Alok Industries....A value pick

The expectation of significant cash flows due to improving global and domestic traction for garments and textiles has caught the eye of FIIs. This can be supported by the surge in various textile company stocks. Many key textile companies undertook large capacity expansion during 2006-2009 to achieve the much expected critical scale. Most of these capacities are slated to reach full utilization from 2010-11. 

From mid-2007 to mid-2009, the domestic textile industry was reeling under multiple factors, including an appreciating rupee, demand slowdown in foreign markets, inventory de-stocking by domestic retailers, and higher depreciation and interest costs. Most of these factors reversed in 2009-10 and we expect the industry’s fortunes to improve further in 2010-11. Alok Industries, Arvind Ltd., S Kumars Nationwide, Century Textiles & Industries and Bombay Dyeing, among others, recently benefited from this renewed FII interest during the previous quarter. The other drivers of the sector’s growth are increasing population, income levels, rapid urbanization, improving demographics, rising number of players and growing penetration of retailers into smaller cities.

Alok Industries, among the pack of textile stocks is a valuable pick for one’s portfolio. According to a latest release, FIIs raised their stake in Alok Industries, a fast-growing vertically-integrated textile company to 13.89% in the quarter from 4.92% in the June quarter. The demand in both domestic and export markets is on the rise. This will have a positive impact on profitability as volumes as well as realizations are moving up. For Q2FY11 the company reported a net profit of Rs.79.8crore, 40% y-o-y growth and net sales of Rs.1,451crore, a y-o-y growth of 48.8%. The exports grew by almost 90%. Apparel fabric grew by 74%; home textile grew by 61%; garments grew by 18% and polyester yarn by 13%. The company sold some of its land recently. This would contribute hugely to its cash balance and aid in the expansion plans in future. The company currently has around 250 shops in India and would be adding 100 more in 2011. As far as the UK retail is concerned, it has 218 shops at present and within the next calendar year the figure would be 300. Going ahead the company is looking forward to aggressive restructuring and expansion plans along with introducing international brands in India. 

We recommend long term investors to add the scrip to their portfolio for value addition and reap healthy returns in 1-2 years.