Equity analyst Sovid Gupta of Fairwealth Securities is bullish on Alok Industries and maintained 'Buy' rating on the stock to achieve a target of Rs 28.

Alok Industries is a leading vertically integrated textile player having sales of over 3000 crore and tough bottom line.

The analyst initiate a buy call on the company on basis of its good valuation, vast growth in topline by the next three years and augmented outcome from higher foreign currency earnings, increased sale of Value added products and Vertical/ backward Integration.

The analyst estimate Alok Industries net profit to develop at 30% compounded by 2012. Profit margins for FY09 are expected to taper to 6.1% for FY09 and move back to
9-10% by FY11E.

At present, the company is trading at 4.5x is FY08 earnings; at estimated profits of 290 crores and 412 crores for FY10E and FY11E stock is presently valued at 2.9 and 2.1 times its earnings per share (EPS) of 4.8 and 6.8 respectively.

In industry, Alok Industries has its cost of capital lowest at around 10% as company after tax cost of debt is around 6%. Out of total debt of 6500 crores, 4000 crores has been lifted as part of TUF plan.

Alok Industries started substantial growth plans since 2006 that is likely to be finished by Q1 FY10. As part of the growth plan, company aims to attain integrated operations and economies of scale; become a 'Nominated Supplier' to worldwide clients and growth of retail of products made by the company divisions including apparel fabrics, home textiles store 21 in UK and cotton yarn.

Alok Ind has total debt of around 6500 crores out of which 4500 crore long term debt has been lifted as part of TUF's at subsidized rates, while the remaining 2000 crores is lifted as working capital loans.

Considering company's high net D/E ratio of 3:1, it has decided to issue rights issue at 83:40 lifting around 450 crores. Post right issue company's total net worth would touch
2300 crores with cash balance of around 1800 crores.

Company's Long Term Debt: Equity ratio post right issue stood at 1.8 to 2 that would be much more stable. Another thing supporting the company is low debt cost. Long term Debt has been lifted as part of the textile promotion plan, TUF that offers 5% subsidy on interest cost of debt.

90% of the overall capacities are likely to be used by 2011 from existing levels of about 75%.

Sovid Gupta expects company's top line growth of compounded 30-35% by the next 3 years, with bulk growth coming from exports and retail sales.

By 2010, exports would add around 50% of company's net sales. Bottomline will get bettered through backward integration steps; company aims to meet 50% of its yarn demand in house and increased margin from dollar depreciation.

Sovid Gupta values company at 4.5 x its 2009 expected EPS of 3.1. For FY10E and FY11E, he anticipates company to register PAT of 320 crores and 410 crores respectively giving it a valuation of 2.6x and 2x its FY10E and FY 11E EPS of 5.4 amd 6.9 respectively.

Investment Rational:

- Thrust on rising the value chain by increasing its retail workings and offering higher margin products like home textiles.
- Cost savings via backward integration and vertical integration.
- Enhanced product line through attainments and R&D to help secure large orders globally.
- Increased capacities by the next 2 years With completion of Phase IV, we expected company to double its projected topline to touch 5000 crores by FY11E.

Company completed 2000 crore expansion in Silvasa and Vapi in Gujarat. Company expects to take utilization to over 90% across all segments and units.

The share price of the company has decreased 87% since it hit its life time high of 104 in Dec'08.

Over past one year stock prices has dropped by almost 80%, while the becnhmark Nifty has dropped by less than 40%.

Between 2004 and 2008, share prices of Alok Industries traded between Rs 40 and Rs 80 during most part.

Fundamentally company continues to remain very strong textile player with stable operating margins and manageable interests' costs.