Expansion To Drive Growth - Shiva Texyarn

In India investors have always given premium to growth while ignoring the laggards. Similar seems to be the story of Shiva Texyarn which, despite its promises, had failed to show consistency in the earlier years and hence was ignored by the investor fraternity. However, after having taken the right initiatives the management has turned the company around and put it on the growth track so that it merits a second look.

Considering factors such as improvement in demand, forward integration from spinning to fabrics and garments, a 20-year dividend history, low PE of mere 4x, and its FY11 estimated profits, Shiva Texyarn looks like a ‘must have’ scrip in the portfolio. The company is a manufacturer of cotton hosiery yarns. Over 95 per cent of its revenues are from the textile division while the balance is derived from its windmill business. Of the textile revenue, spinning contributes around 92 per cent while 6 per cent comes from knitting, and the balance from garments. Around 60 per cent of the cotton yarn is sold to the Tirupur knitting factories and 30 per cent make for exports. The balance is sold in the other domestic markets.

Shiva’s growth seems right at an inflection point wherein all its major expansions have been commissioned. The company was involved in massive capacity expansion over the last two fiscals to the tune of Rs 214 crore out of which Rs 190 crore was for expanding its spindle capacity from 39,072 spindles to 50,400 spindles (commissioned in Q1FY11), Rs 20 crore for enhancing its knitting capacity, and the balance for the production of garments. Shiva’s knitting and garment capacity is now 3,600 TPA and two lakh pieces per month.

However, it’s the spinning division that will drive Shiva’s current growth since it has done well with its average realisations per kg increasing steadily from Rs 120 per kg in FY09 to Rs 130 per kg in FY10 to Rs 155-160 per kg in H1FY11. Though the yarn prices have fallen a tad bit with a fall in the cotton prices, the trend is expected to remain firm and this should give a good fillip to the company’s revenues. What’s more to the Shiva story is the 28.75 MW wind power capacity it has, of which 75-80 per cent is being used for captive purposes. This has dual benefits as it assures continuous power supply to its units and it should help it reducing the power cost, thereby further expanding the margins. In terms of its financial performance, for H1FY11 Shiva’s topline and bottomline increased by 126 per cent to Rs 172 crore (Rs 76 crore) and 190 per cent to 18 crore (Rs 6 crore). This sharp jump was on account of the commissioning of its capacities and the lower cost of the cotton stock. For FY11, the management is confident of posting revenue of Rs 350 crore and profit of Rs 27-30 crore. At these estimates Shiva is available at a mere 4x its FY11 profits, which is very attractive. In fact Shiva’s enterprise value is Rs 375.42 crore, of which the power capacity itself is valued at Rs 185 crore. Adjusting for this, the textile business is available for EV/EBDITA of 2x, thus making it a fancy bet with a target of Rs 75.