July

10

Pravesh K Nagra (PGP/13/099)

The purpose of this report is to do equity analysis of the company S Kumar Nationwide Ltd.
And Give recommendations on whether to Buy, sell or hold the stock.

S K u m a r s N a ti o n w i d e L t d .
 I. Introduction
1 Company
SKNL is one of India’s leading textile and apparel company with expertise in multi-
fibre manufacturing. SKNL is a customer led, design-centric player with focused
brands for each market segment. It has a Global reach with brands and businesses in
India, USA, Canada, UK and Italy. It is rapidly growing in Ready to wear (RTW) and
Branded Fabrics markets. It is vertically and laterally integrated business
conglomerate with seamless supply chain. It has multi-locational manufacturing units
in India, Italy, UK, USA, and Canada.
SKNL is the only company in India to operate across all 3 segments of the industry-
 Fabrics
 Apparels
 Home Textiles
It has branded presence in all socio-economic segments. SKNL achieved a consistent
revenue growth of 35 % (CAGR) for the last 3 years in the domestic businesses.
Global acquisitions provided 37 brands across premium and super-premium segments
of the apparel market with distribution network of large departmental and specialty
stores to SKNL. Additionally, SKNL gained access to brands in the luxury segment
enabling supply of fabrics.
SKNL's success is based on its four pillars of strength
i. Manufacturing
The company has invested extensively in manufacturing facilities to maintain high
quality standards. Four state of art manufacturing units based in Mysore (Karnataka)
and Dewas (Madhya Pradesh) collectively produce over 2,00,000 meters of high-
quality fabrics each day. Two new plants at Bharuch, Gujarat for Cotton have been
recently established. SKNL plans to introduce yet another facility, of the Ready-to-
Wear SBU, near Bangalore to cater to the international market.
ii. Distribution
The company’s wide network reaches both domestic as well as overseas market.
SKNL caters to the entire socio-economic segments of the Indian market across
30,000 outlets through 300 dealers
iii. Brands
SKNL is the only Indian company to operate 45 globally well-established textile
brands. Some important Brands are shown below
iv. Human Capital

II. Equity Analysis

Fundamental Analysis
1 Economic Analysis and Outlook
i. Preface
By the end of FY09, the Indian economy was reeling under pressures emanated from
the global economic crisis; however, the economy would begin to revive by H2 FY10
supported by a revival in consumption demand. Nonetheless, a gradual turnaround
was visible from the second quarter itself backed by timely and aggressive policy
responses by the Government and the RBI to tackle the crisis.
ii. GDP Growth
The economic growth prospects will improve significantly in FY11 as the private
sector demand - both consumption as well as investment - begins to pick up.
However, the government consumption demand is expected to moderate on account
of fiscal consolidation plan and expected gradual withdrawal of stimulus packages
announced earlier. Nonetheless, the focus of government spending on infrastructure
sector would continue to support growth. Assuming a normal monsoon, the expected
GDP growth to surge to 8.5% during FY11. This growth would largely be driven by
the following factors:
 Robust industrial growth backed by improvement in consumption demand
 Increase in infrastructure spending
 Substantial growth in investment activity
 Recuperating external demand conditions
 Stability and improvement in financial markets
iii. Inflation
Inflation has remained in double-digits since February 2010 and become much more
generalized with each passing month. In light of the recent fuel price hike and rising
core inflation, it is unlikely that inflation would ease any time soon. By March 2011,
however, We can expect WPI inflation to be around 6.5 per cent (RBI’s expectation
stands at 6.0 per cent), as we expect food inflation to moderate due to better monsoon
and non-food inflation to fall due to RBI’s gradual monetary tightening.
iv. Fiscal Scenario
On the fiscal front, the growth in indirect tax revenue to fall short of the budgeted
increase of 28.5% thereby resulting in higher than budgeted fiscal deficit. On the
external front, growth in imports to be faster than exports thereby leading to high
trade deficit. And the current account deficit would surge to 2.5% of the GDP in
FY11, due to a high trade deficit. Further, the rupee is forecasted to appreciate from
the current levels backed by expected foreign fund inflows and improvement in
growth prospect of the Indian economy.
v. Industrial Production
The growth momentum witnessed in the Indian economy during the last fiscal has
consolidated further and become more broad-based this fiscal. Industrial growth led
by investment, continues to be robust. During, April-May 2010, IIP recorded a year-
on-year growth of 14 per cent. The IIP growth is expected to remain robust during
FY11 on account of:
 Substantial improvement in domestic demand
  Recovery in demand for Indian exports
  Increase in investment activity
  Increased thrust of the government on infrastructure projects

vi. Bank Credit Growth

We can expect Bank Credit growth to Improve During FY11 but Remain Below Pre-
Crisis levels. We can expect the bank credit growth to moderate to around 16.5% by
end of FY10 as compared to 17.5% by end of FY09.
vii. Interest Rates Set to Harden
Interest rates on 10 year G-Sec to be between 8.3% - 8.5% on account of RBI’s
tightening of monetary supply policy.
2 Textile industry Analysis and Outlook
The SWOT analysis of the Textile industry is below: -
i. Strengths:
 Industry is an Independent & Self-Reliant
 Low cost inputs
 Low Cost and Skilled Manpower
 Availability of large varieties of cotton fiber
 India has great advantage in Spinning Sector
 Growing Economy and Potential Domestic and International Market.
 Industry has Manufacturing Flexibility that helps to increase the productivity.
ii. Weaknesses:
 Indian Textile Industry is highly Fragmented Industry.
 Lower Productivity in various segments.
 Lack of Technological Development.
 Infrastructural Bottlenecks and Efficiency
 Unfavorable labor Laws.
 Lacking to generate Economies of Scale.
 Higher Indirect Taxes, Power and Interest Rates.

iii. Opportunities:
 Growth rate of Domestic Textile Industry is 6-8% per annum.
 Large, Potential Domestic and International Market.
 Product development and Diversification to cater global needs.
 Elimination of Quota Restriction leads to greater Market Development.
 Market is gradually shifting towards Branded Readymade Garment.
 Increased Disposable Income and Purchasing Power of Indian Customer
 Greater Investment and FDI opportunities available.

iv. Threats:
 Competition from other developing countries, especially China.
 Continuous Quality Improvement is need of the hour as there are different demand
patterns all over the world.
 Threat for Traditional Market for Power loom and Handloom Products.
 International labor and Environmental Laws.
 To make balance between price and quality

After being severely battered by recession in the global markets and currency
volatility in FY09, credit profiles of the textile companies are expected to improve
with revival in the domestic demand and signs of improvement in the global markets.
However, appreciation of rupee and significant rise in cotton prices raise concerns on
the profitability. Domestic markets are expected to grow at healthy pace supported by
strong fundamentals such as rising disposable incomes, rising aspirations, favorable
demographics and growth in organized retail.
3 SKNL’s Financial Analysis
i. Financial Ratio Analysis

09- 08- 07- 06- 05- 04- 03- 02- 01- Sep-
Mar Mar Mar Mar Mar Sep Sep Sep Sep 00
Key Ratios
Debt-Equity Ratio 1.65 1.5 3.2 27.33 7.52 3.88 3.34 2.11 1.85 1.85
Long Term Debt-
Equity Ratio 1.07 0.93 2.1 18.04 5.35 2.92 2.43 1.49 1.33 1.36
Current Ratio 2.07 2.25 1.99 1.59 1.86 2.14 1.79 1.65 1.64 1.57
ROCE (%) 9.09 15.29 11.3 6.82 1.62 0 0 0 10.3 12.39
 8 2

Interest Cover - -
Ratio 1.6 3.41 2.97 2.17 4.21 7.17 0.17 0.13 1.22 1.69
From the above ratio analysis, it can be seen that the D/E Ratio of SKNL is very much
below the sector average providing SKNL with more flexibility and safety. The
Interest cover ratio is well above 1 indicating good liquidity health of SKNL.
In terms of MCap SKNL is second to Jaybharat Textiles Ltd. Thus, it reflects Strong
Market position and economies of scale on part of SKNL. And Pretty High ROCE
suggests that the Management is good in utilising the resources.
ii. DuPont Analysis

09- 08- 07- 06- 05- 04- 03- 02- 01- Sep-
Mar Mar Mar Mar Mar Sep Sep Sep Sep 00
PBIDT/Sales(% 19.8 18.6 22.3 21.5
) 5 21.46 3 2 9.55 6.51 6.32 8.21 4 23.39
Sales/Net Assets 0.54 0.78 0.68 0.74 0.3 0.42 0.45 0.61 0.6 0.61
Net Assets/Net 39.7 -
Worth 3.5 2.67 4.25 4 16.37 4.87 6.72 3.88 3.16 3.89
24.8 14.9
ROE(%) 1.23 25.29 3 6 5.77 0 0 0 5.64 17.06

iii. Comparison with Peers

Company Market Cap P/BV (TTM) ROE D/E

(Rs. in Cr.) (x) (%) (x)
Jaybharat Text 9,857.10 70.16 26 2.4

S Kumars Nation 1,927.56 1.99 1.2 1.65

Alok Inds. 1,614.99 0.73 11.8 3.88

Shree Ram Urban 398.78 16.82 -35.9 8.13

Pradip Overseas 343.35 1.13 41.5 2.39

Garden Silk Mill 313.79 0.64 16 2.06

Siyaram Silk 294.36 1.73 8.2 1.81

 Shri Lakshmi 294.08 0.96 21.1 2.96
Pantaloon Inds. 215.24 8.27 0 11.14

Donear Inds. 139.36 2.22 -23.3 1.85

Nakoda 93.03 0.98 26.8 2.48
Sarla Performanc 72.04 0.95 13.3 0.64

iv. Cash Flow Analysis

Company’s cost of Capital (WACC) = 10%
Dividends = Zero
Growth Rate, g = ROE * Retention Ratio
Since, Retention Ratio= 100%
Then g = ROE
Free Cash Flow = EBDIT (1-T) + D
 2736.8 m (1 - 0.3) + 265.4 m = 2181.16 m
 Market Value, V = FCF/(WACC - g)
 V = 2181.16 m / (0.1 – 0.0123)
 V = 248706.95 m
 Now, Total Shares = 236513838
 Therefore, Share Price P = V / Total Shares
 248706.95 m / 236513838
Therefore, Rs. 105.15 (Expected Stock Price)
Current Stock price = Rs. 85.45
4 Conclusion and Recommendation
It has been observed that with healthy financials and the newly added overseas
activities, viz., the acquisition of Leggiuno SpA and substantially all the assets of
Hartmarx Corp, which was not there in the previous year the company is going to be
grow at a fast pace. And the stock is expected undervalued and it is expected to be
around Rs. 105. My recommendation is ‘Buy’.
5 References: -
 www.sknl.co.in
 www.capitaline.com
 www.money.rediff.com
 www.fiber2fashion.com
 www.bloomberg.com
6 Attachemnts: -