YEARS

Alok Industries Ltd
Pulled down by retail and real estate
Fundamental Grade Valuation Grade Industry 3/5 (Good fundamentals) 5/5 (CMP has strong upside) Textile, Apparel & Luxury Goods

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September 07, 2012 Fair Value CMP CFV MATRIX
Excellent Fundamentals

Rs 29 Rs 12

Fundamental Grade

Alok Industries Ltd’s (Alok’s) fundamental grade of 3/5 is currently under review. The company’s balance sheet has deteriorated more than our expectations; increase in consolidated debt to Rs 158.8 bn and debt-to-equity zooming to 5.2x in FY12 have worsened its financial profile. High losses in the UK retail store (Rs 1.5 bn) in FY12, higher-thanexpected inventory levels despite a rise in share of the polyester business and no further deals in real estate have led to this situation. We may revise Alok’s fundamental grade due to (a) a worsening financial profile, (b) bleak outlook on the UK retail business, and (c) expected delay in exit from the real estate venture due to the worsening macroeconomic situation. Annual report highlights • Debt level at an alarming level – Consolidated debt has increased to Rs 158.8 bn in FY12, with gearing at an alarming 5.2x compared to 4.3x in the previous year on account of huge capacity expansion, and investments in real estate and retail. In our August report, we had assumed debt to be Rs 133 bn with gearing of 4.5x. • Working capital cycle stretched – Alok’s inventory has increased by 72% to Rs 37 bn against revenue growth of 48% in FY12. Its inventory days have climbed to 204 days in FY12 from 179 in FY11. Inventory has gone up despite a rise in share of polyester (which requires working capital of ~80 days compared to cotton’s 170 days). Its share has increased from 27% in FY11 to 34% in FY12. Earlier, we had assumed inventory of Rs 28 bn (154 days). • UK retail losses ballooned – Alok’s UK retail chain continued to post losses in FY12 (Rs 1.5). The company is planning to close its non-profitable stores within a year. However, with the weak macroeconomic situation in Europe, it will be difficult to reduce losses. • Delay in real estate exit to hurt – Post Q4FY12, the company has not made any major progress in real estate. The interest cost of Rs 1.5-1.75 bn will be charged to P&L, which will dent the net profitability. In Q4FY12, it has sold eight floors (estimated deal size Rs 5 bn) in Peninsula Business Park and has only received Rs 1.1 bn as token consideration. CRISIL Research believes that excess supply and lower demand in Mumbai’s Lower Parel for commercial real estate along with a worsening macro situation will make it difficult for Alok to exit the business. Valuation Post our review, we will revisit our projections and will revise the fair value downwards. The current fair value is Rs 29 per share.

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Poor Fundamentals

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Valuation Grade
Strong Downside Strong Upside

KEY STOCK STATISTICS
NIFTY/SENSEX NSE/BSE ticker Face value (Rs per share) Shares outstanding (mn) Market cap (Rs mn)/(US$ mn) Enterprise value (Rs mn)/(US$ mn) 52-week range (Rs)/(H/L) Beta Free float (%) Avg daily volumes (30-days) Avg daily value (30-days) (Rs mn) 5238/17346 ALOKTEXT/ ALOKIND 10 826 9,664/174 162/3 24/11 1.4 66.5% 10,355,332 150.0

SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 11.7% 17.0% 11.7% 20.8% 11.3% 15.2% 11.3% 17.8% 41.4% 37.6% 41.8% 37.4%

KEY FORECAST
(Rs mn) Operating income EBITDA Adj Net income Adj EPS-Rs EPS growth (%) Dividend Yield (%) RoCE (%) RoE (%) PE (x) P/BV (x) EV/EBITDA (x) FY10 44,202 12,704 2,320 2.9 (58.9) 1.3 8.4 10.0 7.5 0.6 7.8 FY11 66,114 18,094 3,267 4.1 127.5 1.3 9.4 11.8 5.4 0.6 7.0 FY12 97,909 23,978 1,785 2.2 (75.4) 2.2 9.7 6.1 7.2 0.4 6.6

20% 10% 0%

30.0% Sep-11 Promoter

30.0% Dec-11 FII

31.8% Mar-12 DII

33.6%

Jun-12 Oth ers

PERFORMANCE VIS-À-VIS MARKET
1-m -25% 1% Returns 3-m 6-m -36% -45% 9% -2% 12-m -35% 4%

Alok NIFTY

ANALYTICAL CONTACT
Mohit Modi (Director) Vinay Chhawchharia Vishal Rampuria Client servicing desk +91 22 3342 3561 clientservicing@crisil.com mohit.modi@crisil.com vinay.chhawchharia@crisil.com vishal.rampuria@crisil.com

NM: Not meaningful; CMP: Current market price Source: Company, CRISIL Research estimates

For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

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