Weaving Success

There is a general belief that the textile sector is yet to come out of the trough. So does it really make sense to even look at such a sector and the scrips within? But in contrast to this general belief, we feel otherwise because the sector has already seen the worst and the scrip prices are reflecting the same. And so, it was this hunt to find a scrip in the textile pack that could be of investor interest that led us to Siyaram Silk Mills. Even as we read the name Siyaram, there flitted through the mind the tune of the jingle ‘Coming Home To Siyaram’ which had become so popular at one point of time. It just goes to prove that the brand continues to have a strong impact. So with our curiosity already on the rise we decide to explore further to find out what the company has been up to lately. We met up with Surendra Shetty, CFO, Siyaram Silk Mills (SSML) at their corporate office and our discussion on business threw up some interesting pointers. Considering that SSML has been a successful domestic story, it makes us strongly believe that this scrip does merit a second look.

Interestingly though the name Siyaram Silk Mills might lead to a direct association with silk, the company actually doesn’t have anything to do with that product. The name came about only because of a trend that existed during the late '70s and early '80s when it was considered fashionable to add the word silk for any company engaged in the textile business.

SSML is a manufacturer of suiting and shirting fabrics. That apart, it has built its presence in the manufacturing of readymade garments and value-added yarns along with enter-ing into the home furnishing business as well. In the fabric sector, SSML has four brands viz. Siyaram, Mistair, Feather and J Hampstead, while in the readymade garments it has two brands, Oxemberg and MSD. SSML’s FY09 revenues stood at Rs 532 crore of which 83 per cent or Rs 441.56 crore was derived from the fabrics’ segment. Readymade garments generated 10.55 per cent or Rs 56.12 crore while 4.4 per cent or Rs 23.40 crore was obtained from the yarn division and the balance 2 per cent or Rs 10 crore from others.

There are various reasons why we feel SSML would do well. First and foremost is the fact that the company has retained its focus on its core competency i.e. fabric manufacturing. Though SSML has been trying its hands at other segments as well, the fabric business will always remain the primary area of its operations. In fact even in the fabric segment SSML is clear that it wants to be in the manufacturing of poly viscose, a synthetic fabric, which is used by the masses at large. It should be noted that out of the total fabric production, almost 85 per cent of production is poly viscose, while 10 per cent is poly wool and 5 per cent poly cotton. Thus SSML actually wants to do what it does best and this augurs well for the company.

Second, with the presence of strong brands in the premium fabrics’ segment which cater to the high end of the market, SSML is trying to create its own space in the mass market segment and makes products for the middle class segment that ranges from the lower middle class to upper middle class. Contrary to what many might think, SSML’s major focus is on the Tier II and Tier III cities and rural areas which are perfect places to market its fabrics and readymade garments that are very competitively priced. Says Surendra Shetty: “We as a company focus on the lower middle to higher middle class and we sell to the masses. Therefore the concentration of our marketing is also on the B and C class cities.” It should be noted that SSML has extensive reach across the country with 25,000 retailers, 1,500 dealers and 750 agents. With the collective force of all such factors, SSML seems rightly poised to grow in the coming years. 

Third, what will further strengthen its growth are the brands that SSML has. It should be noted that despite many new national and international brands making their foray in recent times, SSML has been successful in keeping the Siyaram brand alive. This is quite an achievement considering the fact that many once famous peer brands such as Mafatlal, OCM or Digjam have faded away and the new generation might not even know of them at all. The combination of its brands has helped strengthen its port-folio and would help SSML command a higher premium over unorganised players in the market. The company’s retail growth, which was stalled due to the slowdown in the sector, has started once again and it aims to spread through its franchisee network now even if the pace might comparatively be slower. [INSERT_1]

SSML expects to add 50 stores by December 2010 to its existing 50 stores in the country today. The aim is not just to push sales but to create brand awareness and inform people what it manufacturers. Explains Shetty, “These shops would do lot of sales promotion activities. When you go to a mall, you see people do a lot of window shop-ping. Similarly, people should know what we are manufacturing through such activities.” Moreover, continuous investment in ramping up capacity in the fabrics, readymade garments and yarn division will help SSML increase its growth momentum. From FY07 through FY09, SSML has invested around Rs 100 crore for ramping up capacities in the fabrics, readymade and yarn divisions. In FY10 the investments would be to the tune of Rs 22 crore in expanding its capacities, thus enabling it to cater to the increasing demand in a better way.

SSML has also initiated cost rationalisation initiatives such as controlling new project expenses, keeping ad spend under check, lowering the interest burden through retirement of debts etc. Its debt is currently at Rs 160 crore compared to Rs 220 crore in FY09. All this has led to expansion of margins by about 232 basis points in H1FY10, which is commendable. The only concern we have is the presence of the huge unorganised market which occupies up to 75-80 per cent of business space. This could eat into SSML’s growth pie. However, the brands it has should help it defend itself as it moves forward. In terms of its financial performance, for H1FY10 SSML’s revenues increased by 32 per cent to Rs 309.29 crore (Rs 234.57 crore) on account of better demand and increased realisations, while profits increased by a whopping 240 per cent on account of better cost management.

SSML’s management expects revenues of around Rs 650 crore for FY10. At these estimates its profits could be around Rs 22- 24.63 crore. Thus an estimated EPS of Rs 26 results in a PE of just 6x, while market cap to sales stands at only 0.23x. This, we feel, is quite low. On an EV/EBDITA of 5x, the valuations are low too. Besides, SSML has been consistently paying dividend since the last 19 years and with 5 per cent dividend in FY09, its yield works out to 3 per cent and hence makes it an attractive buy at Rs 162 with a one-year target price of Rs 233.