Buy Banswara Syntex, target of Rs 160: Finquest

Banswara Syntex BSE | NSE 01/06/12 Are Mutual Funds betting on Banswara Syntex?

Broking house, Finquest Securities is bullish on Banswara Syntex . It has initiated coverage on the stock with a buy rating and target price at Rs 160.

The Finquest Securities report on Banswara Syntex:

Banswara Syntex, BSL is a well renowned player in the textile industry for the supply of quality synthetic yarn and fabric. BSLs ramp up in capacity, diversification of its product mix, forward integration in garments to achieve complete control over the textile value chain and power cost savings will drive the company's bottomline."

Investment rationale

Diversifying product mix to reduce risk

"BSL has been traditionally a synthetic yarn player and in order to reduce it's the risk associated with the synthetic segment, BSL has decided to set up cotton yarn capacities as well. Post conversion the synthetic yarn segment will contribute to 80% of the yarn revenues the balance being cotton yarn. Traditionally, the duty structure in India has favoured cotton yarn manufacturers over synthetic yarn manufacturers. Also with the rising crude oil prices, the prices of polyester staple fiber, PSF have also been on the up move. This creates a huge dent in the operational profitability of the company and has been impacting BSLs OPM adversely."

"As a result the OPM for the company stood at 9.2% in FY2005 with raw material cost forming 56.2% of sales. In order to reduce the risk and take advantage of the demand in the cotton yarn industry BSL has diversified into cotton yarn business. It has converted around 12,000 spindles to cotton yarn and also added an additional cotton spinning capacity of 6,000 spindles to cumulate the total cotton yarn spinning capacity to 18,000 spindles."

JV with CMT

"BSL has entered into a 50:50 joint venture, JV with M/s Carreman Michel Thierry, CMT, France to set up a weaving unit in Banswara in the name of Carreman Fabrics India with a weaving capacity of 60 looms. The JV will manufacture high value lycra based designer fabrics to cater to the export markets, especially aimed at women. The total cost of the project is Rs 400 million."

"The JV will be funded by an equity participation of Rs 130 million and Rs 270 million through TUFS. BSL will bring in its experience in manufacturing the fabric and Carreman will bring the technical know-how and market the products of the JV in European and US markets."

"This JV is expected to benefit BSL in more ways than one. Besides the share in profits of the JV - BSL will find a ready customer for its yarn in the JV. Further, the fabric produced at the JV will be processed at the BSL process house for which the JV will be charged processing charges in the range of Rs 7-11 because of high quality fabric processed additionally technological inputs provided by CMT will help BSL to improve and enhance its product offering and improve its efficiency and CMTs vast distribution network will provide BSL ready access to EU markets for its existing products as well."

Moving from commodity to value added businesses

BSL has lined up capex of Rs 270 million to foray into garment manufacturing facility at Daman with a capacity to produce 5,000 garments (trousers) per day. Half of the newly added capacities have commenced commercial production and contributed to FY2006 revenues. The balance 2,500 garments capacity commenced commercial production in July, 2006."

"In addition to the above facility at Daman, the company is setting up a 5,500 garments per day capacity at a SEZ in Surat at a capital cost of Rs 200 million. This unit will produce 500 jackets per day in addition to 5,000 garments a day. Since, this unit is located at a SEZ, BSL will enjoy excise duty and sales tax exemptions and a 15-year income tax holiday. All the above facilities will be operational on a single shift basis. Hence, the capacity can be easily doubled by operating on a double shift without any additional capex."

"The business is expected to improve the profitability of the company, as the garments business is a higher margin business, which will contribute positively to the bottomline of the company. With the new garment facility the BSL will become totally vertically integrated company, producing its own yarn, fabrics and garments. The garmenting facility is expected to contribute 24% of revenues in FY2008E as compared to 4% in FY2006."

Changing product mix to add to margins

"BSL is forward integrating from being predominantly a synthetic yarn manufacturer to a fabric and garment manufacturer without sacrificing its competence in the synthetic yarn segment. The company is currently in the process of implementing a massive capex plan totaling up to Rs 990 million."

"The company's spinning capacity which stood at 81,208 spindles in FY2005 was expanded to 92,032 spindles in FY2006 a further addition of 5,760 spindles will start kicking in from Q3FY2007. In addition to the ring spindle capacity addition the company is also adding 288 air jet spindles to take the company's total air jet spindles from 576 in FY2006 to 864 by FY2007E. This will enhance BSLs yarn production manifoldly as the air jet spindles are 20 times more productive than ring spindles. This increase in spinning capacity will be used to meet the demand from the expanded weaving capacity."

"The company is also in the process of adding new weaving capacities which have been increased to 143 looms (FY2006) from 120 looms (FY2005) with further addition nine looms in the current fiscal. Further, BSLs fabric processing capabilities have increased from 24 million mtrs to 36million mtrs. The incremental capacity commenced operations from June 2006. The company will use the processing facility to process fabric manufactured in house, fabric manufactured at the JV and the balance capacity will be used to process fabric on job work basis."

"Further the company's foray into garmenting with a capacity of manufacturing 10,500 garments per day will complete the company's forward integration up the textile value chain. With this the company will see a spurt in its OPM. Inspite of a bonus issue and equity dilution in the current fiscal the company's ROEs are expected to improve significantly."

Power plant to result in significant cost savings

"BSL currently has a furnace oil based power plant of 9.7MW capacity to meet its power requirements. However, as a result of rising furnace oil prices over the past two years the captive power generation cost has become unwieldy and even the state electricity charges turn out to be cheaper."

"In order to thwart the effect of rising fuel prices the company has decided to set up a 18MW captive coal based power plant at a cost of Rs 420 million. The coal-based power plant will commence operations from February 2007. We expect the company to save approximately Rs 130 million on an annual basis from FY2008E because of its CPP facility. Savings in power and fuel cost will add significantly to the bottom line of the company because of margin expansion. Besides, the profits earned from the sale of excess power to the state electricity board will avail a 10 year tax holiday under Sec 80-IA."

Government initiatives a big relief

"Traditionally the policy structure in India has been lop sided in favour of cotton textile manufacturers. However, in order to reach India's ambitious growth targets for its textile exports man made fibers, MMF have to play a critical role."

"In budget 2006-07, duty on manmade fibres and filament yarns was reduced from 16% to 8%. As a result the inverted duty structure the companies were unable to claim cenvat credit created out of excess outflow of duties. Customs duty on PTA & MEG had been reduced from 15% to 10%. But the excise duties on intermediates were kept unchanged at 16%. On July 20, 2006 the finance ministry announced reduction in central excise duty from 16% to 8% on petro chem products used as textile intermediates. Subsequently the rates on Paraxylene, Px, Dimethyl Terephthalate, DTP, Pure Terephthalic Acid, PTA, polyester chips and Mono Ethylene Glycol, MEG have been revised; whereas duty rate on MEG has come down from 16% to 12%."

"With these changes a level playing field has been made for both cotton and MMF players. Duty changes will ensure the price competitiveness of MMF players and limit pressure on their margins. BSL will benefit from these changes as it is not backward integrated and purchases its PSF requirement from suppliers."

Improving raw material scenario

"One of the critical problems faced by players like BSL operating in the man made segment has been the adverse impact of rising crude oil prices and the demand supply disparity in the key downstream inputs viz PTA and MEG. As a result of these escalations in prices of key inputs BSL was adversely impacted by higher prices of PSF. BSL has seen its margins slide from 11.5% in FY2003 to 9.2% in FY2005."

"However, with new global and domestic capacities for key downstream imputs kicking in, the demand supply gap is expected to reduce. With the industry moving from a state of short supply to oversupply the prices of PTA and MEG are cooling off. As a result of reduction in prices of key inputs and new PSF capacities kicking in the PSF prices are also expected to cool off. Both the above changes are expected to benefit BSL by reducing pressure on its margins."

Rising Exports

"BSL has been growing its exports consistently except in FY2005 when the company was adversely impacted by rising input costs and a slump in demand for MMF fabric and yarn. However, the company has been doing well to develop and penetrate aggressively in the export markets. It has successfully forward integrated into garments, is enhancing its product mix and adding new processing capacities with state of the art machinery. Besides its link up with CMT will help company tap newer markets for export of its products. We believe that the recent capacity expansion and diversification into cotton yarn, new readymade garments and JV with CMT would further enable the company to improve its exports sales."

Volume and margin expansion to drive bottom line

"Expansion in yarn and fabric capacities, JV with CMT and forward integration into garments will ensure that top line continues to grow at a robust pace driven by volume expansion and value added products. In addition to the forward integration and JV the 18MW coal based CPP will result in margin expansion going forward. We expect the company's OPM to expand from 10.9% in FY2006 to 14.8% in FY2008E. The robust 13.3% CAGR (FY2006-08E) in top line and 32% CAGR (FY2006-08E) in Operating Profit will result in CAGR 69.3% (FY2006-08E) in bottomline."

Concerns

Rising crude oil prices

"Consistent rise in crude oil prices over the past few years has put MMF player's margins under pressure. BSLs difficulties were compounded further as its CPP was fuel oil based as a result the company's OPM were under pressure. If the crude oil prices continue to rise the company's raw material cost may escalate and thus put its margins under pressure."

Rising interest costs may impact profitability

"BSL is a highly geared company and its D/E ratio stood at 3.0. This is mainly on account of the capital intensive nature of the business and advantage of subsidy available to textile companies for their expansions under TUFS. However, in the rising interest cost scenario the company's profitability may come under pressure."

Pricing pressure

"Rising input costs and rising competition from low cost countries like Bangladesh, Pakistan, Indonesia etc might create pricing pressure and thus adversely impacting the company's growth prospects."

Outlook and valuation

"BSL has been a well renowned player in the synthetic yarn and fabric industry. The company's aggressive plan to ramp up its spinning, weaving capacities and add new cotton yarn capacities should provide impetus to the company's growth post expansion."

"We expect the company to grow its top line at CAGR of 13.1% (FY2006-2008E) and a bottom line CAGR of 66.6% (FY2006-2008E). At current market price of Rs 114 BSL trades at 10.4x and 5.6x FY2007E and FY2008E of Rs 10.9 and Rs 20.3 respectively. We initiate coverage with a target price of Rs 160 translating into an upside of 40%. Our target price of Rs 160 translates in to 8.0x FY2008E."