Explanation of CRISIL Fundamental and Valuation (CFV) matrix The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade)
FundamentalGradeCRISILs Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective of the size or the industry they operate in. The grading factors in the following:
Business Prospects: Business prospects factors in Industry prospects and companys future financial performance Management Evaluation: Factors such as track record of the management, strategy are taken into consideration Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms
The grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals)
CRISILFundamentalGrade Assessment5/5 Excellent fundamentals 4/5 Superior fundamentals 3/5 Good fundamentals 2/5 Moderate fundamentals 1/5 Poor fundamentals
ValuationGradeCRISILs Valuation Grade represents an assessment of the potential value in the company stock for an equity investor over a 12 month period. The grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISILValuationGrade Assessment5/5 Strong upside (>25% from CMP) 4/5 Upside (10-25% from CMP) 3/5 Align (+-10% from CMP) 2/5 Downside (negative 10-25% from CMP) 1/5 Strong downside (
CRISIL Equities 1
Weaving a diversified pattern Industry: Textiles Date: October 13, 2010
Independent Research Report Shri Lakshmi Cotsyn Ltd
Kanpur-based Shri Lakshmi Cotsyn Ltd (Lakshmi Cotsyn) manufactures textile-based products, ballistic products and armoured vehicles. Going ahead, it intends to set up power, cement and steel plants. Debt-funded capacity expansions, consistent negative operating cash flows in the past and execution risk in ongoing as well as new projects in unrelated areas are the key concerns for the company. We assign Lakshmi Cotsyn a fundamental grade of 2/5, indicating its fundamentals are moderate relative to other listed equity securities in India.
Diversified product portfolio combats revenue cyclicality Lakshmi Cotsyns product portfolio includes basic commodity products such as denim fabric, shirting/suiting fabric as well as value-added products like technical textiles, organic bed sheets and readymade garments. The share of value-added products to total revenues is expected to increase on account of better utilisation rates, capacity additions and good industry prospects. A well diversified product portfolio is a good de-risking strategy for Lakshmi Cotsyn as it helps to combat revenue cyclicality usually associated with commodities like fabrics.
Capacity additions to increase long-term debt, higher working capital requirements to raise short-term debt The company plans to incur capex worth Rs 16.6 bn; of which capacity additions worth Rs 3.7 bn are underway. Majority of this expenditure is to be funded through long-term loan raised under the Technology Upgradation Fund Scheme. As a result, the long-term debt-equity ratio is expected to increase to 1.6x by June 2012 from 1.0x in June 2010. Also, the company has registered negative cash flows from operations over the past five years due to inefficient working capital management. With further expansion, we believe it will have to keep raising short-term debt on a sustained basis to fund its working capital requirements.
Key concerns: Execution of projects in unrelated areas i) Executing projects in unrelated fields such as power, cement and steel due to the promoters relatively less experience in managing such businesses; ii) Intense competition from various established and integrated textile players; and iii) volatility in cotton yarn prices, the major raw material.
Revenues to increase at a two-year CAGR of 29% to Rs 25.6 bn Revenues (consolidated) are expected to increase at a two-year CAGR of 29% to Rs 25.6 bn in June 2012 driven by good industry prospects and capacity additions in its existing product segments. EBITDA margins are expected to improve to 15.8% in June-2012 on account of increased sales of value-added products.
Aligned valuations We have used the discounted cash flow (DCF) method to value Lakshmi Cotsyn and arrived at a one-year fair value of Rs 161 per share. At our fair value, the implied P/E is 4.0x June 2011 EPS and 3.3x June 2012 EPS. Consequently, we initiate coverage on Lakshmi Cotsyn with a valuation grade of 3/5, indicating that the fair value is aligned to the current market price of Rs 164 (as on October 13, 2010)
Key forecast (consolidated financials) (Rs Mn) Jun-08 Jun-09 Jun-10 Jun-11E Jun-12E Operating income 9,370 11,693 15,468 19,580 25,605 EBITDA 1,347 1,739 2,058 2,907 4,046 Adj Net income 577 630 917 1,230 1,471 EPS-Rs 39.0 35.4 45.9 40.4 48.3 EPS growth (%) 38.4 (9.3) 29.9 (12.0) 19.6 PE (x) 4.1 4.5 3.6 4.1 3.4 P/BV (x) 1.0 0.9 0.7 0.7 0.5 RoCE (%) 15.0 14.9 13.1 12.5 11.8 RoE (%) 28.3 23.6 23.6 20.3 17.8 EV/EBITDA (x) 6.4 6.1 6.9 7.4 7.1
Source: Company, CRISIL Equities estimate
Fundamental grade of '2/5' indicates moderate fundamentalsValuation grade of '3/5' indicates aligned market price
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Key stock statistics NSE ticker SHLAKSHMI-EQFair value 161Current market price* 164Shares outstanding (mn) 20Market cap (Rs mn) 3,274Enterprise value (Rs mn) 14,24152-week range(Rs)(H/L) 181/82PE on EPS estimate (Jun-11E)(x) 4.1Beta 1Free float (%) 56.3Average daily volumes 25,333* as on report date Share price movement*
Shri lakshmi Cotsyn Nifty - indexed to 100 Analytical contact Sudhir Nair (Head, Equities) +91 22 3342 3526
Arun Vasu +91 22 3342 3529 Neeta Khilnani +91 22 3342 1882 Email: firstname.lastname@example.org +91 22 3342 3561