Maintaining b/s strength amid tough demand scenario
Given the weak demand scenario for fabric and apparel categories in domestic markets and excess inventory in trade channels, Siyaram (SSML) reported revenue decline of 64.4% YoY to | 173.6 crore (up 3.2x QoQ). However, the recovery rate trajectory has been on an upward trend MoM. Green shoots are visible for the fabric division (~80% of revenues), wherein recovery rate in September reached 60-70% of pre-Covid levels. Garmenting segment continued to be a laggard with recovery rate reaching 30-40% in September. Gross margins (including processing charges) contracted sharply by 900 bps YoY to 34% owing to higher discounting and schemes given to dealers/distributors. However, cost rationalisation measures (employee, other expenses down 54%, 62%, respectively, YoY) curtailed EBITDA losses, to a certain extent. The company reported EBITDA loss of | 5.6 crore (Q1FY21: | 43.7 crore loss, Q2FY20: | 55.2 crore). Subsequently, SSML reported a net loss of | 13.6 crore vs. net profit of | 30.1 crore in Q2FY20 (Q1FY21: | 67.3 crore loss).
Fabrics revenue recovery faster than garmenting division
With the upcoming festive season, we expect recovery rate to pick up pace, especially for the fabric division in Q3FY21E. The company reiterated its stance of not aggressively pushing sales in the trade channels at the cost of stretched working capital cycle (to avoid higher receivable days and risk of sales return later). On the segmental front, fabric division saw better traction (reached 60-70% of pre-Covid sales in September), owing to its strong brand patronage and distribution network that mainly encompasses Tier II/III cities. Higher competitive intensity and sluggish demand offtake continues to weigh on the performance of garmenting segment (reached 30-40% of preCovid sales in September). The channel inventory for garment appears to be on the higher side. This has led to lower flow of new orders from dealers/distributors. While H1FY21 was nearly a washout period owing to store closures and subdued demand (revenue de-growth: 74% YoY), we expect H2FY21 to be significantly better on the back of improved consumer sentiments and festive demand.
Valuation & Outlook
Despite challenging times, SSML continued to focus on stringent control on cash conversion cycles, which resulted in further reduction in debt by ~| 35 crore in H1FY21. The company’s focus on strengthening balance sheet is visible with significant decline in debt from | 590.0 crore in FY18 (D/E: 0.9x) to | 360.0 crore (D/E: 0.5x) as on H1FY21. Some of the cost rationalisation measures undertaken by the company in H1FY21 are likely to sustain post normalisation of demand scenario. This would aid EBITDA margins, going forward. We model earnings CAGR of 19% in FY20-22E (on comparatively low base) and expect the company to generate RoCE of ~13% in FY22E. The company continues to trade at reasonable valuations. Hence, we maintain BUY rating with a revised target price of | 170 (8.0x FY22E EPS).
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