Stock Pick from Textile sector.

HERE IS WHY

• Promoters’ stake hike exhibits their confidence in the business
• Expected reduction in debt levels to improve its profitability
• Revival in textile industry and new branding campaign in fabrics gives good revenue visibility

Established in 1984, Sangam India (Sangam) has business interests across various sectors such as textiles, steel, infrastructure, power and energy. Sangam also has a strong presence in the Indian synthetic blended fabric segment with brands like Sangam and Anmol. Its various brands have the legacy of over two-and-half decades, with an unbeatable market leadership in the manufacture of PV, PC, worsted and Lycra fabrics. The company’s key clientele includes Reliance, Reid and Taylor, Donear, S Kumars, Raymond, Bossa and Grasim.

Sangam’s textile facility at Bhilwara, Rajasthan, is one of the largest and most modernized in the country. Its spinning division is ranked amongst world’s largest PV dyed yarn industry. The diversified facility includes spinning, weaving, processing, denim manufacturing and knitting. The textile business accounts for a major share of Sangam’s earnings. Sangam’s brands were relatively unknown in the domestic market. However, the company has stepped up marketing initiatives in the fabric segment to create strong brand presence. Brand promotion will play a key role in driving Sangam’s topline growth. The company has signed Bollywood star Ajay Devgan as its Brand Ambassador and commenced an extensive brand campaign. This campaign would definitely help Sangam to build strong brand connect through new brand endorsements.

On financial front too, Sangam showed decent performance during the last financial year. The company’s full year revenue stood at `1,440 crore in FY2014 against `1,485 crore, with a marginal negative growth of three per cent on a yearly basis. However, the negative growth is predominantly due to the subdued performance in its toll business. The textile business which contributes more than 97 per cent showed a stable performance with marginal growth of 0.3 per cent. Further, the company has debt of `564 crore on its balance sheet as of 31st March, 2014 and the debt was showing a decreasing trend in the last three years. The revival in the economy is expected to show good traction in the textile business and is expected to show exponential decrease in Sangam’s debt level.

Further, an interesting fact during March ‘14 quarter was that the promoters of Sangam had increased their stake to 42.80 per cent from 30.78 per cent during December ‘13 quarter. Also, the pledged shares of the promoters too decreased to nil from 7.86 per cent during the same period. Th is provides an assurance that the management has considerable confi dence in the business and are definitely willing to reduce the company’s debt levels, resulting in an improvement in the profitability. At current market price, the stock is trading at a PE multiple of 5.5x its trailing twelve months EPS of `10.27. Considering the increasing promoters’ confi dence in the business, expected improvement in its profitability and revival in the textile market, the valuation is quite attractive as compared to its peers. Hence, we recommend our readers to take an exposure in the stock with an investment horizon of one year.