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HIMATSINGKA SEIDE LTD

10-Dec-12 Please refer to the disclaimer towards the end of the document P a g e | 1

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Himatsingka Seide Ltd. (HSL)

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Recommendation BUY Valuation & Recommendation Himatsingka Siede Ltd. (HSL) profitability got impacted in the last four years on account of delay in commissioning of new bed linen business at Hassan SEZ, acquisition of 80% stake in Divatex Home Fashions Inc., New York, in July 2007 (distribution company) at peak time, slow down in US economy, volatility in raw-material prices (raw silk and cotton) and long open derivative contracts. To combat the crisis, the company had introduced product mix changes, addition of new customers, enhancing focus on the brands, launching value added products and higher capacity utilization will lead growth in the sales and improvement in margins. The last leg of derivative contract also got closed in August 2012 which we believe will result into the stable financials going forward. The improvement in drapery and upholstery capacity utilization and improvement in distribution business will be the key driver of improvement in margin. We initiate coverage with a ‘BUY’ recommendation and a target of Rs. 54 per share (10xPE FY14E), an upside of 32%.

Investment Rationale Increase in capacity utilization will lead revenue growth without any

incremental capex: The installed capacity for silk business is 1.8mn square meters. However, this segment operated at very low utilization of 45% in FY12. The company will focus on improving the utilization, which would add revenue growth and margin expansion in the coming years without any fresh investment.

Financial Leverage set to improve: Company’s PBT/EBITDA ratio stood at 30%, implying higher financials leverage. As the company is looking to improve the utilization in the coming quarters without any incremental capex, which would result in strong jump in profitability. On the back of envelop calculation shows that a 10% jump in EBITDA should result in 33% jump in PBT. The company is also looking to deleveraging the balance sheet and therefore we believe the growth in PBT would be higher than 33%.

Operating margin to improve going forward: We have seen wild fluctuation in company’s key raw-material prices viz, cotton and raw silk which had impacted the operating margin in last few years. With the stable outlook for cotton and silk prices in near future the margins for the company is likely to improve.

Strong Distribution network in US to drive growth with improvement in US economy: HSL derives 80% of revenue from North America market with strong distribution network. Its performance got impacted with slowdown in US economy. The recent initiative by US fed for revival of housing market and improving retail sales will drive the revenue growth for the company.

Closure of derivative contract on August 2012 will lead to stable financials: HSL was carrying baggage of exotic currency derivative contracts

entered in the year 2007 and had paid big price of Rs. 70 crores in last five years. All the contracts got closed with last leg closing in August 2012. With this company will have more stable financials going forward.

CMP Rs. 41

Target Price Rs. 54

Sector Textiles

Stock Details

BSE Code 514043

NSE Code HIMATSEIDE

Bloomberg Code HSS IN

Market Cap (Rs cr) 402

Free Float (%) 46.3%

52- wk HI/Lo (Rs) 42/23

Avg. volume BSE (Quarterly) 44822

Face Value (Rs) 5

Dividend (FY 12) 10%

Shares o/s (Crs) 9.8

Relative Performance 1Mth 3Mth 1Yr

Himatsingka 4.1% 24.0% 7.5%

Sensex -0.6% 8.1% 7.1%

Shareholding Pattern 30th

Sep. 2012

Indian Promoters Holding Foreign Promoter Holding

53.7% 1.3%

Institutional (Incl. FII) 13.7%

Corporate Bodies 5.4%

Public & others 26%

Ruchita Maheshwari –Research Analyst (+91 22 3926 8023) [email protected]

Sunil Jain – HOR (Retail) [email protected] Year Consolidated

Net Sales (Rscr)

Growth (%)

EBITDA (Rs cr)

Margin (%)

APAT (Rs cr)

Margin (%)

EPS (Rs)

PE (x)

ROE (%)

FY11 1232.7 14.6% 87.1 7.1% -16.6 -1.3% -1.7 -25.6 -3.0%

FY12 1428.7 15.9% 144.7 10.1% 33.1 2.4% 3.4 11.9 6.2%

FY13E 1542.7 8.0% 159.4 10.3% 42.1 2.6% 4.3 10.0 6.9%

FY14E 1696.9 10.0% 179.6 10.6% 53.6 3.2% 5.4 7.4 8.7%

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Himatsingka

mailto:[email protected]


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Business Description Himatsingka Seide Limited (HSL) is a vertically integrated Home Textile major with a global footprint, engages in the manufacture, marketing, distribution, and retail of home furnishing fabrics in India, the North America, and Europe. The company provides decorative fabrics, such as fabrics for drapes and upholstery for home, as well as for contract and hospitality. In addition, the company manufactures spun and silk blended yarn products. The company commissioned green-field bed linen project at Hassan SEZ in 2007-08. As part of its forward integration initiative it acquired 70% stake in Giuseppe Bellora SpA, Italy and 80% stake in Divatex Home Fashions Inc., and 100% stake in DWI Holdings, New York, in 2007-08. The company used the distribution channel of Divatex, DWI and Bellora to sell its bed linen business. The distribution business is engaged in both the private label and branded space. The company also operates 14 retail stores, including 2 international stores at Dubai and Singapore under the ATMOSPHERE brand name. The company was incorporated in 1985 and is based in Bangalore, India. The Group operates two manufacturing facilities in India and four distribution businesses across North America, Europe and Asia. The Group is a major distributor of branded luxury home textile products in North America and Europe. It also offers private label home textile products to major retailers and is the second largest distributor of “Top of Bed” products in the United States. The portfolio of license brands includes Calvin Klein Home (currently the second largest selling bath and bedding brand sold through departmental stores in the United States), Barbara Barry, Peacock Alley (acquired last year), Bellora, Esprit, Waverly and ‘ATMOSPHERE’. With a portfolio of distribution companies in the Bed Linen business, the Company occupies a strategic foothold in the home textiles space in North America and Europe. Divatex Home Fashions Inc., USA, is the third largest distributor of Bed Linen products in the USA and gives

the Company deep inroads into the private label market. Divatex also has the license to market important brands such as Esprit and Waverly in certain stores in United States. In the current year, company has

increased its holding in Divatex from 80% to 90% with an investment of Rs. 48 crores. As per pre-agreement, HSL will buy additional 10% stake in Divatex for Rs. 48 crores in FY13E.

DWI Holdings Inc., USA, which possesses licenses of luxury home textile brands such as Calvin Klein Home and Barbara Barry Home and Peacock Alley, gives HSL access to the high end and branded segment of the bedding market in the USA.

Giuseppe Bellora S.p.A, Italy, has a significant share in the luxury market in Italy and gives HSL, a platform to expand business in the other markets of Europe and other geographies.

The Group is structured into two business verticals viz. Manufacturing (Drapery Upholstery and bed linen)Vertical

Distribution (North America, Europe, India and Asia)


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Group Structure

Source: Company PPT and Nirmal Bang Research

FY12 Geographical Break-up

Source: Company and Nirmal Bang Research

81.7%

11.4%

4.3% 2.6%

FY12 Geographical Break-up

North America Europe India Others


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Business Structure

Plant Location Operations / Model Installed Capacity Average Price Realization

(FY12)

HS: C & U Vertical - Manufacturing

Doddaballapur, Karnataka

Operates the largest Silk & Silk Blended manufacturing

facility in India

1.8 million meter per annum

Rs. 1050 – Rs 1125 per meter

HWPL: C & U Vertical – Retail – India /Asia

Operates 14 stores across India, UAE

and Singapore

Unique model with no inventory at Point of Sale (POS) and low inventory

obsolescence resulting in no “DISCOUNT SALES” since

inception

NA Retail Rs 2000 in India, Rs 2100 in UAE and Rs 2700

in Singapore

HL: Bed Linen Vertical - Manufacturing

Hassan SEZ, Karnataka

Vertically integrated facility equipped with warping, sizing,

weaving, continuous processing, yarn dyeing, sewing and captive co-generation capabilities

21 million meters of wide width

processed fabric translating into 3.5 million sheet sets

Rs 275 - 300 per meter

Bed Linen Vertical – Distribution,

North America through its

subsidiaries – DWI & Divatex

Branded and private label distribution space across the

United States, Canada & Mexico

NA NA

Bed Linen Vertical – Distribution,

Europe through its

subsidiary – Bellora

Foothold in Europe, with focus on the Italian market

NA NA

Source: Company PPT and Nirmal Bang Research

Investment Rationale

Increase in capacity utilization in Silk will lead revenue growth without any incremental capex

The installed capacity for silk business is 1.8mn square meters. However, this segment operated at very low utilization of 45% in FY12. The silk business had an average EBITDA margin of 35% to 38% during 2004-2007. In 2007, the company had commissioned a bed linen project until that time silk was the only contributor with high operating margin. With slowdown in the developed economy the margin in silk business deteriorated to 21%-22% in FY12. Himatsingka had been marred by the economic slowdown in Europe and Americas, resulting in the loss of revenue from FY09 to FY12. Sky-rocketing raw-material prices have adversely impacted margins of the company during the same period.

The EBITDA margin in the silk business is set to improve from the current 21%-22% to 25-30% in the next two years time due to the stabilization in the raw-material prices and improvement in capacity utilization. We feel that with the improvement in the revenue contribution and EBITDA margin, the company will register a good growth in the top-line and bottom-line going forward. The revenue of the silk business is highly dependent on USA and Europe. The export sales of the company got impacted during 2008 and 2009 as retail sale was at bottom in US. For the past couple of quarters, the retail Sales in US is showing improvement which in our view will be positive for Himatsingka. If we look at the graph on the next page, it seems that the retail sales in USA is registering growth and any spurt in the retail sales growth can translate into good demand for Himatsingka.


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US Retail Sales

Source: Bloomberg and Nirmal Bang Research

Demand for home textile is directly linked to housing sales which was another major victim of slowdown in US. The housing sales which declined post crisis have not yet peaked up much. But with the recent initiation of Fed in US where it has announced mortgage bond buying in last Quantitative Easing 3 (QE) is directly impacting housing market. We feel this initiation will improve housing sales in US and in turn demand for HSL product. US Existing Home Sales (mn)



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The capacity utilization in silk was 45% in FY12. To factor in the slower improvement, we have assumed on conservative basis will report Rs. 128 crores sales in FY13E and Rs. 157 crores in FY14E in the silk business. We have assumed 50% and 60% capacity utilization for FY13E and FY14E respectively. Management has guided to report Rs. 175 crores revenue in the next two to three years time. Management had diversified in Bed linen business in 2008 where it has set-up a green-field bed linen plant with the capacity of 22mn meters per annum. The current capacity utilization is 80% and the management expects to maintain

the same level. The management expects to improve EBITDA margin from 13% to 16% in the next two-three years on the account of cost control and improving realization. We feel that with the judicious product mix and improvement in the capacity utilization of silk will lead to the growth in the top-line and improvement in operating margin going forward.

Financial Leverage set to improve Company’s PBT/EBITDA ratio stood at 30%, implying higher financials leverage. As the company is looking to improve the utilization in the coming quarters without any incremental capex, which would result in strong jump in profitability. On the back of envelop calculation shows that a 10% jump in EBITDA should result in 33% jump in PBT. The company is also looking to deleveraging the balance sheet and therefore we believe the growth in PBT would be much higher than 33%. Financial Leverage

Year PBT Growth% EBITDA Growth% PBT/EBITDA

FY07 70.0 55.9 125.1%

FY08 -21.6 29.2

FY09 -77.9 7.0

FY10 11.5 98.9 11.6%

FY11 -14.0 87.1

FY12 44.8 144.7 30.9%

FY13E 51.6 15.2% 159.4 10.2% 32.4%

FY14E 70.0 35.7% 179.6 12.7% 39.0%

Source: Company and Nirmal Bang Research

Operating margin to improve going forward

HSL was only in silk business before 2007 which was high margin business. In 2007, company diversified in bed linen business. The margin came off substantially from 30% before 2007 to less in 10% in next 3-4 years. The decline in margin was on account of, a) Bed linen business is lower margin business, b) the new bed linen plant took time to stabilize leading to higher operating and fixed cost, c)slowdown in key market of US and Europe, d) high fluctuation in company raw-material prices viz, silk and cotton during last 2-3 years. Now bed linen plant has stabilize and operating at 80% capacity utilization. US market has shown some sign of improvement and will be the main trigger for improvement in performance of HSL. The raw-material cost both silk and cotton has shown some sign of stability in prices in recent past and are expected to remain stable.


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Even to counter the negative impact of rise in raw-material prices specifically silk, the management has introduced innovation in the product category and enlarges its product offering. With the innovation in the product formation the company has been able to negate the impact of rise in raw-material prices. Even the raw silk prices which increased from $23-24 to over $60 have now stabilize around $48-50. The other major raw-material also saw unusual boom in the year 2010-11 as international cotton prices (Cotlook A index) increased from 194.18 cents/kg in April 2010 to 506.34 cents/kg in Mar 2011 and the domestic prices for S-6 variety of cotton increased from Rs. 28277/candy in April 2010 to Rs 59700/candy in Mar 2011. International prices for Cotton

Source: ICE Exchange and Nirmal Bang Research

India Wholesale Price Index Raw Cotton


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Unusual rise in prices in 2010-11

Prices are trending to stabilize


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Boosted by the high prices and profits from cotton in 2010-11, farmers in India have gone in to produce a record crop of cotton in 2011-12. But the demand for cotton from China seems to be slowing down (which is a ripple effect of dwindling demand in Euro-zone and the US). This is leading to declining international prices, adversely affecting domestic prices and profits of cotton farmers, especially compared to 2010-11. The prices in 2011-12 settled down towards their trend price. As per the International Cotton Advisory Committee (ICAC) report, the cotton production in the world is expected to be about 256.3 lakh tons in 2012-13, which is 6% less than previous year and consumption is expected to be about 234.6 lakh tons. Besides, a record of 139.7 lakh tons was the ending stock of the last year 2011-12 at world level which will lead to a further large ending stock at the end of this year to about 161.4 lakh tons. The large inventory will keep the cotton prices under check. During the current year cotton sowing in India is estimated about 116 lakh ha and production is expected to be 5% lower than last year at about 334 lakh bales. However, the cotton price is expected to remain stable due to large stock pile in China and at world level. This may result in low export of Indian cotton to about 75 lakh bales as against 127 lakh bales during last year. With the large stock pile in India, the prices are expected to remain stable going forward. We believe that with the raw-material prices stabilizing and improving scenario in the USA and Europe, the operating margin is set to improve to 10.3% in FY13E and 10.6% in FY14E from 10.1% in FY12.

Strong Distribution network in US to drive growth with improvement in US economy HSL derives 80% of revenue from North America market with strong distribution network. Its performance got impacted with slowdown in US economy. The recent initiative by US fed for revival of housing market and improving retail sales will drive the revenue growth for the company. The company enjoys strong global distribution where it has distribution Entities – Divatex, DWI, Bellora & HWPL spread across North America, Europe & Asia. The company has 5000 - 6000 POS (Point of Sales) including 200 Shop-in-Shops, 300 Multi Brand Outlets, 200 Wholesale Points, and 44 Company Owned & Franchised Stores. The company also equipped with over 600,000 sq. ft of warehousing facilities across North America, Europe & India. We believe that the distribution portfolio is well balanced between the branded & the private label portfolio which is in sync with the shop floor configuration of the manufacturing entity. We also believe that with the strong global distribution reach, strong branded and private labels in the portfolio plus the improving scenario in USA and Europe, the performance of the company will improve from here on.

Closure of derivative contract on August 2012 will lead to stable financials

The Company is exposed to currency fluctuations on foreign currency assets and cash flows denominated in foreign currency.

During 2007-08, apart from forward contracts, the Company, entered into three exotic foreign exchange derivative contracts. Himatsingka had entered into the derivatives contract with the counterparty in July 2007 to manage its euro and US dollar currency risk. The Company entered into a contract with a bank to sell US Dollars on a monthly basis at a fixed premium over the market rate subject to certain conditions. The contract obligates the Company to pay premium on a notional amount of Euro 20 million, if the EUR/USD is above a specified level on any of settlement dates. The contract also provides for a “Knock Out” option if the EUR/USD trades at or below a specified level. “A knock out event occurs when a currency breaches the specified price level upon which the contract is based.”


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a) The first contract got closed in 2008. the company had filed a suit against the counter party with which it had entered into a derivative contract, that such a contract was void ab initio and not binding on the Company. During the year, the Company paid Rs. 8.5 crores to HDFC bank.

b) In respect to second contract, the company had paid Rs. 54 crores to HSBC Bank. The contract got closed in July 2009.

c) The company entered into a foreign exchange derivative contract with a bank with duration of 60 months, to sell US Dollars on a monthly basis at fixed rate subject to certain conditions. The contract also obligates the Company to pay a notional amount of Swiss Franc and receive notional amount of Rupees based on the Swiss Franc to US Dollar exchange rates during a specified monitoring period in the year 2012. The last contract also got closed in August 2012. The company continues to hedge foreign-currency exposure through forward-exchange contracts. The company has no other exotic derivative contracts.

Company does not have any open derivative contract which in our view will provide stable financials in the coming quarters and improve profitability of the company.

Increase in number of stores of ‘ATMOSPHERE’ to drive top-line growth ‘ATMOSPHERE’ is India’s first luxury Home Textile brand. With an exclusive collection of over 2500 products, the brand offers the most comprehensive range of luxury Drapery and Upholstery fabrics for its customers. Atmosphere fabrics are exclusive and unique as they are designed by the parent company -Himatsingka Seide - in their own studios in New York and Bangalore. Fabrics are manufactured in-house in one of the world’s most advanced facilities of its kind. Atmosphere undertakes projects and customization orders with both residential and institutional applications. The company is planning to increase the number of stores of Atmosphere from the current 14 (12 in India, one in Dubai

and one in Singapore) to 40 stores in the next three years with an investment of Rs. 25 crores. The company expects to open majority of stores in India and couple of stores in Middle East and South East Asia. The uniqueness which sets Atmosphere from other retail distribution is that unlike other retail distribution, the company carries minimal inventory in the retail showroom. This means, if the customer makes an order, the company directly send it from the centralized warehouse. The company does not keep any inventory at Point of Sales (POS) and therefore has low inventory obsolescence and had far no “Discount Sales” since inception. The manpower requirement to run this model is also optimal. The increase in number of stores will provide strong retail network to capitalize on the rising consumer demand for luxury home furnishing products in India, South East Asia and the Middle East. We feel that, the increase in number of stores will result into the higher brand visibility and increase in market presence. Sales from ATMOSPHERE retail chain is likely to improve from Rs. 49 crores in FY12 to Rs. 55 crores in FY14E.


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Gross Debt to reduce from FY14E, improve the balance sheet Company has a gross debt of Rs. 698.4 crores in FY12. According to the management, the gross debt will come down as the company will do re-payment going forward. With no incremental capex and increase in capacity utilization, the financial leverage will improve. With the increase in Free Cash Flow, the company will be able to re-pay debt and the D/E ratio which was 1.2x in FY12 will come down to 1.1x in FY13E and will further decline to the manageable level of 0.9x in FY14E. We believe that the reduction in debt will improve the financial health of the balance sheet going forward.

Strong Brands and Clientele base

The Group has a strong portfolio of licensed brands represented by Calvein Klein, Barbara Barry, Bellora, Esprit, Peacock Alley (acquired last year). Portfolio comprises of mature brands with high recall. We believe that the strong brands enhance pricing power & distribution reach as they provide longer shelf life & stronger foothold in the market place. Other than its licensed brands, the group caters to strongest brands & retailers in the Home Textile space through private label. HSL supply products to 19 out of the Top 30 Retailing Giants in US. With revival of US economy, improvement in US retail and home sale and HSL strong presence though both licensed brand and private labels, company will be able to improve its sales in US.

Financial Analysis

To combat the recent crisis (jump in raw-material prices, financial turmoil in USA and Europe and subdued demand in the premium segment), the company had introduced product mix changes, addition of new customers, enhancing focus on the brands, launching value added products and stable raw-material prices will lead growth in the sales. To streamline its financial earnings, the derivative contract also got closed in August 2012 which we believe will result into the stable financials going forward. With the series of initiatives taken by the company, we expect the Net Sales to grow by 9% CAGR over FY12 to FY14E.

Source: Company & Nirmal Bang Research

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FY10 FY11 FY12 FY13E FY14E

Net Sales and Growth%

Net Sales Growth%


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The company used to enjoy EBITDA margin as high as 30% in FY08 due to high contribution from the silk business as the segment commands high operating margin. But the operating margin fell to in the range of 7% to 10% with the start of the bed-linen business as the segment has low operating margin. The operating margin was further negatively impacted due to rise in raw-material prices in silk and cotton; and b) financial turmoil US and Europe in 2008 led the decline in revenue. We feel that the operating margin will improve by 20bps to 10.3% in FY13E and by 30bps in FY14E to 10.6%. We expect EBITDA to grow by 10.2% to Rs. 159.4 crores in FY13E and by 12.7% to Rs. 179.6 crores in FY14E. The higher leverage and reduction in debt will help PAT to grow by 24.2% to Rs. 42.1 crores in FY13E and by 33.1% to Rs. 53.6 crores in FY14E.

Q2FY13 Financial Analysis Particulars Q2FY13 Q2FY12 YoY% Q1FY13 QoQ(%)

Net Sales 459.14 360.96 27.2% 375.14 22.4%

Other Operating Income 13.52 5.44 148.5% 7.31 85.0%

Total Income 472.66 366.40 29.0% 382.45 23.6%

Raw Material Consumed 89.86 117.74 -23.7% 119.49 -24.8%

Stock Adjustment 36.37 -27.76 -40.88

Purchases of stock in trade 189.33 142.4 33.0% 164.44 15.1%

Employee Expenses 40.26 36.22 11.2% 41.33 -2.6%

Other Expenses 65.66 56.14 17.0% 61.48 6.8%

Foreign Exchange 9.38 3.91 139.9% -2.15 -536.3%

TOTAL EXPENDITURE 430.86 328.65 31.1% 343.71 25.4%

EBITDA 41.80 37.75 10.7% 38.74 7.9%

Interest 16.64 13.12 26.8% 16.34 1.8%

Other Income 0.98 0.36 172.2% 0.83 18.1%

EBDT 26.14 24.99 4.6% 23.23 12.5%

Depreciation 13.49 13.92 -3.1% 13.59 -0.7%

Exceptional Gain/Loss 2.12 1.9 11.6% 1.44 47.2%

PBT 14.77 12.97 13.9% 11.08 33.3%

Tax 4.33 2.27 90.7% 2.12 104.2%

Reported Profit After Tax 10.44 10.70 -2.4% 8.96 16.5%

Minority Interest -1.04 0.44 -1.44

Adjusted Profit After Extra-ordinary item 11.48 10.26 11.9% 10.40 10.4%

EPS (Unit Curr.) 1.17 1.04 1.06

Equity 49.23 49.23 49.23

EBITDA(%) 9.1% 10.5% 10.3%

PBT(%) 3.2% 3.6% 3.0%

PAT(%) 2.3% 3.0% 2.4% Source: Company and Nirmal Bang Research

9.2%

7.1%

10.1% 10.3% 10.6%

1.1%

-1.3%

2.3% 2.7% 3.2%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-50

0

50

100

150

200

FY10 FY11 FY12 FY13E FY14E

EBITDA, PAT and Margins

EBITDA PAT EBITDA% PAT%


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Analysis:

HSL, consolidated net sales stood at Rs. 472.66 crores in Q2FY13, up by 29% YoY on account of improved capacity utilization and efficient North American (includes US, Canada and Mexico) distribution business which grew by 32% YoY.

EBITDA was up by 10.7% YoY to Rs. 41.8 crores as against Rs. 37.75 crores. The EBITDA margin was down by 140bps YoY and by 120bs QoQ mainly on account of foreign exchange fluctuations.

The company reported a PAT of Rs. 11.48 crores in Q2FY13 as against Rs. 10.26 crores in Q2FY12, up by 11.9%. Exceptional item of Rs. 2.12 crores represents gain on account of foreign exchange derivative contract which has been fully settled in August 2012.

The interest cost was up by 26.8% YoY to Rs. 16.64 crores in Q2FY13 on account of appreciation of dollar against rupee.

The manufacturing order books for the bedding division stands at around Rs. 239 crores and order book for upholstery and drapery side of the business stood at Rs. 24 crores.

The company has a forex exposure at an average rate of Rs. 55 for the next two quarters. During the quarter, the company had acquired additional 10% stake in Divatex Home Fashions taking the total

shareholding to 90% at a price of Rs. 48 crores.

One Year Forward PE Band


-100

-50

0

50

100

150

200

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

PE Band

Price PER-5 PER-10 PER-15 PER-20 PER-25


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Valuation & Recommendation HSL was only in silk business before 2007 which was high operating margin to the tune of 35% to 38%. In 2007, the company diversified in the bed linen business which was low operating margin. The operating margin fell off substantially to less than 10% in next 3-4 years. The decline in margin was on account of, a) Bed linen business is lower margin business, b) the new bed linen plant took time to stabilize leading to higher operating and fixed cost, c) slowdown in key market of US and Europe, d) high fluctuation in company raw-material prices viz, silk and cotton during last 2-3 years. The bed linen business has stabilized and is currently operating at 80% capacity utilization. The US market has shown some sign of improvement where the housing sales has shown spurt in the growth on account of the initiation by FED where it has announced mortgage bond buying in last QE3, which will directly impact the housing market. As demand for home textile is directly linked to housing sales, any jump in the housing sale will in turn improve the demand for HSL product. Post 2007, the silk business was marred by the significant jump in silk prices and slowdown in US and Europe. This has deteriorated the high margin business of +35% to around 22%. We feel that the EBITDA margin in silk business is set to improve to +25% in the next two years time due to the stabilization in the raw-material prices and improvement in capacity utilization from the current 45% in FY12 to 50% in FY13E and 60% in FY14E. We are also of the view that the financial leverage will improve going forward on the account of improvement in capacity utilization without any incremental capex which would result in strong jump in profitability. We estimate net revenues and net profits to post at CAGR of 9% and 26.8% over 2012-14, respectively. At the CMP of Rs. 41, HSL trades at P/E of 10x and 7.4x for FY13E and FY14E respectively. The EV/EBITDA stood at 6.5x FY13E and 5.4x FY14E. We initiate coverage on Himatsingka Seide Ltd. with a “BUY” rating based on a 12-month price target of Rs. 54 per share (10x PE FY14E), an upside of 32%.

Risks & Concerns Exchange risk: HSL owns assets, incurs liabilities, earns revenues and pays expenses in currencies other than

the Indian Rupee. Therefore, fluctuations in the exchange rates may have an adverse effect on the business results and financial position which in turn will impact our estimates.

Increase in Raw material prices: Any sharp up movement in prices of silk and cotton will erode margins for the

company and impact our estimates. Prolong financial turmoil in USA and Europe: The company’s business is predominantly export oriented and

82% of consolidated revenue comes from North America. The continuation of financial turmoil in these regions will impact the revenue of the company which will in turn adversely impact our estimates for the company.


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22 Consolidated Financials

Profitability (Rs. In Cr) FY11 FY12 FY13E FY14E Balance Sheet (Rs. In Cr) FY11 FY12 FY13E FY14E

Y/E - March Share Capital 49.2 49.2 49.2 49.2

Revenues - Net 1232.7 1428.7 1542.7 1696.9 Reserves & Surplus 473.7 519.2 555.5 601.7

% change 14.6% 15.9% 8.0% 10.0% Net Worth 523.0 568.5 604.7 650.9

EBITDA 87.1 144.7 159.4 179.6 Total Loans 744.6 698.4 675.4 600.4

% change -11.9% 66.2% 10.2% 12.7% Minority Interest 0.6 0.3 -1.6 -0.6

Interest 52.6 52.8 58.4 54.2 Net Deferred Tax Assets 2.3 11.2 11.2 11.2

Other Income 8.0 2.9 3.1 3.3 Total Liabilities 1270.5 1278.3 1289.7 1261.9

EBDT 42.5 94.8 104.1 128.7 Net Fixed Assets 548.1 487.2 455.0 411.3

Depreciation 56.5 55.6 56.1 58.7 Investments 10.0 13.0 13.0 13.0

Extraordinary/Exceptional 0.0 -5.5 -3.6 0.0 CWIP 6.5 8.9 0.0 0.0

PBT -14.0 44.8 51.6 70.0 Goodwill 384.5 431.3 527.3 527.3

Tax 1.8 10.8 11.4 15.4 Inventories 383.9 427.0 429.1 455.7

PAT before Minorit Interest -15.8 33.9 40.3 54.6 Sundry Debtors 70.5 81.7 82.4 88.4

Minority Interest 0.8 0.9 -1.9 1.0 Cash & Bank 10.0 8.4 3.2 5.3

PAT -16.6 33.1 42.1 53.6 Loans & Advances 74.1 85.3 86.7 97.7

Shares o/s ( No. in Cr.)* 9.8 9.8 9.8 9.8 C A L&A 538.5 602.5 601.4 647.1

EPS -1.7 3.4 4.3 5.4 CL & P 217.2 264.5 307.0 336.8

Cash EPS 4.1 9.1 9.8 11.5 Working Capital 321.3 337.9 294.4 310.2

DPS (Rs.) 0.0 1.0 1.2 1.5 Total Assets 1270.5 1278.3 1289.7 1261.9

Quarterly (Rs. In Cr) Dec.11 Mar.12 June.12 Sep.12 Cash Flow (Rs. In Cr) FY11 FY12 FY13E FY14E

Revenue including OI 401.2 334.8 382.5 472.7 Operating

EBITDA 41.7 36.8 38.7 41.8 Profit Before Tax -14.0 44.8 51.6 70.0

Interest 12.7 18.1 16.3 16.6 Direct Taxes paid -1.5 -6.7 -11.4 -15.4

EBDT 29.0 18.8 22.4 25.2 Depreciation 56.5 55.6 56.1 58.7

Dep 14.2 13.6 13.6 13.5 Change in WC 36.7 -18.3 38.4 -13.8

Other Inc. 0.6 0.1 0.8 1.0 Interest Expenses 52.5 52.8 58.4 54.2

Exceptional 0.0 -2.1 1.4 2.1 Other Operating Activities -1.5 -10.3 -3.1 -3.3

PBT 15.5 3.2 11.1 14.8 CF from Operation 128.6 117.8 190.0 150.4

Tax 3.8 1.4 2.1 4.3 Investment

PAT from ordinary activities 11.7 1.8 9.0 10.4 Capex -23.1 -18.9 -15.0 -15.0

Minority Interest 0.5 -0.3 -1.4 -1.0 Other Investment 2.3 34.8 -96.0 0.0

PAT 11.2 2.0 10.4 11.5 Interest Received 0.5 0.1 3.1 3.3

EPS (Rs.) 1.1 0.2 1.1 1.2 Total Investment -20.3 15.9 -107.9 -11.7

Operational Ratio FY11 FY12 FY13E FY14E Free Cash Flow 108.3 133.7 82.1 138.7

EBITDA margin (%) 7.1% 10.1% 10.3% 10.6% Financing

PAT margin (%) -1.3% 2.3% 2.7% 3.2% Proceeds of borrowing 16.1 86.6 0.0 0.0

PAT Growth (%) -270.5% -309.5% 24.2% 33.1% Repayment of borrowings -66.5 -168.8 -23.0 -75.0

Price Earnings (x) -25.6 11.9 10.0 7.4 Subsidy / Subvention received 14.5 22.8 14.5 14.5

Book Value (Rs.) 53.1 57.7 61.4 66.1 Dividend (incl. tax) paid -7.6 -2.1 -5.9 -7.4

ROCE (%) 3.0% 7.3% 8.4% 9.8% Proposed share issue exp. -0.8 0.0 0.0 0.0

RONW (%) -3.0% 6.2% 6.9% 8.7% Interest Expenses -69.4 -71.4 -72.9 -68.7

Debt Equity Ratio 1.4 1.2 1.1 0.9 Cash Flow from Financing Activities -113.7 -132.8 -87.3 -136.6

Price / Book Value (x) 0.8 0.7 0.7 0.6 Net Cash Flow -5.4 0.9 -5.1 2.1

EV / Sales 0.9 0.8 0.7 0.6 Beginning Cash Flow 17.8 10.0 8.4 3.2

EV / EBIDTA 11.9 7.3 6.5 5.4 Add: Deposits in Banks -2.5 -2.8 0.0 0.0

Add: Foreign Currency in Hand 0.0 0.0 0.0 0.0

Cash as reported in Balance Sheet 10.0 8.1 3.2 5.3



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Disclaimer:

This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information,

analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources

believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents

Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or

employees shall not in any way be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and

all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as

an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to

time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or

perform investment banking or other services for any company mentioned in this document.

Nirmal Bang Research (Division of Nirmal Bang Securities PVT LTD)

B-2, 301/302, Marathon Innova,

Nr. Peninsula Corporate Park

Lower Parel (W), Mumbai-400013

Board No. : 91 22 3926 8000/8001

Fax : 022 3926 8010

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