Bombay Rayon Fashions

Investors with a long-term perspective can buy the stock of small-cap textile player Bombay Rayon Fashions (BRFL), manufacturer of fabric and apparel. At Rs 189, the stock trades at 10.6 times its trailing 12-month per share earnings. Though not strictly comparable, this valuation is at a discount to other export and apparel textile players such as Gokaldas Exports and S Kumars.

In a year marked by sliding textile exports, BRFL has doubled its exports, added clients and increased business per client, boding well for its growth prospects. Healthy growth in revenues, an integrated manufacturing process leading to stronger margins and significant manufacturing capacities are other positives for this company. With consumer demand now on an upswing, domestic markets too hold good prospects.

BRFL makes fabric primarily for the domestic market, while garments are channelled almost entirely into exports. Higher-margin garments have contributed 64 per cent to sales in 2008-09, up from 43 per cent the year earlier. With design offices in India, New York, London, Amsterdam and Italy, among others, BRFL is able to provide a wider range of services. Besides creating its own designs according to seasons and trends, it works with clients to manufacture fabric and garments to suit their requirements.

Export strength

Export revenues have more than doubled in FY-09, contributing 63 per cent to the year's revenues. This is a huge jump from the 40 per cent contribution in earlier years. The increase in exports amid the global slump, was the result of the trend of retailers turning to increased sourcing from low-cost suppliers. BRFL's clients are large-scale manufacturers and retailers such as Inditex, Carrefour, Walmart and so on.

As global players went in for cost controls, BRFL had scalability in terms of production capacity to meet a step-up in client requirement. The company has thus increased business per client and added new clients. Hitherto concentrated in the UK and the EU, BRFL is expanding geographical footprint, exploring tie-ups in Japan and China. It also has clients in West Asia.

Integrated manufacturing

The manufacturing process is integrated, from yarn dyeing to fabric processing to making garments. Such integration gives it the flexibility to alter production according to demand and helps cost control. Operating margins have held above 20 per cent for the past three years; margins in the first half of FY-10 are at 25 per cent.

The company had undertaken massive capacity expansions — fabric capacity is at 120 million meters per annum against 50 million in 2007. Garment manufacturing capacity increased from 19.2 million pieces per annum in 2007 to 73.8 million pieces currently. Its Maharashtra plant is expected to begin production from the next quarter.

Interest and debt

Sales, over the past three years, grew at a compounded annual rate of 88.7 per cent, while net profits doubled in the same period. Profit growth has been helped by reductions on the raw material front and manufacturing costs. For the first half of FY-10, sales have grown 28 per cent, though profit growth was at 9 per cent.

Interest costs, increasing almost five times between FY-07 and FY-09, have been the key cause for slower profit growth. Net margins dropped to 11 per cent in FY-09 from 13 per cent a year earlier. Similarly, net profit margins in the first two quarters of FY-10 have been lower than the margins in the same period in FY-09.

Debt has been taken on to fund capacity expansions. This debt comes under the Government's Technology Upgradation Fund Scheme that comes with an interest rate of 5 per cent and a long repayment period of 10 years. The company has further plumped up its funds base through equity — Rs 436 crore was raised through a GDR issue last quarter, Rs 322 crore came in earlier via an equity stake sale, another Rs 193 crore is in the pipeline post warrant conversions. With funds required now completely tied up, interest outgo is set to dwindle over the next few quarters.

Points of concern

In mid-2008, BRFL acquired high-end Italian brand; outlets span Portugal, Netherlands and Italy. It closed on a loss for FY-09, and BRFL hopes to break even this year. The first Indian store has also been opened in Mumbai, with no concrete roll-out plans on the cards. Higher-end retail is yet to return to it's hey days in the European markets. The retail venture is not likely to contribute significantly to revenues or profits in the near-term.

BRFL is also facing difficulties in sourcing yarn and grey fabric, which could lead to delays in production. On the forex front, the company has an average contract term of three months, mitigating risks of a steady decline in exchange rate, butexposes the company to short-term exchange rate fluctuations.

via BL