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Demand normalisation to aid revenue growth…

About the stock: Siyaram Silk Mills (Siyaram), a fabric and apparel manufacturer, has created a strong brand portfolio largely catering to Tier II & III towns.

* Siyaram’s brand portfolio consists of reputed brands like Siyaram (flagship brand), Oxemberg, MSD and J Hampstead

* Over the last decade, the company has gradually expanded its fabric and garment capacities and simultaneously managed to reduce the debt/equity from 1.0x in FY12 to 0.2x in FY21.

Q1FY22 Results: SSML reported a resilient performance in a challenging scenario.

* SSML reported QoQ de-growth of 54% to | 233 crore for Q1FY22 (Q1FY21 revenue of | 24 crore, Q1FY20 revenue of | 326 crore)

* Though gross margins (including processing charges) improved 980 bps QoQ to 49.4%, negative operating leverage led to EBITDA margin decline of 310 bps QoQ to 12.7%

* Lower other income further dented the profitability with PAT down 78% QoQ to | 12.9 crore (Q1FY21: Net loss of | 67 crore)

What should investors do?

Over the last five years, the stock price has appreciated at a CAGR of 10%.

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value SSML at | 455 i.e. 14x FY23E EPS.

Key triggers for future price performance:

* SSML is expected to benefit from a demand revival post reduction/removal of restrictions on trade activities owing to its strong brand portfolio and panIndia distribution network

* Enhanced capital efficiency (low leverage and controlled working capital cycle) and better profitability would result in Siyaram reporting healthy RoCE of ~17% by FY23E

* Cost rationalisation measure adopted in FY21 led to a significant reduction in overheads. The management expects 25% of these cost savings to be structural in nature and likely to aid EBITDA margin improvement, going ahead

* July 2021 sales is trending ~70% of pre-Covid levels and is expected to pick up further pace during the festive season.

Alternate stock Idea: Besides SSML, in our textile coverage we also like KPR Mills.

* KPR Mills is among select vertically integrated textile players in India that has displayed consistent operating margins with strong return ratios

* BUY with a target price of | 2310

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