CD Equisearch's research report on Indo Count Industries Dramatic slowdown in sales growth (6%) last quarter left investors bewildered for the seeming ambiguity portends stress in demand from overseas markets, particularly US. Not only sales growth slid to the lowest in at least nine quarters, but operating margins shriveled too - 19.8% Vs 20.7% in the same quarter a year ago, hurtling earning cuts - 4.1% for FY17. Steady rise in cotton prices in last few months probably elucidate the shrinkage in material margins - 46.5% Vs 50.1% in Q1FY16 and 47.4% in Q4FY16. Worryingly, growing revenue share of home textiles division and rapturous hurling of value added products (read: institutional bedding, fashion bedding and utility bedding) did little to preclude margin suppression.
The stock currently trades at 9.9x FY17e EPS of Rs 75.49 and 8.5x FY18e EPS of Rs 88.12. Post Welspun India’s Egyptian cotton fiasco, Indian textile exporters have been hurled in a state of trepidation as fears of global retailers reviewing their sourcing arrangements come to fore. Yet Indo Count's minimal exposure to branded cotton (12-13% of total turnover) somewhat shields it from ravaging outcomes of sourcing realignments of global retailers. Its reluctance to debt pile up fortifies its resistance to unforeseen events. We retain our buy recommendation on the stock with revised target of Rs 1057 (previous target: Rs 1365) over a period of 9-12 months.
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