Garden Silk Mills (GSM) is likely to witness exponential growth in its profitability driven by increase in its commercial production of partially oriented yarn (POY) and chips at its new continuous polymerization plant. The company is expected to double its revenue for year ended June 06. GSM was marred by the rising raw material prices, which will result in discouraging growth in net profit for the financial year ended June 05. However, these prices have softened recently resulting in substantial gains to the top line & profits of the company.  

The continuous polymerisation plant, which has commenced commercial production from August 2005, will meet in-house requirement and act as an additional revenue stream. The company is expected to register turnover of Rs.1350-1400 crore translating to an EPS estimate of Rs.28 per share for year ended June 2007.  

Background

Garden Silk Mills (GSM) is an Indian fabric engineer, design maker and manufacturer of polyester yarn. The company belongs to the Garden Vareli Group, one of country’s oldest groups in the textile business. GSM operates primarily in two segments, viz yarn & fabric. The company has manufacturing units in Vareli and Jolva, near Surat , Gujarat , for manufacturing polyester filament yarn (PFY), cloth and garments. It sells partially oriented yarn (POY), draw twisted yarn, draw warped yarn, sized yarn, greige fabric, dyed and printed fabric and apparel under well known brands "Garden" and "Vareli".  

Investment Rationale

Backward integration to drive revenues

GSM has commenced commercial production of its 600 tons per day (TPD) continuous polymerisation polyester (CPP) project at its Jolwa plant at Surat from mid of August 2005. This CPP project will not only fulfill the company’s internal requirement of polymer/chips of about 270 TPD for the manufacture of partially oriented yarn (POY) but also act as an additional revenue stream as the balance 330 TPD chips will be marketed through its extensive marketing channel.  

Big growth potential in PFY Business

The polyester filament yarn (PFY) industry provides an enormous growth opportunity. The company is expanding the PFY production to leverage on its extensive knowledge of PFY, processed yarn and fabric and strong marketing network. The company has also been increasing its yarn texturising capacity. The company plans to consolidate and further expand the yarn business over the next two years, and expects to be among the top three yarn manufacturers in the country.  

Stable business stream in apparel & fabric business

GSM has stable revenue stream from the fabric business & retailing of sarees. This is a stable business line with reasonable margins well supported by its vast marketing network within the country. Garden fabrics are available in a host of countries including UK, France, Spain, US, Australia, & the Gulf resulting in global presence for the company.  

Strong marketing & distribution channel

Garden Vareli’s extensive marketing network encompasses 68 dealers, 18 company owned depots and 293 retail outlets in over 65 cities in India . Besides this, garden fabrics are available in a host of countries around the world. The real estate value adds further to the ever-expanding sales & marketing channel leading to an unparalleled distribution network.  

Consistency in dividend

GSM has been a consistent dividend paying company over the last decade. The investors are deriving a dividend yield of 5 to 7% over the last five years. The company has declared a dividend ranging from 12 % to 25 % over the last five years in line with the company’s consistent track record.      

Benefits of leverage

GSM is highly leveraged in terms of its debt- equity ratio. The company’s expected debt/equity ratio stands around 1.2 times. The company has used the long-term debt to set up continuous polymerisation polyester (CPP) project at its Jolwa plant at Surat . The high debt equity ratio is generally presumed to be risky, however, high leveraging also results in substantial benefits to shareholders especially in improving business conditions resulting in increased earning potential and substantial value accretion.          

GSM has a three years moratorium, and an additional five years to repay its loans. Thus there would not be any immediate impact on the cash flow of the company. It would continue to enjoy the leveraging benefits of low cost funds resulting in increased EPS for its shareholders.  

The company recorded turnover of Rs 603 crores for 9 months ended March 05 against Rs.450 crore for the corresponding period for March 04. However, the PAT stood at a meager 6.67 crores for 9 months ended March 05 against a PAT of 29.77 crores for the corresponding period ended June 04 because of spiraling raw material prices. The company is expected to do well in the near future as the raw material prices have softened considerably resulting in increased profitability for the company.  

Outlook

The company is expected very soon with its financial numbers for year ending June 05. The company is expected to register a 30% growth in its revenue at Rs.798 crores. However, the spiraling raw material prices during 2004-05 will result in lower net profits for year ending June 05 as compared to year ended June 04. However, the financial year ending June 06 is expected to boost both the revenue & profitability of the company.