Stock Analysis - Garden Silk Mills

Garden Silk Mills (Garden) had pioneered the branded polyester sari and dress material business in India through its high impact and coveted advertising campaigns.

It also makes polyethylene terephthalic acid (PET) chips, polyester filament yarn and fabrics like georgette, chiffon, faille, fabric, jacquard (dyed and printed) for blouses, skirts and dresses. Garden was once known for the quality of its fabrics and unique designs. But, in the past few years, the company has become more of a polyester manufacturer and shifted its focus quite substantially from being a branded fabric producer. This is clear from the contribution of the fabric business to sales, which is now just 8% (down from 36% in 2003), while the share of polyester chips in total sales increased to 43% (from 1% in the same period). In that sense, Garden is more of a company making intermediate products.

Polyester filament yarn (PFY) is produced from molten polymer or PET chips. This helps Garden to operate through the total value chain of the polyester textiles business. It has production facilities at Surat, which is one of the largest PFY markets. It also exports to UK, France, Spain, Portugal and other countries. Earlier, the polyester market was heavily taxed—almost 50% plus excise duty. This was later reduced to 8%. Last year’s fiscal stimulus package saw a further drop to 4% boosting consumption. Garden is expanding continuously. About six months ago, Garden started an additional 36,500 tonnes polymerisation capacity and announced that it will set up a 10,000tpa PET chips plant.

Globally, India and China are the two major producers of PFY. In the post-quota regime, major capacities have shifted to China and India as these two countries offer low-cost labour and production technology; Taiwan, Korea and Japan have become uncompetitive in the polyester market. Sales have grown through the downturn as has operating profit (up 106% in Q1FY10). For FY2009-10, Garden should achieve net sales of around Rs2,000 crore and net profit of Rs75 crore which will translate into an EPS of around Rs19.

The stock is trading at just four times the FY10E EPS. Buy stocks around Rs60.

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