BUY
Shri Lakshmi Cotsyn Ltd. (SLCL) is one of the largest textile manufacturers in Northern India with a turnover of Rs. 6,443 mn during FY07. SLCL is on a massive expansion drive to increase its product range and is also foraying into Retail to provide a facelift to company’s brand and increase in its market reach. Given the company’s massive expansion plans, and with the completion of Phase I expansion already reflected in the impressive financials performance for FY07, we expect SLCL to deliver strong growth in the next 2 years, with the completion of its three phase expansion program.
We believe that the SLCL, post its Phase III expansion, with its large scale facilities, fully integrated operations and a diversified rich product mix, will significantly benefit from both the export and domestic opportunities. We expect a revenue CAGR of 30% and a net profit CAGR of 36% over FY07-10E.
Factoring all this, we are initiating coverage on SLCL with a BUY rating with a target price of Rs 240. P/E is our primary valuation tool as we see it as best capturing the company's earnings growth potential & we assign a target P/E multiple of 9x FY09 Earning of Rs 26.7 per share. On the other hand on Marketcap/ sales valuation SLCL is trading at 0.2x FY09 estimates, and on EV/EBITDA multiple SLCL trades at 4xFY09E, which is a steep discount to its peers like Welspun India, Abhishek and Alok wherein, the average Marketcap/sales multiple of these players on FY09E, is at 0.5x and average EV/EBITDA is at 6.8x.
Nevertheless, with strong earnings visibility to continue, post expansion plans we consider valuations to be attractive at current level and we recommend a BUY on Shri Lakshmi Cotsyn Ltd. (SLCL) with a 12-M target price of Rs 240.
Consistent financials and Operational Performance…. The financial performance of SLCL is characterized by consistent growth in operations over the years resulting in steady cash flow generation, during FY05- 07A, revenues recorded growth at CAGR of 51% to Rs 6443 mn for FY07A, and for the same period net profit clocked a CAGR of 99% at Rs 405.7 mn. During FY’06, company has increased installed capacity of suiting-shirting (incl. industrial fabric) from 18 million meters per annum (mmpa) to 30 mmpa with installation of additional machinery and debottlenecking, further in FY07 SLCL has continue its expansion program in Home furnishing fabrics, Nylon and Garments. Operational efficiency of SLCL is indicated by capacity utilization at over 100% due to continuous technical upgradation. SLCL has a country wide network of about 300 wholesale dealers & agents, developed and relationship built up for over a decade.
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