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Shanthi Venkataraman

INVESTORS can consider exposure to the stock of Alok Industries. Bright prospects on the export front, capacity expansion that would support volumes growth and a thrust on such high-value products as bed linen and terry towels (home textiles) are likely to provide a stimulus to earnings growth.

The stock, which trades at about 10 times its expected FY-05 earnings per share, is attractively valued. The FY-05 earnings are likely to be tempered by the substantial expansion in equity over the past year. With capacity expansion still underway, revenue and earnings growth over the next couple of quarters is also likely to be moderate.

Over the long term, however, with substantial capacities to drive economies of scale and a presence across the value chain, Alok Industries is likely to emerge a preferred vendor to international players.

It is one of the few organised players in the weaving and processing segment. It is now shifting focus to home textiles, a segment that has attracted considerable international demand. Home textiles command better margins and are relatively less fashion-sensitive vis-à-vis garments.

While home textiles accounted for only about 5 per cent of FY-04 sales, the thrust in the segment appears to have helped Alok Industries spread to the export market. Exports, which accounted for about 10 per cent of sales in FY-04, now account for about 25 per cent of its nine-month sales. Robust demand from domestic manufacturers has kept its fabric business buoyant. Exports, however, are likely to contribute a greater share of revenues, with home textiles acting as the main driver.

The company now plans an entry into the terry towels market, where established exporters such as Welspun India and Abhishek Industries are likely to provide competition. Should it meet the buyers' quality and pricing parameters, Alok Industries could step in as an alternative supplier, as there are but a few vendors with large capacity in this segment. Terry towels would also help broaden the range of its offerings.

Alok Industries is aggressively ramping up capacity across segments, from weaving to terry towels. Planned over two phases, the projects are expected to be completed over the next one/two years at an estimated cost of about Rs 1,000 crore.

The company has made several preferential allotments over the past year, which have been used to retire high-cost debt and fund expansion. The debt is still high, though the interest outgo is low, as the company is able to source funds at low interest rates.

The close- to-50 per cent expansion in equity over the previous year's level is a cause for concern. The revenue and earnings growth that would kick in once the additional capacities are commissioned should compensate for the equity expansion.

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