A Good Bedtime Story

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The kind of macroeconomic data we have been receiving recently indicates towards a revival of global economy. The consumer confidence index is improving and private consumption has increased in the developed markets. In the meantime, while the indirect impact of the same is visible in our equity markets, there are certain direct beneficiaries too. Himatsingka Seide Limited (HSL), which is into the manufacturing and distribution of silk fabric as well as bed linen and earns more than 90 per cent of revenues from exports, is one of them. In FY09, HSL witnessed a downturn on account of the economic slowdown, which impacted its exports. In addition, the forex losses cut into its bottomline. But with the global economy back on track, the worst seems to be behind now and there are certain factors that support putting a ‘buy’ for HSL.

The most important factor is the company’s strong financial performance for H1FY10. The other compelling factors include good improvement on the margin front, revival in the US and UK economy (these being important markets for the company), stability at its Hassan plant and last but not the least, the expected cost-saving on account of its recently commissioned captive power plant. HSL is into the manufacturing and distribution of bed linen and silk fabric and its exports contribute up to 96 per cent of the total revenue. HSL owns three distribution companies in the US, viz. Divatex, DWI and Bellora. This works as an integrated business model.

But as mentioned earlier, the unprecedented economic slowdown witnessed the world over coupled with extreme volatility in financial and foreign exchange markets impacted the company’s performance. Its key markets in North America and Western Europe reacted unfavourably to these adverse economic conditions. Further, its financial performance for FY09 was affected by a loss of Rs 43 crore attributable to provisioning on account of foreign exchange derivative contracts. Further, a loss of Rs 18 crore was incurred on account of foreign exchange realisation and a loss of Rs 15 crore was inflicted on account of the stabilisation of the bed linen plant in the first half of the financial year.

However, with the turnaround in the world markets, the performance of the company has been improving and this can also be seen from its H1FY10 results. For H1FY10, its consolidated topline stood at Rs 495.83 crore and PAT stood as Rs 12.21 crore as compared to Rs 491.16 crore and loss of Rs 39.10 crore respectively for H1FY09. So this clearly indicates an improvement in the margins too. Now the margins are expected to improve further as its captive power plant of 12.50 MW has been commissioned for its bed linen plant. So while the improvement in the global scenario is expected to take care of its topline, its margins too may witness an upward rush.

Additionally, having integrated forward into retailing through 14 stores under the ‘Atmosphere’ brand, the company has established a strong presence in the markets of India, Middle East and South East Asia. HSL plans to continue opening new stores in select cities in India and other Asian markets to drive its growth curve. Further, as compared to the other textile companies its debt book is very low with Rs 440 crore as on March 31, 2009. But the company has also got investments to the tune of Rs 240.56 crore. We therefore recommend a ‘buy’ at its CMP of Rs 45 with the perspective of one year.