Alok Industries on revival path: Ashish Chugh

Alok Industries is on revival path says Ashish Chugh, Investment Analyst.

Chugh told CNBC-TV18, "The price of Alok Industries has come to its eight years low. I would say that this is a stock  which is for the contrarian investors with very high risk appetite. There are of course concerns which regard to the high  debt in the company but in the price those concerns are pretty much fully priced in."
He further added, "I don’t need to tell too much about the company, it is a fully integrated company, quite well-known and the mistake they made few years back is that they ventured into the real estate business and also their excessive capacity expansion in last five-six years where they spent close to Rs 7500 crore. There was a huge debt which was taken for that expansion because of which the debt-equity ratio is not very comfortable."
"If you look at the financial numbers of the company in the second quarter of the current financial year, sales are up by about 50 percent to Rs 3300 crore. Profit after tax (PAT) is Rs 290 crore which is up by 200 percent. Now this PAT includes some extraordinary items with regard to foreign exchange gains. If you reduce that, if you factor in  that, the profit for this quarter is about Rs 200 crore."
"Now market cap of the company is about Rs 900-950 crore whereas profit for the current quarter alone is about Rs  200 crore. This is primarily on account of the reason that cotton prices were very comfortable and also most textile  companies did very good profits for the current quarter."
"Now change in fortunes of this company is a function of two factors, one is reduction in debt of the company and  second is a changed revival in the business or change in the business environment for textile companies. Now as far  as reduction of debt is concerned company has in the last few months sold the commercial properties, which it had in  the Lower Parel area in Mumbai. Besides that company is trying to sell about 450 acres of land which it has in Silvassa."
"Also the company has got various residential properties in Mumbai which it might want to sell. Besides this the company also has a retail business in UK and in India. There may be rationalization in that business which includes closing down the unviable stores and also bringing in a strategic investor for that business."
"The second part is change in the business environment. As of now the cotton prices are low and that is why textile  companies are doing well. Second is that in the last 18 months the depreciation in rupee has been much more  compared to depreciation in currency of Bangladesh or Vietnam which are the competitor countries. So India  would have a competitive advantage there with respect to other competitors."
"I think the wildcard in the next few months can be a revaluation of Yuan which looks very much possible and in case that happens that would lead to the revival in the entire export sector and this company being export led, would benefit from that. When that would happen and how the business environment will change is something which is very  difficult to guess."
"Alok currently trades at about Rs 11-11.50 and it is trading at its eight years low. The possibility of downside from these levels looks to be maximum of about 10-15 percent. And in case the company is able to sell its real estate and pair down its debt and the business environment for textile company improves or remains the way it is as of now, I think the stock could be on a revival path." Disclosure: No personal holding in the above stock