Kandagiri Spinning Mills Ltd
Enhancing investment decisions
Q3FY11 Result Update
Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment
making process – Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation
Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to
grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong
upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISIL Fundamental Grade
Assessment CRISIL Valuation Grade
Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (- 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)
Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict
of interest that can bias the grading recommendation of the company. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-commissioned Report (Report) is based on data publicly available or from sources considered reliable
by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report
and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. The Data /
Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the
date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation,
whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially
states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the
personal information only of the authorized recipient in India only. This Report should not be reproduced or
redistributed or communicated directly or indirectly in any form to any other person – especially outside India or
published or copied in whole or in part, for any purpose.
CRISIL EQUITIES | 1
Company name Tag line
Fundamental Grade X/5 (_____ fundamentals)
Valuation Grade X/5 (CMP is/has ___)
Industry _____ (GICS Code)
Fair Value Rs 141 CMP Rs 103
February 08, 2011
Kandagiri Spinning Mills Ltd
Caught in industry web
Fundamental Grade 2/5 (Moderate fundamentals)
Valuation Grade 5/5 (CMP has strong upside)
Industry Textiles, Apparel & Luxury Goods
Kandagiri Spinning Mills Ltd’s (Kandagiri’s) Q3FY11 revenues were in line with CRISIL Equities’ expectations driven by robust demand in the domestic readymade garments (RMG) segment. The company plans to add ~8,000 spindles, likely to get commissioned by Q2FY12. Consequently, we have raised our FY12 revenue estimates. The government has imposed a cap on cotton yarn exports in 2010-11, resulting in greater competition in the highly fragmented domestic cotton yarn industry. Given this backdrop, Kandagiri is finding it difficult to increase its realisations, even as cotton prices continue to rise. We retain our fundamental grade of ‘2/5’. Q3FY11 result analysis
• Kandagiri’s Q3 revenues grew by 55.1% y-o-y to Rs 397 mn driven by robust demand in the domestic cotton yarn segment.
• EBITDA margin contracted by 109 bps y-o-y mainly on account of higher
cotton cost and also due to a salary bonus of ~15%, thereby increasing employee expenses from Rs 36.4 mn in Q3FY11 vs. Rs 23.5 mn in Q3FY10.
• PAT margin increased by ~298 bps y-o-y to 5.4% due to flat interest and
depreciation expenses (together they accounted for 10.7% of sales in
Q3FY11 as against 17.3% of sales in Q3FY10). Q3FY11 EPS increased to Rs 5.5 vs. Rs 1.6 in Q3FY10.
Key developments
• Due to tightened supply of raw cotton in the global market, cotton yarn
exports from India increased significantly in FY11. To protect the domestic
RMG segment, the government has imposed a cap on cotton yarn exports
at 720 mn kgs for 2010-11. This has resulted in greater competition in the
domestic market, thereby limiting pricing flexibility of non-integrated
smaller players like Kandagiri in times of rising cotton prices. Accordingly, we expect EBITDA margins in FY12 to be lower than in FY11.
• Kandagiri has planned a capacity addition of 8,000 spindles along with the
modernisation of its existing units. The capacity expansion, which entails a capex of Rs 150 mn, is expected to come on stream by Q2FY12.
Valuations: Current market price has strong upside
We continue to value Kandagiri based on the discounted cash flow method. Due to rolling forward of our projections to FY13 from FY12, our fair value estimate for Kandagiri is revised to Rs 141 per share from Rs 124, and the valuation grade is revised to ‘5/5’ from ‘4/5’.
KEY FORECAST
(Rs mn) FY09 FY10 FY11E FY12E FY13E
Operating income 936 1,142 1,481 1,729 1,929
EBITDA 130 213 354 372 382
Adj PAT (27) 32 119 128 134
Adj EPS-Rs (7.1) 8.4 30.9 33.3 34.7
EPS growth (%) (156.1) (217.3) 269.4 7.8 4.2
Dividend yield (%) - - 2.7 2.7 2.7
RoCE (%) 4.2 9.9 18.9 18.0 17.1
RoE (%) (12.6) 14.4 40.4 31.7 25.6
PE (x) (4.6) 13.2 3.6 3.3 3.2
P/BV (x) 0.6 1.8 1.2 0.9 0.7
EV/EBITDA (x) 9.5 7.3 4.4 4.3 4.1
NM: Not meaningful; CMP: Current Market Price
Source: Company, CRISIL Equities estimate
CFV MATRIX
1 2 3 4 5
1
2
3
4
5
Valuation Grade
Fu
nd
am
en
tal G
rade
Poor Fundamentals
ExcellentFundamentals
Str
on
gD
ow
nsi
de
Str
on
gU
psi
de
KEY STOCK STATISTICS NIFTY 5421
NSE ticker KANDAGIRI-EQ
Face value (Rs per share) 10
Shares outstanding (mn) 3.86
Market cap (Rs mn)/(US$ mn) 408/9
Enterprise value (Rs mn) /(US$ mn) 1542/34
52-week range (Rs) (H/L) 147/81
Beta 0.21
Free float (%) 30.1
Avg daily volumes (30-days) 1418
Avg daily value (30-days) (Rs mn) 0.01
SHAREHOLDING PATTERN
69.9% 69.9% 69.9% 69.9
30.1% 30.1% 30.1% 30.1
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mar-10 Jun-10 Sep-10 Dec-10
Promoter FII DII Others
PERFORMANCE VIS-À-VIS MARKET
Returns
1-m 3-m 6-m 12-m
KANDAGIRI 5% -4% 22% 52%
NIFTY -4% -6% 6% 18%
ANALYTICAL CONTACT Sudhir Nair (Head) [email protected]
Neeta Khilnani [email protected]
Suresh Guruprasad [email protected]
Client servicing desk
+91 22 3342 3561 [email protected]
CRISIL EQUITIES | 2
Kandagiri Spinning Mills Ltd
Q3FY11 Result Summary (Rs mn) Q3FY11 Q2FY11 Q3FY10 q-o-q (%) y-o-y (%)
Net sales 397 378 256 5.0 55.1
Raw materials cost 217 202 123 7.4 76.5
Raw materials cost (% of net sales) 55% 53% 48% 118 bps 662.1 bps
Employees cost 36.4 34.3 23.5 6.1 54.9
Other expenses 66.8 38.3 57.2 74.4 16.8
EBITDA 77.1 103.5 52.5 (25.5) 46.9
EBITDA margin 19.4% 27.4% 20.5% -795.8 bps -109.1 bps
Depreciation 19.6 19.3 19.5 1.6 0.5
EBIT 57.5 84.2 33.0 (31.7) 74.2
Interest and finance charges 23.2 25.7 24.9 (9.7) (6.8)
Operating PBT 34.3 58.5 8.1 (41.4) 323.5
Other Income - 0.9 0.4 n.m n.m
PBT 34.3 59.4 8.5 (42.3) 303.5
Tax 13.0 21.5 2.4 (39.5) 441.7
PAT 21.3 37.9 6.1 (43.8) 249.2
Adj PAT 21.3 37.9 6.1 (43.8) 249.2
Adj PAT margin 5.4% 10.0% 2.4% -465.9 bps 297.9 bps
No of equity shares (Mn) 3.9 3.9 3.9 - -
Adj EPS (Rs) 5.5 9.8 1.6 (43.7) 249.2
Source: Company, CRISIL Equ it ies
Q3FY11 EBITDA margin contracted marginally y-o-y Q3FY11 PAT margin expanded by ~298 bps y-o-y
197 228 258 256 315 335 378 397
15.1
24.5 23.5
20.5
14.9
23.6
27.4
19.4
0
5
10
15
20
25
30
0
50
100
150
200
250
300
350
400
450
Q4FY
09
Q1FY
10
Q2FY
10
Q3FY
10
Q4FY
10
Q1FY
11
Q2FY
11
Q3FY
11
(%)(Rs mn)
Revenues EBITDA margin (RHS)
-37 12 6 8 25 38 21
-1.3
3.2
4.5
2.4 2.6
7.5
10.0
5.4
-2
0
2
4
6
8
10
12
-5
0
5
10
15
20
25
30
35
40
Q4F
Y09
Q1F
Y10
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
(%)(Rs mn)
PAT PAT margin (RHS) Source: Company, CRISIL Equ it ies Source: Company, CRISIL Equ it ies
Share price movement Fair value movement since initiation
0
50
100
150
200
250
300
350
Jan-
04
Jul-
04
Jan-
05
Jul-
05
Jan-
06
Jul-
06
Jan-
07
Jul-
07
Jan-
08
Jul-
08
Jan-
09
Jul-
09
Jan-
10
Jul-
10
Jan-
11
Kandagiri NIFTY -Indexed to 100
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0
20
40
60
80
100
120
140
29-N
ov-1
0
06-
Dec
-10
13-
Dec
-10
20-
Dec
-10
27-
Dec
-10
03-J
an-
11
10-J
an-
11
17-J
an-
11
24-J
an-
11
('000)(Rs)
Total Traded Quantity(RHS) CRISIL Fair Value Kandagiri
Source: NSE, CRISIL Equ ities Source: NSE, CRISIL Equ ities
Revenues increase y-o-y
on the back of healthy realisation growth
EBITDA margin contracted
by ~796 bps q-o-q due to
higher purchase of power
from the grid. PLF in wind
generation is lower as 3Q
and 4Q are lean periods for wind energy
CRISIL EQUITIES | 3
Kandagiri Spinning Mills Ltd
EARNINGS ESTIMATES REVISED UPWARDS
The capacity expansion of ~8,000 spindles in expected to come on stream in
Q2FY12, hence we have raised our revenue estimates for FY12 by 6% to Rs
1,729 mn. FY12 EBITDA margin is likely to remain at the earlier level of
~21.5%. The cap on cotton yarn exports is likely to make the pricing in the
domestic market more competitve. Hence, the company will find it difficult to
increase realisations on a sustainable basis, even as cotton prices are expected
to continue to rise. However, we have lowered our PAT estimates by 5% for
FY11 on account of higher interest costs.
Particulars Unit FY11E FY12E
Old New % change Old New % change
Revenue (Rs mn) 1481 1,481 0% 1636 1,729 6%
EBITDA (Rs mn) 354 354 0% 348 372 7%
EBITDA margin % 23.9% 23.9% 0bps 21.3% 21.5% 25bps
PAT (Rs mn) 126 119 -5% 115 128 12%
PAT margin % 8.5% 8.1% -46bps 7.0% 7.4% 40bps
EPS Rs 32.7 30.9 -6% 29.9 33.3 11%
CRISIL EQUITIES | 4
Kandagiri Spinning Mills Ltd
VALUATION
We continue to value Kandagiri based on the DCF method. Due to rolling
forward of our projections to FY13 from FY12, our fair value estimate for
Kandagiri is revised to Rs 141. At this value, the implied P/Es are 4.2x FY12E
and 4.1x FY13E earnings.
One-year forward P/E band One-year forward EV/EBITDA band
-50
-30
-10
10
30
50
70
90
110
130
150
Jan-0
5Apr-
05
Jul-
05
Oct
-05
Jan-0
6Apr-
06
Jul-
06
Oct
-06
Jan-0
7Apr-
07
Jul-
07
Oct
-07
Jan-0
8
Apr-
08
Jul-
08
Oct
-08
Jan-0
9Apr-
09
Jul-
09
Oct
-09
Jan-1
0
Apr-
10
Jul-
10
Oct
-10
Jan-1
1
(Rs)
Kandagiri 2.5x 3.0x 3.5x 4x
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan-0
5
May
-05
Sep-0
5
Jan-0
6
May
-06
Sep-0
6
Jan-0
7
May
-07
Sep-0
7
Jan-0
8
May
-08
Sep-0
8
Jan-0
9
May
-09
Sep-0
9
Jan-1
0
Ma y
-10
Sep-1
0
Jan-1
1
(Rs mn)
EV 4x 5x 5x Source: NSE, CRISIL Equ ities Source: NSE, CRISIL Equ ities
P/E-premium/discount to NIFTY P/E movement
-90%
-86%
-82%
-78%
-74%
-70%
Sep-
09
Oct
-09
Nov
-09
Dec-
09
Jan-1
0
Feb-1
0
Mar
-10
Apr-
10
May-1
0
Jun-
10
Jul-
10
Aug
-10
Sep-
10
Oct
-10
Nov
-10
Dec-
10
Jan-1
1
Premium/Discount to NIFTY MEDIAN
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Sep-
09
Oct
-09
Nov
-09
Dec-
09
Jan-1
0
Feb-1
0
Mar
-10
Apr-
10
May-1
0
Jun-
10
Jul-
10
Aug
-10
Sep-
10
Oct
-10
Nov
-10
Dec-
10
Jan-1
11yr Fwd PE (x) MEDIAN
+1 std dev
-1 std dev
Source: NSE, CRISIL Equ ities Source: NSE, CRISIL Equ ities
CRISIL IER reports released on Kandagiri Spinning Mills Ltd
Date Nature of report Fundamental
grade
Fair value Valuation
grade
CMP
(on the date of report)
29-Nov-10 Initiating coverage* 2/5 Rs 124 4/5 Rs 110
08-Feb-11 Q3FY11 result update 2/5 Rs 141 5/5 Rs 103
* 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.
We now value Kandagiri
at Rs 141 per share
CRISIL EQUITIES | 5
Kandagiri Spinning Mills Ltd
FINANCIALS
Income statement Balance Sheet
(Rs mn) FY09 FY10 FY11E FY12E FY13E (Rs mn) FY09 FY10 FY11E FY12E FY13E
Operating income 936 1,142 1,481 1,729 1,929 Liabilities
EBITDA 130 213 354 372 382 Equity share capital 39 39 39 39 39
EBITDA margin 13.9% 18.6% 23.9% 21.5% 19.8% Reserves 167 204 309 424 545
Depreciation 74 79 79 88 92 Minorities - - - - -
EBIT 56 134 274 284 291 Net worth 205 242 348 463 583
Interest 97 92 98 95 94 Convertible debt - - - - -
Operating PBT (41) 42 176 189 197 Other debt 1,121 1,149 1,169 1,189 1,159
Other income 2 2 2 3 3 Total debt 1,121 1,149 1,169 1,189 1,159
Exceptional inc/(exp) (0) (0) - - - Deferred tax liability (net) 130 141 141 141 141
PBT (39) 44 178 192 200 Total liabilities 1,457 1,532 1,658 1,793 1,883
Tax provision (12) 12 59 63 66 Assets
Minority interest - - - - - Net fixed assets 1,158 1,092 1,023 1,125 1,133
PAT (reported) (28) 32 119 128 134 Capital WIP - - 40 - -
Less: Exceptionals (0) (0) - - - Total fixed assets 1,158 1,092 1,063 1,125 1,133
Adjusted PAT (27) 32 119 128 134 Investments 25 25 25 25 25
Current assets
Ratios Inventory 106 333 424 485 530
FY09 FY10 FY11E FY12E FY13E Sundry debtors 151 109 149 184 216
Growth Loans and advances 102 93 121 142 158
Operating income (%) 2.3 22.0 29.7 16.7 11.6 Cash & bank balance 18 15 37 22 33
EBITDA (%) (24.9) 63.8 66.1 5.2 2.8 Marketable securities - - - - -
Adj PAT (%) (227.3) (217.4) 269.4 7.8 4.2 Total current assets 377 550 731 832 937
Adj EPS (%) (227.3) (217.4) 269.4 7.8 4.2 Total current liabilities 103 134 160 189 212
Net current assets 274 416 571 643 725
Profitability Intangibles/misc. expenditure - - - - -
EBITDA margin (%) 13.9 18.6 23.9 21.5 19.8 Total assets 1,457 1,532 1,658 1,793 1,883
Adj PAT margin (%) (2.9) 2.8 8.1 7.4 6.9
RoE (%) (12.6) 14.4 40.4 31.7 25.6 Cash flow
RoCE (%) 4.2 9.9 18.9 18.0 17.1 (Rs mn) FY09 FY10 FY11E FY12E FY13E
RoIC (%) 5.5 9.6 15.7 14.8 14.0 Pre-tax profit (39) 44 178 192 200
Total tax paid (1) - (59) (63) (66)
Valuations Depreciation 74 79 79 88 92
Price-earnings (x) (4.6) 13.2 3.6 3.3 3.2 Working capital changes 20 (144) (133) (87) (71)
Price-book (x) 0.6 1.8 1.2 0.9 0.7 Net cash from operations 54 (21) 65 129 155
EV/EBITDA (x) 9.5 7.3 4.4 4.3 4.1 Cash from investments
EV/sales (x) 1.5 1.5 1.2 1.0 0.9 Capital expenditure (65) (13) (50) (150) (100)
Dividend payout ratio (%) - - 9.7 9.0 8.6 Investments and others - - - - -
Dividend yield (%) - - 2.7 2.7 2.7 Net cash from investments (65) (13) (50) (150) (100)
Cash from financing
B/S ratios Equity raised/(repaid) - - - - -
Inventory days 49 132 139 132 127 Debt raised/(repaid) 19 27 20 20 (30)
Creditors days 40 48 47 46 45 Dividend (incl. tax) - - (14) (14) (14)
Debtor days 64 38 40 42 45 Others (incl extraordinaries) 3 5 - - (0)
Working capital days 104 105 115 122 124 Net cash from financing 22 32 6 6 (44)
Gross asset turnover (x) 0.6 0.6 0.8 0.9 0.9 Change in cash position 12 (3) 22 (15) 11
Net asset turnover (x) 0.9 1.0 1.4 1.6 1.7 Closing cash 18 15 37 22 33
Sales/operating assets (x) 0.8 1.0 1.4 1.6 1.7
Current ratio (x) 3.7 4.1 4.6 4.4 4.4 Quarterly financials
Debt-equity (x) 5.5 4.7 3.4 2.6 2.0 (Rs mn) Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11
Net debt/equity (x) 5.4 4.7 3.3 2.5 1.9 Net sales 256 315 335 378 397 Interest coverage 0.6 1.5 2.8 3.0 3.1 Change (q-o-q) -1% 23% 6% 12.9% 5.0%
EBITDA 53 47 79 104 77 Per share Change (q-o-q) -13% -12% 69% 30.7% -25.5%
FY09 FY10 FY11E FY12E FY13E EBITDA margin 20.5% 14.9% 23.6% 27.4% 19.4%Adj EPS (Rs) (7.1) 8.4 30.9 33.3 34.7 PAT 6 8 25 38 21 CEPS 12.0 28.8 51.5 56.0 58.5 Adj PAT 6 8 25 38 21 Book value 53.2 62.8 90.2 119.9 151.1 Change (q-o-q) -47% 34% 202% 51.0% -43.8%Dividend (Rs) - - 3.0 3.0 3.0 Adj PAT margin 2.4% 2.6% 7.5% 10.0% 5.4%Actual o/s shares (mn) 3.9 3.9 3.9 3.9 3.9 Adj EPS 1.6 2.2 6.5 9.8 10.7
Note: All ratios are computed on Adj PAT
Source: Company, CRISIL Equities estimate
CRISIL Independent Equity Research Team
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