Shift from Alok Industries to Raymond:
Alok Industries- a commodity play with stretched balance sheet: Alok Industries operates in entire textile value chain from yarn manufacturing till apparel fabric, made-up fabric (bed sheets/pillow covers and other sheeting fabric) and final garmenting. Despite such presence across the vertical, the business seems to be commodity in nature as there is no recognizable brand that Alok can boast of in any of the segments it operates. Further the company is highly leveraged with consolidated debt-equity ratio of 3.5-4x level. The balance sheet could further come under stress given the tough liquidity conditions and to fund its planned capacity expansion.
Raymond - brand play; improving financials & well heeled distribution set-up- On the other hand, Raymond has a presence in the worsted, denim as well as readymade apparel segment. It does not have presence in the yarn segment which is low on value addition, but over the years has created enviable brands like Raymond, Color plus, Park Avenue, Parx with deep and wide distribution set-up with its unique store presence “The Raymond Shop”. Its consolidated debt-equity ratio is at manageable levels of 1-1.2x level and the operating cash inflows are expected to improve in future. The development of land at Thane and exit from non-core diversified business are additional triggers for value unlocking in the near future.
Valuation; Raymond’s outperformance is sustainable:
Over the last one year, Raymond has outperformed the benchmark indices considerably whereas Alok Industries has performed in line with benchmark indices Sensex. We believe that the out performance by Raymond is well deserved and sustainable on account of its improving fundamentals and strong brand strength coupled with robust distribution set-up. We expect Raymond to report compound growth of 26.7% in its earnings over the next two years.
At the current price, Raymond is trading at 5.2x its FY2013 EV/EBITDA and 10.8x its 2013 PE, while Alok is trading at around 6x its 2013 EV/EBITDA. We believe that Raymond deserves better valuation than Alok, given its improving fundamentals and strong brand lineage. Branded apparel plays like Page Industries (Jockey), Kewal Kiran Clothing (Killer), and Titan Industries are trading at an average band of 16-22x their FY2013 earnings, and with Raymond having four power & performing brands in its portfolio, it would fast catch up with the valuations of the other listed plays.
On the other hand, there is high risk of further equity dilution in Alok which would be a drag on its valuations and there are no trigger for multiple re-rating in case of Alok Industries. Hence we suggest our investors to switch from Alok to a strategically better placed & focus play- Raymond. Our sum of parts based valuation puts a target price of Rs500 for the stock.
Risk to our call- If the consumer discretionary demand continues to witness slowdown as seen in Q3FY12, for a prolonged period, then our FY13 earnings for Raymond may be at risk and hence our target price for the same.
....more info
Alok Industries- a commodity play with stretched balance sheet: Alok Industries operates in entire textile value chain from yarn manufacturing till apparel fabric, made-up fabric (bed sheets/pillow covers and other sheeting fabric) and final garmenting. Despite such presence across the vertical, the business seems to be commodity in nature as there is no recognizable brand that Alok can boast of in any of the segments it operates. Further the company is highly leveraged with consolidated debt-equity ratio of 3.5-4x level. The balance sheet could further come under stress given the tough liquidity conditions and to fund its planned capacity expansion.
Raymond - brand play; improving financials & well heeled distribution set-up- On the other hand, Raymond has a presence in the worsted, denim as well as readymade apparel segment. It does not have presence in the yarn segment which is low on value addition, but over the years has created enviable brands like Raymond, Color plus, Park Avenue, Parx with deep and wide distribution set-up with its unique store presence “The Raymond Shop”. Its consolidated debt-equity ratio is at manageable levels of 1-1.2x level and the operating cash inflows are expected to improve in future. The development of land at Thane and exit from non-core diversified business are additional triggers for value unlocking in the near future.
Valuation; Raymond’s outperformance is sustainable:
Over the last one year, Raymond has outperformed the benchmark indices considerably whereas Alok Industries has performed in line with benchmark indices Sensex. We believe that the out performance by Raymond is well deserved and sustainable on account of its improving fundamentals and strong brand strength coupled with robust distribution set-up. We expect Raymond to report compound growth of 26.7% in its earnings over the next two years.
At the current price, Raymond is trading at 5.2x its FY2013 EV/EBITDA and 10.8x its 2013 PE, while Alok is trading at around 6x its 2013 EV/EBITDA. We believe that Raymond deserves better valuation than Alok, given its improving fundamentals and strong brand lineage. Branded apparel plays like Page Industries (Jockey), Kewal Kiran Clothing (Killer), and Titan Industries are trading at an average band of 16-22x their FY2013 earnings, and with Raymond having four power & performing brands in its portfolio, it would fast catch up with the valuations of the other listed plays.
On the other hand, there is high risk of further equity dilution in Alok which would be a drag on its valuations and there are no trigger for multiple re-rating in case of Alok Industries. Hence we suggest our investors to switch from Alok to a strategically better placed & focus play- Raymond. Our sum of parts based valuation puts a target price of Rs500 for the stock.
Risk to our call- If the consumer discretionary demand continues to witness slowdown as seen in Q3FY12, for a prolonged period, then our FY13 earnings for Raymond may be at risk and hence our target price for the same.
....more info