Little upside

Insight

Bombay Rayon Fashions, a manufacturer of fabric, garments and home-textiles, has seen its stock price rise 44% since April 2007 as compared to the 13.7% rise in the BSE Sensex.

This outperformance is due to developments including commencement of the company’s integrated textile park in end-March 2007 and expected jump in performance, among others.

With respect to the latter, the company, on July 3rd, announced decent set of numbers for the fourth quarter (Q4) as well as full year ended March 2006-07. While revenues have almost tripled to Rs 173 crore in Q4, they are up 146% to Rs 490 crore in 2006-07 led by higher production of fabrics.

In Q4, though, a sharper rise in material costs led to a decline in margins by 300 basis points to 16.9%, thanks to a higher proportion of fabric sales (64.7% against 31% in Q4 last year), which typically yields lower margins as compared to garments.

For 2006-07, margins were up 200 basis points at 18.8% as the share of garments increased to almost 40%, as compared to 26% in 2005-06. Thereafter, while higher capacities meant increased depreciation, interest costs grew at a slower pace whereas other income rose sharply.

The latter was on account of the company raising funds in December 2006-January 2007; it allotted shares to QIB (Rs 294 crore; Rs 210 per share) and warrants to promoters (Rs 126 crore; to be convertible at Rs 207 per share).

These funds are expected to be used for the company expansion plans which includes increasing annual capacity by about 140%, of both, fabrics to 120 million metres and garments to 55 million pieces annually, at an estimated cost Rs 350 crore.

In between, Bombay Rayon also acquired 70% stake in DPJ Clothing, UK (engaged in wholesale marketing and distribution of apparels) for £1.54 million, which should help in expanding its reach in the UK and Europe markets.

And very recently, the company’s subsidiary acquired the business of garment manufacturer Leela Scottish Lace Private Ltd (part of the group that owns Hotel Leelaventure) for Rs 155 crore. Leela Lace, with capacity to produce 12 million garments, reported revenues of Rs 400 crore in 2005-06.

Besides, it is also a profitable company with net margins of about 4%-5%. All these moves only indicate the company’s aggressive appetite for growth, which should be equally good going forward.

However, the stock (at Rs 231.15), which has moved up and quite fast, quotes at a PE of 29.6 based on its consolidated fully diluted EPS of Rs 7.81 for 2006-07. At this level, most of the near-to-medium term prospects are factored in.

Synergistic buys

It cannot but be highly depressing for investors whose stocks aren’t delivering good returns in the best-ever bull-run the country has seen so far. And Himatsingka Siede’s stock, at Rs 130 now, the same levels as it was in October 2005, must be one of those.

The company’s consolidated performance has been lacklustre. Between 2003-04 and 2005-06, topline growth was below 12%, while profit fluctuated between Rs 45 crore and Rs 49 crore.

It is only in 2006-07 that consolidated revenues jumped 29% to Rs 209.11 crore, whereas net profit moved up 26.3% to Rs 61.43 crore, thanks to the acquisition of Giuseppe Bellora Spa, Italy (70% stake) in February 2007. This acquisition was funded through the GDR proceeds of $60 million raised in December 2005.

Bellora, which reported revenues of €29 million in 2006, is a luxury brand in the bed linen segment in Europe and also has exclusive stores in Italy, Spain and Germany, among others.

Also, Himatsingka, which provides yarn dyed decorative fashion and bridal fabrics, on July 2 acquired 80% stake in New York’s Divatex Home Fashions (DHF) Inc, which reported revenues $151 million and operating profit of $14 million in 2006.

DHF operates a large warehousing and distribution facility out of South California and is one of the top three distributors of bed linen products in US. The company will be investing $53 million on this buyout.

The two acquisitions provides a good platform to Himatsingka to forward-integrate globally into retailing and branding in the home textile segment by obtaining large distribution networks and high-end brands in the home textile arena. HSL expects the combined revenues at Rs 800 crore from both these acquisitions, and their contribution to HSL will be visible from this year itself.

These acquisitions also come at an appropriate time and will assist in the distribution of bed linen produced at HSL’s new facility in Hassan SEZ, Karnataka — expected to generate revenues worth Rs 400 crore.

This unit has a capacity of 60,000 meters per day of wider width cotton fabrics and 8,000 sets per day of exquisite made-up products, and will begin commercial production in July 2007. Clearly, the acquisitions are expected to deliver significant synergies in the days ahead.

With these moves, the consolidated revenues of HSL are also expected to cross Rs 1,000 crore, while the two acquired companies should also add to the profits.

HSL is also relatively better placed as compared to its peers when it comes to rupee appreciation as it gets its revenues in currencies other than dollars too. In addition to that, HSL has value added product portfolio and high design content.

The stock price has shot up by 9.98% post the announcement of the second (DHF) acquisition to Rs 129.85 (PE of 23 times its trailing 12 month earnings). The acquisitions definitely bode well for the company and have the potential to unlock value in the days to come.