Getting The Weave Right

Do you belong to the breed of investors willing to risk money on expected policy announcements? If so, Himatsingka Seide could be a stock worth considering. The largest silk textiles company in the country and one of the largest in the world could be a major beneficiary if the government comes up with certain remissions on the MAT, especially for exporters.

Also, its new expansions, which possess an EOU status, are expected to come through by the middle of this year and could make a major difference to the bottomline in 1997-98.

If this year continues in the present form, the introduction of MAT in the 1995-96 budget will affect the company's bottomline to some extent. For the full year the company estimates a tax payout of roughly Rs 3.5 crore. It has already provided (unlike many others who have not) for a higher tax provision in the first half results, considering MAT at Rs 1.79 crore against Rs 0.6 crore in the previous half.

 

On the flip side, if the Budget does away with MAT, then the company will benefit directly to the extent of the tax paid. This would make a substantial difference to the bottomline.

However, even if MAT is not reviewed, the new projects are being set up as EOUs and will not come under the purview of MAT. These comprise a backward integration plan by setting up a weaving and processing plant for producing 1.2 million sq.mts of furnishing fabrics using high quality cotton and blends of other natural fibres. This project has been divided into two phases, each of a capacity of six lakh square metres per annum.

Himatsingka is also setting up a spun silk/blended yarn project with a capacity of 410 tpa near its existing plant at a cost of Rs 46.2 crore which is being funded through internal accruals. It has signed a technical collaboration agreement for this project with M/s Fiati Buratti SPA, Italy.

These high value added products are meant for exports only. The spun silk/blended yarn project is likely to start production in June 1997 while the cotton and blended fabric weaving project will start production in August 1997.

While the existing units have exhausted their tax-holiday period, the new units will be exempt from paying tax under the exemption given to EOUs. As of now, HSL has a product range including over 15,000 items in hi- fashion furnishing fabrics (contributing around 70 per cent to sales) and dress materials for women (around 30 per cent of sales). It has built up an exclusive clientele in the West (Europe and the US account for around 90 per cent of the turnover).

HSL imports its entire requirement of silk yarn from China, Italy and Brazil. Earlier, despite the fluctuation in the price of raw materials, it was successful in increasing margins regularly. This was mainly because of the end user segments that the company caters to. The high-value silk fabric segment in the international market is characterised by low volumes and high margins. The company is supported by a strong design studio equipped with CAD/CAM workstations and highly qualified designers.

However this time around, the increase in raw material prices has impacted on margins, primarily as the end user demand has slowed down somewhat. In the first half of 1996-97, margins have shown a decline for the first time in the last three years (see table).

One other reason could be the commissioning of capacity towards the end of last year which will take time to stabilise.

Given its core strengths and understanding of the overseas market, the extent to which HSL will succeed in its foray into blended furnishing fabrics remains to be seen. With the commissioning of the above projects in 1997-98, HSL should witness a massive jump in turnover and significantly higher profits.

Moreover, an older expansion programme should impact on sales and margins in this current year, thus negating the impact of tax payouts somewhat. The capacity of natural silk/blended fabrics which earlier was 1.13 million square metres was expanded in two phases -- in June and December 1995 -- to 1.68 million square mts in 1995-96. The full effects of this expansion should be felt this year.

That the company is cash rich is obvious with a cash profit of Rs 27.51 crore in 1995-96 on a turnover of Rs 48.17 crore. The reserves position is also extremely cosy with a 1995-96 end figure of Rs 76.84 crore (Rs 17.27 crore is accounted for by share premium) on an equity capital of Rs 9.55 crore.

Unfortunately for the shareholders, the company decided to park some of its surplus in the share market, but this has not succeeded as it has stopped trading in shares and converted the stocks-in-trade to investments. Investments have been shown at cost and not at market value.

Depreciation, which was Rs 1.98 crore in the previous half, has gone up to Rs 2.31 crore. Next year will see the depreciation figures go up further as the new projects are commissioned. However, company spokesmen say that Himatsingka should be able to keep margins at present levels.

Also, the company has remained relatively insulated from the high cost of borrowings as it has repayed all its term loans and avails only of some working capital finance. This combined with its earlier EOU status has ensured that the earnings growth has been quite steady.

The stock is trading at Rs 180 on the bourses.