On September 25, Alok Industries announced a rights issue of Rs 551 crore. While this might have disappointed shareholders, as dilution of 30 per cent stake is likely (at current market prices), the company would gain through savings in interest cost it would have to pay had it opted to raise more debt.
Since the announcement, the company’s stock outperformed the Sensex, with a gain of 9.1 per cent, compared with the benchmark index’s rise of two per cent. The stock, which touched a nine-year low of Rs 11 on August 28, has risen 21 per cent since then to Rs 13.40, with a valuation of 2.3 times FY14 estimated earnings, compared with the average target multiple of two times estimated by analysts.
Analysts, however, are sceptical. In a report on September 26, Bharat Chodda, analyst at ICICI Direct, stated, “Shareholders have not benefited, either through dividend or share appreciation, as the company has continuously expanded, and diluted or raised debt.”
To improve its net profit and cash flow, Alok Industries plans to reduce debt, boost asset turnover and improve the return on capital employed (ROCE)) through the next three years. Also, the company’s core business (textile manufacturing) is faring well. However, the Street would monitor the progress and results of these initiatives, given some of the targets appear ambitious.
Focus on profitability
In 2011-12, the company’s consolidated debt-to-equity ratio was about five times and interest costs stood at 52 per cent of the operating profit. This led to a net loss of Rs 28 crore (on an adjusted basis), compared with a net profit of Rs 271.54 crore in 2010-11.
Raising Rs 551 crore through debt would have hit its balance sheet and profitability further. Also, there is little possibility of raising any more debt. Apart from the rights offer, the company also plans to raise about Rs 2,500 crore in two years by exiting non-core businesses, primarily real estate, to reduce debt. The company plans to reduce the debt-to-equity ratio to 1.5 times by around 2016. However, after the quarter ended June, the company hasn’t announced any asset sale. Analysts, therefore, expect delay in meeting the target goal, and this could be a key overhang.
The company is closely monitoring its retail business under the ‘Homes and Apparels’ brand. Recently, it had announced of its 137 stores, 45 non-profitable ones would be shut by September-end. Though its 154 shops-in-shop through franchises are recording good business, the company has stated it is not satisfied with the progress, it would gradually wind up this business.
This strategy applies to its loss-making UK retail chain of stores under the ‘Store 21’ brand as well.
On the other hand, by increasing the share of polyester business in future (currently 35 per cent) and value-added products in case of cotton, the company expects to improve its asset-turnover ratio, which will lead to better operational performance, ROCE and hence cash flows. Says an analyst, “Polyester is a volume game; hence margin is comparatively lower than cotton but ROCE is good.” One can only be hopeful that the company achieves success in its objectives.