Broker bullish on Gangotri Textiles

Broking house, Pranav Securities is bullish on Gangotri Textiles . It has initiated coverage on the company with a 'buy rating' with 18-months target price of Rs 350. 

About the company's itself, the report says,

"Gangotri Textiles, a Coimbatore based cotton yarn manufacturer. It is having its manufacturing facilities in and around Coimbatore as well as a plant in Kolhapur, Maharashtra. The company has also established itself into garments with its Tibre brand getting popular. We are very much confident on the company's ability to grow bigger in the years ahead supported by its planned capacity expansion to meet the growing demand across various segments of textiles."

"Gangotri primarily manufactures cotton yarn; both ring spinning and Open-End technology. OE cotton yarn is produced in counts ranging from 2 s to 20 s. this yarn is available in varieties of cheese yarn, doubling, multi-fold, TFO and Hank yarn forms. OE yarn is being supplied to home textiles producers including furnishings and terry towels."

"Gangotri's Ring Spun cotton yarn is available in counts ranging from 14 s to 40 s and is being sold to weaving and knit wear manufacturers. The company has also forayed into readymade garments and manufacturers Men's trousers under the Tibre brand. These 100% cotton trousers are sold in the retail market."

The report mentioned several investment views, these are below: -

Indian Textiles in Post Quota Regime

"As anticipated, India has been one of the biggest beneficiaries of abolition of the quota regime that governed global textile trade for more than four decades. The recent data from US government shows a surge in exports of textiles and garments from India, both in volume as well as value terms. The vision 2010 of the Government of India too aims to increase the textile production of the country from Rs 48 billion at present to Rs 95 billion as well as increase exports from Rs 14 billion to Rs 50 billion by 2010, at an estimated investment of Rs 65000 crore (Rs 650 billion). Though, these targets seem ambitious, the performance of the Indian textile sector has been encouraging in the post quota regime."

"All said and done, there are still few handicaps within the industry and its structure that are restricting the growth of the textile sector. While rigid labour laws continue to be a drag on Indian corporate, a major handicap in the industry is the absence of sufficient weaving, processing and garmenting facilities as compared to the large yarn capacities that the country has established. Also, India's shuttle less weaving capacity is only 1.2% of the world capacity as against 10% in China and 15% in Russia. Hence, to capitalize on this opportunity, Gangotri is expanding its capacities by establishing a state of the art weaving, processing and garmenting facilities."

Adding capacities to fuel growth

"Gangotri has announced a major expansion plan at an investment of Rs 351 crore (Rs 3.51 billion). The proposed expansion work is expected to commence by October 2005 and completed by September 07."

Low cost debt to fund the expansion projects

"Gangotri is in the process for obtaining loan funds under the TUF Scheme of the government of India. Out of the Rs 351 crore (Rs 3.51 billion) for the total capex, the company has planned to fund Rs 273 crore (Rs 2.73 billion) from bank loans under TUF. The company is negotiating with the bankers to obtain funds at 7.5% to 8% interest rates, which after adjusting for the 5% subsidy under TUF, works out to an effective interest cost between 2.5% to 3%."

"We believe that the company would be benefiting from the low cost funds it intends to obtain under TUFs. Under TUFs (Technology Upgradation Fund) of the government of India, textile companies get a 5% interest subsidy on loans for augmenting capacities and modernizing the plants. This scheme is being made available till 2007."

Capacity expansion across divisions

"Gangotri is expanding its capacities and adding weaving and processing facilities. With the full implementation of the proposed expansion, Gangotri will become a well-integrated company having its presence across the entire textile value chain. Also, with the in-house power generation through the proposed wind mills, the company will enjoy substantial benefits in power and fuel cost. With the additional facilities of fabrics and garmenting, the proportion of these high margin businesses to the total revenues would substantially improve and result into expansion of margins."

Equity base to expand by 200%

"Gangotri has recently announced a bonus issue in the proportion of 1:1. This would double the equity base of the company from Rs 48 million to Rs 96 million by end of FY06. The company would be capitalizing a part of its reserves, which were Rs 270 million in FY05. Further, the company plans to go for a stock split by reducing the face value of shares to Rs 5. This would double the number of shares and accordingly would be reflected in lower EPS for FY06."

"Gangotri also plans to raise Rs 55 crore (Rs 550 million) from a further public issue in Dec 05-Jan 06. This issue is expected to increase the equity base of the company to Rs 146 million after adjusting bonus shares."

Substantial Savings from Windmills project

"Gangotri is setting up 9.9 MW windmills as a part of its expansion plans. The windmills would be located at Udumalpet and Veeranam at an investment of Rs 60 crore (Rs 600 million). The company is setting up 6 windmills and at 100% capacity; one mill would be generating 4500000 units per annum of power. The company expects to save Rs 3.5 per unit after full implementation of the above project."

"The company plans to deploy Rs 50 crore (Rs 500 million) of loan funds for the above project. Since, the interest subsidy under TUF is not available for windmill project; the effective interest rate for the above funds would be 8%."

About the company's future financials, the report says,

"We expect Gangotri to witness a sharp jump in sales once entire capacities start functioning. As the company forays into fabrics and scales up its capacities of garments, the sales mix would get better. The high proportion of fabrics and garments would improve the operating margins as these segments offer much better margins than cotton yarn. Also, the addition of new windmills will results into substantial savings and power cost would reduce further."

"We expect revenues to grow at a CAGR of 32% over FY05-FY08 and operating margins to expand to 17.5% by FY08. Interest cost is expected to be at lower level compared to the very high debt, which the company has recently raised. The availability of cheap loan under TUFs would minimize the interest cost and enable the company to expand capacities at low cost debt. We expect the interest cost to remain at lower levels of 3.5% to 4% of sales, going forward."

"Depreciation would also remain at higher level considering the capacity addition that the company has undertaken. However, the company has been generating fairly good cash profits for the past several years. The same trend is expected to continue considering higher depreciation while we estimate PAT CAGR of 99% over FY05 to FY08."

About the company's valuations, the report says, "At CMP of Rs 202 (Cum-Bonus), the stock trades at 20.3x FY07P and 11.5x its FY08P earnings on a fully diluted basis. Gangotri's capacity expansion, foray into fabrics and scaling up of garments facilities would result into topline CAGR of 32% over FY05-08. This coupled with improving operating margins and lower interest cost would translate into a 99% CAGR at PAT level. Also, the company has been generating higher cash and the stock trades at P/CEPS of 9.5x FY07P and 5.8x FY08Pon estimated Cash EPS of Rs 21.3 and Rs 34.7 for FY07P and FY08P respectively."

"We believe that the stock deserves a discounting of 10x forward earnings considering its high growth rates and higher cash generation. We initiate coverage on the stock with strong Buy with 10x FY08 EPS of Rs 17.5 (Ex-Bonus and Cum-Split) which when adjusted for Cum-Bonus, translates into an 18 months target price of Rs 350 (73% upside)."