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Sangam India - ICICI
Tuesday, June 5, 2007
Sangam India Ltd (SIL) reported a hefty 59% increase in revenues to Rs 552.36 crore for FY07, exceeding our expectation. Though sales showed good momentum, EBIDTA margin declined to 16.98% in FY07 from 17.03% in FY06 due to the increase in power cost-to-sales ratio to 10.2% from 7.9%. A significant jump in interest cost, which increased 294% to Rs 20.98 crore in FY07 (Rs 5.32 crore in FY06), restricted net profit growth to 9.1% at Rs 27.02 crores.
During Q4FY07, EBIDTA declined to 15.16% against 20.98% in Q4FY06. SIL’s performance has been impacted due to the increase in prices of key raw materials. The company expects to pass on the cost pressure to customers and get higher realizations in the coming quarters. Margins are likely to be under pressure in the short-term due to rise in raw material prices and higher power cost. We expect margins to improve after the commissioning of the 21-MW captive power plant in July 2007. We continue to maintain our Outperformer rating as we believe that commissioning of new capacities and the power plant would enable the company report a better financial performance in FY08.
RESULTS HIGHLIGHTS
Net sales registered a growth of 51.4% y-o-y to Rs 163.34 crore and 16.4% q-o-q due to addition of new capacities, which has enabled the company to achieve accelerated growth in sales volumes.
EBIDTA margin declined by 582 bps y-o-y from 20.98% to 15.16%. A surge in the raw material-to-sales ratio from 56.58% in Q4FY06 to 62.1% in Q4FY07 and increase in power cost to sales ratio from 6.6% to 9.2% has dented the EBIDTA margin.
Interest cost has risen by 338% to Rs 6.53 crore, while depreciation has increased by 77.4% to Rs 9.95 crore respectively.
Decline in EBIDTA margins and surge in interest and depreciation charges have resulted in a de-growth of 47.2% in net profit to Rs 7.65 crore.
Short-term pressure on margins
An increase in VSF prices by 4% to Rs 93 per kg in Q4FY07 has resulted in SIL’s raw material cost-to-sales ratio increasing to 62.1% from 56.6% in Q4FY06. Power cost has increased by 109% to Rs 14.95 crore. We expect VSF prices to remain firm in the near term and the power cost to remain high for Q1FY08. Subsequently in Q2FY08, we expect power cost to come down with the commissioning of the 21-MW captive thermal power plant in July 2007. The full benefit
of the reduction in power cost would be felt in the second half of FY08, which would help the company improve its margins.
Expansions on track
SIL is implementing an expansion and diversification plan with a capital outlay of Rs 707 crore. The plan includes installation of 147,552 spindles, 140 weaving machines, 12 knitting machines, captive power plant of 21 MW and a process house. Out of the above projects, 66,912 spindles, 90 weaving machines, and 12 Knitting machines have been installed till March 31, 2007. The captive thermal power plant is expected to start in July 2007. Impact of the new additional capacities installed will be reflected in SIL’s FY08 financials.
VALUATIONS
The stock trades at a P/E of 4.6x its FY08E earnings. We are positive about the long-term prospects of the company due to timely expansions, enabling volume growth in sales, strong customer relationships and improving realizations. We believe that the company will be able to improve upon its operating margin with the commissioning of its 21 MW thermal power plant. We reaffirm our Outperformer rating on the stock and expect it to generate a return to the tune of 75% over the next 12 months with a target price of Rs 120.
During Q4FY07, EBIDTA declined to 15.16% against 20.98% in Q4FY06. SIL’s performance has been impacted due to the increase in prices of key raw materials. The company expects to pass on the cost pressure to customers and get higher realizations in the coming quarters. Margins are likely to be under pressure in the short-term due to rise in raw material prices and higher power cost. We expect margins to improve after the commissioning of the 21-MW captive power plant in July 2007. We continue to maintain our Outperformer rating as we believe that commissioning of new capacities and the power plant would enable the company report a better financial performance in FY08.
RESULTS HIGHLIGHTS
Net sales registered a growth of 51.4% y-o-y to Rs 163.34 crore and 16.4% q-o-q due to addition of new capacities, which has enabled the company to achieve accelerated growth in sales volumes.
EBIDTA margin declined by 582 bps y-o-y from 20.98% to 15.16%. A surge in the raw material-to-sales ratio from 56.58% in Q4FY06 to 62.1% in Q4FY07 and increase in power cost to sales ratio from 6.6% to 9.2% has dented the EBIDTA margin.
Interest cost has risen by 338% to Rs 6.53 crore, while depreciation has increased by 77.4% to Rs 9.95 crore respectively.
Decline in EBIDTA margins and surge in interest and depreciation charges have resulted in a de-growth of 47.2% in net profit to Rs 7.65 crore.
Short-term pressure on margins
An increase in VSF prices by 4% to Rs 93 per kg in Q4FY07 has resulted in SIL’s raw material cost-to-sales ratio increasing to 62.1% from 56.6% in Q4FY06. Power cost has increased by 109% to Rs 14.95 crore. We expect VSF prices to remain firm in the near term and the power cost to remain high for Q1FY08. Subsequently in Q2FY08, we expect power cost to come down with the commissioning of the 21-MW captive thermal power plant in July 2007. The full benefit
of the reduction in power cost would be felt in the second half of FY08, which would help the company improve its margins.
Expansions on track
SIL is implementing an expansion and diversification plan with a capital outlay of Rs 707 crore. The plan includes installation of 147,552 spindles, 140 weaving machines, 12 knitting machines, captive power plant of 21 MW and a process house. Out of the above projects, 66,912 spindles, 90 weaving machines, and 12 Knitting machines have been installed till March 31, 2007. The captive thermal power plant is expected to start in July 2007. Impact of the new additional capacities installed will be reflected in SIL’s FY08 financials.
VALUATIONS
The stock trades at a P/E of 4.6x its FY08E earnings. We are positive about the long-term prospects of the company due to timely expansions, enabling volume growth in sales, strong customer relationships and improving realizations. We believe that the company will be able to improve upon its operating margin with the commissioning of its 21 MW thermal power plant. We reaffirm our Outperformer rating on the stock and expect it to generate a return to the tune of 75% over the next 12 months with a target price of Rs 120.
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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.
