CRISIL revises Shri Lakshmi Cotsyn`s fair value to Rs 127

CRISIL Research has come out with its report on Shri Lakshmi Cotsyn. According to the research firm, the company has incurred Rs 13.6 bn capex in FY12 to expand terry towel, denim, sheeting and fusible interlining capacities. The terry towel capacity has already reached full utilisation and the segment grew by 141% y-o-y.

Shri Lakshmi Cotsyn Ltd’s (Lakshmi Cotsyn’s) Q4FY12 (year-ending June) consolidated profitability was higher than CRISIL Research’s expectations. Revenues fell by 1.8% q-o-q to Rs 6,972 mn as one of its expanded capacities is yet to scale up. EBITDA margin improved by 486 bps q-o-q to 22.5% due to lower raw material costs as the company benefitted from increase in prices of stocked material. Despite a healthy EBITDA growth due to significant increase in depreciation and interest costs, PAT grew by just 3.3% q-o-q to Rs 403 mn. The company capitalised assets worth Rs13.6 bn in FY12. PAT margin increased by 28 bps q-o-q to 5.8%. While the planned GDR issue has been cancelled, FCCBs worth US$ 6.5 mn and mezzanine debt worth Rs 1.75 bn are due in September 2012. We have not considered any equity infusion as the company is still exploring options for debt repayment. Given the company’s strained cash flows and increase in working capital requirement for its expanded capacities, it is under significant financial stress. We will closely monitor the financing activities. We maintain our fundamental grade of 2/5, indicating that its fundamentals are moderate relative to other listed securities in India.

Expanded terry towel capacity reached full utilisation, sheeting yet to scale up:
Lakshmi Cotsyn incurred Rs 13.6 bn capex in FY12 to expand terry towel, denim, sheeting and fusible interlining capacities. The terry towel capacity has already reached full utilisation and the segment grew by 141% y-o-y. The denim and home furnishing segments grew by 65% y-o-y and 1.3% y-o-y, respectively, in FY12. We believe the expanded sheeting capacity is yet to scale up. It also plans to backward integrate by setting up a yarn manufacturing facility with an outlay of Rs 1,650 mn, which is expected to improve its margins.

GDR issue cancelled; FCCBs and mezzanine debt due in September:
Lakshmi Cotsyn had planned to raise Rs 1,850 mn through a GDR issue in June 2012, which has been cancelled. At the same time, it has outstanding FCCBs worth US$ 6.5 mn (~Rs 360 mn), which will mature in September 2012. Given the present share price, the FCCBs are out of money and the company will have to redeem these FCCBs. Further, mezzanine debt worth Rs 1.75 bn, which was availed for capacity expansions in FY12, is also due in September 2012. The management has indicated that it is working out alternate means of financing to repay the FCCB bond holders and the mezzanine debt. Lakshmi Cotsyn’s debt to equity ratio is 2.8x and it has a low cash level of Rs 49 mn as of FY12.

Earnings estimates lowered; fair value revised: We continue to use the discounted cash flow method to value Lakshmi Cotsyn. We have lowered our earnings estimates. The revised fair value is Rs 127 at an increased cost of equity of 22%. At the current market price of Rs 61, the valuation grade is 5/5. Equity dilution at lower than our fair value would impact our valuation and remains a key monitorable.

To read the full report click on the attachment

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