CRISIL maintains Alok Industries` fair value to Rs 29

Alok Industries Ltd (Alok) is one of India’s leading integrated textile players. It is present across the textile value chain from yarn manufacturing to garmenting and has a wide range of products. Strong capabilities in the textile business and sizeable capacities have helped it grow by 35% in the past five years and become a preferred vendor for international clients. We expect Alok’s financial profile will improve following its strategy to exit the noncore realty and retail businesses. Hence, we maintain the fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India.

Consolidating its position
Alok is in the consolidation mode and plans to focus on value-added products and improvement of utilisation across the value chain. In the past few years, Alok has set up large-scale capacities in all divisions polyester yarn, apparel fabrics and home textiles to cater to the global and domestic markets. A diversified product mix has made it one of India’s fastest growing textile company.

Domestic textile industry to grow at 5-6%, polyester to drive growth; Alok to benefit
CRISIL Research expects India’s domestic textile industry to record a CAGR of about 5-6%, expanding to over Rs 3,400 bn by 2016 from Rs 2,653 bn in 2011. Growth in the polyester segment will outpace growth in the cotton segment and we expect Alok to benefit from this. However, capacity addition in the polyester segment in the past two years has resulted in an oversupply situation which will limit pricing flexibility.

Exiting real estate: financial flexibility is a key monitorable
Alok is in the process of monetising its real estate venture to use the proceeds for repaying debt. CRISIL Research expects it to garner Rs 16-17 bn in the next two years by exiting the real estate business. During FY12, it sold some portion of its portfolio and will realise Rs 6-7 bn. Its high debt-equity ratio of 4.1x (as of FY12) is expected to decline to 2.6x by FY14 and will also improve its return indicator. However, any delay or change of plans could hamper financial flexibility.

Revenues to register a CAGR of 11%; margins to decline
With most capacities already commissioned, we expect Alok’s top line to grow at a two-year CAGR of 11% to Rs 121.2 bn in FY14. EBITDA margin is estimated to contract from 25.7% in FY12 to 23% in FY13 and FY14 due to higher share of the low-margin polyester business.

Valuations: Current market price has strong upside
We continue to use the discounted cash flow method to value Alok and maintain our fair value at Rs 29. At this value, the implied P/B multiples are 0.7x FY13E and 0.6x FY14E book value. At the current market price of Rs 18, the assigned valuation grade is 5/5.

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