We provide below a perspective on Welspun Syntex which is listed on BSE with codes as BSE: 508933 and ISIN: INE193B01039. This stock is presently not traded on NSE.
Do remember to keep an eye on below comments also where we will be updating all aspects about this stock in future.
Focus on specialty yarns and niche markets proves to be a game changer: While most of the polyester companies have reported losses or margin pressure in the past few years, Welspun Syntex Ltd (WSL) has posted a compounded annual growth rate (CAGR) of 43% in earnings over FY2010-15. Realising that there is an oversupply situation of grey polyester in India in FY2011, it had strategically moved its product mix towards specialty products like nylon, bulk continuous filament (BCF; used in carpets), drylon (used in bath rugs), where the OPM is high (in the range of 15-20%) and there is a captive demand within the Welspun Group.
Product mix shift moderates revenue growth but boosts margins: The company’s strategy to rejig its product mix is resulting in the moderation of revenue growth (high-quality thin nylon yarn reduces throughput). However, the spreads (OPM up from 6.5% to 10% now) are much better in specialised products due to a relatively lower competitive intensity. The management is looking at further converting the rest of the 35% capacity away from polyester to other specialised products which is expected to steadily boost the margins over the next couple years.
Comfortable gearing levels with robust return ratios: The company is likely to incur a capital expenditure of Rs25-30 annually for the next two to three years mostly for debottlenecking and conversion of existing polyester facility into nylon and other products. It is likely to be financed with internal accruals; it had generated over Rs45 crore of operating cash flow in FY2014 which will improve with margin expansion. Its current debt-equity ratio is also within the comfortable range of 1.2x. The company’s return ratios were robust for FY2015 at more than 25% and are likely to remain in the robust level for the coming few years.
Quality play available at attractive level: We feel that due to its focus on niche yarn segments, WSL has partially delinked from the vagaries suffered by the polyester yarn business. While the revenues are likely to post a muted annual growth of 6-8%, margin expansion is going to be the growth driver for earnings over FY2015-17. Overall, we are expecting a CAGR of 12.5% in profit after tax over FY2015-17E. Further, the recent commissioning of its BCF plant is likely to post a strong earnings growth from Q2FY2016 onwards. While the stock price has already shot up in the recent times, the stock is still trading attractively at 6.4x its FY2017E earnings. We see a potential upside of 20-25% to the stock price from the current level.
Key risks: Increased competition in its new products segment, extreme volatility in crude oil price and foreign currency exchange rates (exports currently contribute 22-25% to the revenues).
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