Spinning A Profitable Yarn - Precot Meridian

The Indian textile sector that saw its financial performance dwindling after the global economic crisis has bounced back with vengeance and remains one of the best performing sectors in the recently announced quarterly financial results. The topline for the sector has increased by 30 per cent and its bottomline has shot up by an astounding rate of 113 per cent. Precot Meridian (PML), one of the south-based textile companies, is basically engaged in the production of cotton yarn and has outperformed the sector with its topline and bottomline increasing by 39 per cent and 272 per cent respectively. What makes scrip attractive is that even after more than its share price becoming more than double in the last one year, it still is available at a PE of 5 times of its last 12-month earning and EV/EBITDA of 3.7 times compared to some its peer trading at double digit.

The icing on the cake is the company’s dividend yield of 2.2 per cent. PML’s business primarily spreads into three segments viz. cotton yarn, fabrics, and garments. But it is yarn that contributes most to the topline of the company which, for FY10, was Rs 373.9 crore - 86 per cent of its total sales.This was followed by fabrics and garments that contributed 13 per cent and less than 1 per cent respectively. Apart from domestic sales the company has a presence in exports too, primarily yarn. Its exports constitute 22 per cent of the sales. The figure for a year ago was 26 per cent. The company is currently operating at around 92 per cent of its capacity. This is going to further increase with the modernisation plan that the company is implementing at a cost of Rs 40 crore. This plan will cover around 30,000 spindles that will boost the productivity of spindles. The entire amount of Rs 40 crore will be partly funded by internal accruals and through the Technology Upgradation Fund Scheme (TUFS).

As for the company’s financials, the exceptionally good second quarter results were due to the management’s foresightedness in expecting an increase in cotton prices - the key raw material for yarn - and stocking it. This has helped company to keep the cost of raw material under control at 48 per cent of sales, down from 49 per cent of sales during the same period last year. The management expects the benefit to continue till the December quarter after which the cotton prices are expected to stabilise. The next two quarters of FY11 will therefore be good. The bottomline in FY11 may therefore double to Rs 30 crore. With its current market cap of Rs 157 crore, the scrip is trading at a PE of only 5 times. This looks attractive as most of the other textile companies are trading at PEs of double digits. As for its EV/EBITDA, it is trading at just 3.7 times. Even in terms of its price to book value the company is trading at 0.86 times. PML also has an investment (as promoter) in a listed company called Pricol, the valuation of which works out to around Rs 18 per share. Therefore our advice to our readers is to take exposure in the scrip with a price appreciation of 20-25 per cent in the next 12 months.