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

CRISIL Research has come out with its report on Shri Lakshmi Cotsyn. The research firm has maintained the fundamental grade of 2/5 to the company in its May 25, 2012 report.

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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Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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