Recommendation From Textiles Processing

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

US production facility helps to save import duty

Sarla Performance Fiber is in the business of manufacturing and distribution of high value added polyester yarn and nylon yarn. The company, a 100% export oriented company has multi geographical presence in over 40 countries located in six continents. The company has branded clientele in its platter like- Hanes Brands, Gildan, Renfro, American & Efird, Delta Galil, Coats & Jockey. SPFL focuses to expand its global client base. For that they have one marketing centre at Portugal and two distribution centres at Thailand and Vietnam.

It is the only Indian company which enjoys one of its manufacturing facility at USA in product line of partially oriented yarn and textured polyester yarn. The US facility caters to apparel and upholstery market. Currently the US textile industry is on a positive foothold. The US textile industry stands at fourth position when it comes to the global export list after China, India and Germany.The company plans to increase its capacity from 9,900 TPA to ~18,000 TPA by FY17 and improve utilisation to 100% from current 30%.The company benefits from the duty free exports of goods manufactured inside the US as per NAFTA and CAFTA . CAFTA nullifies all tariffs on over 80 per cent of the US manufactured goods. Due to this, it is in advantageous position as it doesn't have to pay 32 per cent duty vs the other exporters to the US. Also, it saves in logistics, power and borrowing cost at this facility. The strategic location also helps it to market its products more effectively.

It also has manufacturing facilities in India at Silvassa and Vapi. At Silvassa, the company produces 250 varieties of polyester and Nylon yarn with installed capacity of 11,900 TPA. The company is in process of expansion of Nylon 66 capacity at this facility from current 1.5 TPD to 6 TPD with CAPEX of Rs 10 crore. Nylon 66 is one of the growth drivers of SPFL.  Due to high tenacity and lower shrinkage of Nylon 66, it has application in parachutes, shoes, seat belts and car airbags, specialised sewing applications in automotive, shoe leather, industrial filters and hose. Growing demand from increasing automotive applications is expected to drive the Nylon 66 market. It can replace metal and reduce weight of the vehicle to meet vehicle emission standards. SPFL also has in-house dying facility at Vapi with an installed capacity of 3,200 TPA.

The company also generates wind power at Gujarat, Maharashtra and Madhya Pradesh with a total installed capacity of 10.25 MW at ~23-25% load factor which supplies power in-house and to private entities which adds other income in its balance sheet.

On the financial front, the company improved EBITDA margin by 25.96 per cent on YoY basis in 1QFY17 due to lower raw material costs. Other income of the company has gone up by 146 per cent to Rs 362 crore in Q1FY17 on a YoY basis led by in-house wind power business. PAT of the company also increased by 28.38 per cent to Rs 900 crore in Q1FY17 on a yearly basis.

On valuation front, SPFL has been trading with TTM PE of 10.75x and P/B of 1.78x. Undervalue valuation number, low debt status (D/E- 1.02 as per FY16) and positive numbers bring bullish vision on this scrip. So we recommend our reader-investors to BUY this stock.