Buy Siyaram Silk Mills; target of Rs 3100: ICICI Direct

ICICI Direct's research report on Siyaram Silk Mills

Siyaram (SSML) caters to Tier II and III towns across India with its offering of fabrics & readymade garments. The company commenced operations as a fabric manufacturer and later forward integrated to manufacturing readymade garments. After successfully establishing its flagship brand Siyaram, the company has widened its product portfolio by introducing new brands such as Oxemberg, MSD, J Hampstead. It also has a JV with Italian lifestyle brand Cadini. We believe the management’s focus on increasing the share of garments in the overall revenue mix and introduction of premium international brands like Cadini would lead to enhanced profitability. Also, Siyaram has recently announced sub-division of its equity shares from Rs 10/share to Rs 2/share (record date October 26, 2017), which should improve liquidity in the stock.

Outlook

We introduce FY20 estimates and expect revenue, earnings to grow at a CAGR of 13.5%, 21.1%, respectively, in FY17-20E. The triggers contributing towards the strong earnings growth are a) higher share of garments in the revenue mix and b) focus on enhancing premium brands in the fabric segment. SSML has followed an asset light model with minimum capex requirements. This has led to superior return ratios (15%+ RoCE) and high asset turnover of 3.3x to gross block as on FY17. Going forward, SSML intends to incur capex of ~Rs 150 crore over a period of two years towards increasing its processing fabric capacity from current 3.6 million metre to 6 million metre and to set up a value-added indigo yarn dyeing facility. We believe SSML’s strong cash flow from operations (CFO) will partially enable it to fund its capex through internal accruals with rest through debt. SSML is comfortably placed with a debt/equity ratio of 0.5x. Given the strong earnings trajectory and a healthy balance sheet, we upgrade SSML from HOLD to BUY with a revised target price of Rs 3100 (18.0x FY20 EPS of Rs 172.3).