Sangam India Ltd Term Buy Call: Fairwealth Securities

Sangam India Ltd Term Buy Call: Fairwealth SecuritiesBhilware based Sangam India Ltd (SIL) is the largest player in the Indian poly viscose (PV) yarn market. At present, Sangam India has 162720 spindles of polyester-viscose dyed yarn and 31,200 spindles for cotton yarn installed in Bhilwara along with 257 weaving machines and a 31 MW thermal power plant.

Key Investment Rationale:

Favourable Shift Towards PV-Yarn as the Cotton prices rise:-

Increased cotton yarn prices, coupled with evolving dressing sense in the country is the growth driver for the PV-Yarn. During the last 5-6 years, the PV-yarn as a segment grew by 8-9% as against the 5-6% growth wittnesed in Textile sector as a whole.

Market Leader- Drives Pricing Power :

Sangam India Ltd, is the market leader with over 25% share in PV-Yarn, thereby enjoying the bargaining power. The Polyester prices have risen by around 25%, viscose, prices have increased by around 30% in the past one year. The company has been able to raise yarn prices by 30-35%.

Improved Product Mix will lead to margins expansion:

Earlier, Sangam was mainly concentrated on coarser counts (realisation are lower than finer counts). Its per kg. realisation of yarn was Rs 130/kg. for FY09 and Rs 142/kg. for FY10. This is expected to improve to Rs 155/kg. in FY11 as the Company plans to focus more on value added products

Future Valuation:

At the current price of 48, the stock is trading at 7.20 and 5.12x times of our estimated FY11E & FY12E earnings. We thus recommend a `BUY' with a Price target of Rs 68.

COMPANY PROFILE

A Textile Conglomerate, the Bhilwara (Rajasthan) based Sangam Group of Companies (SGC) is today a name synonymous with excellence in textiles. It is a "Complete Textile House" that is diversified into spinning, weaving, knitting, flock processing. It is a prominent and leading manufacturer, exporter and supplier of world-class Suitings, Denim fabric, Flock Fabrics and Cotton and synthetic yarns from India

Based in textile city, Bhilwara, it has one of the largest unit in Indi to produce dyed yarn using state-of-the-art machinery. The company exports its premium product range to Turkey, Belgium MiddleEast, and various other countries.

Segments of the Sangam India

Yarn: Sangam (India) Ltd (SIL) possesses produce synthetic and blended dyed/grey spun yarn, cotton yarn and fabrics (synthetics blended, denim, knitted and flock fabrics). manufacturing plants which are located at Biliya Sareri, Rajasthan (with 97056 spindles and 1944 rotors dedicated for yarn manufacturing. SIL offers one of the broadest range of products in terms 6-50 counts of yarns. In addition, its product range also offers single ply, double ply, grindle, roving other fancy yarns. It has a colour shade bank of more than 5000 shades.

Fabric: SIL manufactures a range of woven and processed fabrics various colours, blends, textures and finishes. The company manufactures woven fabrics which are mainly used for suiting and trousers. The company's plant is located at Atun, Rajasthan with Woven fabrics capacity that stands at 25mn meters per annum per annum producing capacity of processed fabrics.

Denim: The company has ventured into Denim Fabric man business supporting its strategy to move to higher value for wider based growth in the future. The Company has plant( Saleri, Rajasthan) to focus on producing high fabric which has better realization and demand in the international market. Keeping pace with the changing times, the increase its denim capacity to 16mn meters per annum existing 8mn meters.

Home Furnishing Division: The Company ventured in home furnishing in 1999 with British technology and established with annual capacity of 4 mn mtrs. In a short span, it has established a good reputation in pile base home furnishing market. It sells home furnishing fabrics (Thermal curtain and Velore fabrics) of Laurel brand.

Sangam India Ltd drives major chunk of its revenues from Domestic operations, while 23% of the total revenue comes from Overseas markets. The company has been able to grow its exports by a CAGR of 67% between 2003-2010 to Rs 196cr, the company primarily caters to Middle East, Eastern and Continental Europe and many other countries. The company basically exports poly-viscose yarn and poly-viscose fabrics.

The company has an order position of over Rs 175cr as on 31st July, 2010. The exports order comprises nearly Rs 55Cr while the rest come from domestic market.

Sangam India Limited has state of the art machinery which has been supplied by the world renowned manufactures like Rieters of Switzerland, Suessen & Schlafhorst of Germany & Savio of Italy. Lakshmi Machine Works Ltd., Coimbatore and Veejay Lakshmi Engineering Works Ltd. The Company has OE, Spinning Capacity of 2464 rotors.

It has popular brands under its basket like Savana, Wills & Scott, Cavalier, Signet and Linovita. The company also has a retail presence, supplying its fabrics to over 100 dealers and 1000 retail shops under its brands `Sangam' and `Anmol'.

During the quarter ended 30th June, 2010, the net sales of the company reported an increment of 30.35% on y-o-y basis to Rs 255.1cr as against Rs 195.7cr during the corresponding quarter last year. On sequential basis the company's performance was modest, and the net sales saw an expansion of 11.21% from Rs 229.38cr.

On operating front, the EBIDTA registered a growth of 28.02% to Rs 38.42cr from Rs 30.01cr as against the corresponding period last year, while on sequential basis EBIDTA registered a marginal growth of 3.98% from Rs 36.95cr. However, the company has been able to maintain its margins over 15% flat on both y-o-y basis and sequential basis, largely on account of higher realization from PV-yarn segment.

The net profit of the company saw an increment of 246.15% YoY to Rs 7.65cr as against Rs 2.21cr during the corresponding quarter, while on Q-o-Q basis the net profit fell marginally by 1.8% from Rs 7.79cr. The better-than-expected bottom-line performance of the company was mainly contributed by higher Top line of the company and stable interest cost.

For the year ended March 31, 2010, the company posted a 14 per cent rise in net sales at Rs 852.25cr compared to Rs 748.27Cr in 2008-09. The company posted a net profit of Rs 17.16cr during 2009-10, against a net loss of Rs 15.98cr in 2008-09. Despite challenging market scenario and volatile movement of currency, the company has seen a significant improvement in its EBIDTA margins by 561 bps to 14.98% in 2009- 10, as compared to 9.37% in 2008-09.

The company's total yarn production increased 12.3%, from 41430 tonnes in 2008-09 to 46554 tonnes in 2009-10. The PV yarns (including dyed) accounted for 80% of the total yarn production in 2009-10 as against 85% in 2008-09. The production of man-made fiber yarns increased 10.5%, from 35368 tonnes in 2008-09 to 37126 tonnes in 2009-10. Cotton yarns accounted for 20% of the company's total production in 2009-10 as against 15% in 2008-09. Its total production increased by 55%, from 6062 tones in 2008-09 to 9428 tonnes in 2009-10. The segmental revenues increased by 16%, from Rs 500cr in 2008-09 to Rs 580cr in 2009-10, on account of strong domestic as well as exports growth.

The company's total finish fabrics production stood at 20.5 mn metres. The woven fabrics accounted for 18% of the total sales 2009-10, .The production of processed fabrics stood at 28.17 mn mtrs including job of 7.67 mn mtrs in 2009-10. The segmental revenues increased by 5.5%, from Rs 163cr in 2008-09 to Rs 172cr in 2009-10, on account of strong domestic growth.

Key Concerns:

Adverse Raw Material Prices:

Steep rise in raw material prices could seriously impact the profitability of the company, as both polyester and viscose are dependent on oil prices and are volatile in nature.

High Debt-Equity Ratio:

The debt-equity ratio of the company stands on the higher side, this can reduce further leveraging for the company, thereby affecting the further expansion plans of the company.

Demand affected by global pricing:

The fluctuations in global pricing of PV yarn directly affects the realizations and also the company's revenue are subjected to risk associated with exchange rate, which could have bearing on the margins of the company.