CRISIL Research Ier Report Alok Industries 2012

YEARS
CRISIL IERIndependentEquityResearch
Alok Apoll Hospitals Industries Ltd o rprise Ltd Ente

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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a fivepoint scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISIL Fundamental Grade

5/5 4/5 3/5 2/5 1/5
Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals
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5/5 4/5 3/5 2/5 1/5
Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)
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YEARS
Alok Industries Ltd

I
Back to basics
Fundamental Grade Valuation Grade Industry 3/5 (Good fundamentals) 5/5 (CMP has strong upside) Textiles, Apparel & Luxury Goods
July 11, 2012 Fair Value CMP CFV MATRIX

Excellent Fundamentals
Rs 29 Rs 18
Fundamental Grade
Alok Industries Ltd (Alok) is one of Indias leading integrated textile players. It is present across the textile value chain from yarn manufacturing to garmenting and has a wide range of products. Strong capabilities in the textile business and sizeable capacities have helped it grow by 35% in the past five years and become a preferred vendor for international clients. W e expect Aloks financial profile will improve following its strategy to exit the non- core realty and retail businesses. Hence, we maintain the fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India. Consolidating its position Alok is in the consolidation mode and plans to focus on value-added products and improvement of utilisation across the value chain. In the past few years, Alok has set up large-scale capacities in all divisions polyester yarn, apparel fabrics and home textiles to cater to the global and domestic markets. A diversified product mix has made it one of Indias fastest growing textile company. Domestic textile industry to grow at 5-6%, polyester to drive growth; Alok to benefit CRISIL Research expects Indias domestic textile industry to record a CAGR of about 5-6%, expanding to over Rs 3,400 bn by 2016 from Rs 2,653 bn in 2011. Growth in the polyester segment will outpace growth in the cotton segment and we expect Alok to benefit from this. However, capacity addition in the polyester segment in the past two years has resulted in an oversupply situation which will limit pricing flexibility. Exiting real estate: financial flexibility is a key monitorable Alok is in the process of monetising its real estate venture to use the proceeds for repaying debt. CRISIL Research expects it to garner Rs 16-17 bn in the next two years by exiting the real estate business. During FY12, it sold some portion of its portfolio and will realise Rs 6-7 bn. Its high debt-equity ratio of 4.1x (as of FY12) is expected to decline to 2.6x by FY14 and will also improve its return indicator. However, any delay or change of plans could hamper financial flexibility. Revenues to register a CAGR of 11%; margins to decline With most capacities already commissioned, we expect Aloks top line to grow at a two-year CAGR of 11% to Rs 121.2 bn in FY14. EBITDA margin is estimated to contract from 25.7% in FY12 to 23% in FY13 and FY14 due to higher share of the low-margin polyester business. Valuations: Current market price has strong upside W e continue to use the discounted cash flow method to value Alok and maintain our fair value at Rs 29. At this value, the implied P/B multiples are 0.7x FY13E and 0.6x FY14E book value. At the current market price of Rs 18, the assigned valuation grade is 5/5.
5 4 3 2 1
Poor Fundamentals
Valuation Grade
Strong Downside Strong Upside
37.6% 41.8% 11.7% 20.8% 11.3% 15.2% 30.0% 31.8% Dec -11 D II Mar-12 Others FII
KEY STOCK STATISTICS

NIFTY/SENSEX 5306/17489 NSE/BSE ticker ALOKTEXT/ ALOKIND Face value (Rs per share) 10 Shares outstanding (mn) 826 Market cap (Rs mn)/(US$ mn) 14,538/262 Enterprise value (Rs mn)/(US$ mn) 136/2 52-week range (Rs)/(H/L) 29/16 Beta 1.4 Free float (%) 68.2% Avg daily volumes (30-days) 4,533,466 Avg daily value (30-days) (Rs mn) 82.4
SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20.7% 11.7% 38.3% 41.4%
11.7% 17.0%
KEY FORECAST
(Rs mn) FY10 FY11 FY12# FY13E FY14E 44,202 66,114 98,754 120,042 121,257 Operating income EBITDA 12,704 18,094 25,380 27,664 27,944 Adj Net income 927 1,935 3,798 5,249 7,001 Adj EPS-Rs 1.2 2.5 4.6 6.4 8.5 EPS growth (%) (58.9) 127.5 (11.5) 18.7 153.2 Dividend Yield (%) 1.3 1.3 1.6 2.7 3.8 RoCE (%) 8.4 9.4 11.8 12.7 13.4 RoE (%) 4.0 7.0 12.8 16.0 18.3 PE (x) 18.9 9.0 4.0 2.9 2.2 P/BV (x) 0.6 0.6 0.5 0.4 0.4 EV/EBITDA (x) 7.8 7.0 5.4 4.6 4.0 NM: Not meaningful; CMP: Current market price; #consolidated financials not declared Source: Company, CRISIL Research estimates
20% 10% 0% J un-11 Promoter Sep-11 29.4% 30.0%
PERFORMANCE VIS--VIS MARKET

Returns 1-m Alok NIFTY -4% 5% 3-m -12% 2% 6-m -5% 9% 12-m -29% -6%
ANALYTICAL CONTACT
Mohit Modi (Director) Vinay Chhawchharia Vishal Rampuria Client servicing desk +91 22 3342 3561 clientservicing@crisil.com mohit.modi@crisil.com vinay.chhawchharia@crisil.com vishal.rampuria@crisil.com
For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.
Table 1: Aloks - Business snapshot (standalone)

Product / Segment Revenue contribution (FY12) Revenue contribution (FY14) Product / service offering Operates 0.4 mn spindles, ~90% of the yarn is used for captive consumption Surplus yarn is sold in domestic/export markets based on the price and government regulation Manufactures woven and knitted fabrics It produces different kinds of fabrics such as twills, voiles, cambrics, poplins, satin, jacquard Manufactures a wide range Alok manufactures drawn texturised yarn (DTY), fully of sheet sets, comforters, drawn yarn (FDY), dyed blankets, quilts, curtains, yarn and yarn used for dobbies and jacquards of various thread counts and technical purposes widths. Also present in the terry towel business Global (95% of production Supplies to domestic is exported to 70 countries; weavers; exports to around 30 countries 40% to US, 13-15% to Europe and the rest to Asian countries and South America) Market position Largest player (single location) in the fragmented cotton yarn industry in India It accounted for ~1% of the total One of the large manufacturers of all types of fabric Poised to become the second largest manufacturer of POY in India after RIL Moving towards valueadded products with DTY, staple fibre and FDY capacity Cotton yarn 4% 2% Apparel fabric 46% 42% Home textile (HT) 14% 12% Polyester 34% 42%
Presence
Global
International and domestic brands
Has an edge over unorganised processing and weaving industry due to its fabric processing capacity cotton yarn production in India in FY12. Vardhman Textiles, the largest player in the cotton yarn industry, accounted for 2% of the total yarn production during the same period Industry growth expectations CRISIL Research expects domestic cotton yarn demand to grow at a CAGR of 5-6% from FY12 to FY17 CRISIL Research expects domestic readymade garments (RMG) and export demand to grow at a CAGR of 8% and 5% over FY12-FY17 Sales growth (FY09FY12 3-yr CAGR) Sales forecast (FY12FY14 2-yr CAGR) Demand drivers 43% -25% Healthy growth in the domestic RMG and HT segments 37% 7% 36% 5% CRISIL Research expects domestic HT and export demand to grow at a CAGR of 5-7% over FY12-FY17
CRISIL Research expects POY demand to grow at a CAGR of 7-8% over FY12FY17 69% 26% Demand from RMG, home textile and technical textile in domestic and export markets
Demand from readymade W eak rupee and vendor garments in the domestic and consolidation in export export markets market
Margin drivers
Ability to pass on hikes in raw material costs, economies of scale, balanced capacity and presence in value-added products (processes fabric, dyed yarn, FDY) Polyester business traditionally has been a low-margin business with higher asset turnover. Expansion of the polyester business is expected to reduce margins but improve RoE; the retail business will continue to impact margins
Key competitors
Fabric - Vardhman Textiles, Arvind Ltd HT - W elspun India, Trident Ltd (Abhishek Industries) Polyester - Reliance Industries, Indo Rama Synthetics Ltd, JBF Industries, Garden Silk Mills Ltd
Source: Company, CRISIL Research
Alok Industries Ltd
YEARS
Grading Rationale
Dominant textile manufacturer in India across value chain
Alok is one of Indias leading integrated textile manufacturers. In order to cater to growing demand both in the domestic and export markets, Alok has expanded its
capacity over the past seven years in all the divisions and had largely funded it through the Technology Upgradation Fund Scheme (TUFS). It is present across the textile value chain - from spinning to manufacturing of fabrics, home textiles, garments and retailing. Aloks modern equipment, integrated plants, balanced capacities and
One of Indias leading integrated players with presence across the value chain
manufacturing flexibility coupled with an efficient procurement and product development team give it a competitive advantage over its peers. Its large scale capacities have helped it to grow by more than 35% in both domestic and export markets. Currently, the company is in a consolidation mode, post massive capital expenditure of Rs 75 bn over the past seven years, which has resulted in huge debt and high gearing (4x). The company has no major plans of adding capacity for the next two years. Also, the company has planned not to add any more stores in the retail segment, and will monetise its real estate properties to pay off its debt; we expect this move will improve the companys financial health.
Table 2: Large-scale balance capacity across the value chain

UNITS Spinning HOME TEXTILE Processing W eaving Terry towel APPAREL FABRICS Processing woven W eaving Knitting GARMENTS POLYESTER YARN Continuous polymerisation (CP) (Tonnes) 400,000 100,000 Top 3 player mn mtrs mn mtrs (tonnes) mn pcs 130 186 18,200 22 6,800 Largest player Top 3 player Top 5 player Top 15 player mn mtrs mn mtrs (Tonnes) 105 96 13,400 Largest player Largest player Top 3 player (Tonnes) FY12 80,000 Expansion under implementation 3,600 Position Largest at single location
Table 3: Strong growth in both the markets

Rs mn Domestic Export Total Export % FY07 11,830 6,417 18,247 35.2% FY08 14,889 6,815 21,704 31.4% FY09 19,224 10,545 29,769 35.4% FY10 27,522 15,590 43,112 36.2% FY11 41,594 22,066 63,660 34.7% FY12 58,714 30,295 89,009 34.0% CAGR 37.8% 36.4% 37.3%
Domestic market to remain primary demand driver

The Indian textile industry continued the momentum and grew at a healthy rate of 7% in 2011 after growing at 8% in 2010. The domestic market, which forms more than 75% of Indias textile output in volume terms and 70% in value terms, will continue be a major growth driver. Going forward, CRISIL Research expects the domestic garment industry to grow at 78% over the next five years. W ith rising income levels, growing population, favourable demographics along with higher proportion of working women population the demand for garments will always be there. Rising organised retail, mall culture, higher usage of credit/debit card along with online retailing also bodes well for the domestic textile market. The domestic home textile market is also expected to grow at a similar rate in the future.
Chart 1: Indian textile industry break-up
Indian textile industry Rs 2653 billion
Domestic - Home textile Rs 560 billion
Domestic - Garment Rs 1325 billion
Exports (Garment + Home textile) Rs 768 billion
Men's apparel Rs 612 billion
Women's apparel Rs 557 billion
Kids appar el Rs 155 billion
USA Rs 222 billion
EU Rs 414 billion
Other Rs 130 billion
46%
42%
12%
29%
54%
17%
Source: CRISIL Research
Figure 1: Domestic RMG market is major growth driver

(Rs bn) 1,400 1,200 1,000 800 425 600 400 200 2007 Men's apparel 2008 2009 W omen's apparel 2010 2011 E Kids' apparel 480 496 518 567 612 430 143 132 122 129 481 519 557 1,325 155 1, 028
Figure 2: Rising income leads to higher spending on textile

(%) 100% 0. 9 22.6 80% 60% 40% 20% 0% 2001-02 2004-05 2007-08 2009-10 2010-11 2011-12 F Households wit h inc ome<= Rs 1 lac p.a Households wit h inc ome Rs 1 lac and Rs 5 lac p.a Households wit h inc ome Rs 5 lac and Rs 10 lac p. a Households wit h inc ome > Rs 10 lac p.a 0. 4 0. 6 1.2 25. 2 0.9 1. 6 32.5 1.1 1.8 36.2 1.2 2 38. 7 1. 3 2. 1 40.8
76.1
73
65
60.9
58. 2
55.8
Alok Industries Ltd
YEARS
Vendor consolidation + favourable currency to strengthen competitiveness

Major global retailers are focused on vendor consolidation to lower their logistics and procurement costs. Retailers like JCPenney and W al-Mart have reduced their sourcing locations post quota removal by the US and the EU. China, India, Bangladesh and Vietnam are the beneficiaries of this consolidation. Chinas market share in the US and the EU has been on an upward trend (30% in 2006 to 41% in 2011); however, its business is currently constrained by the rising Yuan and increase in manufacturing costs.
Large capacities to benefit Alok as customers opt for vendor consolidation
Bangladesh has also gained (6% in 2006 to 8.6% in 2011 in the US and EU market) due to its least developed country (LDC) status, cheap labour cost and heavy government incentives to promote textile exports. Indias designing capabilities and the ability to provide end-to-end textile solutions on account of abundant raw material supply and labour availability have been its core strength in the highly competitive export market.
Figure 3: Indias share has not grown in the US and the EU

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% India 5. 6 2006 5. 5 2007 China 5.5 2008 Bangladesh 6.0 2009 5.7 2010 Vietnam 5. 6 2011 Ot hers 29. 9 34.4 37.7 6. 2 3. 8 6. 0 4.5 6.5 55. 1 50.3 45.8 40.5 39. 1 39.4
Figure 4: Re has depreciated more than other currencies

130 125 120 115 110
4.7 7.4
5.0 7.6
5. 4 8. 6
105 100 95 90 Jul-11
41.4
42. 7
41.0
85 80 May-11 Apr-11 J un-11
Mar-12
May-12
Nov -11
Dec -11
Feb-12
Oc t-11
Aug-11
Sep-11
J an-12
Apr-12
USD-INR X-RATE USD-VND X-RATE
USD-BDT X-RATE USD-CNY X-RATE
India lags in supplying large volumes of quality textile to the export market due to fragmentation of the industry and obsolete weaving and processing technologies. Alok, with the help of TUFS, has set up large scale capacities which now enable it to supply quality fabrics consistently and in large volumes to global and local manufacturers. TUFS is an interest subsidy (up to 5% interest reimbursement and capital subsidy of 10% on processing equipments) scheme introduced by the Government of India to set up/upgrade modern textile units. The scheme has benefited Indian textile players in a big way to stay competitive in the export market and Alok has been one of the biggest beneficiaries of the scheme. Indias textile exports have grown at a CAGR of 8% during FY07-12, while Aloks export revenue has grown by 36% during the same period. The company exports to more than 75 countries; 40% to the US, 13-15% to the EU and rest to Middle East, Latin and South America, Australia and other Asian countries. The sharp depreciation (~26%) of the rupee against the US$ over the past 15 months has strengthened its position further. Bangladeshi Taka has depreciated by only 13%; Vietnamese
Players have to remain cautious about the volatile currency situation and hedge their positions accordingly to mitigate risk and derive benefits
J un-12
Dong has remained flat while Chinese Yuan has appreciated by 3% during the same period. A weak currency will not benefit margins significantly but will ensure a strong order book for the future.
Figure 5: Indias textile exports have grown at 8% CAGR

(Rs bn) 1200 19.3% 1000 800 9. 3% 600 5.4% 400 -0.6% 200 739 0 FY08 FY09 FY10 FY11 FY12E I ndia's Tex tile export Growth (y -o-y ) (RHS) 882 929 927 1013 -5.0% -0.3% 0.0% 5.0% 10.0% 20.0% 15.0% 25.0%
Figure 6: Aloks export business has grown too

(Rs bn) 35. 0 30. 0 25. 0 20. 0 30% 15. 0 10. 0 5. 0 0. 0 6% 6. 8 FY08 10.5 FY09 15. 6 FY10 22.1 FY11 30.3 0% FY12 Growth (y -o-y ) (RHS) 20% 10% 55% 48% 42% 37% 40% 50% 60%
Alok's ex port rev enue
All segments to drive growth

Table 4: Diversified product mix to mitigate risk; polyester to lead growth
FY07 Cotton yarn Apparel fabric Home textile Polyester Garments Total sales (Rs mn) 4.6% 49.1% 18.3% 26.3% 1.6% 18,247 FY09 3.7% 54.1% 16.7% 20.8% 4.7% 29,769 FY11 9.0% 46.6% 15.5% 26.1% 2.7% 63,660 FY12 3.6% 46.4% 14.0% 33.5% 2.4% 89,009 CAGR (FY07-12) 31% 36% 30% 44% 50% 37% FY13E 1.2% 41.5% 12.0% 43.0% 2.3% 110,596 FY14E 1.6% 42.0% 12.1% 42.1% 2.2% 113,010 CAGR (FY12-14) -25.1% 7.1% 4.7% 26.4% 7.3% 12.7%
Polyester to be key focus area

The company remains more buoyant on polyester as compared to cotton:
With additions of 100,000 tpa, Alok will be the second largest player
Higher demand compared to cotton due to its price competitiveness and versatile nature Lower capex and working capital requirement leading to higher return, however EBITDA margins are low
India currently consumes 55% cotton and 45% polyester. But the company believes India will soon move to the global consumption mix (65% polyester) and hence is aggressive on its polyester expansion. Alok has set up a continuous polymerisation (CP) unit of 200,000 tonnes in FY10 for assured supply of partially oriented yarn (POY) for its texturising capacity, which would also reduce costs for its texturised yarn business. It further, doubled its CP capacity to 400,000 tonnes in FY12; it plans to add another 100,000 tonnes in H2FY13. Over the next five years, we believe demand for polyester yarn will be up at a CAGR of 7-8%, more than the 56% growth in cotton yarn. Rise in the use of non-cotton fabrics for technical and home textiles, and the increase in substitution of cotton (due to high cotton and cotton yarn prices as well as versatile application of polyester) will boost demand for polyester yarn.
Alok Industries Ltd
YEARS
Figure 7: Improving price competitiveness of polyester

2.2
Table 5: Share of value-added products to rise

(Tonnes) FY12 400,000 70,000 210,000 120,000 FY13 500,000 70,000 166,000 170,000 24,000 70,000 Value added Commodity Value added Value added Value added Product type
2.0 1.8 1.6 1.4 1.2 1.0 Apr-06 Aug-06 Dec-06 Apr-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Dec-11 Aug-07 Aug-09 Aug-11 Apr-12
CP FDY Chips/POY DTY Cationic yarn Polyester staple fibre (PSF)
Cotton yarn/polyes ter
Source: CRISIL Research, Industry
Source: CRISIL Research, Company
Currently, the company uses the bulk of its CP for POY production and less than 35% is converted into value-added products such as FDY and DTY. Going forward, the company will sell ~65% value-added products and will introduce cationic yarn, dyed yarn and PSF. Contribution from the polyester business is expected to rise to ~43% of total revenue in FY13 from 33.5% in FY12 resulting in marginal improvement of asset turnover and RoCE, and lowering the working capital requirement; however, the companys EBITDA margin will decline from the current level as the polyester segment generates 15-16% margin compared to other segments 25-30%.
Figure 8: Going aggressive on polyester expansion

(tonnes) 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50, 000 FY08 CP c apacity FY09 FY10 F Y11 FY12 Value added produc ts (RHS) 10% 54,000 182,500 200,000 200,000 400,000 0% 35% 42% 33% 50% 40% 57% 60% 70% 60%
Figure 9: Polyester to contribute more than 40% in FY13-14

(Rs mn) 60, 000 50, 000 33% 40, 000 30, 000 30% 20% 20, 000 10, 000 11,931 FY10 FY11 FY12 FY13E F Y14E Poly es ter rev enue Share (%) (RHS) 16, 638 29,790 46,500 48, 000 28% 26% 43% 50% 42% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Polyester industry to witness over-supply in short term

Although Reliance Industries Ltd has the largest CP capacity (28%) for production of POY in the domestic market, its share has declined as players like Alok, Garden and JBF have expanded their capacities during the past few years, each commanding ~17% market share in terms of capacity.
Demand for polyester filament yarn increased by 6.5% during FY07-FY12 and is expected to grow at a CAGR of 7-8% over the next five years. However, significant capacity additions by players in the past two years (650-700 mn kg) lowered operating rates to 68% in FY11 and to 64% in FY12. Going forward, we expect utilisation rates to improve as no major capacity addition is expected; however, it will take two to three years to cross the 75% level.
Figure 10: Reliance has the largest CP capacity

Others 13% Indo Rama Sy nt hetic s 9% Reliance Indus tries , 28%
Figure 11: Utilisation levels to improve

(Mn kgs) 2,500 72% 2,000 69% 1,500 68% 70% 69% 70% 68% 64% 66% 64% 74% 76% 74% 72%
1,000 J BF Indus tries 17% Garden Silk Mills 17% Alok Indust ries 17%
500 1,450 FY08 FY09 FY10 FY11 FY12 F Y13E FY14E Demand Operating rat e 1,470 1, 550 1,700 1,850 1, 989 2,138
62% 60% 58%
Apparel fabric: Largest manufacturer of processed fabric

CRISIL Research expects the demand for cotton fabric in the domestic market to increase at a CAGR of 5-6% over FY12-FY17 mainly driven by demand for cotton-based apparels and home textiles. A revival in world economies will boost textile exports as well.
Alok is running its fabric plant at

Under its apparel fabrics division, Alok has the capacity to manufacture 186 mn metres of woven fabric ,18,200 tpa of knitted fabric and 22 mn meters of embroidered fabric. Alok plans to increase the capacity of knitted fabric to 25,000 tpa by FY13.
optimum utilisation and has a strong order book for 2012
Integration + value addition have reduced risk from fragmented industry

The Indian weaving and processing industry is highly fragmented and unorganised with 65% of the supply coming from the decentralised powerloom sector. Organised mills account for less than 5% of total fabric supply. In the fabric segment, Alok is present in the mid to premium segment; the fragmented nature of this segment and the priceconscious domestic consumer makes this a highly competitive segment. However, Alok mitigates competition from the unorganised players with backward integration and valueadded fabrics; it has 130 mn metres processing capacity for woven fabrics. Alok meets more than 90% of its yarn demand for the fabric department through its own spinning unit which assures consistent supply of quality yarn. Besides, Alok has upgraded its yarn dyeing technologies through the acquisition of Mileta a.s. (Mileta), an integrated textile entity with expertise in yarn dyed fabrics. Post the acquisition, Alok manufactures quality yarndyed fabrics, which are priced at a significant premium compared to its other processed fabric;
Alok Industries Ltd
YEARS
since this high quality dyed yarn forms less than 10% of its fabric sales currently, Alok will invest further in yarn dyeing facility for more value addition. Alok also manufactures work wear fabric (20 mn meters per annum). W ork wear is clothing worn in specialised areas like hospitals, defence, extraction, etc. Under this category, Alok produces different varieties of clothing that are flame retardant, have high visibility, are oil resistant, and have anti-static and infra red finishes. It has executed orders globally for armed forces.
Table 6: Apparel fabric - capacities

FY08 Apparel fabrics Processing woven W eaving Knits Knits processing Yarn dyeing Units mn. mtrs mn. mtrs Tonnes Tonnes Tonnes 83 64 18,200 18,200 3,000 FY09 105 70 18,200 18,200 5,000 FY10 105 93 18,200 18,200 5,000 FY11 105 93 18,200 18,200 5,000 FY12 130 186 18,200 18,200 5,000
Home textiles: Large-scale operations to help compete with international players

Alok manufactures a wide range of home textile (HT) products such as bed sheets, duvets, comforters, blankets, quilts, curtains and towels. The HT division comprises 14% of total sales. This division is also the largest export revenue generator for the company with 41% of total exports in FY12. Aloks HT business reported 30% CAGR over the past five years. Alok continues to focus on the export market in the HT division, with exports comprising more than 95% of HTs revenue.
Figure 12: Indias HT exports post 7% CAGR

(Rs bn) 140 15.0% 120 100 80 5% 60 108 40 20 96 0 FY08 FY09 India's HT export FY10 FY11 F Y12 Growth (y-o-y) (RHS) 108 117 -7.0% 125 -10% 0% -5% 13.1% 7.7% 15% 10% 20%
Figure 13: Focus on exports and growth continues

(Rs bn) 14. 0 12. 0 10. 0 8. 0 97% 6. 0 4. 0 2. 0 4.0 0. 0 FY08 FY09 Total HT rev enue FY10 FY11 F Y12 Ex port (%) (RHS) 5.0 7.1 9.9 12. 5 94% 96% 96% 95% 98% 98% 99% 100% 99% 97% 98%
Alok has expanded its wider width weaving capacity (for the bed linen segment) of 68 mn metres to 96 mn metres in FY12. The company also added 22.5 mn metres to the existing
fabric-processing capacity of 82.5 mn metres, taking it to 105 mn meters. Aloks share in Indias total HT exports has increased from 4% in FY08 to 10% in FY12.
Table 7: Home textiles capacities

FY08 Home textiles Processing W eaving Terry towel Units mn mtrs mn mtrs Tonnes 60 45.2 FY09 82.5 47.05 6,700 FY10 82.5 68 6,700 FY11 82.5 68 6,700 FY12 105 96 13,400
Table 8: Home textiles - competitive position

FY11 - Capacity Home textiles Terry towel Mn mtrs Tonnes Alok Industries 96 13,400 Welspun India Ltd 45 41,500 Indo Count Ind Ltd 37 Trident Ltd 32,000
Cotton yarn capacities = better control over costs and supply

Alok owns about 1.1% of the total spindle installed in India and is among the top five spinners in the country. To ensure that its fabric and HT departments have an assured supply of quality yarn, Alok has constantly increased its spinning capacity over the years. It expanded its spinning capacity from 150,912 spindles in FY08 to 411,840 spindles in FY12. The company will add another ~11,000 spindles during FY13. The yarn, in excess after internal consumption, is sold locally or exported. It also has yarn dyeing facility to produce premium quality fabric and the company intends to invest in the same in future. Unlike other players, cotton yarn contributes only 5-10% of Aloks revenue which enables the company to generate higher margin compared to standalone spinners and weavers.
Alok will have better control over costs compared to standalone weavers
Figure 14: Steady capacity addition for internal consumption

(tonnes) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 FY08 FY09 FY10 F Y11 F Y12 20,500 33,300 58, 500 69,040 80,000 0.15 0. 25 0. 30 0.35 0.41 (mn no.) 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00
Figure 15: Share of cotton yarn in revenue lowest

100 90 80 70 60 50 40 30 20 10 0 Alok Vardhman Nahar Spinning Super Spinning K P R Mills 4 53 76 51 92
Yarn capac ity
Spindles (RHS)
% t o total rev enues
10
Alok Industries Ltd
YEARS
Table 9: Cotton yarn - Competitive position

Market share (FY11) by capacity % Spindles Market share by capacity % Aloks capacity is for FY12 Source: Company, CRISIL Research Alok Industries 411,840 1.1 Vardhman Textiles 736,168 2.0 Nahar Spinning Mills 383,296 1.0 Super Spinning Ltd 165,984 0.5
Technical textile new area for growth

The nascent technical textiles industry has a great growth potential due to rising industrialisation and an expanding domestic economy. The abundant availability of raw materials (natural and synthetic), skilled labour and technical knowhow provides
India with a competitive advantage to become one of the major manufacturers/ exporters of technical textiles.
To focus on R&D in the technical textile space
Unlike the conventional textile industry, the technical textile industry is import-intensive with few companies in India having the expertise to manufacture speciality fabrics such as fire retardant fabric, water repellent, soil release fabric and high visibility fabric. These are widely used in industrial, aerospace, military, automobile, medical, construction,
transportation and high technology applications. Alok is planning to set up a research and development team to carry out innovations and develop new products on similar lines. Given the huge potential in the business and lower competition in the domestic market, Alok can benefit by tapping the potential at an early stage and generate higher margins with a larger market share.
Real estate - a job half done

To expedite exiting the non-core realty business (and use the proceeds to repay debt), the company gave a mandate to Cushman & W akefield of the US to execute the same; however, due to a weak macro situation, it could only sell ~40% of its portfolio. During 2012, the company sold eight floors (out of 20 floors) from its largest real estate venture, PBP project (estimated deal size of Rs 4-4.5 bn) and three floors (out of the eight floors) of the Ashford Centre and received a token sum of Rs ~500 mn; we have assumed that full payment will be received only in FY13. Apart from these two deals, the company also sold 73 acres of industrial land at Silvassa for Rs 390 mn. The company is keen on selling the remaining nine floors of the PBP project (three floors will be used for own use) during FY13 and is positive about the same. Also, it intends to sell other real estate properties and land by FY14 and expects to raise Rs 20 bn; however, we have assumed that the company will be able to generate only Rs 16-17 bn due to weak market conditions. Exit from real estate will improve capital structure and returns
Debt-equity ratio to improve post exiting real estate; healthy cash flow and limited capex in next two years
indicators. Its debt/equity ratio will decline from 4.1x in FY12 to 3.6x and 2.6x in FY13 and FY14 respectively; also, its interest burden will come down significantly as
interest coverage ratio improves to 1.6-2.0x in FY13-FY14 from 1.4x in FY12.
11
If the company is unable to sell its properties, it will have an adverse impact on its financial flexibility. CRISIL Research believes that excess supply and lower demand in Lower Parel for commercial real estate will make it difficult for Alok to sell its property at a desirable price. Alok ventured into the real estate sector through its 100% subsidiary, Alok Infrastructure Pvt Ltd, in FY07. The foray into real estate was to capitalise on the possible opportunities of capital profits and/or perpetual lease rental income. However, due to adverse
market conditions, exiting from real estate got delayed and has impacted Aloks financial health.
Table 10: List of real estate ventures

Equity share (%) 100% 100% 100% 50% 100% 100% 50% 30% Project type Division SPV SPV SPV SPV Division Division SPV Expected completion date Ready Ready Ready Ready Ready Ready Dec-14 Dec-15 -1,812 Source: CRISIL Research, Company Profit/loss Rs (mn) FY13 1,400 (2,882) (331) 63 50 600 580 200 1,699 11,998 FY14 207 Cash flow (Rs mn) FY13 1,800 9,148 1,050 81 80 840 3,055 320 4,641 FY14 266
Project name Land at Silvasa Peninsula Business Park, Lower Parel, Mumbai Ashford Center, Lower Parel, Mumbai Land at Vapi (Gujarat) Lotus Corporate Park, Goregoan, Mumbai Peninsula Corporate Park, Lower Parel, Mumbai Ashford Royale, Nahur, Mumbai Ashford Palazzo, Mumbai
Area 538 acres
Proposed use Industrial use
Commercial - ITES 200.6 mn sq.ft. storey, 600-car parking 60,000 sq.ft. 36 acres Commercial - office space, 8 storeys, 40-car parking Residential
13,500 sq.ft. Commercial 40,000 sq.ft. Commercial 1.1 mn sq.ft. Residential 0.1 mn sq.ft. Residential
Retail segment still in losses

India - Through its wholly-owned subsidiary Alok H&A Ltd, Alok forayed into retailing in FY07 to push the sale of its own products in the domestic market and to take advantage of the growing organised retail sector; it had planned to reach 500 stores by FY14. It currently manages 291 outlets (as of May 31, 2012) under the brand H&A. It has presence across 150 cities in 23 states. Majority of the sales come from home textiles, mens, womens and kids wear. Recently, the company also launched accessories like ties, handkerchiefs, sun glasses, etc.
Table 11: Store format

Model Exclusive Brand Outlet (EBO) Shop in Shop (SIS) Total Source: CRISIL Research, Company No. of stores 137 154 291
12
Alok Industries Ltd
YEARS
However, the company has now put its expansion plan on hold on account of a challenging macro-economic situation in the domestic market and will focus on its core
manufacturing business. The domestic retail business contributes less than 1% to the companys consolidated top line and hence no major impact is expected in Aloks
operations. W e have mentioned in our earlier report (dated July 26, 2011) that competition in
domestic retail industry has intensified in recent years leading to major retail players booking thin margins. PAT margin for typical value retailers ranges between 1% and 3%. Taking the competitive scenario and thin margins into consideration, we do not see the domestic retail segment add significant revenue or profitability to the company. UK - Post amalgamation of Grabal Alok Impex Limited (GAIL) with Alok, Aloks
effective shareholding in this UK-based retail chain (Store-Twenty One) has increase from 41.7% to 91% in Grabal Alok (UK) Limited (GAUKL), making it a subsidiary of Alok. GAIL is engaged in manufacturing a wide range of embroidered fabrics and holds 49.3% in GAUKL. GAIL had reported revenue of Rs 2,350 mn and 21% EBITDA margin in FY11. Amalgamation of GAIL into the company was completed in March 2012, with effect from April 2011. One share of Alok was issued for every one share of GAIL. W e expect the consolidation of GAUKL to negatively impact Aloks financials in the near term, as the retail chain is posting losses at the EBITDA level. Store-Twenty One runs 221 stores as of March 2012 and had a gross turnover of ~GBP 106 mn.
Exiting retail venture will free up management time and strengthen its balance sheet
Table 12: Store-Twenty One - snapshot

FY09 Revenue (GBP mn) Revenue (Rs mn) EBITDA 91 6,652 Negative FY10 117 7,494 Negative FY11 130 9,167 Negative FY12E 106 7,929 Negative FY13E 95 7,780 Breakeven FY14E 80 6,400 1%
Source: CRISIL Research, Company Considering the weak outlook for retail sales in the UK, the company has decided to close its 50 non-profitable stores and reduce the employee cost by cutting salary. Post these changes, we expect revenue to decline by 10-12% in FY13 and the chain to breakeven at the EBITDA level. In FY14, we expect revenue to decline by another ~10% under the full impact of store shutdown and the chain to turn EBITDA positive. Overall, the merger is expected to reduce the consolidated EBITDA margin by 200bps and weaken the capital structure.
Consolidation to impact EBITDA margin by 200bps
13
Key Risks
Volatile raw material prices
The company derived around 33.5% of revenue from the polyester business in FY12. W ith the polyester segment expanding in the next two years, revenue is expected to increase to ~43%. Purified terephthalic acid (PTA) and mono ethylene glycol (MEG) are two key raw materials for polyester manufacturing, which account for ~75% of the total operating costs. Historically, PTA and MEG prices are directly linked to naphtha prices, and MEG prices are linked to ethylene prices, both of which are volatile in nature. Also, PTA is in tight supply in the domestic market and, hence, adequate raw material tie-ups hold the key for running an expanded capacity. Hence, the companys EBITDA margins are sensitive to the movement in raw material prices especially in a down cycle. Though the company is completely integrated in the cotton segment, it buys cotton and converts it into fabric and home textiles. Cotton prices have remained volatile in the past and resulted in huge amount of inventory losses for the industry. As cotton forms ~60% of its operating cost, inventory risks remain. The cotton value chain has higher working capital cycle of 130 days compared to 90 days for polyester.
Figure 16: Cotton and cotton yarn prices

(Rs/Kg) 280 260 240 220 200 180 160 140 120 100 Oct -10 Dec -10 Oct -11 Dec -11 J un-10 J un-11 Apr-10 Apr-12 Feb-11 Feb-12 Aug-10 Apr-11 Aug-11 70 50 150 130 110 90 190 170
Figure 17: PTA and MEG prices

(Rs/ Kg) 80 75 70 65 60 55 50 45 40 35 30 Oct -10 Dec -10 Oct -11 Dec -11 J un-10 Feb-11 J un-11 Feb-12 Apr-10 Apr-11 Aug-10 Aug-11 Apr-12
Cotton yarn
Cotton (RHS)
PTA
MEG
Exiting real estate

There has been considerable delay in Alok exiting the real estate business, which has impacted its balance sheet. Its debt levels have increased to Rs 122 bn. W e expect the company to realise Rs 16-17 bn in the next two years by monetising its properties. Any delay from our expectation will further impact its balance sheet.
14
Alok Industries Ltd
YEARS
Financial Outlook
Revenue: Aloks standalone revenue grew by 40% in FY12, and clocked a CAGR of 37% for the past five years. The domestic and export markets grew at a similar rate in FY12. Growth in FY12 was largely supported by polyester and apparel fabric businesses. The
polyester segment grew by 80% mainly due to capacity addition and contributed more than 50% to incremental revenue. Apparel fabric grew by 40% and contributed 45% to incremental revenue in FY12. W e estimate FY13 standalone revenue to grow at a
healthy rate of ~24%, largely supported by the polyester segment (100,000 tonnes to be operational in H2FY13). Share of the polyester business rose to 33.5% in FY12 from 26% in FY11 and is expected to increase to 43% in FY13. FY14 will see moderate revenue (standalone) growth of ~2.2% as no additional capacity is expected to get commissioned. Aloks consolidated revenue (Alok + retail operations) is expected to move in trajectory similar to standalone revenue, as it contributes more than 90%. Growth will be marginally lower on account of closure of few retail stores in the UK. W e expect Aloks consolidated revenue to grow at 21.6% and 1.0%, respectively, in FY13 and FY14.
Figure 18: Revenue and growth (standalone)

(Rs mn) 120,000 48% 100,000 80,000 60,000 40,000 20,000 43,068 0 FY10 FY11 FY12# F Y13E F Y14E Revenue Rev enue Growth (RHS) 63, 845 89,075 110, 596 0% 24% 113,010 20% 10% 44% 40% 40% 30% 50% 60%
Figure 19: Revenue break-down (standalone)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8% FY10 Cott on y arn 9% FY11 Apparel fabric FY12# Home text ile 1% FY13E Polyes ter FY14E Garment s 45% 47% 46% 42% 42% 16% 15% 14% 12% 12% 28% 26% 33% 43% 42% 3% 3% 2% 2% 2%
Source: Company, CRISIL Research estimate
Figure 20: Revenue and growth (consolidated)

(Rs mn) 140, 000 50% 120, 000 42% 100, 000 80, 000 60, 000 40, 000 20, 000 44,202 0 FY10 FY11 FY12E FY13E FY14E Revenue Rev enue Growt h(RHS) 66,114 98, 754 120, 042 1% 0% % 121,257 30% 49% 50% 40% 60%
Figure 21: Other businesses revenue to decline

(Rs mn) 12,500 12,000 11,500 11,000 10,500 20% 10% 11,500 10,000 9,500 9,000 FY10 FY11 FY12E FY13E FY14E UK ret ail + H&A + GAI L 12,100 11, 229 11, 330 10,150
15
EBITDA: Aloks standalone EBIDTA margin is expected to decline from 28.7% in FY12 to 25% in FY13 and FY14. This decline is due to higher contribution from the polyester business which has relatively lower margins (15-16% margin) vis- -vis other businesses 25-30%. Also, with consolidation of the UK retail store chain, consolidated EBITDA is expected to decline from 27.4% in FY11 to 25.7% in FY12E. W e expect with lower margins on standalone basis and breakeven for Store-Twenty One, consolidated margin will decline to 23% in FY13. W e expect margin in FY14 to remain at similar levels.
Figure 22: Polyester business to lower EBITDA margin (standalone)

(Rs mn) 30,000 25,000 20,000 15,000 15% 10,000 5,000 12,917 0 FY10 FY11 EBITDA FY12# FY13E FY14E EBI TDA Margin(RHS) 18,275 25, 559 27,609 27,967 0% 10% 5% 30. 0% 35% 28.6% 28. 7% 25.0% 30% 24. % 25% 20%
Figure 23: Retail operations impact consolidated EBITDA margin

(Rs mn) 30, 000 28. 7% 25, 000 20, 000 15, 000 15% 10, 000 5,000 12, 704 0 FY10 FY11 EBITDA FY12E FY13E FY14E EBITDA Margin(RHS) 18,094 25,380 27,664 27, 944 0% 10% 5% 27. 4% 25.7% 23.0% 23.0% 35% 30% 25% 20%
Figure 24: Adj. PAT and Adj. PAT margin (consolidated)

(Rs mn) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 927 0 FY10 FY11 Adj PAT FY12E FY13E FY14E Adj PAT Margin(RHS) 1,935 3,798 5, 249 7, 001 0% 2.1% 2.9% 3% 2% 1% 3. 8% 4% 4. 4% 5. 8% 6% 5% 7%
Figure 25: RoCE and RoE to improve (consolidated)

20. 0 18. 0 16. 0 14. 0 12. 0 10. 0 8.0 6.0 4.0 2.0 0.0 FY10 FY11 RoCE FY12E FY13E RoE FY14E 4.0 8.4 7.0 9.4 12.8 12.7 13. 4 16.0 18. 3
11.8
16
Alok Industries Ltd
YEARS
Figure 26: Debt-equity and interest coverage (consolidated)

5.0 4. 3 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY10 FY11 Gearing FY12E FY13E I nterest coverage FY14E 1.3 1. 2 1.4 1. 6 2.6 3.5 4.1 3. 6
Figure 27: Cash flow (consolidated) to turn positive in FY13

(Rs bn) 40 30 20 10
34 23 2 8 -14 -24 2 9 -9 -2 -13 17
2.0 0 -3 -10 -20 -30 FY10 CFO FY11 -22 -1
FY12E CFI
FY13E CFF
FY14E
Figure 28: Working capital days fall as polyester share rises

(days) 250
Figure 29: EPS to double in FY14 (consolidated)

(Rs) 9.0 8.0
200
7.0 6.0
150 233 100 208 172 50 176 170
5.0 4.0 3.0 2.0 1.0 2.5 1.2 FY10 FY11 FY12E Adj EPS FY13E FY14E 4. 6 6.4 8.5
0 FY10 FY11 FY12E W ork ing c apit al day s FY13E FY14E
0.0
17
Integration at all levels results in higher margin than peers

Figure 30: EBITDA margin comparison across players spinners
35% 30. 0% 30% 25% 19.1% 20% 15% 10% 5% 4. 4% 0% FY08 Alok FY09 FY10 FY11 FY12 Nahar Spinning Vardhman Text iles 0. 0% FY08 Alok Arvind FY09 FY10 Sangam Wels pun FY11 FY12 Siyaram Trident 13. 5% 9. 5% 14.5% 16.8% 17. 0% 15.0% 10.0% 5. 0% 28.1% 26.1% 25. 3% 22. 2% 21.1% 20.0% 28. 6% 28. 7%
Figure 31: EBITDA margin comparison across players fabric and HT

35.0% 30.0% 25.0%
Figure 32: EBITDA margin comparison across players polyester

35. 0% 30. 0% 25. 0% 20. 0% 15. 0% 10. 0% 5. 0% 0. 0% FY08 Alok FY09 Bombay Dy eing FY10 Garden Silk FY11 I ndo Rama Sy n FY12 JBF
18
Alok Industries Ltd
YEARS
Earnings Estimates Revised

FY13E Particulars Revenue EBITDA EBITDA margin Exceptional inc/(exp) PAT (reported) Adj PAT Adj PAT margin Adj EPS Unit (Rs mn) (Rs mn) % (Rs mn) (Rs mn) (Rs mn) % Rs Estimate 122,687 28,273 23.0 (1,839) 3,700 5,539 4.5 6.7 Actual 120,042 27,664 23.0 (1,812) 3,436 5,249 4.4 6.4 change -2.2% -2.2% 0 bps NM -7% -5.2% -14 bps -5.2% Old 123,237 28,400 23.0 1,500 8,463 6,963 5.7 8.4 FY14E New 121,257 27,944 23.0 1,699 8,700 7,001 5.8 8.5 change -1.6% -1.6% 0 bps 13.3% 3% 0.5% 12 bps 0.9%
Source: CRISIL Research estimate
Reasons for changes in estimates

Line item Revenues FY13 FY14 Marginally lower revenue on account of the retail business, closure of stores in the UK and no new stores in India. expected No change
EBITDA margins
19
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as prospects, and financial performance. industry and business
Well-experienced management
Alok has a well-experienced management headed by Mr Ashok Jiwrajka along with his two brothers Mr Dilip Jiwrajka and Mr Surendra Jiwrajka. The three brothers have more than two decades of experience in the textile business, and have played an important role in growing Alok from a trading company into a leading integrated textile player in India. CRISIL Research believes that Aloks growth is driven by the managements strategic prowess - the ability to spot business opportunities arising due to opening up of quotas and ensuring continuous product innovation, which has enabled the company to be a leader in the domestic textile business. The management has also been able to develop growth in
Experienced and aggressive management
strong relationships the export business.
with leading global
vendors leading to tremendous
Strong second level of management

The second level of management (the sons of the three promoters) is currently being groomed. Further, they are ably supported by key professionals at the middle management level, who have been with the company for a relatively longer duration.
Venture into other businesses

CRISIL Research believes that the managements foray into the real estate business was opportunistic with no clear roadmap. The management is taking adequate steps to exit real estate and use the proceeds to reduce debt. They are also evaluating exiting the retail business so that they can focus on their core business. .
To focus on core manufacturing business
20
Alok Industries Ltd
YEARS
Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board composition, typical board processes, disclosure standards, and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Aloks board represents a fair mix of experienced people with the presence of a large number of nominee directors of various financial institutions namely, IFCI, IDBI, EXIM Bank and LIC. Overall, Aloks corporate governance conforms to regulatory requirements supported by reasonably good board practices and an independent board.
Corporate governance practices confirm to the regulatory requirement
Board composition
Aloks board consists of 11 members, seven of whom are independent directors, which is in line with the requirements under Clause 49 of SEBIs listing guidelines. The board includes several nominee independent directors; given the background of the directors, we believe the board is well experienced. The audit committee is chaired by an independent director. Further, the position of the chairman is independent from that of the managing director/CEO. List of independent directors/nominees from various institutions: Name of the person Smt. Maya Chakravorty Mr M. V. Muthu Smt Thankom Mathew Mr David Rasquinha Mr Ashok G Rajani Mr K. R. Modi Mr Timothy Ingram Nominee from IDBI Bank IFCI Ltd LIC Export Import Bank of India -
21
Valuation
Grade: 5/5
W e continue to use the DCF (discounted cash flow) method to value the consolidated cash flow of Aloks textile, retail and infrastructure businesses. W e maintain our fair value of Rs 29 per share. At the current market price of Rs 18 per share (July 11, 2012), the stock trades at P/B multiples of 0.44x and 0.36x FY13E and FY14E book value of Rs 41.6 and Rs 51.3, respectively. The fair value of Rs 29 gives implied P/B multiples of 0.7x and 0.57x FY13E and FY14E book value, respectively. At the CMP of Rs 18, the valuation grade is 5/5.
Key DCF assumptions

W e have considered the discounted value of the firms free cash flow from FY13-22. W e have assumed maintenance capex of Rs 7,500 mn in the terminal year. W e have assumed a terminal growth rate of 3% beyond the explicit forecast period.
WACC computation
FY13-22 Terminal value Cost of equity Cost of debt (post tax) WACC Terminal growth rate 19.2% 6.7% 9.5% 19.2% 7.4% 13.9% 3.00%
Sensitivity analysis to terminal WACC and terminal growth rate

Terminal growth rate W Terminal WACC 1.0% 12.0% 13.0% 13.9% 15.0% 16.0% 34 28 24 19 16 2.0% 38 32 27 22 18 3.0% 44 36 29 24 20 4.0% 50 40 34 27 22 5.0% 59 47 38 30 25
Source: CRISIL Research estimates
One-year forward P/E band

(Rs) 40 35 30 25 20 15 10 5 0 Oc t-10 Dec-10 Oc t-11 May -12 Jun-10 Jun-11 Jan-12 Mar-12 Feb-11 Jul-12 Apr-10 Aug-11 Aug-10 Apr-11
One-year forward EV/EBITDA band

(Rs mn) 160, 000 140, 000 120, 000 100, 000 80,000 60,000 40,000 20,000 0 Oc t-10 Dec-10 Oc t-11 May -12 5. 5x Jun-10 Jun-11 Jan-12 Mar-12 Feb-11 Apr-10 Aug-10 Apr-11 Aug-11 Jul-12
Alok
3x
4x
5x
6x
7x
EV
4x
4. 5x
5x
Source: NSE, CRISIL Research
22
Alok Industries Ltd
YEARS
P/E premium/discount to NIFTY

0% -10% -20% -30% -40% -50% -60% -70% -80% Oct -11 Oct -10 Dec -10 J un-10 J un-11 J an-12 May-12 Feb-11 Aug-10 Aug-11 Mar-12 Apr-10 Apr-11 Jul-12
P/E movement
(Times) 10 9 8 7 6 5 4 3 2 1 0 Apr-10 Aug-10 Feb-11 Mar-12 May -12 0 Jul-11 Mar-12 May-12 Feb-12 Oc t-11 Dec -11 Aug-11 Sep-11 J an-12 Apr-12 J un-12 Jul-12 Jun-10 Dec-10 Apr-11 Aug-11 Oc t-10 Jun-11 Oc t-11 Jan-12 Jul-12 ('000) 30, 000 25, 000 20, 000 15, 000 15 10, 000 5,000 -1 s td dev +1 s td dev
Premium/Dis count to NIFTY
Median premium/ dis c ount to NI FTY
1y r Fwd PE (x)
Median PE
CRISIL IER reports released on Alok Industries Ltd

Date 26-Jul-11 04-Aug-11 15-Nov-11 05-Mar-12 08-Jun-12 11-July-12 Nature of report Initiating coverage* Q1FY12 result update Q2FY12 result update Q3FY12 result update Q4FY12 result update Detailed Report Fundamental grade 3/5 3/5 3/5 3/5 3/5 3/5 Fair value Rs 31 Rs 31 Rs 29 Rs 29 Rs 29 Rs 29 Valuation grade 4/5 5/5 5/5 5/5 5/5 5/5 CMP (on the date of report) Rs 26 Rs 24 Rs 19 Rs 21 Rs 19 Rs 18
Share price movement

(Rs mn) 120 100 80 60 40
Fair value movement since initiation

(Rs) 35 30 25 20
10 20 0 Nov -08 Oc t-09 May -10 Dec -11 Jan-08 Mar-09 Jan-11 Jul-09 Mar-12 Feb-10 Apr-08 Sep-10 Apr-11 Aug-08 Aug-11 Jul-12 5 0
Alok
NIFTY
Traded Quantit y (RHS)
CRISIL Fair Value
Alok
-Indexed to 100 Source: NSE, CRISIL Research Source: NSE, BSE,CRISIL Research
23
Company Overview
Alok, established in 1986 as a private limited company, commenced operations with yarn texturising. It has subsequently grown into a multi-divisional textiles company, engaged in weaving, knitting, processing home textiles and readymade garments. The company has a presence across the textile value chain, from spinning to home textiles, garments and retailing.
Key milestones
FY89 FY91 FY94 Set up manufacturing facilities for texturising at Silvassa (with one texturising machine) Commenced weaving operation at Bhiwandi, Thane Expansion of weaving capacity (50 Cimmco looms) at Bhiwandi and texturising capacity (three texturising machines) at Silvassa Financial and technical collaboration with Albert Grabher Gesellshaft GmbH & Co of Austria for manufacturing embroidered products through a JV, Grabal Alok Impex Ltd Set up knitting division at Silvassa (eight machines) and a state-of-the-art ecofriendly process house at Navi Mumbai (three stenters) Expansion of texturising capacity (five texturising machines) at Silvassa Modernisation and expansion of weaving (24 Sulzer Projectile looms) at Silvassa Expansion of weaving (28 Sulzer Projectile Looms) and knitting capacities (20 machines) at Silvassa Undertook expansion of weaving and processing capacities under TUFS at an aggregate cost of Rs1,900 mn Completion of modernisation and expansion of weaving project (88 air jet /Rapier Sulzer Looms) at Silvassa Expansion of knitting capacities (28 machines) at Silvassa Completion of modernisation and expansion of processing project at Vapi (two stenters) Expansion of texturising capacity at Silvassa (10 machines) Set up garment unit at Navi Mumbai (100 stitching machines) FY04 Expansion of various capacities in Silvassa: texturising (30 machines) knitting (40 machines) weaving (170 air jet/Rapier Looms)
FY95
FY96
FY97 FY98 FY99
FY01
FY02
FY03
Foray into home textiles (bed sheets) for direct exports FY05 FY06 Expansion of weaving capacity at Silvassa (170 air jet/Rapier Looms) Completion of wider width weaving and processing project Set up new plant for processing of knitted fabric at Vapi and a POY plant at Silvassa Successfully completed rights issue of 400 mn shares at 2075 :1 at Rs 11 per share The company has shown intentions of getting out of the real estate business Expanded polyester capacity to 400,000 tonnes, also sold a portion of real estate
FY10 FY11 FY12
Source: Company
24
Alok Industries Ltd
YEARS
Annexure: Financials (Consolidated)

Incom e s tate m e nt (Rs m n) Ope rating incom e EBIT DA EBITDA m ar gin Depreciation EBIT Interest Ope rating PBT Other income Exceptional inc/(exp) PBT Tax provision Minority interes t PAT (Re por te d) Less: Exceptionals Adjusted PAT Ratios FY10 Gr ow th Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) Pr ofitability EBITDA margin (%) Adj PAT Margin (%) RoE (%) RoCE (%) RoIC (%) Valuations Price-earnings (x) Price-book (x) EV/EBITDA (x) EV/Sales (x) Dividend payout ratio (%) Dividend yield (%) B/S r atios Inventory days Creditors days Debtor days Working capital days Gross asset turnover (x) Net asset turnover (x) Sales/operating assets (x) Current ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage Per share FY10 Adj EPS (Rs) CEPS Book value Dividend (Rs) Actual o/s shares (mn) 1.2 5.9 34.7 0.3 787.8 FY11 2.5 9.2 35.5 0.3 787.8 FY12# 4.6 13.2 38.0 0.3 826.3 FY13E 6.4 15.4 41.6 0.5 826.3 FY14E 8.5 17.4 51.3 0.7 826.3 202 75 96 233 0.7 0.9 0.6 6.5 3.5 3.0 1.3 179 72 103 208 0.8 1.0 0.7 5.9 4.3 3.9 1.2 156 88 95 172 0.9 1.1 1.0 3.9 4.1 3.8 1.4 162 88 95 176 1.0 1.3 1.2 3.9 3.6 3.3 1.6 159 88 95 170 1.0 1.5 1.4 3.9 2.6 2.3 2.0 18.9 0.6 7.8 2.3 16.8 1.3 9.0 0.6 7.0 2.0 7.4 1.3 4.0 0.5 5.4 1.4 8.6 1.6 2.9 0.4 4.6 1.1 12.0 2.7 2.2 0.4 4.0 0.9 6.6 3.8 28.7 2.1 4.0 8.4 8.3 27.4 2.9 7.0 9.4 11.5 25.7 3.8 12.8 11.8 12.2 23.0 4.4 16.0 12.7 12.3 23.0 5.8 18.3 13.4 12.6 42.1 58.5 (211.1) (127.8) 49.6 42.4 108.7 108.7 49.4 40.3 96.3 87.2 21.6 9.0 38.2 38.2 1.0 1.0 33.4 33.4 FY11 FY12# FY13E FY14E FY10 44,202 12,704 28.7% 3,718 8,986 6,812 2,174 40 444 2,657 1,286 1,371 444 927 FY11 66,114 18,094 27.4% 5,310 12,784 10,413 2,371 1,350 1,184 4,905 1,786 3,119 1,184 1,935 FY12# 98,754 25,380 25.7% 7,078 18,301 12,837 5,464 662 (902) 5,224 2,328 2,896 (902) 3,798 FY13E 120,042 27,664 23.0% 7,500 20,164 12,574 7,590 244 (1,812) 6,021 2,585 3,436 (1,812) 5,249 FY14E 121,257 27,944 23.0% 7,417 20,527 10,372 10,155 294 1,699 12,148 3,448 8,700 1,699 7,001 Balance Sheet (Rs m n) Liabilitie s Equity share capital Reserves Minorities Ne t w or th Convertible debt Other debt Total de bt Deferred tax liability (net) Total liabilitie s Asse ts Net f ixed assets Capital WIP Total fixe d as s e ts Inve s tm e nts Current assets Inventory Sundry debtors Loans and advances Cash & bank balanc e Marketable securities Total current assets Total current liabilities Ne t curr e nt as s e ts Intangibles/M isc. expenditure Total as s e ts Cas h flow (Rs m n) Pre-tax prof it Total tax paid Depreciation Working capital changes Ne t cas h fr om ope r ations Cas h fr om inve s tm e nts Capital expenditure Investments and others Ne t cas h fr om inve s tm e nts Cas h fr om financing Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Ne t cas h fr om financing Change in cash pos ition Closing cash Quar te r ly financials (Standalone ) (Rs m n) Ne t s ale s Change (q-o-q) EBIT DA Change (q-o-q) EBITDA m ar gin A djusted PBT Re por te d PAT Change (q-o-q) Re por te d PAT m argin Re por te d EPS Q4FY11 21,959 37% 5,581 34% 25.4% 2557 1,595 78% 7.3% 2.0 Q1FY12 16,449 -25% 4,522 -19% 27.5% 875 578 -64% 3.5% 0.7 Q2FY12 21,275 29% 6,751 49% 31.7% 2,889 744 29% 3.5% 0.9 Q3FY12 23,867 12% 6,423 -5% 26.9% 1,855 (366) -149% -1.5% (0.5) Q4FY12 25,954 9% 7,288 13% 28.1% 2,293 2,835 -875% 10.9% 3.4 8,743 27,161 (230) (1,330) 34,344 9,832 14,107 24,517 (230) (1,095) 23,192 (2,064) 12,043 816 8,000 (289) (902) 7,625 (3,909) 8,134 (7,000) (482) (1,812) (9,294) 1,659 9,793 (14,000) (674) 1,699 (12,975) 2,194 11,986 (22,050) 487 (21,563) (23,335) (655) (23,990) (15,921) 2,000 (13,921) 8,811 8,811 (1,558) (1,558) FY10 2,213 (321) 3,718 (8,559) (2,948) FY11 3,721 (813) 5,310 (9,484) (1,266) FY12# 6,126 (978) 7,078 (9,839) 2,388 FY13E 7,834 (1,810) 7,500 (11,382) 2,142 FY14E 10,449 (2,414) 7,417 1,275 16,727 15,678 11,561 8,526 14,107 460 50,332 7,699 42,633 2,053 128,115 21,499 18,471 7,880 12,043 395 60,287 10,299 49,988 2,000 154,215 28,409 26,194 11,770 8,134 395 74,902 18,983 55,918 2,000 166,988 37,493 31,840 13,107 9,793 395 92,627 23,669 68,959 2,000 163,718 37,208 32,163 12,027 11,986 395 93,779 23,901 69,878 2,000 158,778 62,703 16,914 79,617 3,812 75,060 22,636 97,695 4,532 101,902 4,636 106,538 2,532 85,592 4,636 90,228 2,532 79,233 5,136 84,368 2,532 96,726 96,726 4,030 128,115 FY10 7,878 19,445 36 27,360 121,243 121,243 5,003 154,215 FY11 7,878 20,045 46 27,969 129,243 129,243 6,353 166,988 122,243 122,243 7,129 163,718 108,243 108,243 8,163 158,778 FY12# 8,263 23,083 46 31,392 FY13E 8,263 26,037 46 34,346 FY14E 8,263 34,063 46 42,372
#consolidated financials not declared Source: CRISIL Research
25
Focus Charts
Revenue and growth (consolidated)
(Rs mn) 140, 000 50% 120, 000 42% 100, 000 80, 000 60, 000 40, 000 20, 000 44,202 0 FY10 FY11 FY12E FY13E FY14E Revenue Rev enue Growt h(RHS) 66,114 98, 754 120, 042 0% 22% 121,257 30% 4.0 20% 10% 1.0 0.0 FY10 FY11 FY12E Adj EPS FY13E FY14E 1.2 3.0 2.0 2.5 4. 6 6.4 49% 50% 7.0 40% 6.0 5.0 8.5 60%
EPS to double in FY14 (consolidated)

(Rs) 9.0 8.0
Debt-equity and interest coverage (consolidated)

5.0 4. 3 4.5 4.0 3.5 3.0 2.5 2.0 1.3 1.5 1.0 0.5 0.0 FY10 FY11 Gearing FY12E FY13E I nterest coverage FY14E 1. 2 1.4 1. 6 2.6 3.5 4.1 3. 6
Cash flow (consolidated) to turn positive in FY13

(Rs bn) 40 30 20 10 2.0 0 -3 -10 -20 -30 FY10 CFO FY11 FY12E CFI FY13E CFF FY14E -22 -1 -24 -14 -9 -2 -13
34 23 2 8 2 9 17
Source: Industry, CRISIL Research
Source: Industry, CRISIL Research
Working capital days fall as polyester share rises

(days) 250
Share price movement

(Rs mn) 120 100
200 80 150 233 100 208 172 50 0 Nov -08 Dec -11 Oc t-09 Mar-12 Jan-08 May -10 Jan-11 Sep-10 Apr-11 Mar-09 0 FY10 FY11 FY12E Work ing c apit al day s FY13E FY14E Aug-08 Feb-10 Aug-11 Apr-08 Jul-09 Jul-12 176 170 20 60 40
Alok
NI FTY
-Indexed to 100 Source: Company, CRISIL Research Source: Company, CRISIL Research
26
YEARS
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CRISIL Research Ier Report Alok Industries 2012

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Alok Apoll Hospitals Industries Ltd o rprise Ltd Ente

Enhancing investment decisions

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

CRISIL Fundamental Grade

CRISIL Valuation Grade

About CRISIL Limited

About CRISIL Research

Alok Industries Ltd

July 11, 2012 Fair Value CMP CFV MATRIX

KEY STOCK STATISTICS

20% 10% 0% J un-11 Promoter Sep-11 29.4% 30.0%

PERFORMANCE VIS--VIS MARKET

Table 1: Aloks - Business snapshot (standalone)

International and domestic brands

Source: Company, CRISIL Research

Alok Industries Ltd

Table 2: Large-scale balance capacity across the value chain

Source: Company, CRISIL Research

Table 3: Strong growth in both the markets

Source: Company, CRISIL Research

Domestic market to remain primary demand driver

Chart 1: Indian textile industry break-up

Indian textile industry Rs 2653 billion

Domestic - Home textile Rs 560 billion

Domestic - Garment Rs 1325 billion

Exports (Garment + Home textile) Rs 768 billion

Men's apparel Rs 612 billion

Women's apparel Rs 557 billion

Kids appar el Rs 155 billion

USA Rs 222 billion

Other Rs 130 billion

Source: CRISIL Research

Figure 1: Domestic RMG market is major growth driver

Figure 2: Rising income leads to higher spending on textile

Source: CRISIL Research

Source: CRISIL Research

Alok Industries Ltd

Vendor consolidation + favourable currency to strengthen competitiveness

Large capacities to benefit Alok as customers opt for vendor consolidation

Figure 3: Indias share has not grown in the US and the EU

Figure 4: Re has depreciated more than other currencies

105 100 95 90 Jul-11

85 80 May-11 Apr-11 J un-11

USD-INR X-RATE USD-VND X-RATE

USD-BDT X-RATE USD-CNY X-RATE

Source: CRISIL Research

Source: CRISIL Research

Figure 5: Indias textile exports have grown at 8% CAGR

Figure 6: Aloks export business has grown too

Alok's ex port rev enue

Source: CRISIL Research

Source: CRISIL Research

All segments to drive growth

Source: Company, CRISIL Research

Polyester to be key focus area

Alok Industries Ltd

Figure 7: Improving price competitiveness of polyester

Table 5: Share of value-added products to rise

CP FDY Chips/POY DTY Cationic yarn Polyester staple fibre (PSF)

Cotton yarn/polyes ter

Source: CRISIL Research, Industry

Source: CRISIL Research, Company