09/01/2008

Eastern Silk Industries Ltd.

Initiating with a BUY 12mth Price Target: Rs324

We are initiating coverage on Eastern Silk Industries Ltd with a 12-month price
Lalitha M.R target of Rs. 324.
(lalitha@ascilonline.com)
Research Head
Investment Highlights
Jayamurugan P Latest quarter performance: The Company’s topline stood at Rs. 151.23
(jayamurugan@ascilonline.com) Crs for the quarter ended Sep 2007, an increase of 30% on a YoY basis.
Research Analyst
The company’s bottomline stood at Rs. 21.18 Crs for the sep quarter
2007, an increase of 31% on a YoY basis.
Industry: Textile
Price Data Expansion plans to drive volumes: The total production capacity of the
Current Price (Rs) 246.85 company now stands enhanced to 18.5 lakh Mtrs pa (LMPA) from 13.9
52 wk range (Rs) 364-170 (LMPA) in FY07, a growth of 33%. The enhanced capacity went into
Price Movement Chart operation since 1Q FY08. Further the company in the process of setting
0.3 400
up a new unit exclusively for home furnishing made-ups.
0.25 350
Shift in product mix to enhance the topline: The company is now
Volume in mns

0.2 300
focusing on machine-made silk fabrics rather than handloom made silk
Price

0.15 250
fabrics. The machine made silk fabrics fetches higher margin and have
0.1 200
0.05 150
better demand in developed countries.
0 100
Fund raising plans to facilitate expansion: The company has plans to
raise close to $100 million via a FCCB/ GDR/ADR issue for further
1/9/2007

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6/14/2007

8/2/2007

9/21/2007

11/12/2007

1/2/2008

expansion.
More focus on domestic markets to improve margins: ESIL plans to
Stock Performance venture domestic markets due to an increase in demand for silk in the
1M 3M 6M furnishing segment in India. The margins in the domestic market will be
Absolute % 14.5 3.5 (17.7) higher as the products are sold directly to retailers.
Acquisition on the cards: The company is likely to acquire an European
Stock Data silk outfit for which negotiation is in the process.
Mkt Cap (Rs Cr) 390
Last traded qty (NSE) 15,646 Financial Performance
No. of shares o/s(Cr) 1.58 (Rs Crs)
Free float (%) 53
Particulars FY06 FY07 FY08E
Share holding pattern chart
Net Sales 390.49 451.19 550.00
Shareholding Pattern as on Mar07
Adj PAT 50.56 68.04 93.50
12% 19% Adj PAT Margin (%) 12.95% 15.08% 17.00%
14% Basic EPS (Rs.) 32.02 43.09 59.21
47%
Dilluted EPS (Rs.) 15.95 21.46 29.50
8%
P/E 15.48 11.50 8.37
Private corp Promoter Mcap/Sales 1.00 0.86 0.71
Institutions Public
NRI

Key Indicators Valuation

EPS (FY07) (Rs) 43.09
BV per share (Rs) 211.68 We expect a stronger topline and bottomline growth on the back of enhanced
ROE (%) 20.36 capacity and company’s increased focus on power loom fabrics. Further, the
PAT Margin (%) 15.08 company’s fund raising via ADR/GDR/FCCB to the tune of $100 mn will be utilised
for expansion or acquisition plans. Even after considering the dilution of equity,
Code the FY08 EPS is estimated to be Rs. 29.5. The CMP discounts the FY08E earnings
NSE EASTSILK
by just 8.5x. Compared to the industry average PE of 18.5x, the stock is highly
BSE 590022
undervalued. We recommend a BUY on the stock with a 12M- price target of
Reuters ESIL.BO
Rs. 324.
Bloomberg ESLK IN
 Industry Profile

The global production of silk fabrics is around 130,000 Mtrs, a 5-year CAGR
of 4%.
Asia accounts for 90% of the total global silk production. China contributes a
major portion followed by India, Brazil and Thailand.
India is the only country to produce all the four varieties of silk i.e.,
Mulberry, Tassar, Eri and Muga.
Karnataka is the biggest silk producer in India, contributing around 60% of
the country’s silk production.
India’s silk fabric exports are expected to grow to US$ 1.5 bn by FY’10 from
US$ 1.25 bn in FY’07.
India’s average cost of raw silk imports decreased from US$ 36-38 per kg. in
2006 to US$ 23-24 per kg in 2007.

ESIL’s Sales (Rs. Cr)

Gross Sales
Company Profile
500

400 Eastern Silk Industries Ltd (ESIL), based out of Kolkata, is engaged in manufacture
of silk yarn, silk fabrics & made ups, home furnishings and embroidered fabrics. ESIL
300
Rs. Cr.

is the largest exporter of silk fabrics with a share of around 9% of India's exports.
200 The company has an installed capacity of 18.5 lakh Mtrs p.a. with 4 units located in
100 Karnataka & West Bengal. The company imports around 65% of its raw materials and
-
exports around 65-70% of its net sales, primarily to US and Europe.
FY05 FY06 FY07
ESIL’s Shift in Product Mix Investment Rationale
Product Mix of ESIL
The company now focuses more on power loom fabrics. Further, the
100%
21% 22% sales realization is 3.12 times more than that of Handlooms fabric.
80% Moreover the company’s capacity expansion from 13.9 LMPA to 18.5
60% LMPA, which happened in 1Q FY 2008, would enable the topline and
44% 47%
profit margin to improve going forward.
40%

20% 36% 31%

Yarn prices during FY07 fell by 37%, which coupled with the rupee
0%
appreciation has benefited the company since most of the yarn
Q1 07 Q1 08
requirement for the company is imported. The industry expects that the
prices will continue to remain at these levels for the next few quarters,
Handloom fabrics Powerloom fabrics
which will help them to maintain margins.
Autoloom fabrics
The company directly supplies home furnishings, such as silk curtains, to
leading stores and has 200 global clients. Around 65% of its export
revenues come from the US and Europe. Further, in 1Q FY08, power loom
fabrics constituted 47% of sales compared to 44% in the corresponding
quarter of the previous year. Going forward, the diversified geographical
mix and product mix would help the company to improve its
performance.
Fund Holdings
Fund raising plan of USD100 million via FCCB/GDR/ADR will enable the
No. of % of pd
company to make an entry into certain new products such as inner
Fund Name Month shares up
garments and fashion items and organized retail space with their own
capital
brand. This will help the company to capture the retail margins, which
DSP ML
were otherwise being passed on to other brand owners. Further, the
Tax saver Dec-07 41,754 0.27%
company is also in the process of negotiations with a European company
for acquisitions. This fund raising would help them to partly finance such
initiatives.

Peer comparison
Name of the M Cap* Price* Face Value Net Sales # PAT # Mcap/ EPS P/E
Company (Rs Cr) (Rs) (Rs) (Rs Cr) (Rs Cr) Sales (Rs)
ESIL 389.78 246.85 10.00 551.74 80.40 0.71 50.92 4.85
Himatsing. Seide 1,170.13 120.10 5.00 670.48 36.56 1.75 3.75 32.01

*As on 08/01/08
# 1H figures annualized

Investment Concern

Eastern silk imports around 60% of its raw materials from China. Any
increase in the raw material cost would affect its margins.
Any market stagnation in the US and EU (accounting for two-thirds of the
global trade) could affect the industry.
Technical Outlook

Technically ESIL has formed strong support at 190 levels. The stock is forming a
series of higher tops and higher bottoms indicating underlying Bullish sentiment.
MACD has moved in positive territory. It may take resistance R1 at 280, R2 at 330
levels and support S1at 225 and S2 at 200 levels for a period of next 6 months.
Consolidated Financial Statements

Income Statement
(Rs Cr)
Particulars FY05 FY06 FY07
Sales 337.93 390.49 451.19
Total Expenses 285.21 322.65 365.68
Gross profit 52.72 67.84 85.51
Other income 5.64 5.56 14.70
Depreciation 8.98 11.83 10.37
PBIT 58.36 73.40 100.21
Interest 16.02 17.63 20.22
PBT 42.34 55.77 79.99
Tax 8.74 5.21 11.95
PAT before Minority interest 33.60 50.56 68.04
Minority interest - - -
Reported PAT 33.60 50.56 68.04
Extraordinary items - - -
Adjusted PAT 33.60 50.56 68.04

Ratio Analysis
Profitability Ratios
Gross profit margin 15.60% 17.37% 18.95%
EBIT/sales 17.27% 18.80% 22.21%
Other Inc/Sales 1.67% 1.42% 3.26%
Net profit margin 9.94% 12.95% 15.08%
Tax Rate 20.64% 9.34% 14.94%
Valuation Ratios
EPS 21.28 32.02 43.09
Book Value 130.22 146.71 211.68
Mcap/Sales 1.15 1.00 0.86
P/E 11.60 7.71 5.73
Price/BV 1.90 1.68 1.17
EV/EBITDA 9.14 7.21 5.44
ROCE (%) 24.45% 29.01% 27.35%
ROE(%) 16.34% 21.83% 20.36%
 Balance Sheet
(Rs Cr)
Particulars FY05 FY06 FY07
SOURCES OF FUNDS
Share Capital 27.49 27.49 29.79
Equity 13.49 13.49 15.79
Preference 14.00 14.00 14.00
Reserves and Surplus 192.12 218.17 318.45
Minority Interest - - -
Secured Loans 93.24 117.14 97.72
Unsecured Loans 17.10 0.25 15.95

TOTAL LIABILITIES 329.95 363.05 461.91

APPLICATION OF FUNDS
Gross Block 186.20 194.90 195.61
Less: Accumulated Depreciation 27.01 44.32 57.65
Net Block 159.19 150.58 137.96
Capital Work in Progress 6.21 1.21 6.98
Investments 1.71 1.01 13.56
Current Assets, Loans and Advances
Inventories 120.78 156.49 143.71
Sundry Debtors 89.47 119.49 133.33
Loans and Advances 38.88 38.67 111.61
Cash and Bank Balances 16.31 17.13 24.99
Total Current Assets 265.44 331.78 413.64
Current Liabilities
Sundry Creditors 52.32 60.96 43.30
Other liabilities 32.83 30.76 24.76
Provisions 6.12 18.31 27.45
Total Current Liabilities 91.27 110.03 95.51
Net Current Assets 174.17 221.75 318.13
Miscs Expe (not written off) 0.79 0.01 0.01
Deffered Tax Asset - - -
Deffered Tax Liability 12.12 11.51 14.73
Net Deferred tax (12.12) (11.51) (14.73)

TOTAL ASSETS 329.95 363.05 461.91

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