Company Background:
SEL Manufacturing Company Limited is a vertically integrated textile company that manufactures and exports cotton yarn, combed yarn, knitted fabrics and knitted garments. The Company has production facilities located in Ludhiana in Punjab and Baddi in Himachal Pradesh, India. It manufactures and exports all types of knitted garments and its main products include t-shirts, polo shirts, sweat shirts, boxer shorts and girls top.
The Company operates in four segments: readymade garments, texturized yarn, knitted cloth and cotton yarn. The Company is a 99% partner in the partnership firms, M/s SE Exports and M/s Kudu Industries. During the fiscal year ended March 31, 2008, the Company increased its stake to 99% in M/s Kudu Industries. In July 2009, the Company acquired a majority stake in SEL Textiles Pvt Ltd, thereby making it a subsidiary.
Analyzing Results
Company's income and profit has been almost doubling for past 2 years. Net profit had increased 100% in 2008 compared to 2007. In year 2009, despite of slowdown, profit increased 25% (44.85 Crores in F.Y. 2008 and 54.78 Crores in F.Y. 2009)
This growth looks attractive looking at the income and profits, so let's have a look at one of the very important factor responsible for deciding valuations of any stock. EPS. Earnings per share.
2007 : 24.04
2008 : 29.48
2009 : 31.91
EPS is increasing but at the same time equity base is also increasing. Equity base meaning number of shares issued in markets. So Earnings Per Share with respect to profits does not translates into growth similar to profit or earnings growth.
Promoters shareholding also stands at healthy 55.73%.
In last week company has acquired majority stake in SEL Textiles Pvt. Limited, thereby making it a subsidiary.
With the aforesaid acquisition of stake in SEL Textiles Pvt. Limited, the consolidated manufacturing facilities (i. e in Spinning) of SEL Manufacturing Company Limited, including the capacities under implementation under its expansion plans, would increase upto approximate 1.75 Lakh spindles + 1632 rotors for open ended spinning.
The only worrying factor is - SEL Manufacturing has large debt in it's balance sheet. And it is increasing year by year. The interest cost is eating out sizeable pie of profits thereby reducing EPS.
Total Debt:
Mar. 06 : 42.99 Crores
Mar. 07 : 136.94 Croes
Mar. 08 : 325.83 Crores
I could not get access to balance sheet of company for year 2009. So not sure how much debt company has in this year's balance sheet.
Verdict:
Textile as a sector has been in prolonged downturn for past year. Company had growth of ~10% in it's EPS. It is trading at P/E ratio of 2.10. Industry woide P/E ratio for textiles is around 9. I believe the stock did not get re-rated in recent stock market rally because of it's increasing DEBT and overall performance of textile sector.
Even if it manages to keep the same growth rate in EPS for FY 2010, EPS could be around 35. Forward P/E would come below 2 at CMP. From these calculations, stock valuations look much cheaper but stock would get re-rated only if company manages to pay off the DEBT and get rid of huge loans. If you consider the debt amount of 325 Crores, how would the company pay back such huge amount? From profits. To pay off loans of Rs. 325 Crores (this amount could be bigger in this year's balance sheet), SEL Manufacturing will need many years and till that time interest cost and loan repayment would eat out major share of profits.
If one believes in company and business, and is ready to wait for few years, and if company successfully repays it's debts, there are chances that stock could prove multibagger. For short or mid tearm, stock could give 15 - 20% returns. I do not think stock would be able to touch it's highs soon.
Market Cap 115.27
* EPS (TTM) 31.91
* P/E 2.10
* P/C 1.60
* Book Value 159.63
* Price/Book 0.42
Div(%) 10.00
Div Yield(%) 1.49
Market Lot 1.00
Face Value 10.00
Industry P/E 9.83
