Alok Industries - High raw material costs impact operating margin - ICICIdirect

Alok Industries' (Alok) Q2FY13 results were a mixed bag. While revenues were ahead of our estimates, the operational performance was weaker. Alok's sales, EBITDA and PAT (excluding the impact of exceptional items) stood at Rs.3,324.8 crore (up 51.3% YoY), Rs.884.4 crore (up 26.0% YoY) and Rs.189.7 crore (down 24.2% YoY), respectively. During the quarter, the company sold 6.5 floors at Peninsula Business Park, Lower Parel and also one floor at Ashford Centre, Lower Parel. The company expects to garner Rs.783 crore, of which it has already received Rs.160 crore as token amount. The company is also actively closing down H&A stores that are loss making and plans to continue only the profit making stores. Alok has also provided an impairment of Rs.92 crore towards the retail and domestic apparel business during the quarter. In the recent past, some steps have been taken in the right direction but we remain apprehensive of the high debt and ongoing dilution practice of the company. We maintain a SELL rating on Alok Industries with a target price of Rs.8.4.

Operating margin weakens

Alok reported an operating margin of 26.6% (I-direct estimate: 31.7%), down 534 bps and 433 bps YoY and QoQ, respectively. This was mainly due to higher raw material costs as the company resorted to higher outsourcing in the apparel fabric segment. This is likely to continue, going forward, but the dip in operating margin is likely to be compensated by higher volumes.

Land monetisation continues...

During the quarter, the company sold 6.5 floors in Tower B of Peninsula Business Park, Lower Parel, taking the total floors sold to 14.5 out of 20 floors. It also sold one additional floor of Ashford Centre, Lower Parel taking the total floors sold to four out of eight floors. The company has received a sum of Rs.160 crore of the total deal size of Rs.783 crore.

Debt & dilution concerns warrant a SELL


While there have been no/minimal concerns on the business front, we remain worried about the high leverage & dilution plans of Alok. Alok's net debt/equity increased from 3.1x in March 2012 to 3.4x in September 2012. We, therefore, maintain our SELL rating on Alok Industries with a target price of Rs.8.4 (based on an average arrived at by assigning a multiple of 0.2x FY14E book value & 1.6x multiple FY14E EPS).

Source : Equity Bulls

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