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[mehak1]

In line with our expectations, Alok Industries posted strong results for Q3FY08, supported by capacity expansions completed in the past few quarters. During the quarter, the company’s PAT grew by 31% due to moderate topline growth and improving margins. Operating margins, at 24.5%, were significantly higher than our expectations. With its phase III and the phase IV expansion underway, Alok Industries has completed a large part of its planned capex. As a result, we expect the company to continue recording exponential growth in revenues and profits over the next two years. The fabric, home textile, and garment divisions would continue to be the key growth drivers.
Alok Industries continues to be one of the cheapest pick in the textile sector, trading at 6.5X our FY08 EPS estimates. The valuations do not factor in the company’s recent foray into the
real estate space through Alok Infrastructure, its 100% subsidiary.

1. Moderate topline growth mainly driven by its fabrics
segment:
During Q3FY08, Alok Industries reported a 15% growth in topline, mainly led by the apparel fabric, home textiles, and yarn segments. Knitted fabrics (7% of revenues) saw a huge jump of 67% in revenues. The revenues of the woven fabrics segment, however, dropped marginally as the company cut down on lowmargin products and grey fabrics. The yarn spinning capacity commissioned during the quarter also contributed to around 17% of the turnover during Q3FY08.

2. Operating margins improve significantly:
Alok Industries’ operating margins saw a jump of 200bps, exceeding our expectations. This was mainly on account of higher realisations in most segments. The average realisations of woven fabrics increased by 14% YoY with the mix shifting towards processed and value added products. Besides, the backward integration to production of yarn also supported the increase in operating margins.

3. Despite higher depreciation on account of the new capacities coming on stream, the company’s PAT grew by 31%; this was due to the increase in operating margins.

4. Strengthening presence in domestic markets:
Alok Industries continues to expand its retail chains in the domestic market. The company plans to increase its stores from the current 18 to 40 by the end of FY08. The revenues from the retail segment grew 167% to Rs15.7 mn during the quarter.

5. Expansions on track; Phase IV expansions to commence shortly:
Alok Industries has completed a large part of its Phase III expansion, the benefits of which are already visible in the strong topline growth and increasing operating margins during the last few quarters. Phase IV expansion, which encompasses further expansion of apparel fabrics, home textiles, and made-ups, would be completed by FY09E. With large scale integrated operations, Alok Industries has been consistently delivering on its capex plans. We expect these capacity additions to further drive the company’s growth over the next two years.

6. One the cheapest stocks in the textile sector:
Alok Industries remains one of the cheapest stocks in the textile sector, trading at 6.5X our FY08 EPS estimates (on a fully diluted basis). The completion of a major part of the capex plan and strong results for the quarter, indicate robust growth in the coming quarters and provide better visibility to our estimates.

Report card

PE ratio          6.92   27/02/08
EPS (Rs)          10.29   Mar, 07
Sales (Rs crore)       550.78   Dec, 07
Face Value (Rs)          10   
Net profit margin (%)  8.77   Mar, 07
Last dividend (%)        14      01/08/07
Return on average equity 16.02   Mar, 07