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GARDEN SILK MILLS

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					FUNDAMENTALS             VALUATION




               GARDEN SILK MILLS LIMITED

                                20th October 2010
ANALYTICAL CONTACT

Ms. Revati Kasture                           +91-22-6754 3465                revati.kasture@careratings.com


BUSINESS DEVELOPMENT CONTACTS

MUMBAI
Mr. P. N. Satheeskumar                       +91-22-6754 3555             sathees.kumar@careratings.com

KOLKATA
Mr. Sukanta Nag                              +91-33- 2283 1800                sukanta.nag@careratings.com


CHENNAI
Mr. V Pradeep Kumar                          +91-44-2849 7812            pradeep.kumar@careratings.com


AHMEDABAD
Mr. Mehul Pandya                              +91-79-40265656             mehul.pandya@careratings.com


NEW DELHI
Ms. Swati Agrawal                            +91- 11- 2331 8701              swati.agrawal@careratings.com


BANGALORE
Mr. G. Sundara Vathanan                      +91-80-2211 7140          sundara.vathanan@careratings.com


HYDERABAD
Mr. Ashwini Kumar Jani                        +91-40-40102030                 ashwini.jani@careratings.com


CARE EQUITY RESEARCH OFFERS

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EQUI-GRADE – Analytical Power for Investment Decisions
     EQUIGRADE
GARDEN SILK MILLS LTD
                                   GARDEN SILK MILLS
Textiles



Good Fundamentals; Fairly Priced                 CMP : Rs. 129.35 / CIV : Rs. 128.00 1                 20 October 2010

                                                         CARE Equity Research assigns 3/5 on fundamental grade to
                                                         Garden Silk Mills Limited
                                                         CARE Equity Research assigns fundamental grade of 3/5 to Garden
                                                         Silk Mills Limited (GSML). This indicates „Good Fundamentals‟.
                                                         The grading draws strength from positive outlook on long-term
                                                         prospects of polyester yarn business, which is expect to grow at
                                                         7.0% through 2010-12. GSML‟s leadership position in polyester
                                                         chips market along with its locational advantage would make it one
                                                         of the most competitive chips players. Furthermore, GSML‟s
                                                         capacity augmentation into yarn business, where net realizations are
                                                         relatively higher than chips, would shield the company from any
                                                         shrinkage in demand due to the ongoing backward integration plans
                                                         by major chip buyers.


                                                         GSML‟s limited presence in textile value chain may limit the
                                                         company‟s ability to achieve any meaningful expansion in its
                                                         margins. Furthermore, GSML remains exposed to adverse
                                                         movements in raw material prices as the current overcapacities in
                                                         the polyester yarn market has lead to intense pricing pressures.


                                                         Valuation
                                                         CARE Equity Research assigns valuation grade of 3/5 to GSML
                                                         based on the Current Intrinsic Value (CIV) of Rs. 128.00 as against
                                                         Current market Price (CMP) of 129.35. This indicates that the
                                                         stock is „Fairly Priced‟. The CIV is arrived at by using combination
                                                         of Discounted Cash Flow and EV/EBITDA methods.

                                                         Financial Information Snapshot
                                                         (Rs Crore)                      FY09# FY10 FY11 P FY12 P
                                                         Operating Income                1,339 2,521 3,163 3,461
                                                         EBITDA                           162     239     270     299
                                                         PAT (After minority interest)     50      63      65     90
                                                         Fully Diluted EPS* (Rs.)         12.9    16.5    16.9   23.5
                                                         Dividend Per Share (Rs.)          1.8     2.1     2.2    3.0
                                                         P/E (times)                               7.8     7.6    5.5
                                                         EV/EBITDA (times)                         7.6     6.7    6.1
                                                         * Face Value of Rs. 10/share; # 9 months ending March-09

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                                      GARDEN SILK MILLS                                    EQUIGRADE



      FUNDAMENTAL GRADE                           Good Fundamentals                                  3/5




     Textile Value Chain; Garden Silk Mills Ltd‟s business model; and CARE Equity Research opinions



            Legend

              GSML Presence                        Crude Oil -> Naphtha

              CARE Equity
             Research Opinion
                                               Paraxylene          Ethylene

                                                                                     Raw material prices to
                                                                                     remain stable despite
         Limited pricing                       PTA/DMT              MEG               rising crude prices
      flexibility will lead to
      shrinkage in margins
     for next 12-18 months


       (Revenue                                                                      Chips to
                                                                     Polyester
        share:43%) Yarn to weaving       POY                                       independent
                                                                      Chips
                        mills/looms                                                POY players     (Revenue
                                                                                                    share:51%)
      Long-term
                                        PFY/FDY              PSF
      prospects of
   polyester business        Cotton                                                  Capacity augmentation
    remain positive                                                                   into yarn business a
                                                                                       positive given the
                                             Fabric                 Garments/          ongoing backward
                            Cotton           Weaving               Home Textiles      integration plans by
                             Yarn            Knitting                                  major chip buyers


      Cotton yarn to remain a                Fabric to
       weak substitute for                   end users
          polyester yarn
                                            (Revenue
                                             share:6%)




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Long-term prospects of polyester business remain positive; expected to grow at 7.0%

CARE Equity Research remains positive about the long-term prospects of Indian polyester yarn industry due to
higher domestic demand and switch-over effect from cotton due to higher cotton prices. CARE Equity Research
expects the domestic demand for polyester yarn to show healthy growth during the FY10-FY12 period. Apart from
the demand from conventional textiles, the growth in polyester industry will also be driven by newer applications
such as technical textiles and home textiles. CARE Equity Research believes that margins for polyester yarn may
shrink for FY11 owing to large capacities coming online, but may show signs of recovery post FY12 on the back of
healthy demand outlook. Lastly, operating rates of the industry are expected to inch up to 80 - 85% by FY12 from
70-75% in FY08 on the back of growing demand.



Raw material prices to remain stable despite rising crude prices

Purified Terephthalic Acid (PTA) and Monoethylene Glycol (MEG) are the key raw materials for GSML,
contributing about 84% to the total operating expenses. The prices of these raw materials, being crude oil
derivatives, more or less move in tandem with crude oil prices. CARE Equity Research notes that pricing flexibility
of polyester players are limited wherein moderate and gradual rise in feedstock prices can eventually be passed on
to the consumer; but any sudden upward spike in prices may have to be absorbed by the polyester yarn
manufacturer.



Going forward, CARE Equity Research believes that even under the rising crude oil price scenario, prices of PTA
and MEG are expected to remain stable on current levels on two counts. Firstly, the period of 2010-12 shall
witness substantial increase in the production capacities of PTA and MEG. This additional capacity, despite
strengthening demand, is likely to result in significant capacity surplus in next two to three years. CARE Equity
Research estimates that the global surplus capacities for PTA and MEG would stand at about 4.4 million metric
tonnes per annum (MMTPA) and 3.4 MMTPA by 2012 respectively. Alternatively, these surplus capacities, when
expressed as percentage of total capacities are likely to average at about 8.0-8.5% for PTA and 12.0-14.5% for
MEG. This additional capacity is likely to keep PTA/MEG price muted in near-to-medium term. Secondly, the
domestic PTA sourcing situation may tighten in 2011-12 owing to rapidly increasing polyester demand coupled
with lack of new domestic capacity addition. The situation may be relieved in 2013 when IOCL (560 KTPA at
Koyali) and RIL (1,100 KTPA at Dahej) are expected to augment their PTA manufacturing capacities.




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                                                                                          GARDEN SILK MILLS                                                                                                                                             EQUIGRADE


                                                            GSML: Global Surplus Capacity Outlook for Key Raw Materials

                                                           PTA (million tonnes)                                                                                                           MEG (million tonnes)

                                    10.0                                                                       15%                                                                  7.0                                                                 20%




                                                                                                                     Surplus Cap. (% of total)




                                                                                                                                                                                                                                                              Capacity Utilization (%)
           Capacity Surplus (mn tonnes)




                                                                                                                                                     Capacity Surplus (mn tonnes)
                                                                                                                                                                                    6.0
                                          8.0                                                                                                                                                                                                           15%
                                                                                                               10%                                                                  5.0
                                          6.0                                                                                                                                       4.0
                                                                                                                                                                                                                                                        10%
                                          4.0                                                                                                                                       3.0
                                                                                                               5%                                                                   2.0
                                          2.0                                                                                                                                                                                                           5%
                                                                                                                                                                                    1.0
                                          0.0                                                                  0%                                                                   0.0                                                                 0%
                                                                      2009(E)




                                                                                                                                                                                                               2009(E)
                                                                                2010(F)

                                                                                           2011(F)

                                                                                                     2012(F)




                                                                                                                                                                                                                         2010(F)

                                                                                                                                                                                                                                    2011(F)

                                                                                                                                                                                                                                              2012(F)
                                                            2008(A)




                                                                                                                                                                                                     2008(A)
                                                 2007(A)




                                                                                                                                                                                           2007(A)
                                                Capacity Surplus                          Surplus (% of total)                                                                            Capacity Surplus                         Surplus (% of total)



                                                              Source: CARE Equity Research and Association of Synthetic Fiber Industry



   Leadership position in polyester chips market with great locational advantage
   Polyester chips are a type of solidified polymer used to produce Polyester Filament Yarn (PFY) and Polyester
   Staple Fibre (PSF) through extruder technology. These chips are largely used by independent small-scale spinners
   who do not have continuous polymerization facilities.


   GSML is market leader in polyester chips market with a market share of 38%. The company‟s chip manufacturing
   facilities are located at Surat (Gujarat), which accommodates about 42% of India‟s total extruder base yarn
   manufacturing facilities. Furthermore, Silvassa, which contains additional 31% of the capacity, is located in close
   proximity from Surat. This locational advantage gives GSML easy access to the end consumers increasing its cost-
   efficiencies substantially.

                                                           India: Geographical distribution of Extruder base capacities (KTPA)

                                                                                                                                           Extruder Capacity
                                                                                                                                           KTPA % Share
                                                                                                Surat                                        90       42%
                                                                                                Silvassa                                     67       31%
                                                                                                North India                                  37       17%
                                                                                                Other region                                 22       10%
                                                                                                Total                                       216      100%

                                                                        Source: CARE Equity Research and Reliance Industries Limited



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                              GARDEN SILK MILLS

GSML‟s capacity augmentation into yarn business a positive given the ongoing backward integration
plans by major chip buyers

In last three years, GSML has augmented its polyester chips manufacturing capacities substantially from 2,16,000
MTPA in FY08 to 416,000 MTPA in FY10. Going forward, the company is expecting to add another 108,000
MTPA capacity which shall bring the overall chips manufacturing capacity to about 524,000 MTPA by March-
2011. CARE Equity Research expects that the polyester chips market would shrink going forward despite the rising
yarn demand as major chip buyers are backward integrating into chips manufacturing, posing risk to future revenue
and capacity utilization. However, following the augmentation in chips capacity, GSML has also been aggressively
adding capacities in downstream yarn manufacturing. CARE Equity Research believes that this forward integration
would help GSML in weathering a possible slowdown in chips market as the increased production of chips/melt
can be utilized for captive consumption.



CARE Equity Research expects GSML‟s revenue mix to change substantially in near future. The revenue mix for
FY12 would be more skewed towards polyester yarn segment, which is expected to increase its contribution from
43% in FY10 to 54% in FY12. Correspondingly, share of polyester chips in the company‟s total revenue is
expected to reduce from 51% in FY10 to about 41% in FY12.



Cotton yarn to remain a weak substitute for polyester yarn

Cotton yarn is a substitute for Polyester yarn. High cotton prices along with limited availability may lead to an
increase in cotton yarn prices. This may prompt independent weaving mills/looms to shift their polyester-cotton
(PC) blend from cotton yarn to polyester yarn. This switch-over can be quick and is primarily motivated by the fact
that weaving mills/looms can use same machines/equipments for both the types of yarn.

In recent months, the domestic cotton prices have peaked to its lifetime high of Rs 100 per kg owing to strong
demand from China. This sharp spike was attributed to the short term disruption in cotton availability due to the
heavy rains in central China. Nevertheless, CARE Equity Research believes that the prices will remain robust in
near-to-medium term on two counts. Firstly, new domestic cotton crop deliveries are expected to get delayed by at
least 3 weeks due to heavy rains. Most of the smaller domestic spinning mills, running at very low stock to
consumption ratio, may refurbish their inventories quickly in order to take advantage of strengthening export
opportunities. Secondly, globally cotton market have been facing perennial deficit situation with demand exceeding
the supply by a wide margin. The recent data points suggest that India, being the second biggest cotton exporter,
may not be able to increase its cotton production despite rise in cotton harvesting area. For the harvesting season
2009-10, the total domestic cotton production is expected to remain flat at about 29.2 million bales (1 bale = 170
kg) despite the harvesting area increasing at about 8% to 10.2 million hectares.


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                                                       GARDEN SILK MILLS                                                                                                             EQUIGRADE



   CARE Equity Research believes that under such scenario of strengthening cotton prices along with its short supply
   would make cotton yarn a weak substitute for polyester yarn.


        Cotton yarn pricing premium to PFY (Rs./kg)                                                                                   India‟s Cotton Yarn Statistics

       50.0                                                                     45                                      10.5                                                                    35.0




                                                                                           Harvest Area (mn hectares)




                                                                                                                                                                                                       Production (mn bales)
                                                                         40                                             10.0                                                                    30.0
       40.0
                                                                  33                                                     9.5                                                                    25.0
                                      31
       30.0                                  27            28                                                                                                                                   20.0
                                                                                                                         9.0
                 22     23                                                                                                                                                            10.2      15.0
                                                                                                                         8.5                                     9.4       9.4                  10.0
       20.0                                                                                                                                            9.1
                                                    13                                                                   8.0      8.8        8.7
                                                                                                                                                                                                5.0
       10.0                    5                                                                                         7.5                                                                    0.0




                                                                                                                                                       2006-07

                                                                                                                                                                 2007-08

                                                                                                                                                                           2008-09

                                                                                                                                                                                      2009-10
                                                                                                                                   2004-05

                                                                                                                                             2005-06
         0.0
                 FY01

                        FY02

                               FY03

                                      FY04

                                             FY05

                                                    FY06

                                                           FY07

                                                                  FY08

                                                                         FY09

                                                                                FY10




                                                                                                                               Area (mn hectares)                Production(mn bales)-RHS

     Notes: 1) Cotton yarn prices are taken for Cotton Cone
     Yarn 34S/37s Price. 2) PFY prices are taken for POY
     (115D/118D/126D) at Mumbai



                                                      Source: CARE Equity Research
               Notes: 1) Cotton yarn prices are taken for Cotton Cone Yarn 34S/37s Price. 2) PFY prices are taken for POY
                                                      (115D/118D/126D) at Mumbai

   Limited pricing flexibility will lead to shrinkage in margins for next 12-18 months

   Polyester yarn industry is characterized by a pass-through business model, whereby any price increase or decrease
   is passed-on to the downstream weaving/loom players. However, GSML‟s ability to pass-on any changes in the raw
   material cost remains negatively skewed as consumers usually show less willingness to absorb price increase rather
   than accept price decrease. Furthermore, the current overcapacity in the polyester yarn market may lead to limiting
   pricing flexibility for industry players. Therefore, any sudden movement in raw material prices (PTA/MEG) may
   erode GSML‟s profitability substantially.

   CARE Equity Research expects GSML‟s operating margins to decline in FY11 to 8.6% owing to pricing pressures
   in finished yarn market. Post that, GSML‟s profitability may show marginal improvement as the company‟s
   capacity expansion plans in yarn business would start realizing synergy benefits with its existing chip manufacturing
   facilities.




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                               GARDEN SILK MILLS

              Polyester Industry Statistics                                 GSML: Margin Outlook (2008-12)

                                         (mn tonnes)              15.0%            12.1%
                                                                           10.9%
                                       Domestic                                            9.5%            8.7%
            Capacity Production                                   10.0%                            8.6%
                                      Consumption
     FY07       3.46           2.06             1.85               5.0%             3.7%
                                                                            2.4%           2.5%    2.0%    2.6%
     FY08       3.46           2.30             2.03
     FY09       3.50           2.09             1.91               0.0%
                                                                           FY08 A FY09* A FY10 A FY11 E FY12 E

                                                                          EBITDA Margins (%)      PAT Margin (%)


                                            Source: CARE Equity Research

New captive power plant at Jolwa not likely to reduce power and fuel expenditure substantially

Power and fuel expenses constitute about 7% of the total operating expenses of the company. GSML is currently
in process of establishing a coal based thermal power plant of 18 MW at Jolwa to meet the increased power
requirement for capacity expansions and to partially compensate for lower generation from its existing gas fired
plant on account of decreased supply of natural gas. The power project will use imported coal on monthly contract
basis and likely to cater to about 25% of the total power requirement. According to CARE Equity Research, the
new power plant, even after considering generation cost of about Rs 3.25/unit, would not be able to help GSML in
reducing its power and fuel expenditure substantially. CARE Equity Research estimates that GSML‟s overall
electricity costs may reduce from existing Rs 4.4/unit to about Rs. 3.9/unit by FY12, keeping the total power and
fuel costs flat at about 6.2% of net sales through 2010-12.


Reasonable corporate Governance practices

•     GSML‟s board comprises of 12 directors, of which 6 are independent directors. This meets SEBI‟s
      minimum stipulated guidelines and suggests well diversified composition of board with adequate separation
      of ownership and management.
•     As per SEBI Regulations, there are three key Board level committees in GSML - (i) Audit Committee, (ii)
      Shareholders/Investors Grievances Committee and (iii) Remuneration Committee. All three committees are
      chaired by independent directors.
•     As per FY10 annual report, all three audit committee members are “financially literate” and are non-
      executive directors.
•     SEBI encourages companies to report unqualified financial statements. GSML has no Audit qualifications in
      FY10.



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                                            GARDEN SILK MILLS                                                                                EQUIGRADE


                      GSML: Peer Group Comparison (Financial and Operational Aspects)


                                                        Garden Silk Mills              JBF Industries               Century Enka
                                                             [1]
                                                FY09 A                FY10 A          FY09 A FY10 A               FY09 A FY10 [ 3 ] A
                 Financial Statement (Rs crore)
                 Revenue                           1,339                 2,521           4,326        4,981           1,181        1,241
                 EBITDA                              162                   239             466          512             109          224
                 EBIT                                117                   166             388          394              50          163
                 PAT                                  50                    63             189          190              17          100
                 Margins (%)
                 EBITDA                            12.1%                  9.5%           10.8%        10.3%            9.2%        18.1%
                 EBIT                               8.7%                  6.6%            9.0%         7.9%            4.2%        13.1%
                 PAT                                3.7%                  2.5%            4.4%         3.8%            1.4%         8.1%
                 Per Share Data (Rs)
                 EPS                                 12.9                  16.5            30.3        30.6            8.29        49.61
                 DPS                                  1.8                   2.1             5.8         7.0           11.73        15.29
                 BVPS                               113.6                 128.0           117.8       140.4           234.6        284.7
                 Valuation Ratios (x)(trailing)
                 P/E                                    -                   7.8                -         6.3                -         4.9
                 EV/EBITDA                              -                   7.6                -         6.6                -         3.5
                 P/BV                                   -                   1.0                -         1.4                -         0.9
                 Profitability Ratio (%)
                 ROE [2]                                    13.6%        13.7%           18.6%        16.1%            5.0%        20.5%
                 ROCE [2]                                   10.4%        10.8%           15.4%        13.2%            7.7%        21.0%
                 Dividend Yield                              1.4%         1.6%            3.0%         3.7%            4.8%         6.3%
                 Leverage Ratios (x)
                 Net Debt to Equity                           1.91         2.03            1.02         1.02            0.59         0.35
                 Total Debt to Equity                         2.08         2.10            1.69         1.56            0.60         0.36
                 Notes: [1] 9 months ending March-09. [2] ROE and ROCE for GSML estimated for 12-month period ending March-09.
                      [3] Century Enka reported inventory gains of Rs 38 crore in FY10 as compared to inventory loss of Rs 26 crore in FY09.


                                         Garden Silk Mills           JBF Industries          Indo Rama Syn.            Century Enka
                                              FY09       FY10         FY09        FY10         FY08       FY09          FY09       FY10

                  Capacity (TPA)
                  Polyester Chips           4,16,000 4,16,000        5,50,800 5,50,800         52,500 87,500          1,46,000 1,46,000
                  POY                       1,15,200 1,62,450        1,63,200 2,01,200       2,59,000 2,59,000        1,25,200 1,25,200

                  Production (TPA)
                  Polyester Chips  1,78,386 3,58,758                 3,99,554 4,31,342         29,968 29,163             18,835     16,667
                  POY                71,863 1,27,520                 1,49,375 1,51,551       2,04,643 1,69,312           61,834     55,878

                  Capacity Utilization (%)#
                  Polyester Chips             43%      86%          73%      78%           57%      33%                    13%        11%
                  POY                         62%      78%          92%      75%           79%      65%                    49%        45%
                  # - Utilization calculated on year-end capacity. Not adjusted for effective annual capacity.



                                                         Source: CARE Equity Research




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                              GARDEN SILK MILLS

        VALUATION GRADE                                       Fairly Priced                                  3/5


CARE Equity Research values GSML Silk Mills at Rs. 128 per share

According to CARE Equity Research, the Current Intrinsic Value (CIV) of GSML stands at Rs. 128.00 per share.
This translates into Enterprise Value (EV) of Rs. 1,815 crore. Thus, the equity shares of GSML are „Fairly Priced‟
from the current market price (CMP) of Rs 129.35 per share.


The CIV is arrived based on combination of Discounted Cash Flow (DCF) and EV/EBITDA
methodology

The CIV is arrived based on combination of DCF and EV/EBITDA methodologies. CARE Equity Research has
arrived at CIV of the stock by taking average of fair value calculated using forward EV/EBITDA multiple and DCF
methodologies.

                                         GSML: Target Price Summary

                 Sl No               Methodology                          Fair Value (Rs/share)
                    1    Discounted Cash Flow (DCF) Basis                          133
                    2    EV/EBITDA Basis                                           123
                         Current Intrinsic Value (CIV)                             128


                                           Source: CARE Equity Research



Discounted Cash Flow
        The overall firm Weighted Average Cost of Capital (WACC) is calculated based on our long term
         assumptions of cost of financing summarized in below table.
        CARE Equity Research has used Free Cash Flow (FCF) methodology to arrive at the firm value. The
         forecasted FCF is as per CARE Equity Research estimates.
        Terminal value is arrived at by using Gordon Growth Model. CARE Equity Research has assumed that in
         the long-run, GSML capital expenditure shall be equal to its depreciation charge. The estimated terminal
         value forms about 73% of the firm‟s total equity value, which appears to be reasonable.




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                                 GSML: Valuation Based on Discounted Cash Flows


                      Item                                     Value                               Basis
                      Risk Free Rate                              8.00%      10 year G-sec yield
                      Equity Risk Premium                         6.00%
                      Beta                                          1.10
                      Cost of Equity                             14.60%
                      Cost of Debt                               11.00%      Average cost of long term debt
                      Tax Rate                                   30.00%      Long term tax rate
                      D/E Ratio                                     1.50     Long term target D/E ratio; Capital Intensive
                      WACC                                      10.46%
                      Terminal growth rate                        3.00%

                                                                                              (Rs crore except per share data)
                                                                   2010-11 2011-12 2012-13 2013-14                 2014-15
                      PAT                                                65     90     100     109                       131
                      Non-Cash Items                                    105    112     115     119                       126
                      Interest (1-T)                                     59     53      45      38                        32
                      Capex                                            -393    -30     -30     -50                       -50
                      Increase in WC                                     48    -32     -10       -7                       -4
                      Free Cash Flow                                  -117    192     220     209                       236
                      Discount Rate                                    0.91   0.82    0.74    0.67                      0.61
                      PV of FCF                                       -106    158     163     140                       143
                      PV of Terminal Value                                                                            1,336

                      Total Discounted Value of Firm                 1,835
                       Less : Net Debt                               1,324
                      Present Value of Equity                          511
                      No of Equity Shares                             3.83
                      Fair Value of Equity Share                    133.4




                                                 GSML: Sensitivity Analysis – Share price


                                                               Weighted Average Cost of Capital (%)

                                                            9.5%       10.0%        10.5%          11.0%    11.5%
                               Growth Rate (%)




                                                   2.0%      103        96            89            81        74
                                Terminal Year




                                                   2.5%      125        117          110           102        94
                                                   3.0%      149        141          133           125        117
                                                   3.5%      177        168          160           151        143
                                                   4.0%      209        200          191           182        173



                                                          Source: CARE Equity Research



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EV/EBITDA basis

The stock is currently trading at EV/EBITDA of 6.7x and 6.1x our FY11 and FY12 EBITDA estimates
respectively. Similarly, the current market price is reflecting P/E of 7.6x and 5.5x our FY11 and FY12 EPS
estimates respectively. The stock has traded at an average historical forward EV/EBITDA of about 4.3-6.5x and
forward P/E multiple of about 4.0-6.0x through FY06-10 period. CARE Equity Research have estimated fair value
of the stock using EV/EBITDA of 6.0x our FY12 EBITDA earnings estimate, which is close to the upper band of
GSML‟s historic trading average. CARE Equity Research believes that the stock deserves upper band of valuation
given that the recent capacity expansion plans would start yielding benefits to the company post FY11.

       GSML: Fair Value Estimation using                                                                                                                                                           GSML: Implied P/E Calculation
             EV/EBITDA Multiple Method                                                                                                                                                                               based on Fair Value


                                                                           EV/EBITDA                                                                                                                                          Implied P/E

                                      EBITDA (2012)                                                                                     299                                                   PAT (2012)                                                                               90
                                      Market Cap                                                                                        494                                                   No. of Shares (crore)                                                                   3.8
                                      Net Debt (2010)                                                                                 1,324                                                   EPS(2012)                                                                              23.5
                                      EV                                                                                              1,818
                                      EV/EBITDA (2012)                                                                                  6.1                                                   Fair Value                                                                             128
                                      Justified EV/EBITDA                                                                               6.0
                                      Target Price                                                                                    123.3                                                   Implied P/E                                                                            5.5



             GSML: 1-yr forward P/E contour                                                                                                                                                 GSML: Historic 1-yr forward EV/EBITDA



                            160                                                                                                                                                              8.0
                                                                                                                                                                 EV/EBITDA 1 Year Forward




                            140                                                                                                                                                              7.5
                                                                                                                                                   8X
         Share Price (Rs)




                            120                                                                                                                                                              7.0
                                                                                                                                                                                                                                                                           +1 Std Dev
                            100                                                                                                                    6X                                        6.5
                             80                                                                                                                                                              6.0
                             60                                                                                                                    4X
                                                                                                                                                                                             5.5
                             40                                                                                                                                                              5.0
                                                                                                                                                       2X                                                                                                                  -1 Std Dev
                             20
                                                                                                                                                                                             4.5
                              0
                                                                                                                                                                                             4.0
                                                                      May-07
                                                                               Oct-07


                                                                                                 Aug-08
                                           Feb-06


                                                             Dec-06




                                                                                                          Jan-09
                                                                                        Mar-08




                                                                                                                            Nov-09
                                                                                                                                     Apr-10
                                                    Jul-06
                                  Sep-05




                                                                                                                   Jun-09



                                                                                                                                              Sep-10




                                                                                                                                                                                                   Sep-05


                                                                                                                                                                                                                     Sep-06


                                                                                                                                                                                                                                       Sep-07


                                                                                                                                                                                                                                                         Sep-08


                                                                                                                                                                                                                                                                            Sep-09


                                                                                                                                                                                                                                                                                               Sep-10
                                                                                                                                                                                                            Mar-06


                                                                                                                                                                                                                              Mar-07


                                                                                                                                                                                                                                                Mar-08


                                                                                                                                                                                                                                                                  Mar-09


                                                                                                                                                                                                                                                                                      Mar-10




                                                             Source for all above graphs and tables: CARE Equity Research and Prowess




                                                                                                                                                            11                                                                                                                                 www.careratings.com
                                      GARDEN SILK MILLS                                                EQUIGRADE



                                            COMPANY BACKGROUND


   Company Overview

   Garden Silk Mills Ltd (GSML) is one of the pioneers in Indian Textile Industry, with particular strength in
   Polyester based textiles and yarns. The company operates only in one segment, namely textiles. They are having
   their manufacturing facilities located at Vareli and Jolwa in Surat, Gujarat. GSML was incorporated in the year 1979
   as a private limited company under the name and style of Vareli Weaves Pvt Ltd. The company was established
   with the main object of manufacturing synthetic textiles. They became a public limited company on July 17, 1987.
   The company's products and services include textiles, which includes yarn (including partially oriented yarn and
   processed yarns), cotton, polyester, silk, fabrics, georgettes, chiffons, failles and jacquards. Their apparel section
   includes vareli business shirts and ready-to-wear women garments.


                                                 Geographical Break Up


                           2007-08                                                     2009-10

                                      Export,                                                      Export,
                                      1.60%                                                        6.30%




           Domestic                                                      Domestic
           , 98.40%                                                      , 93.70%


                                                Source : CARE Equity Research


   Extensive Distribution Network

   GSML's impressive marketing network encompasses more than 70 dealers, 12 company owned depots and more
   than 290 authorized retail outlets including shops and counters in over 65 cities in India. GSML fabrics are also
   available in a host of countries including Canada, U.S.A., U.K., Indonesia, Malaysia, South Africa, Middle East and
   Gulf countries.




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EQUIGRADE
                              GARDEN SILK MILLS

Capex Plans

The company spent around Rs 186.49cr in FY10. The capex program of the company is well funded by a blend of
internal accruals and long term borrowing from the banks. The company had issued Commercial Paper /Mibor
linked short term unsecured NCD aggregating Rs 185cr for a maturity up to 6 months.


Segmental Break Up

GSML has a diversified revenue stream (mainly from Yarn and Polyester Chips) and has seen structural shift with
majority of revenue coming from Polyester Chips followed by Yarn. Some other revenue stream which is miniscule
includes Fabrics, Apparels, PTA and MEG. The company has laid out large expansion plan in Polyester Filament
Yarn (PFY) in both Partially Oriented Yarn (POY) and Fully Drawn Yarn (FDY) and has arranged the finance for
the same. The share of Polyester chips as a percent of Total Sales has increased from 43% in FY08 to 51% in FY10
and thereby the share of Yarn has gone down from 46% to 43% for the same period.

                                  GSML: Division-wise Revenue Break-up (in %)

                           100%                                                  5.67
                                          7.85                8.00
                            80%
                                                                                42.54
                                          45.78               48.96
                            60%

                            40%
                                                                                50.93
                            20%           42.76               42.35

                             0%
                                          FY08               FY09*                FY10
                                       (18,234 mn)        (13,848 mn)        (26,623 mn)
                                  Chips     Yarn (POY & Processed yarn)   Fabrics    Others
                                                 „* 9 months ending March-09
                                              Source: CARE Equity Research
Promoters

Mr Praful A Shah: (Managing Director): He holds M.S. (Stanford University) and is the promoter of Garden Silk
Mills. He has more than four decades of experience in textile industry.

Mr Alok P Shah :( Joint Managing Director): He holds B.S. (Stanford University) M.B.A. (University of Chicago,
USA) and is one of the promoters of Garden Silk Mills.

Mr Sanjay S Shah: (Executive Director): He holds a degree of B.A. from Essex University, U.K. has experience in
the field of Yarn Preparatory and Weaving. He possesses experience in overall business management particularly
with regard to textile industry and has more than 16 years of experience in Senior Corporate Management.



                                                             13                                   www.careratings.com
                                      GARDEN SILK MILLS                                                 EQUIGRADE



                                         SNAPSHOT OF THE INDUSTRY




   Indian Man-Made Fibre Industry


   The Indian Textile Industry is one of the most important and integrated industries in the Indian economy
   providing employment to about 35 mn people directly and 50 mn people indirectly. The market size is estimated at
   USD52 bn (of which exports are about USD20 bn) and accounts for 26% of the manufacturing sector, 20% of the
   industrial production and 18% of total industrial employment. The industry also contributes 15% to gross export
   earnings and 4% to national GDP. The textile industry can be segmented into Natural fibres and Man-Made Fibres
   (MMFs) based on use of basic raw material, cotton or crude derivate, respectively.



   The Indian MMF industry is valued at USD4.63 bn, with polyester (70%) and viscose (10%) dominating the
   industry consumption. RIL and Grasim are the key players in polyester and viscose segments, respectively. India
   also ranks amongst the top three major producers of polyester in the world. Globally the share of MMF
   consumption in textiles is 65% compared to 45% in India. Due to ample availability of cotton and tropical climate,
   cotton is considered as preferred choice over MMF, especially polyester.



   Among the various MMF products in synthetic and cellulosic segments like polyester, olefin, nylon, acrylics, viscose
   etc, polyester is the most consumed fibre; the benefits being higher durability, easy availability, competitive pricing
   etc. Within polyester, Polyester Filament Yarn (PFY) forms 69% of total polyester demand and Polyester Staple
   Fibre (PSF) forms the balance 31% of the total polyester demand.



   The Indian MMF industry is characterised by cyclical nature with strong linkages to GDP growth rates, consumer
   spending patterns, low per capita consumption (2 kgs compared to 12 kgs in China and 11 kgs in Europe), higher
   environmental burden as compared to natural fibres, higher raw material cost and margins dependent on crude
   price volatility. The demand drivers of the industry are increasing population & changing fashion trends, higher
   percentage of working women, higher disposable income, use of plastic cards and superior demographic factors.




www.careratings.com                                          14
EQUIGRADE
                                    GARDEN SILK MILLS

                                                     FINANCIAL STATISTICS


          Incom e Statem ent
          ( R s Crore)                                             F Y08   F Y09*     F Y10    F Y11 P   F Y12 P
          O perating Incom e                                     1,690.1   1,338.7   2,521.3   3,163.2   3,461.3
          EBITDA                                                   183.2    161.8     238.8      270.1     299.4
          Depreciation and amortisation                             57.0     47.0      73.2       84.9      76.2
          EBIT                                                     125.8    116.9     166.3      178.8     206.7
          Interest                                                  57.0     47.0      73.2       84.9      76.2
          PBT                                                       68.7     70.0      93.1       93.9     130.5
          PAT ( After m inority interest)                          40.0      49.6      63.2      64.8      90.0
          F ully Diluted Earnings Per Share* ( R s.)               10.4      12.9      16.5      16.9      23.5
          Dividend
             On Preffered Stock                                      0.0     0.0       0.0       0.0       0.0
             On Common Stock                                         6.7     6.7       8.0       8.2      11.5
          * Calculated on Current Face Value of Rs. 10/- per share

          Balance Sheet
          ( R s Crore)                                          F Y08      F Y09*     F Y10    F Y11 P   F Y12 P
          Net worth (incl. Minority Interest)                    392         435       490        547       625
          Debt                                                   802         904      1,028      1,213     1,088
          Deferred Tax Liability / (Asset)                        91         104       118        131       150
          Capital Em ployed                                     1,286      1,443      1,636     1,891     1,863
          Net Fixed Assets                                       685         850       948       1,249     1,187
          Investments & Others                                   182         190       272        272       272
          Current Assets, Loans and Advances                     524         561       747        822       897
             Loans and Advances                                  154         203       220        265       290
             Inventory                                           186         218       365        399       434
             Recievables                                         108          67       127        122       133
             Cash and Cash Equivalents                            76          73        35         36        39
          Less: Current Liabilities and Provisions               105         159       331        452       492
          Total Assets                                          1,286      1,443      1,636     1,891     1,863

          R atios
                                                                F Y08      F Y09      F Y10    F Y11 P   F Y12 P
          Growth in Operating Income                               -       -20.8%     88.3%     25.5%      9.4%
          Growth in EBITDA                                         -       -11.7%     47.6%     13.1%     10.8%
          Growth in PAT                                            -        23.9%     27.5%      2.5%     39.0%
          Growth in EPS                                            -        23.9%     27.5%      2.5%     39.0%
          EBITDA Margin                                         10.8%       12.1%      9.5%      8.5%      8.6%
          PAT Margin                                             2.4%       3.7%       2.5%      2.0%      2.6%
          RoCE                                                   9.8%       10.4%     10.8%     10.1%     11.0%
          RoE                                                   10.2%       13.6%     13.7%     12.5%     15.4%
          Net Debt-Equity (times)                                 1.9        1.9        2.0       2.2       1.7
          Interest Coverage (times)                               3.2        3.4        3.3       3.2       3.9
          Current Ratio (times)                                   5.0        3.5        2.3       1.8       1.8
          Inventory Days                                          40          59        53        46        46
          Recievable Days                                         23          18        18        14        14
          Price / Earnings (P/E) Ratio                             -           -        7.8       7.6       5.5
          Price / Book Value(P/BV) Ratio                           -           -        1.0       0.9       0.8
          Enterprise Value (EV)/EBITDA                             -           -        7.6       6.7       6.1
          Source: Com pany, CAR E Equity R esearch
„* - Nine months ending March 2009.
     ROE and ROCE for GSML estimated for 12-month period ending March-09.



                                                                    15                                       www.careratings.com
                                      GARDEN SILK MILLS                                             EQUIGRADE



                                           EXPLANATION OF GRADES



   CARE Equigrade Grid (CEG)

   Through CEG, CARE Equity Research addresses two critical factors considered by an investor while investing in a
   particular company‟s equity shares:

  1. Fundamentals: Whether the company is fundamentally sound with respect to its business, its financial position, its
      management and its prospects.
  2. Valuation: What is the Current Intrinsic Value (CIV) of the stock and how it compares vis-a-vis its Current
      Market Price (CMP)



   These factors are answered assigning quantitative grades to both these parameters. CEG is the snapshot of
   „Fundamental Grade‟ and „Valuation Grade‟ assigned by CARE Equity Research.


   Fundamental Grade

   This grade represents how sound the company is fundamentally, vis-à-vis other listed companies in India. This grade
   captures:

  1. Business Fundamentals and Prospects
  2. Financial Soundness
  3. Management Quality
  4. Corporate Governance Practices



   The grade is assigned on a five-point scale as under:
        CARE Fundamental Grade                          Evaluation
                 5/5                               Strong Fundamentals
                 4/5                             Very Good Fundamentals
                 3/5                               Good Fundamentals
                 2/5                              Modest Fundamentals
                 1/5                               Weak Fundamentals




www.careratings.com                                        16
      EQUIGRADE
                                          GARDEN SILK MILLS

      Valuation Grade

      This grade represents the potential value in the company‟s equity share for the investor over a 1 year period. The
      Current Intrinsic Value (CIV) or the price arrived by CARE Equity Research on fundamental basis is compared with
      the current market price (CMP) of the stock and the grade is assigned based on the gap between CIV and CMP of the
      stock.



      The grade is assigned on a five-point scale as under:
               CARE Valuation Grade                               Evaluation
                                                        Considerable Upside Potential
                           5/5
                                                             (>25% from CMP)
                                                          Moderate Upside Potential
                           4/5
                                                            (10-25% from CMP)
                                                                 Fairly Priced
                           3/5
                                                            (+/- 10% from CMP)
                                                        Moderate Downside Potential
                           2/5
                                                         (Negative 10-25 from CMP)
                                                       Considerable Downside Potential
                           1/5
                                                             (<25% from CMP)

      Grading determination is a matter of experienced and holistic judgment, based on relevant quantitative and qualitative factors of
      the company in relation to other listed companies.


                                                                   DISCLOSURES

   Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict of interest that can bias
    the grading recommendation of the company.
   This report has been sponsored by the company.

                                                                   DISLCLAIMER
This report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has taken utmost care to
ensure accuracy and objectivity while developing this report based on information available in public domain or from sources considered reliable.
However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Research operates independently of
ratings division and this report does not contain any confidential information obtained by ratings division, which they may have obtained in the
regular course of operations. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report can be
construed as either investment or any other advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of
this report or data herein. CARE specifically states that it or any of its divisions or employees have no financial liabilities whatsoever to the
subscribers / users of this report. This report is for personal information only of the authorised recipient in India only. This report or part of it
should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person, especially outside India or
published or copied for any purpose.

      Published by Credit Analysis & REsearch Ltd., 4th Floor Godrej Coliseum, Off Eastern Express Highway, Somaiya Hospital Road, Sion
      East, Mumbai – 400 022.



CARE Research is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information
                                                                           17                                                     www.careratings.com
contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this product. This
report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner
without prior written permission of CARE Research.
                                         GARDEN SILK MILLS                                                       EQUIGRADE



                                                              ABOUT CARE


   Credit Analysis & REsearch Ltd. (CARE) is a full service rating company that offers a wide range of rating and grading services
   across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international
   practices.


   CARE Research
   CARE Research is an independent research division of CARE Ratings, a full service rating company. CARE Research is
   involved in preparing detailed industry research reports with 5 year demand and 2 year profitability outlook on the industry
   besides providing comprehensive trend analysis and the current state of the industry. CARE Research also offers research that
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   Pipes, Natural Gas, Retail, Sugar, etc. CARE Research now offers independent research of equities through its product
   „EQUIGRADE‟.


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