Buy Bannari Amman Spg Mills, target of Rs 154: Finquest

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Broking house, Finquest Securities is bullish on Bannari Amman Spinning Mills , BASML. It has initiated coverage on the stock with a target price of Rs 154.

The Finquest Securities report on Bannari Amman Spinning Mills:

Investment argument

Complete integration

"BASML is moving from being primarily a yarn manufacturer to fabric and garment manufacturer. Thus progressing from a commodity to a value added player. These expansions will help reduce the company's susceptibility to commodity prices and protect the company's margins in case of a downturn in commodity cycle."

Strengthen its dominance in spinning

"The company's expansion of its spinning capacity by 1,08,000 spindles and move from coarser count of 20s and 50s count yarn to 100s and 120s count yarn will enable BASML to strengthen its dominance in the spinning industry and enhance its yarn revenues and realizations. Its OPM's are one of the best in the industry."

Power cost savings to drive margins

"BASML's power generation through windmills will meet 68% of its total power requirement, thereby enabling the company to enhance its margins."

Forward integration in garments... focus on Home textiles

"BASML plans to set up a modern processing unit, to be complimented by a garmenting and home textile unit. BASML can create its own niche in the export market with its expertise allowing it to command premium for its products in the global market."

Concerns

Dependant on limited number of buyers

"BASMLs top 10 customers contributed 42% of its revenues in FY2005. Thus any loss in one of these customers or the quantity they source from BASML will adversely affect the company's revenues. However, the company has been continuously making efforts to reduce its concentration on a few customers and as a result customer concentration has shown a declining trend over the years. The share of customers other than the top 10 has increased from 42% in FY2003 to 58% in FY2005."

Deferred tax provisioning

"Writs have been filed by BASML and many other south based spinning companies questioning the constitutional validity of provisioning of deferred tax and Fringe Benefit Tax thereby challenging AS-22 of ICAI. Further, the Madras high court has admitted the writs and granted stay. This tax liability, which has not been provided by the company in FY2006 and Q1FY2007 may arise in future thus affecting the company's profits and cash flows."

Susceptible to changes in wind cycles

"Power generation from wind mills is susceptible to vagaries of nature such as the consistent speed of wind, which is crucial to generate power. In case if there is any shortage in generation of power the company will have to source it from the power grid which in turn will increase the company's operational costs and adversely impact its margins. This is because the cost of generating wind power is substantially lower than the cost of sourcing it from the power grid."

Venturing into unfamiliar lines of business

"The company is expanding its capacities in new lines of business like processing and home textiles where the company has no prior experience. It might take the company some time to achieve optimum efficiency in this field and stabilize its operations."

Valuations

"The company has chalked out an expansion plan covering the entire gamut of textile value chain. In addition the company's savings in power cost, forward integration and low interest costs will percolate into strong earnings growth. The company's stock is available at very attractive valuations at 1.1x P/BV of Rs 96 on trailing basis and 0.8x FY2008E BV of Rs 128."

"We believe that the stock is grossly undervalued and a re-rating in the company's stock price is overdue. We initiate coverage on BASML with a price target of Rs 154 and an investment horizon of 12 months, an upside of 48%."