STOCK IDEAS - SEL Manufacturing Company Ltd.

Company name- SEL Manufacturing Company Ltd

 

BSE code - 532886

 

NSE Code - SELMCL

 

SEL manufacturing company Ltd (SEL) is a vertically integrated multi product, multi location textile manufacturing company. It has a capacity to manufacture 14 million garments per annum. Starting as only a garment manufacturer and exporter it has successfully de-risked its business model to multiple textile products across value chain. It has gained adequate domestic market presence as well as has expanded it overseas market. From being dependant only on exports to Russia, it today exports products to approximately 40 countries across the globe. It now manufacturers and exports cotton yarns, combed yarn, knitted fabrics and knitted garments. It has successfully grown and has made series of acquisitions since 2006 for strengthening its product line and expanding its capacities. Funds have been allocated for further growth. It has set up an Integrated Textile and apparels park In Punjab.

 

Business-

The textile manufacturer and exporter is into Spinning, knitting, processing and garment business. Where in spinning and knitting the focus lies on volumes and marketing in both domestic and export market, processing is used for in-house production. It is Garmenting, which is the highest margin segment and main focus of SEL lies on exports. This segment will be main driver for future growth.

 

Its seven manufacturing units are located in Knitting hub of India i.e. Ludhiana in Punjab, while two units are located at tax free zone of Baddi in Himachal Pradesh.

 

Existing product range comprises Range of cotton yarns (carded, compact, milanges, double, dyed & fancy yarns), range of dyed knitted fabrics and readymade garments. It's readymade garment range comprises of Basic T-Shirts, Polo T-shirts, Sweat Shirts, Inner Thermal Garments, Girls Top and Kids tops & T-shirts.

 

Consolidation of group business in SEL started with amalgamation of two fabric knitting and processing group companies from April 04. In April'05 it acquired 99 percent stake its garmenting partnership firm while in June '06 it acquired a group spinning export-oriented unit.

 

It took inorganic route for further growth. In May'06 it successfully bid for acquisition of Mangla Cotex Pvt Ltd. Properties of same were located adjoining its existing facilities in Ludhiana and boosted capacities of Knitting, fabric processing and garmenting. Post its public issue in Dec'06 it acquired manufacturing capacities of Utkarsh apparels in March 07 followed by 99 percent stake in largest process house M/s Kudu Industries in November 07. It acquired garmenting facilities of Preet Hosiery in Jan'08.

 

Ever since it has strengthened its presence across value chain. It attained the desired domestic turnover, multiple product range and expanded its export markets. It exports Garments to Russia, Middle East and other countries and Yarn is exported to 40 countries globally.

 

It is expanding its product range and looks at Technical textiles and Hygiene products as-well-as Terry Towels to be future growth drivers. While former finds extensive use in mechanical, infrastructure, hygiene & automobile sectors, Terry Towels focus on existing customers in Export market and manufacturing designer towels using Jacquard looms. It's focus also lies on open ended spinning for captive consumption in towel manufacturing and to become self sufficient in power with captive power.

 

Investment rationale-

Indian textile Industry is expected to reach a size of $115 billion by FY12 from $52 billion in FY07. Textile & Apparel export are expected to be $50 billion of which garmenting will contribute 50 percent. Thus SEL has great opportunities to benefit from the growth.

 

Looking at Opportunities SEL is expanding capacities. Ongoing expansions has boosted Garments capacity by 3.5 million pieces to 14 million pieces, spinning capacity by 50,400 spindles to 149656 spindles and fabric knitting by 1800 tons to 8850 tons per annum.

 

Focus is also on deeper penetration of existing markets. Marketing focus is being shifted to direct sales for growth and enhanced margins. It also works on backward integration for captive power. With ongoing expansions 10 MW of captive power capacity will be achieved by Jan'09. Product mix is further being enhanced.

 

Works are on for diversification. World market for technical textiles is expected to grow phenomenal and reach $127 billion by 2010. SEL forays into Technical textiles. Hygiene products are also in pipeline. Products like Wipes, Diapers, geo textiles, and surgical packs along with personal care products are being developed. Designer Terry towel facility is being set and will be integrated with open-ended spinning capacities.

Capacities under new expansion include 1632 spindles for open ended spinning, 32,400 TPA of Technical textiles and 12600 TPA of terry towels. Captive power generation capacity will be further increased to 20 MW. Development on acquired 20 acres of land is in progress and Commercial operations will start in FY10.

 

SEL has its present capacities for garment booked for next full season. While for Yarn, which has 60 days cycle is completely booked and fabrics enjoy handsome export orders.

 

It has further allocated Rs 1500 crores for future growth. It's Special Project vehicle (SPV) for Integrated Textile and Apparels park had been approved and the park inaugurated in district Nawan Shaher, Punjab during September'08. It is also setting up a Technical Textile Park in the state of Himachal Pradesh. SPV has been applied for approval from Ministry of Textiles. This would be a one-shop solution for entire manufacturing process of technical textile products. Total investment for the project would be Rs 500 crores.

 

SEL is looking for acquisitions of manufacturing units in India with valuations being attractive now. Retail units in India and abroad are also being eyed. Acquiring Brands of Hygiene products are being looked at for achieving mileage in the overseas market. Any suitable opportunity will thereby be utilized said Mr Neeraj Saluja MD, SEL.

 

Concerns-

For Expansion plans funding has been done through internal accrual and debt. Out of total cost of Rs 611.67 for ongoing expansions Rs 480 crores is through debt. Thus interest cost has risen sharply during past few quarters denting the bottomline. However interest rates are likely to go down in remaining quarters of financial year bringing respite.

 

Valuations-

SEL posted a strong Topline of Rs 115.31 during Second quarter, which grew impressive 35.39 percent y-o-y. Operating margins improved phenomenal 450 basis points. However growing depreciation costs, taxes and Interest costs dented net profit. Ongoing expansions also contributed to depreciation costs increase by Rs 1.46 crores. Adverse environment for Interest rates saw the Interest costs surge by Rs 7.21 crores (367.86 percent). However reducing Interest rates will bring respite to SEL. With on-going expansions almost complete benefits to revenues will start accruing. Thus Looking at the growth plans of SEL and the opportunities available, it offers good long-term prospects for investors.

 

	Q2	Annual	Annual E
	FY09	FY08	FY09
Net sales	115.31	392.64	624.00
OP	30.41	78.45	124.80
PAT	8.57	44.85	74.88
Capital	17.17	15.22	17.17
EPS	5.24	29.48	43.62

 

Margin
OP	16.27	19.98	20
PAT	8.08	11.42	12
Price	54.95	Date	28/11/2008
PE	1.86	P/BV	0.57
Book Value	95.58	EV	365.73
EV/EBIDTA 4.66		Mcap	94.33
		(rs.crore)

                    

Shareholding	30-Sep-08
Promoter	57.17
FII	15.74
Public	11.98
Others	15.11
Total	100