Textile Stocks offering value?


The whole textile sector has witnessed a strong performance in last 1 year and the last quarter numbers were exceptional. Yet most of the stocks are languishing and available at low PE multiples. Yes, it could be a value trap if the textile cycle turns towards bad but there are several long term positives going on for the sector and the medium term looks bright, for eg: Appreciation of Yuan is making Indian Textile much more competitive than before.

Ideal way to bet on this sector is to choose few stocks which offer decent margin of safety and invest for medium term. Few ideas which we like are:

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Sunflag Iron – Update & Ideas

A Blog of Value Investing

We had discussed about Sunflag Iron and provided an update earlier. At that time the company had been posting substantial improvement in operating margins and hence much better net profits and it seemed that the improved was because of the backward integration the company had been doing over last 2-3 years. But since last 2 quarterly results, the margins have taken a hit and so have net profits.

As the whole midcap space has undergone a strong correction in last 3 months, there are several other interesting ideas available at good valuations. One may consider switching out from Sunflag Iron into new ideas.

Some new ideas on which we are researching are:

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Welspun Syntex

Welspun Syntex Ltd (WSL) is part of the reputed B K Goenka group (Welspun Gujarat). WSL is one of the largest exporters of Polyster Textured Filament Yarn from India. The company has two plants located at – Silvassa and Palghar, Thane.

Interesting points to note are:

  1. The company is doing a turnover of approx 400 Cr while the Mcap is just 35 Cr.
  2. The company is profitable and posted an Operating profit of 27.12 Cr and NP of 7.13 Cr in FY 2010.
  3. The company has restructured itself well over the years. The company had reduced the equity capital by 3/4th to make the Balance Sheet stronger in 2008.
  4. Now the company is trying to reduce debt .
  5. Company has a huge gross block of almost 300 Cr with an accumulated depreciation of almost 200 Cr.

Interestingly as the company has high turnover and comfortable debt position now, they can spend more on the modernisation and technology front to improve the operating margins of the company which are just 7-8% as compared to 12-13% of JBF Ltd. If done, it will have a huge positive effect on the fortune of this company.

Hidden trigger is that most of the equity is held by Promoters and Financial Institutions. Promoter’s holding is 37.69% & FIs holding is – IFCI 33.62%, IDBI Bank 6.19% and LIC 1.59%. Change of hands could be a major trigger in the stock.

Valuation @ Rs 15:

  • M Cap to Sales ratio is just .08 times.
  • Book Value = 21.60
  • TTM PE = 5

We view this small cap stock idea as an interesting long term turnaround story where the possibilities of value addition are huge.