CRISIL revises 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 April 17, 2012 report.

Shri Lakshmi Cotsyn (Lakshmi Cotsyn) has commissioned its new capacity in home furnishing, denim and technical textile segment worth Rs 9.9 bn (we recently visited this new capacity) in phases by March 2012, in line with CRISIL Research’s expectation. The company has been able to ramp up the terry-towel capacity that came on-stream in FY11 faster compared to our expectation supported by the strengthening of its second line of management. The revenue growth in the home furnishing and technical textiles segments has not been impacted in the on-going economic slowdown. We factor in fund infusion through a GDR issue as the same is in the advanced stage of completion. It has kept its plans of venturing into power and other un-related areas on hold. Taking into account the commencement of the new capacity, and quick ramp-up of the expanded capacity, we lower our cost of equity by 100 bps to 20%, roll forward our base year for valuation to FY14 and raise our fair value to Rs 157 per share. However, if the GDR does not go through, the company will face significant financial stress. Due to high leverage, despite the GDR issue, and elongated working capital cycle, we maintain our fundamental grade of 2/5 indicating its fundamentals are moderate relative to other listed securities in India.

Capacity expansion and backward integration plans to boost prospects
As per the management, the company has an order visibility of almost two months for the expanded capacity. We expect full impact of the expansion to be seen over FY12 and FY13 and revenues to post a robust three-year CAGR of 24% during FY11-FY14. Also, the company currently meets ~40% of its yarn requirements indigenously and plans to completely backward integrate by the end of FY13, with total project cost of Rs 1,650 mn.

Fund raising through GDR issue at an advanced stage
The current expansion of Rs 9.9 bn was funded through debt of Rs 6.4 bn, promoter’s infusion through warrants conversion of Rs 1.2 bn and the remaining through mezzanine debt. Originally, the company planned to raise funds for the expansion through GDR in December 2011 but subdued capital market conditions led it to postpone the GDR issue. However, the company has again revived the plan to raise funds through GDR, which is at an advanced stage. Also, it has received in-principle approval for the same from the BSE. Accordingly, we now factor in the GDR issue of Rs 1,850 mn at Rs 150 per share in our FY12 projections. We have also assumed FCCBs worth US$6.5 mn will get converted to equity because our revised fair value of Rs 157 is equal to the premium-adjusted conversion price. However, if the GDR issue does not go through, the company will face significant financial stress. In case the FCCBs do not get converted, redemption will not be an issue as repayment of FCCBs along with the interest of ~Rs 470 mn is only ~7.5% of FY11 net worth.

Valuations: Current market price is aligned
We have used the discounted cash flow approach to value the firm and rolled forward our model to FY14. Accordingly, we revise our fair value to Rs 157 per share from Rs 136 per share. The fair value implies P/E of 4.9x FY14E EPS and P/Bv of 0.6x FY14E book value.

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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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