Analysts sceptical about Alok’s ambitious plans

On September 25, Alok Industries announced a rights issue

of Rs 551 crores, which is likely to let the company gain through savings on interest cost. It would have had to pay if opted to raise more debt. Since the announcement, the company’s stock outperformed the Sensex, with a gain of 9.1 per cent, compared with the benchmark index’s rise of two per cent. The stock, which touched a nine-year low of Rs 11 on August 28, has risen 21 per cent since then to Rs 13.40, with a valuation of 2.3 times FY14 estimated earnings, compared with the average target multiple of two times estimated by analysts.

However, in a report on September 26, Bharat Chodda, analyst at ICICI Direct said, “Shareholders have not benefited, either through dividend or share appreciation, as the company has continuously expanded, and diluted or raised debt.” To improve its net profit and cash flow, Alok Industries has chalked out a strategy to reduce debt, boost asset turnover and improve the return on capital employed (ROCE)) over the next three years. But the stock market would watch the developments closely before making any moves since some of the targets appear ambitious.

In 2011-12, the company’s consolidated debt-to-equity ratio was about five times and interest costs stood at 52 per cent of the operating profit. This led to a net loss of Rs 28 crores (on an adjusted basis), compared with a net profit of Rs 271.54 crores in 2010-11. Had it raised Rs 551 crores through debt, it would have hit its balance sheet and profitability further. So now apart from the rights offer, the company also plans to raise about Rs 2,500 crores in two years by exiting non-core businesses such as real estate, to reduce debt. The company plans to reduce the debt-to-equity ratio to 1.5 times by around 2016. However, after the quarter ended June, the company hasn’t announced any asset sale, which has led the analysts to keenly observe the moves.

Its retail business under the ‘Homes and Apparels’ brand decided to shut 45 non-profitable stores out of 137 by September-end. Though its 154 shops-in-shops through franchises are recording good business, the company has stated it is not satisfied with the progress, it would gradually wind up this business. This strategy applies to its loss-making UK retail chain of stores under the ‘Store 21’ brand as well.