to Sales of 0.50.
7. Retail business under H&A is yet to make its presence in the marketplace despite all the management talk.
8. If real estate plays out favourably, it will be good for the company and investors. That gives hope. But not sure about the real benefits given these type of land deal transactions.

Edited by master - 24/Nov/2010 at 7:10am

I have been holding shares of alok since last 1 year.

I have been adding regularly in the price range of 18-23. But at 30 rs, I am not sure how much upside is there. However, I feel that the stock may go upto 40 Rs in 1 year ( AN ASSUMPTION)

I bought it last year becoz the textile industry was passing thru a bad phase and stocks were undervalued.

I believed that there has to be a turnaround for the industry if there is a revival of the economy.

Also Alok looked quite undervalued to me.

Negatives

1. High debt of 8500 crores is really high. But so far it has been able to service its debt . Also the rating agencies have improved the short term and long term debt rating.
The company says that it intends to improve the debt equity ratio , reduction of debt and no further equity dilution, however, same cannot be guaranteed.

2. The company has paid a good will of 233 cr out of 314 cr paid for its share holding in Grabal Alok.  grabal alok is a promoter group company and deals in embroidery text.


Positives :

1. Revenues of the company have been increasing consistently , even during recession,  although due to debt and equity addition resulting in lower EPS. But I take it as a positive that the company is able to sell more.

2. The net profit has been increasing thou the profit margin has fallen as the industry was passing thru a bad phase and due to excess debt. Hope it will improve with time and if they are able to reduce debt-equity ratio.


3. The UK subsidiary and another Czech subsidiary Mileta were posting losses in last Fy 08-09. The company was able to turnaround these subsidiaries and the losses have stopped, however the profit margin so far is very less.

4. The company posted a standalone profit of 245 crores on sales of abt 4300 cr last year , but consolidated profits were reduced to abt 137 cr due to losses of subsidiaries, associates and real estate operations.  With the turnaround of subsidiaries and real estate I expect it to post better results even on consolidated basis this.

If we assume that the contribution from subsidiaies and associates, real estate opn to the net profit of Alok ind is zero  ( again an assumption), ( it had reported after June qtr that its UK operations have become profitable, Mileta has started posting profit and company expects returns from real estate opn).
and even if we assume a growth of 10 % in rev and profits ( I expect it to be more) the company will post a profit of abt 270 cr , EPs of 3.4 .
With PE of 10, price comes to 34 rs.  Arvind is quoting at PE of abt 20.

I feel the downside risk is less, the Company is fully integrated into the textile business and has invested a lot in expansion which can contribute to future revenues.

Also there is lot of scope for technical textiles ( special fabric) which India has been primarily importing and the company haas made good investments in that sector.

It has presence in cotton as well as polyester yarn.

Exports have been increasing steadily and company was awarded for export perf.

The retail opns have posted a small profit. The company has been expanding fast and is targeting tier 2 - 3 towns. However , the company does not have any brand with a good recall in India. So I guess they will be primarily in value clothing. A lot depends on how they are able to handle retail operations.

The govt has come up with a national policy for man made fibre. World wide ratio of cotton : manmade fibre  is  40 : 60  , In India it is 57 : 43. ( source text ministry website) So there is lot of scope for synthetic fibre in India.

As per textile ministry , textile growth is expected to be 7 - 8 %

Also availability of gas ( cannot be guaranteed) can bring down the power costs.

Appreciation of rupee will hurt , but appreciation in Yuan will help.

The company has got presence in all the sectors, yarn, fabric, garments, home textiles, knits, technical text, terry towels etc.

Few things if any teddie can clarify

1. What is the percentage untilization of their plants in FY 09-10.



I dont expect it to be a multibagger but i expect steady returns from this counter.

Will like to request members for their advice.


Note : I have a holding in this company. Also the fig mentioned are approx and there can be some error.

Any long term investor should not even consider looking at this scrip. The promoters are serial diluters of equity. IN the last 6 years, the turnover of the company would have grown by 3-4 times and same for profits but the share price is lower than what it was 6 years back..
For trading i have no clue but no long term benefit will come with their expansion plans - Only promoter gets richer or bigger ??

Learning concept of ROCE has been useful to me in understanding why such companies never make money for shareholders unless one is buying these at very distressed levels. There is little use of analyzing companies with consistent ROCE < 10.