The Pitch Report - Result Update: Sutlej Textiles Ltd - BUY - TP Rs.122 - Kotak

- Sutlej reported a 22.2% yoy and a 169% qoq rise in its net profit during the quarter to Rs.634.20 million as compared to Rs.519 million in Q2FY2017 and Rs.235.80 million in Q1FY2018 respectively mainly on account of an exceptional income of Rs.418.30 million received during the quarter;

- Exceptional Income during the quarter includes dividend income of Rs.193.3 million pertaining to the period FY2011 to FY2016 on investment in Non - Convertible Cumulative Redeemable Preference Shares held in other companies and Rs.225 million pertaining to increase in valuation of said investment;

- Profit before exceptional income and tax came down by 30.2% yoy to Rs.432.7 million; however, on qoq it was up by 25.9%. The yoy fall in profit was mainly on account of a 12% rise in raw material expenses and a 59.7% yoy rise in finance costs during the quarter;

- Operating profit during the quarter came down by 8% yoy to Rs.848 million whereas qoq it grew by 11.2% from Rs.762.80 million

- Net sales however grew by 7.9% yoy to Rs.6,037 million whereas qoq it came down by 7.4%;

Though Sutlej's performance on yoy basis has come down, it has improved quite significantly over the last quarter - it has managed to overcome the adverse impact of GST implementation. Going forward we expect it to consistently improve its performance over the next 4 to 6 years because of the following reasons:

- Brownfield capacity expansion plan with 28,800 spindles in Himachal Pradesh is likely to commence production by end of FY2019;

- It has already commenced commercial production of 35,282 spindles in Rajasthan facility, which is expected to be stabilized in FY2018 and the same would improve its bottom line going forward;

- The government reduced the GST rate on man-made yarn 12% from the earlier 18%. This in our view is a positive development for the entire textile sector - including Sutlej Textiles;

- Recently it has announced acquisition of American Silk Mills, LLC (ASM) in the US for a consideration of ~Rs.325 million American Silk Mills is a design- driven boutique weaver of fine jacquard textiles having presence in the home décor segment. Higher share from high margin Home textiles and value added products is expected to improve Sutlej's revenue growth and margin trajectory going forward.

Outlook and Valuation

- Sutlej, with recent acquisitions and expansions of capacities, is in a formidable position to grow its fundamentals substantially in the next 2 to 3 years. Anticipated rising share of Home Textile business (from the current 5% of total revenues), we believe, would not only improve profits but also the valuation multiple on the stock market substantially going forward. At the current market price, the stock trades attractively at 7.9x its FY2019E EPS of Rs.12.2. Hence, we reiterate a BUY on the stock with a target price of Rs.122 (which is 10x it's FY2019E EPS of Rs.12.2).

Risk to our View: Spike in crude oil prices could impact the input prices of the raw materials and act as a risk to the company.

Shares of SUTLEJ TEXTILES & INDUSTRIES LTD. was last trading in BSE at Rs.92.15 as compared to the previous close of Rs. 91. The total number of shares traded during the day was 20416 in over 245 trades.

The stock hit an intraday high of Rs. 95.1 and intraday low of 89.2. The net turnover during the day was Rs. 1904235.

Source : Equity Bulls

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