Recommendation From Textile Sector

Low Priced Scrip is a hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

Sarla Performance Fibers (SPFL) is a manufacturer of specialty polyester and nylon yarns. Its product finds applications in innerwear, hosiery, sportswear, narrow fabrics, seat belt, car airbags, fishing nets and leather goods. These products are different from commoditised yarns given their nature and this transpires into healthy operating margin. SPFL grew its business by expanding and upgrading its existing facilities in India, as well as through the creation of new facilities overseas with the primary objective of establishing them in close proximity of its customers to provide quick and efficient services to them.

SPFL has two manufacturing facilities at Silvassa, India with capacity of 11,000 TPA and one dyeing plant in Vapi with capacity of 3,200 TPA. Recently the company commissioned its pilot capacity for Nylon 66 yarn at its Silvassa plant which is a high-margin product in the overall portfolio. This product is very useful for end-user industries like parachutes, air bags, shoes and lingeries.

It is the first Indian textile company to set up a manufacturing unit in the USA. With this facility, the wholly-owned subsidiary of the company, Sarlaflex Inc. with installed capacity of 9,990 TPA would be able to cater to large textile companies based out of the US, taking benefit of the NAFTA (North American Free Trade Agreement) and CAFTA (Central America Free Trade Agreement) rules with lower freight and power costs compared to India and labour costs reduced by 30 per cent due to automation. Once a sizeable level is reached with regard to utilization of capacity, the company is contemplating phase II as well in FY17.

SPFL exports to over 40 countries around the world. It has a potential customer base in European countries, especially in Italy, Spain, Romania, Turkey, the UK, etc., and some countries in Central and North America and Asia. In the future the company will focus on Israel, Jordan, Canada and South American countries also.

On financial front, SPFL has registered revenue with a compound annual growth rate (CAGR) of 15 per cent, EBITDA CAGR of 11.6 per cent and a PAT CAGR of 10.6 per cent over FY10-15. During the 9MFY16, revenue reported flat at Rs 235.4 crore while EBITDA increased jumped by 52.4 per cent at Rs 54.93 crore along with EBITDA margin expanded by 797 bps at 23.36 per cent. Its bottom-line grew by 72.6 per cent at Rs 38.2 crore. RoE stood at healthy 16.8 per cent on TTM basis.

On valuation front, the stock price is trading at around 10.5 times of price to earnings of Rs 5.3 per share on TTM basis and price to book value it traded at 1.8 times with book value of Rs 31.3 per share. We recommend buying the scrip with expectation of 30-35 per cent from the current market price in the next one year.