Buy of the Week – Spentex Industries Ltd

Spentex Industries Ltd  (521082) is engaged in production of various types of yarn for weaving and knitting industry. Its product range includes PV Yarn, 100% cotton yarn, P/Cotton Yarn, Slub yarn and other types of blended yarns. Promoted by CLC group of Delhi, Spentex is the largest spinning co in India with installed capacity of more than 5,25,000 spindles at various locations including Uzbikstan, Chekoslovakia. Citi Group holds substantial stake in the co which was acquired @ Rs 36/. Spentex caters to domestic market as well as international markets.

When Spentex was on acquisition spree , yarn markets in 2008 crashed badly coupled with lower yarn prices, lower demand and higher cost of production As a result, Spentex incurred heavy losses in 2009-09. Subsequently, when market situation started improving, Spentex managed to reduce its loss in 2009-10 significantly. Now, Spentex is expected report reasonable profits in 2010-11 and hence, the recommendation to buyIn 2008-09, company had suffered huge losses due to falling yarn prices. Moreover, raw cotton prices had come down heavily and company was holding good stocks of raw cotton which was purchased at higher prices. As a result, company had to suffer investory losses as well. Moreover, its newly acquired plant in Uzbekistan was suffering losses due to lower production.

In 2009-10, its losses came down sharply, mainly due to improved market for yarn, leading to higher realisation. In fact in Q4 Spentex made a small profit of 60 lacs . At net level, Spentex made loss of 22.35 cr in 2009-10 but it had provided 35 cr
for depreciation, thus it managed to earn cash profit of nearly 13 cr during the year. Spentex should report PAT of more than 6 cr in Q1.

VALUATIONS :- Current market cap of Spentex is just 115 cr as against projected sales of 910 cr in current year. Spentex got caught, in sort of, vicious circle due to heavy losses incurred in previous 2 years which led to working capital crunch. As a result, company could not keep adequate stock of raw cotton etc, prices of which increased by nearly 50% in last 6-8 months. In between, its plants were also operating at below rated capacity. However, since now Spentex has started earning reasonable profits, liquidity crunch is also easing out which can lead to better raw material management. Stock is trading at 5.15xFY11E EPS and 2.33xFY11E CASH EPS. If yarn markets continue to remain stable for next 6-8 quarters, profitability of Spentex can improve reasonably well , which in turn can help company to reduce its debt. LARGEST SPINNING CO OF INDIA DESERVES BETTER VALUATIONS. Our price target Rs 23-25/ in next 3-6 months. A low priced pick which should give decent appreciation

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