When it comes to the popularity different businesses enjoy with investors, analysts and the markets, the textiles industry figures quite low down the pecking order. Which is why the attention centered on Siyaram Silk Mills comes as a bit of surprise. SS Shetty, the textile legend’s CFO, is swamped with interview requests from analysts and investors alike when we meet him at his fifth-floor office in Mumbai’ posh Worli area. But before we can question him about the investor interest in his company — leading mutual funds such as ICICI have been investors for quite some time, with DSP BlackRock Micro Cap Funds (in the June 2014 quarter) and Reliance Mutual Fund (in August) being the latest entrants — Shetty turns the tables and asks us to explain the phenomenon.
What, then, is driving Siyaram’s share price rise? This definitely is a difficult question to answer — the company has grown in an industry characterised by a very low survival rate. By now, even the paanwallahs on Dalal Street know that textile stocks are usually duds. Short of a land bank — the only other explanation for high textile stock prices — few trends could explain Siyaram’s recent rally. But Shetty instantly dismisses the theory. “Unlike many other textile companies, which are cashing in on large land banks, we have nothing of that sort. It is the success of our core business and the efforts we put in over the last few years that are now paying off,” he says. This bit is true — a cursory glance at the numbers will show that the company’s fiscal performance has been improving, which could be one reason why long-term investors are betting on the stock.
Over the past decade, sales have grown at 16%, while profits have shown a much robust growth of 27%. This growth has been primarily driven by its internal resources, without much reliance on borrowed funds, making Siyaram one of the few companies to make return on equity (RoE) in excess of 20%. Add to this operating margins of 11% and ₹70 crore of cash from operations, partly used for distributing dividends. But will Siyaram be able to sustain these numbers in the future? Shetty definitely seems to think so. “The survival rate is very low in this business, and one vital reason for that is promoter greed. We have been conservative in our approach, all the while sticking to our finances and strengths. We have never gone overboard in expanding our capacities or entered unrelated businesses with aggressive borrowings,” he asserts.
Playing it safe
Shetty, who has been with the company since its inception, was elevated as the CFO three years back. His eye for detail and skill at managing the company’s finances have probably played a key role in Siyaram’s success story. But the key question remains — what is behind the company’s growth spurt? We reserve that question for company chairman and managing director Ramesh Poddar, who incorporated Siyram at the age of 22 in 1978, after completing his BSc. “What is working in Siyaram’s favour are our conscious efforts to continuously drift away from the inherent weaknesses that this industry and most of its players face,” he explains.
The first weakness, Poddar points out, is that the textile industry is highly capital-intensive, which means that most players build huge capacities, largely through borrowed funds. Invariably, when the downturn hits home, they are hurt badly and have to shut shop thanks to the interest burden. “In the past, many companies have gone bankrupt and the ones who are still around are surviving on land banks. To mitigate this, we reacted to market demands conservatively, deliberately increasing capacities gradually, in tandem with our finances. We are happier buying 20% to 40% of our requirements from outside and outsourcing processes instead of building huge capacities that cannot be absorbed by the markets,” he adds.
Poddar’s claim holds true — Siyaram’s current debt to equity is stable at 0.9 times, one of the lowest in the industry. Except in FY08, when debt to equity touched 1.98 times, the figure has remained at 1.26 times over the last decade. That, and the company’s ability to service interest costs. The company’s interest coverage ratio, which is calculated by dividing its earnings before interest and taxes by the interest cost, has remained at an average of 4.3 times over the last decade, highlights its conservative approach towards funding.
The other big weakness, says Poddar, is that the textile industry is highly competitive, with several organised and unorganised sector players in the fray. This intense competition leaves very little for textiles manufacturers. “Thankfully, we have been building our brands since inception and focus has remained on the same. In fact, when companies were fighting over urban customers, we were silently building our brand in rural and mass markets. We have simply extended that culture, which is now yielding good results,” he adds.
Massy does it
Siyaram built its advantages mainly in poly viscose-based fabrics, where larger players fear to tread thanks to high competition, high costs and challenging distribution networks. Today, it continues to generate 80% of its revenues from tier 2 and tier 3 cities, having established itself as the largest player in the suiting and shirting business in India with a 4% market share. Though this may seem minuscule, this only underscores the killing competition in this business. With an annual production capacity of 6.5 crore metre, Siyaram is the largest player in the poly viscose-based fabric segment, generating about 76% of its revenue from the fabric business. “Viscose-based fabrics account for the fastest-growing and largest-selling segment in the business and as a market leader, Siyaram has held a very strong position in this market over the past 25 years,” says Arvind Singhal, chairman of Technopak, a corporate advisory firm with an interest in the textile sector.
Mutual admiration
Domestic fund managers have taken a fancy to the stock
Indeed, the company has worked hard for its success with viscose-based blended fabrics. “Because of our focus on these fabrics, we were considered marginal players or irrelevant in the market in the past, as most players were chasing fabrics such as cotton, pure polyester, wool and others. Today, our focus on viscose is paying us huge dividends because of the demand and the growing size of the market,” says Shetty. That’s seconded by Prashant Agarwal, co-founder and managing director of textile advisory firm Wazir Advisors.
“In the past, viscose-based fabrics were considered low-end compared with costly wool and cotton fabrics. However, viscose- and polyester-based fabrics have fast replaced all other fabrics due to cost advantages, improvement in strength and looks, and adaptability to climate. Which is why this largest-selling segment in the textile chain is growing even faster on the back of existing demand and increased use as a substitute,” says Agarwal.
Siyaram’s dominance in the segment has also been because of its strong branding in the fabrics business, where it has developed several other brands to reach a variety of customer preferences. Apart from Siyaram, which is meant for the mass market, it boasts of premium brands such as J Hampstead and Mistair — the company has roped in actors Hrithik Roshan and Neil Nitin Mukesh, respectively, to back the brands. These properties have helped it move up the value chain and offer products to fit different needs, which may not have been possible under Siyaram. The brands now account for about 24% of its branded fabrics. The company is also leveraging its experience in viscose-based fabrics by introducing two premium brands — Zenesis and Moretti — in the cotton-based fabrics space.
The consumer shift in preference towards branded products has been brewing for a long time, but the industry has reached a juncture where awareness, availability and price have converged into a tipping point. “The launch of two premium cotton brands, entry into linen fabrics and increased focus on J Hampstead will hold the company in good stead as urban growth catches up with rural,” points out Harsh Mehta, analyst at HDFC Securities. The branded fabrics business works for Siyaram as long as customers see value in buying fabric and getting it stitched but, increasingly, people have started opting for readymade garments. “Over the years, the over-the-counter sales market for fabrics — at one point, 70% of the total market — has shrunk to 35%, as more and more people are buying ready-to-wear garments,” says Agarwal. That means the big challenge for Siyaram is how to prepare for these new realities.
Early in the game
Much before ready-made garments became the norm, Siyaram had ventured into this business as early as the 1990s, a decision that is now paying off. This move also made sense because of Siyaram’s own fabric manufacturing capacity and distribution and marketing capabilities. Initially, the company launched its own garments business, starting with men’s readymade garments under the Oxemberg brand with Bollywood actor Saif Ali Khan as brand ambassador.
Better than the rest
Siyaram's operating metrics are much better than its peers
That was in 1993; Oxemberg sales have grown at a strong pace since then. In a bid to replicate the success of Oxemberg and further de-risk its business, Siyaram expanded its brand portfolio with a greater emphasis on garments and brought on Indian cricket captain Mahendra Singh Dohni as the brand ambassador around 2006. Even though the garments arm now constitutes 17% of its total revenues, the Street has its reservations about the success of Siyaram’s foray into a market that is already populated by larger and much more established brands.
Which means that these brands need not just time but also a mammoth amount of money to grow — the company spent close to ₹30 crore-35 crore towards this end in FY13 and about ₹50 crore in FY14. Sure, this has helped them shore up contribution from garments from a mere 10 % in FY11, but Siyaram’s brands are still evolving and any real benefits from them might only translate into hard numbers in the longer term.
Not everyone views rising competition in the branded space as a concern for Siyaram, though. Says Singhal of Technopak, “I do not see a threat to Siyaram from larger brands on two counts: first, they themselves have a strong brand positioning, with Oxemberg being the largest-selling brand in this segment; and second, its large manufacturing capacities have helped the company capitalise on demand for fabrics, making it supplier to some of the biggest brands in the ready-to-wear segment.” Even otherwise, its brands are mostly targeted towards the mass segment, where the company has brand equity and marketing capabilities. Besides, the company is able to manage its growth because of the overall sluggish growth in the fabric business. For instance, in FY14, the company’s garments business recorded a robust 49% growth in revenue, driven mainly by 31% growth in volumes and 14% growth in realisations, which indicates that the company is able to exercise its pricing power.
Defining the future
This transition (from fabrics to branded garments), along with a sharper focus, is helping Siyaram improve margins, which were largely reflecting the commoditised nature of its business. The company has an operating profit margin of about 11%, closer to some of the companies in the premium and branded segment — Raymond has margins of about 11% and Arvind 14%. As the proportion of the garments business goes up and sales from the branded segments improve, there are expectations that the company might actually manage high margins and display an improvement in its return ratios. Unlike its fabric business, which has grown at about 12-13% over the last three years, its garments arm has been growing at a much faster clip of 22-25%. The higher margins from the garments business, in fact, are helping the company improve its margins and return ratios.
In the thick of action
The changing fortunes of the company have not gone unnoticed as the stock has gained four-fold in a year
Apart from its existing business and the brands Siyaram has launched so far, the company’s growth will be driven by the launch of new brands, entry into new categories and the uptick in clothing sales. “The company has recently entered the women’s ethnic wear market under the brand Siya.
Though the brand is relatively small, with annual turnover of just ₹25 crore, it is likely to scale up in the next two years,” says Varun Chakri, analyst at Karvy Stock Broking. The best part of this growth story is that it is set to come without much capex and spending. “Since the company is focusing on the garment segment, we believe that capex requirement will be at the minimum, as the company can easily outsource manufacturing.
Currently, the company outsources 40% of its garments requirement, while 60% is met through in-house manufacturing. The company aims to reverse the ratio to 60:40 by FY16,” says Tejashwini Kumari, analyst, Angel Broking. Improvement in margins without much requirement of funds for the business will enable the company to generate even higher cash flows in the years to come, helping it retire its debt. “We aim to reduce our debts further and keep just a percentage of cash in hand for suitable acquisitions in future,” says Poddar.
Meanwhile, the market has begun capitalising on this transition and is looking at its valuation gap to narrow down in line with some of the pure garment players. The stock has seen a run-up in share price — 187% in the last six months to ₹757 — leading to valuations going up. Since part of the re-rating and expectations are built into the share price, this could mean little scope for gains in the near term. The stock is currently trading at around 11 times trailing earnings, which is still reasonable compared with Arvind and Raymond, both trading at 21 times to 22 times their trailing earnings. This valuation gap can be justified on different counts, but Siyaram’s profile, too, is improving. Better return ratios, marginal debt, comparable operating margins and positive annual cash flows to name a few. The valuation gap should, over a period of time, capture these positives and start reflecting in its share price.
