kandagiri spinning mills ltd · kandagiri spinning mills ltd’s (kandagiri’s) q3fy11 revenues...

Kandagiri Spinning Mills Ltd

Enhancing investment decisions

Q3FY11 Result Update

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 five-point scale from grade 5 (indicating Excellent fundamentals) to

grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong

upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade

Assessment CRISIL Valuation Grade

Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (- 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict

of interest that can bias the grading recommendation of the company. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-commissioned Report (Report) is based on data publicly available or from sources considered reliable

by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report

and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. The Data /

Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the

date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation,

whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially

states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the

personal information only of the authorized recipient in India only. This Report 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 in whole or in part, for any purpose.

CRISIL EQUITIES | 1

Company name Tag line

Fundamental Grade X/5 (_____ fundamentals)

Valuation Grade X/5 (CMP is/has ___)

Industry _____ (GICS Code)

Fair Value Rs 141 CMP Rs 103

February 08, 2011


Caught in industry web

Fundamental Grade 2/5 (Moderate fundamentals)

Valuation Grade 5/5 (CMP has strong upside)

Industry Textiles, Apparel & Luxury Goods

Kandagiri Spinning Mills Ltd’s (Kandagiri’s) Q3FY11 revenues were in line with CRISIL Equities’ expectations driven by robust demand in the domestic readymade garments (RMG) segment. The company plans to add ~8,000 spindles, likely to get commissioned by Q2FY12. Consequently, we have raised our FY12 revenue estimates. The government has imposed a cap on cotton yarn exports in 2010-11, resulting in greater competition in the highly fragmented domestic cotton yarn industry. Given this backdrop, Kandagiri is finding it difficult to increase its realisations, even as cotton prices continue to rise. We retain our fundamental grade of ‘2/5’. Q3FY11 result analysis

• Kandagiri’s Q3 revenues grew by 55.1% y-o-y to Rs 397 mn driven by robust demand in the domestic cotton yarn segment.

• EBITDA margin contracted by 109 bps y-o-y mainly on account of higher

cotton cost and also due to a salary bonus of ~15%, thereby increasing employee expenses from Rs 36.4 mn in Q3FY11 vs. Rs 23.5 mn in Q3FY10.

• PAT margin increased by ~298 bps y-o-y to 5.4% due to flat interest and

depreciation expenses (together they accounted for 10.7% of sales in

Q3FY11 as against 17.3% of sales in Q3FY10). Q3FY11 EPS increased to Rs 5.5 vs. Rs 1.6 in Q3FY10.

Key developments

• Due to tightened supply of raw cotton in the global market, cotton yarn

exports from India increased significantly in FY11. To protect the domestic

RMG segment, the government has imposed a cap on cotton yarn exports

at 720 mn kgs for 2010-11. This has resulted in greater competition in the

domestic market, thereby limiting pricing flexibility of non-integrated

smaller players like Kandagiri in times of rising cotton prices. Accordingly, we expect EBITDA margins in FY12 to be lower than in FY11.

• Kandagiri has planned a capacity addition of 8,000 spindles along with the

modernisation of its existing units. The capacity expansion, which entails a capex of Rs 150 mn, is expected to come on stream by Q2FY12.

Valuations: Current market price has strong upside

We continue to value Kandagiri based on the discounted cash flow method. Due to rolling forward of our projections to FY13 from FY12, our fair value estimate for Kandagiri is revised to Rs 141 per share from Rs 124, and the valuation grade is revised to ‘5/5’ from ‘4/5’.

KEY FORECAST

(Rs mn) FY09 FY10 FY11E FY12E FY13E

Operating income 936 1,142 1,481 1,729 1,929

EBITDA 130 213 354 372 382

Adj PAT (27) 32 119 128 134

Adj EPS-Rs (7.1) 8.4 30.9 33.3 34.7

EPS growth (%) (156.1) (217.3) 269.4 7.8 4.2

Dividend yield (%) - - 2.7 2.7 2.7

RoCE (%) 4.2 9.9 18.9 18.0 17.1

RoE (%) (12.6) 14.4 40.4 31.7 25.6

PE (x) (4.6) 13.2 3.6 3.3 3.2

P/BV (x) 0.6 1.8 1.2 0.9 0.7

EV/EBITDA (x) 9.5 7.3 4.4 4.3 4.1

NM: Not meaningful; CMP: Current Market Price

Source: Company, CRISIL Equities estimate

CFV MATRIX

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fu

nd

am

en

tal G

rade

Poor Fundamentals

ExcellentFundamentals

Str

on

gD

ow

nsi

de

Str

on

gU

psi

de

KEY STOCK STATISTICS NIFTY 5421

NSE ticker KANDAGIRI-EQ

Face value (Rs per share) 10

Shares outstanding (mn) 3.86

Market cap (Rs mn)/(US$ mn) 408/9

Enterprise value (Rs mn) /(US$ mn) 1542/34

52-week range (Rs) (H/L) 147/81

Beta 0.21

Free float (%) 30.1

Avg daily volumes (30-days) 1418

Avg daily value (30-days) (Rs mn) 0.01

SHAREHOLDING PATTERN

69.9% 69.9% 69.9% 69.9

30.1% 30.1% 30.1% 30.1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar-10 Jun-10 Sep-10 Dec-10

Promoter FII DII Others

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-m

KANDAGIRI 5% -4% 22% 52%

NIFTY -4% -6% 6% 18%

ANALYTICAL CONTACT Sudhir Nair (Head) [email protected]

Neeta Khilnani [email protected]

Suresh Guruprasad [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

CRISIL EQUITIES | 2


Q3FY11 Result Summary (Rs mn) Q3FY11 Q2FY11 Q3FY10 q-o-q (%) y-o-y (%)

Net sales 397 378 256 5.0 55.1

Raw materials cost 217 202 123 7.4 76.5

Raw materials cost (% of net sales) 55% 53% 48% 118 bps 662.1 bps

Employees cost 36.4 34.3 23.5 6.1 54.9

Other expenses 66.8 38.3 57.2 74.4 16.8

EBITDA 77.1 103.5 52.5 (25.5) 46.9

EBITDA margin 19.4% 27.4% 20.5% -795.8 bps -109.1 bps

Depreciation 19.6 19.3 19.5 1.6 0.5

EBIT 57.5 84.2 33.0 (31.7) 74.2

Interest and finance charges 23.2 25.7 24.9 (9.7) (6.8)

Operating PBT 34.3 58.5 8.1 (41.4) 323.5

Other Income - 0.9 0.4 n.m n.m

PBT 34.3 59.4 8.5 (42.3) 303.5

Tax 13.0 21.5 2.4 (39.5) 441.7

PAT 21.3 37.9 6.1 (43.8) 249.2

Adj PAT 21.3 37.9 6.1 (43.8) 249.2

Adj PAT margin 5.4% 10.0% 2.4% -465.9 bps 297.9 bps

No of equity shares (Mn) 3.9 3.9 3.9 - -

Adj EPS (Rs) 5.5 9.8 1.6 (43.7) 249.2

Source: Company, CRISIL Equ it ies

Q3FY11 EBITDA margin contracted marginally y-o-y Q3FY11 PAT margin expanded by ~298 bps y-o-y

197 228 258 256 315 335 378 397

15.1

24.5 23.5

20.5

14.9

23.6

27.4

19.4

0

5

10

15

20

25

30

0

50

100

150

200

250

300

350

400

450

Q4FY

09

Q1FY

10

Q2FY

10

Q3FY

10

Q4FY

10

Q1FY

11

Q2FY

11

Q3FY

11

(%)(Rs mn)

Revenues EBITDA margin (RHS)

-37 12 6 8 25 38 21

-1.3

3.2

4.5

2.4 2.6

7.5

10.0

5.4

-2

0

2

4

6

8

10

12

-5

0

5

10

15

20

25

30

35

40

Q4F

Y09

Q1F

Y10

Q2F

Y10

Q3F

Y10

Q4F

Y10

Q1F

Y11

Q2F

Y11

Q3F

Y11

(%)(Rs mn)

PAT PAT margin (RHS) Source: Company, CRISIL Equ it ies Source: Company, CRISIL Equ it ies

Share price movement Fair value movement since initiation

0

50

100

150

200

250

300

350

Jan-

04

Jul-

04

Jan-

05

Jul-

05

Jan-

06

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Jan-

11

Kandagiri NIFTY -Indexed to 100

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

20

40

60

80

100

120

140

29-N

ov-1

0

06-

Dec

-10

13-

Dec

-10

20-

Dec

-10

27-

Dec

-10

03-J

an-

11

10-J

an-

11

17-J

an-

11

24-J

an-

11

('000)(Rs)

Total Traded Quantity(RHS) CRISIL Fair Value Kandagiri

Source: NSE, CRISIL Equ ities Source: NSE, CRISIL Equ ities

Revenues increase y-o-y

on the back of healthy realisation growth

EBITDA margin contracted

by ~796 bps q-o-q due to

higher purchase of power

from the grid. PLF in wind

generation is lower as 3Q

and 4Q are lean periods for wind energy

CRISIL EQUITIES | 3


EARNINGS ESTIMATES REVISED UPWARDS

The capacity expansion of ~8,000 spindles in expected to come on stream in

Q2FY12, hence we have raised our revenue estimates for FY12 by 6% to Rs

1,729 mn. FY12 EBITDA margin is likely to remain at the earlier level of

~21.5%. The cap on cotton yarn exports is likely to make the pricing in the

domestic market more competitve. Hence, the company will find it difficult to

increase realisations on a sustainable basis, even as cotton prices are expected

to continue to rise. However, we have lowered our PAT estimates by 5% for

FY11 on account of higher interest costs.

Particulars Unit FY11E FY12E

Old New % change Old New % change

Revenue (Rs mn) 1481 1,481 0% 1636 1,729 6%

EBITDA (Rs mn) 354 354 0% 348 372 7%

EBITDA margin % 23.9% 23.9% 0bps 21.3% 21.5% 25bps

PAT (Rs mn) 126 119 -5% 115 128 12%

PAT margin % 8.5% 8.1% -46bps 7.0% 7.4% 40bps

EPS Rs 32.7 30.9 -6% 29.9 33.3 11%

CRISIL EQUITIES | 4


VALUATION

We continue to value Kandagiri based on the DCF method. Due to rolling

forward of our projections to FY13 from FY12, our fair value estimate for

Kandagiri is revised to Rs 141. At this value, the implied P/Es are 4.2x FY12E

and 4.1x FY13E earnings.

One-year forward P/E band One-year forward EV/EBITDA band

-50

-30

-10

10

30

50

70

90

110

130

150

Jan-0

5Apr-

05

Jul-

05

Oct

-05

Jan-0

6Apr-

06

Jul-

06

Oct

-06

Jan-0

7Apr-

07

Jul-

07

Oct

-07

Jan-0

8

Apr-

08

Jul-

08

Oct

-08

Jan-0

9Apr-

09

Jul-

09

Oct

-09

Jan-1

0

Apr-

10

Jul-

10

Oct

-10

Jan-1

1

(Rs)

Kandagiri 2.5x 3.0x 3.5x 4x

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-0

5

May

-05

Sep-0

5

Jan-0

6

May

-06

Sep-0

6

Jan-0

7

May

-07

Sep-0

7

Jan-0

8

May

-08

Sep-0

8

Jan-0

9

May

-09

Sep-0

9

Jan-1

0

Ma y

-10

Sep-1

0

Jan-1

1

(Rs mn)

EV 4x 5x 5x Source: NSE, CRISIL Equ ities Source: NSE, CRISIL Equ ities

P/E-premium/discount to NIFTY P/E movement

-90%

-86%

-82%

-78%

-74%

-70%

Sep-

09

Oct

-09

Nov

-09

Dec-

09

Jan-1

0

Feb-1

0

Mar

-10

Apr-

10

May-1

0

Jun-

10

Jul-

10

Aug

-10

Sep-

10

Oct

-10

Nov

-10

Dec-

10

Jan-1

1

Premium/Discount to NIFTY MEDIAN

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Sep-

09

Oct

-09

Nov

-09

Dec-

09

Jan-1

0

Feb-1

0

Mar

-10

Apr-

10

May-1

0

Jun-

10

Jul-

10

Aug

-10

Sep-

10

Oct

-10

Nov

-10

Dec-

10

Jan-1

11yr Fwd PE (x) MEDIAN

+1 std dev

-1 std dev

Source: NSE, CRISIL Equ ities Source: NSE, CRISIL Equ ities

CRISIL IER reports released on Kandagiri Spinning Mills Ltd

Date Nature of report Fundamental

grade

Fair value Valuation

grade

CMP

(on the date of report)

29-Nov-10 Initiating coverage* 2/5 Rs 124 4/5 Rs 110

08-Feb-11 Q3FY11 result update 2/5 Rs 141 5/5 Rs 103

* 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.

We now value Kandagiri

at Rs 141 per share

CRISIL EQUITIES | 5


FINANCIALS

Income statement Balance Sheet

(Rs mn) FY09 FY10 FY11E FY12E FY13E (Rs mn) FY09 FY10 FY11E FY12E FY13E

Operating income 936 1,142 1,481 1,729 1,929 Liabilities

EBITDA 130 213 354 372 382 Equity share capital 39 39 39 39 39

EBITDA margin 13.9% 18.6% 23.9% 21.5% 19.8% Reserves 167 204 309 424 545

Depreciation 74 79 79 88 92 Minorities - - - - -

EBIT 56 134 274 284 291 Net worth 205 242 348 463 583

Interest 97 92 98 95 94 Convertible debt - - - - -

Operating PBT (41) 42 176 189 197 Other debt 1,121 1,149 1,169 1,189 1,159

Other income 2 2 2 3 3 Total debt 1,121 1,149 1,169 1,189 1,159

Exceptional inc/(exp) (0) (0) - - - Deferred tax liability (net) 130 141 141 141 141

PBT (39) 44 178 192 200 Total liabilities 1,457 1,532 1,658 1,793 1,883

Tax provision (12) 12 59 63 66 Assets

Minority interest - - - - - Net fixed assets 1,158 1,092 1,023 1,125 1,133

PAT (reported) (28) 32 119 128 134 Capital WIP - - 40 - -

Less: Exceptionals (0) (0) - - - Total fixed assets 1,158 1,092 1,063 1,125 1,133

Adjusted PAT (27) 32 119 128 134 Investments 25 25 25 25 25

Current assets

Ratios Inventory 106 333 424 485 530

FY09 FY10 FY11E FY12E FY13E Sundry debtors 151 109 149 184 216

Growth Loans and advances 102 93 121 142 158

Operating income (%) 2.3 22.0 29.7 16.7 11.6 Cash & bank balance 18 15 37 22 33

EBITDA (%) (24.9) 63.8 66.1 5.2 2.8 Marketable securities - - - - -

Adj PAT (%) (227.3) (217.4) 269.4 7.8 4.2 Total current assets 377 550 731 832 937

Adj EPS (%) (227.3) (217.4) 269.4 7.8 4.2 Total current liabilities 103 134 160 189 212

Net current assets 274 416 571 643 725

Profitability Intangibles/misc. expenditure - - - - -

EBITDA margin (%) 13.9 18.6 23.9 21.5 19.8 Total assets 1,457 1,532 1,658 1,793 1,883

Adj PAT margin (%) (2.9) 2.8 8.1 7.4 6.9

RoE (%) (12.6) 14.4 40.4 31.7 25.6 Cash flow

RoCE (%) 4.2 9.9 18.9 18.0 17.1 (Rs mn) FY09 FY10 FY11E FY12E FY13E

RoIC (%) 5.5 9.6 15.7 14.8 14.0 Pre-tax profit (39) 44 178 192 200

Total tax paid (1) - (59) (63) (66)

Valuations Depreciation 74 79 79 88 92

Price-earnings (x) (4.6) 13.2 3.6 3.3 3.2 Working capital changes 20 (144) (133) (87) (71)

Price-book (x) 0.6 1.8 1.2 0.9 0.7 Net cash from operations 54 (21) 65 129 155

EV/EBITDA (x) 9.5 7.3 4.4 4.3 4.1 Cash from investments

EV/sales (x) 1.5 1.5 1.2 1.0 0.9 Capital expenditure (65) (13) (50) (150) (100)

Dividend payout ratio (%) - - 9.7 9.0 8.6 Investments and others - - - - -

Dividend yield (%) - - 2.7 2.7 2.7 Net cash from investments (65) (13) (50) (150) (100)

Cash from financing

B/S ratios Equity raised/(repaid) - - - - -

Inventory days 49 132 139 132 127 Debt raised/(repaid) 19 27 20 20 (30)

Creditors days 40 48 47 46 45 Dividend (incl. tax) - - (14) (14) (14)

Debtor days 64 38 40 42 45 Others (incl extraordinaries) 3 5 - - (0)

Working capital days 104 105 115 122 124 Net cash from financing 22 32 6 6 (44)

Gross asset turnover (x) 0.6 0.6 0.8 0.9 0.9 Change in cash position 12 (3) 22 (15) 11

Net asset turnover (x) 0.9 1.0 1.4 1.6 1.7 Closing cash 18 15 37 22 33

Sales/operating assets (x) 0.8 1.0 1.4 1.6 1.7

Current ratio (x) 3.7 4.1 4.6 4.4 4.4 Quarterly financials

Debt-equity (x) 5.5 4.7 3.4 2.6 2.0 (Rs mn) Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11

Net debt/equity (x) 5.4 4.7 3.3 2.5 1.9 Net sales 256 315 335 378 397 Interest coverage 0.6 1.5 2.8 3.0 3.1 Change (q-o-q) -1% 23% 6% 12.9% 5.0%

EBITDA 53 47 79 104 77 Per share Change (q-o-q) -13% -12% 69% 30.7% -25.5%

FY09 FY10 FY11E FY12E FY13E EBITDA margin 20.5% 14.9% 23.6% 27.4% 19.4%Adj EPS (Rs) (7.1) 8.4 30.9 33.3 34.7 PAT 6 8 25 38 21 CEPS 12.0 28.8 51.5 56.0 58.5 Adj PAT 6 8 25 38 21 Book value 53.2 62.8 90.2 119.9 151.1 Change (q-o-q) -47% 34% 202% 51.0% -43.8%Dividend (Rs) - - 3.0 3.0 3.0 Adj PAT margin 2.4% 2.6% 7.5% 10.0% 5.4%Actual o/s shares (mn) 3.9 3.9 3.9 3.9 3.9 Adj EPS 1.6 2.2 6.5 9.8 10.7

Note: All ratios are computed on Adj PAT

Source: Company, CRISIL Equities estimate

CRISIL Independent Equity Research Team

Mukesh Agarwal Director +91 (22) 3342 3035 [email protected]

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