Buy Siyaram Silk Mills; target of Rs 650: ICICI Direct

ICICI Direct's research report on Siyaram Silk Mills

Revenue growth in Q1FY19 was flat YoY at Rs 322 crore. Fabric and garmenting division grew 1% each YoY to Rs 232 crore and Rs 74 crore, respectively Better gross margins (up 50 bps YoY) and lower other expense as a percentage of sales (down 75 bps YoY) led to EBITDA margin improvement of 20 bps YoY to 10.5%. However, higher employee & processing charges as a percentage of sales (up 62 bps, 40 bps, respectively) stemmed the margin expansion. Subsequently, absolute EBITDA grew 2.7% YoY to Rs 34 crore Though other income rose 84% YoY to Rs 7.7 crore, higher interest cost (up 77% to Rs 11 crore) and increase in depreciation (up 4% YoY to Rs 15.6 crore) led net profit to decline 4.3% YoY to Rs 9.9 crore Siyaram has commenced commercial production of its dyed yarn (indigo) facility at Amravati, with an installed capacity of 2500 tonnes per annum.

Outlook

The management addressed the key issue regarding the sluggish recovery in trade channels post implementation of GST. Normalisation at the dealer’s level is taking longer than anticipated. Also, working capital days are expected to remain elongated, keeping debt levels high in FY19E. Going forward, with stabilisation of trade channels, we expect working capital to ease out in FY20E and generate healthy cash flow from operations. Factoring in the performance of Q1FY19, we revise our estimate downwards for FY19E, FY20E. Going forward, we expect overall revenues to increase at 10% CAGR and PAT to grow at 17% CAGR in FY18-20E. We value SSML at Rs 650 i.e. 20x P/E on FY20E EPS of Rs 32.7 with a BUY rating on the stock.