The company’s trouser manufacturing unit, delayed by about a year, is undergoing trial runs. Amidst challenges, such as slowing demand growth, volatile raw material prices and higher operating costs, the near term looks stressed for textile players. As far as Scotts is concerned, its ability to diversify revenues across clients and geographies and timely implementation of expansion plans will be key for its future growth.
The company had reported net sales of Rs 500 crore and net profit of Rs 84 crore in FY12. However, adjusting the one-time gain on sale of investment (of Rs 59.5 crore), the adjusted net profit stood at Rs 25 crore, a fall of 29.7 per cent compared to FY11. Further, the net profit growth has been pretty lumpy since FY08, which limits earnings visibility.
At the price band of Rs 130-132 and after annualising net profit for seven months ended October 2012, the fully diluted price/earnings ratio works out to 14.5-14.7 times. Its larger and more profitable peers (PAT margins of over 7.5 per cent & revenues of Rs 1,000 crore and above) such as Bombay Rayons Fashion and Mandhana Industries trade at 11-17 times earnings. Even if one assumes a 20 per cent growth in FY14, the valuations are not cheap, leaving little room for appreciation.