CRISIL maintains Shri Lakshmi Cotsyn`s fair value to Rs 157

Shri Lakshmi Cotsyn Ltd’s (Lakshmi Cotsyn’s) Q3FY12 (June year-ending) revenues were in line with CRISIL Research’s expectations while profitability significantly exceeded our expectations. The expanded capacity (worth ~Rs 9.9 bn) in the denim, sheeting and technical textile segments were commissioned as scheduled, in Q3FY12. Revenues increased 33% qo- q to Rs 7.1 bn. Minimal increase in employee cost and other expenditure despite a healthy growth in revenues led the company to post an all-time high EBITDA margin of 17.7% in Q3FY12. The management has indicated the effect of the increase in employee cost with strengthening of second line will be visible from the subsequent quarters. Mezzanine debt worth Rs 1.75 bn raised to fund capacity expansion is due in the September quarter. Given the high gearing and increased working capital requirements with the expanded capacity and consequently strained cash flow from operations, it plans to raise Rs 1,850 mn in June 2012 through GDR issue. However, inability to raise funds will put the company under significant financial stress. The lenders also have the option to convert the debt to equity at the prevailing market price. The stock price of the company has seen significant value erosion in the recent days. We had earlier assumed equity fund raising of Rs 1,850 mn at Rs 150 per share. However, with the significant decline in stock price, we now assume the company to raise Rs 1,550 mn at Rs 126 per share (last one month’s average price). Any delay or fund raising at a lower price is a downside risk to our fair value. We will be closely monitoring the fund raising activity. We maintain the fundamental grade of 2/5.

Q3FY12 (June-ending) result analysis
• Revenues grew by 33% q-o-q and 60% y-o-y to Rs 7.1 bn. For 9MFY12, terry towel sales more than tripled y-o-y to Rs 3.9 bn, denim division posted Rs 2.8 bn (up 56% y-o-y) and suiting posted Rs 1.8 bn (up 17% y-o-y). These segments constitute 51% of revenues.

• The company reported an all-time high EBITDA margin of 17.7%, up ~150 bps both q-o-q and y-o-y in Q3FY12. Minimal y-o-y increase of 10% and 1.4% in employee and operating expenditures, respectively, despite a 60% y-o-y revenue growth, led to expansion in EBITDA margin. Increased contribution from the value-added terry towel and denim segments (40% of 9MFY12 revenues vs. 27% of 9MFY11 revenues) led to EBITDA margin expanding ~ 200 bps to 16.8% in 9MFY12.

• Q3FY12 PAT grew by 60% q-o-q and 41% y-o-y to Rs 390 mn driven by robust revenue growth and expansion in EBITDA margin. PAT margin increased by ~100 bps q-o-q to 5.5% and dipped 75 bps y-o-y due to capital cost of expanded capacity. 9MFY12 PAT stood at Rs 842 mn and EPS at Rs 39.9 per share.

Valuations: Current market price has strong upside
We continue to use the discounted cash flow method to value Lakshmi Cotsyn and maintain our fair value of Rs 157. At the current market price of Rs 101, valuation grade is 5/5.

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