Although textile maker Alok Industries Ltd has raised funds to cash in on future business potential, investors’ immediate concern would be the equity expansion and consequent earnings dilution. The company’s shares are hovering around the qualified institutional placement (QIP) issue price of about Rs23.30 apiece, perhaps reflecting the positive sentiment for the textile sector.
Proceeds from the Rs425 crore raised through the QIP will help double its polyester yarn capacity and meet its working capital needs. But the consequent increase in equity will hit earnings expansion in the current year ending March 2010, despite revenue growing by about 35%.
Alok, which has over 60% of its revenue accruing from apparel fabric and home textiles, has leading overseas retail chains and brands as its customers. Besides being an integrated player from yarn to ready-made garments in both cotton and synthetic textiles, Alok is also able to derisk input costs during business cycles. Given the buoyant local and global textile markets, the company would register good revenue accretion arising from capacity expansion.
In the next 12 months, the company will double its polyester yarn capacity from 600 tonnes per day to 1,200 tonnes at a cost of around Rs500 crore, of which Rs310 crore will come from the recent QIP proceeds. Although it appears ambitious, the management hopes to utilize internal accruals to fund the balance, while also investing around Rs600 crore over the next two fiscals to expand cotton spinning capacity from 300,000 spindles to 400,000 spindles. Unfortunately, the ambitions of the promoters have not translated into shareholder value in the last 12-18 months. The company has a high gearing with debt-equity ratio of 3 as on 31 December, with a total debt outstanding of Rs7,900 crore. The consequent increase in interest costs, together with increase in other expenditure, pulled down its net profit margin to around 5% of sales compared with 6% in the year-ago period. This, despite operating profit margins expanding by a couple of percentage points.
Meanwhile, given its high debt, the company had little option but to tap capital markets through a rights issue, where two shares were issued for every one held, at a cost of Rs11 (face value is Rs10 per share). This increased equity capital from around Rs197 crore in 2008-09 to Rs605 crore in the beginning of 2009-10. Consequently, investments in capacity expansions turned unfavourable for the shareholders as the return on capital employed dropped from 13% to 8% between 2005 and 2009.
Graphic: Yogesh Kumar/Mint
Alok is hopeful of exiting its real estate business. According to a senior executive in the company, proceeds from this and internal accruals will help the company retire around Rs1,000-1,500 crore of debt over the next two years. But it is unlikely that the debt-equity ratio will decline below 2.
Given the high demand for yarn and fabric the world over, Alok’s revenue will grow at 30% per annum until 2011-12. For investors, though, much depends on the company’s ability to lower its gearing and avoid constant equity expansion. For 2009-10, the company has guided for an earnings per share of around Rs4 on the post-QIP equity of Rs787 crore, compared with around Rs8 in the previous year.
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