Consistency is one thing that is highly rewarded in the stock market arena and the companies displaying such an attitude are usually awarded with a premium. Zodiac Clothing Company (ZCCL), a quality shirt maker, is one such company which has shown consistent growth in topline since the last ten years. But apart from consistent growth there are certain other factors which guide us to recommend ZCCL as our choice scrip. The most important factor is the good financial performance of the company in 9MFY10. Secondly, the company has a consistent dividend payment history with its dividend yield being 1.65 per cent (ex-dividend). The third factor is that the promoters themselves are buying from the open market, which indeed is a positive sign for any company. Further, the company is de-risking its business from being just an export-oriented model. ZCCL is laying more focus on increasing its domestic revenues and at the same time it intends to stabilise its growth in the export segment as well. While these are micro factors, there are some equally positive factors on the macro front too. The company is into the export of garments and the improvement in global economic health along with increasing consumer confidence spells good news for the textile industry. 

On the valuation front, the company is in the comfort zone. Its CMP of Rs 399 discounts its trailing four quarter earnings by 16x. Its EV/EBITDA is also placed well at 8.80x. Our recommendation to investors is to buy the scrip at its current levels with a target price of Rs 490 in the next one year. As regards the business of the company, ZCCL is a vertically integrated clothing company with manufacturing facilities in India and Dubai. Its current capacity is of 61.82 lakh units. It has three major brands in its kitty viz. Zodiac (premium classic brand appealing to people above 35 years of age), Zod which is a casual wear brand and Z3. 

ZCCL has one of the best business models in the form of production against order, which allows ZCCL to de-risk its business to the highest extent. This strategy helped the company survive even during the global meltdown at a time when its peers were severely impacted. Further, along with exports, ZCCL is emerging as one of the fastest and strongest growing branded retailers in India. Currently the company has 69 stores (as on March 31, 2009). However, one particular factor that needs some mulling over is that despite its aggressive stance, the company closed down 13 unviable retail outlets in FY09. But this has been a good move to contain losses. This is an indication of the strong management bandwidth of the company. As regards growth, the company is expecting growth to come from the export as well as domestic markets. As regards the de-risking strategy, in FY09 exports stood at just 54 per cent of revenues from as high as 92.50 per cent in FY01.

Meanwhile, the company has paid dividend consistently and with better bottomline this fiscal the dividend is expected to be good. In FY09 the topline was good but to due higher raw material cost and other fixed expenses the profitability got impacted. But in 9MFY10 the profitability has improved wherein the PAT has already crossed the FY09 PAT as a whole. In 9MFY10 it posted a topline of Rs 209.61 crore and bottomline of Rs 18.37 crore (bottomline was Rs 15.13 crore in FY09). Considering all these factors, our recommendation is that investors should buy this scrip at its current levels.