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Indo Count Industries - To Buy or Sell - A Tech Perspective

Leading exporter in home textiles: Indo Count Industries Ltd (ICIL) has become one of India's leading vertically integrated textile companies. Started in 2007, its home textile division has emerged as the third largest manufacturer and exporter of bed sheets from India in recent times. Its key clients include global retailers like Walmart, Bed, Bath & Beyond, Macy's and JC Penny. Since FY2011 the revenues from this division have increased by 2.5x and reached Rs1,029 crore in FY2014. Backed by higher capacity utilisation and cost controls, the operating profit margin has also improved to 16.2% in the segment from 11.7% in FY2011. The company expects to sustain such level of margins in the coming quarters.

Exit from CDR expected in next few quarters: During 2007-08, the company incurred losses of Rs130-140 crore on the hedges marked against the export receivables. This coupled with a global downturn led to an erosion of its net worth. In July 2008, the company was admitted into the corporate debt restructuring (CDR) cell and Rs300 crore was spent on restructuring the company's debts. Now, with better profitability and an improving global economic environment, the company is likely to exit the CDR mechanism in the next few quarters. We believe that the exit from CDR would save the interest cost and increase the financial flexibility of the company. Led by a boost in the earnings, the company has reduced its long-term (LT) debt by over Rs100 crore over FY2011-14.

Trading at 5.5x FY2014 EPS, likely to get re-rated after CDR exit: We believe that the company's capacity expansion plan, focus on R&D, the new government's thrust on exports, reduction in long-term debt and imminent CDR exit are the various positive levers that are likely to boost the company's prospects in the next one to two years. We are expecting the company to post a CAGR of 22% in rough-cut earnings estimates over FY2014-16 on a high base of FY2014. Valuation wise, the company is trading very attractively at 5.5x FY2014 earnings per share (EPS) which is at a 20-30% discount to its industry peers like Welspun India. Hence, in view of the better earnings visibility and discounted valuations, we are expecting a re-rating in the company in the near future. We see a potential upside of 20-25% to the stock price of the company in the next four to six months.

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