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Ginni FilamentsLimited

Independent Equity Research

Enhancing investment decisions

In-depth analysis of the fundamentals and valuation

Business Pros ects

Financial Performance

Cor orate Governance

Management Evaluation



Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making

process – Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade)

Fundamental Grade CRISIL’s Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to

other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective

of the size or the industry they operate in. The grading factors in the following:

Business Prospects: Business prospects factors in Industry prospects and company’s future financial performance

Management Evaluation: Factors such as track record of the management, strategy are taken into consideration

Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms

The grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals)

CRISIL Fundamental Grade Assessment 5/5 Excellent fundamentals

4/5 Superior fundamentals

3/5 Good fundamentals

2/5 Moderate fundamentals

1/5 Poor fundamentals

Valuation Grade CRISIL’s Valuation Grade represents an assessment of the potential value in the company stock for an equity investor over a

12 month period. The grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market

price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Valuation Grade Assessment 5/5 Strong upside (>25% from CMP)

4/5 Upside (10-25% from CMP)

3/5 Align (+-10% from CMP)

2/5 Downside (negative 10-25% from CMP)

1/5 Strong downside (<-25% from CMP)

Analyst Disclosure

Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias

the grading recommendation of the company.

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CRISIL Equities

Spinning an expansion yarn Industry Textile

Date October 26, 2010

Independent Research Report – Ginni Filaments Ltd

1

Ginni Filaments Ltd (GFL) is an integrated manufacturer of cotton yarns and fabrics with a

presence across the textile value chain. A change in product mix owing to new product

launches and an ambitious debt-funded expansion plan are expected to drive growth.

However, risks relating to vulnerability to a demand slowdown, limited ability to pass on

hikes in raw material prices, high gearing and uncertain forex movements remain. Hence,

CRISIL Equities assigns GFL a fundamental grade of ‘2/5’, indicating that its fundamentalsare ‘moderate’ relative to other listed securities in India.

Change in product mix improves prospects

In its bid to reduce dependence on yarn (78% in FY07 to 55% in FY10), GFL forayed into

garments, non woven fabrics and the wipes market which helped it remain operationally

(EBITDA) profitable during the tough FY08-09 period. Manufacturers of yarn typically have

a limited ability to pass on hikes in raw material prices owing to higher bargaining power of

downstream companies. Hence, a sustained reduction in the yarn segment’s contribution

to overall revenues bodes well for the company. Moreover, we forecast higher-than-group-

level growth in the non woven segment owing to: 1) robust demand in the meditech and

hometech segments of the technical textile industry, 2) an established position in the

segment, 3) inherent cost benefits of producing from India, and 4) a lead time of ~six

months over competitors due to stringent client approvals.

Aggressive capex plans to aid growth, albeit dependent on new TUF scheme

Taking a cue from the pick-up in industry-wide demand, the company is embarking on an

ambitious two-phased expansion plan. In the first phase, the company aims to double the

non woven capacity and increase its yarn production by 2 tonnes per day (tpd). In the

second phase, it aims to increase the garmenting capacity to 6 mn pieces per annum and

enhance its fabric processing capacity to 14.5 tpd. The expansion plans hinge on the

availability of loans under the Technology Upgradation Fund (TUF) scheme, which is

currently on hold. The government is expected to release an amended version of the

scheme in H2CY10.

Vulnerable to slower-than-expected revival in demand and high gearing

As witnessed during FY09, the company is vulnerable to a slowdown in demand as this

adversely affects its margins. Also, GFL’s high dependence on debt, albeit low cost, inaddition to its high gearing (3.9x debt to equity in FY10), to fund its capex plans is a cause

of concern as it would strain its financials.

Key risks: Forex exposure, raw material prices and competition in non woven

With the contribution of international operations to overall revenues set to increase from

the current levels (66% in FY10, 69% in FY12), GFL’s exposure to fluctuating forex rates is

bound to increase. Also, an increase in raw material prices and the entry of competitors in

the non woven segment would strain GFL’s margins.

Valuations – upside from the current levels

We have used the discounted cash flow (DCF) method to value GFL and arrived at a fair

value of Rs 18.2 per share. This implies a P/E of 4.5 in FY11 and 8.5 in FY12. We initiate

coverage on GFL with a valuation grade of ‘4/5’, indicating that the market price of Rs 16.2

(as on October 26, 2010) has ‘upside’ from current levels.

Key forecast (consolidated financials)

(Rs mn) FY08 FY09 FY10 FY11E FY12E

Operating income 3,069 4,152 5,112 5,875 6,097

EBITDA 212 333 659 879 848

Adj Net income (176) (315) 54 289 161

EPS-Rs (3.0) (5.3) 0.8 4.0 2.1

EPS growth (%) (824.0) 85.6 (112.7) 468.4 (46.6)

PE (x) (3.1) (0.8) 14.2 4.0 7.1

P/BV (x) 0.5 0.3 0.8 0.9 0.8

RoCE (%) 0.5 1.7 8.4 11.4 9.0

RoE (%) (14.8) (33.5) 6.0 25.1 11.8EV/EBITDA (x) 18.5 12.3 7.1 6.4 7.2

Source: Company, CRIS IL Equ i t i es est imates

CFV matrix

Fundamental grade of '2/5' indicates moderate fundamentalsValuation grade of '4/5' indicates CMP has upside

1

2

3

4

5

1 2 3 4 5

Valuation Grade

F u n d a m e n t a l G r a d e

Poor

Fundamentals

Excellent

Fundamentals

S t r o n g

D o w n s i d e

S t r o n g

U p s i d e

Key stock statistics

BSE/NSE Ticker GINNIF/GINNIFILA

Fair value (Rs per share) 18.2

Current market price (as on

Oct 26, 2010) 16.2

Shares outstanding (mn) 71

Market cap (Rs mn) 1,150

Enterprise value (Rs mn) 5,140

52-week range (Rs) (H/L) 17.9/6.5

P/E on EPS estimate (FY11E) 3.8

Beta 0.9

Free float (%) 18.9

Average daily volumes (three

months) 99,183

Share price movement

0

60

120

180

240

300

S e p - 0 8

J a n - 0 9

M a y - 0 9

S e p - 0 9

J a n - 1 0

M a y - 1 0

S e p - 1 0

GFL closing share price Nifty

Indexed to 100

Analytical contact

Sudhir Nair (Head, Equities) +91 22 3342 3526

Arjun Gopalakrishnan +91 22 3342 3503

Arun Vasu +91 22 3342 3529

Email: [email protected] +91 22 3342 3561



CRISIL Equities

Ginni Filaments Limited

2

Table: 1 GFL: Business environment

ParameterTextiles

Yarn Non woven Others

Revenue

contribution (FY10)

55% 24% 21%

Revenue

contribution (FY12E)

53% 24% 23%

Product / service

offering

- Cotton yarn - Non woven fabrics - Grey cloth

- Processed fabrics

- Wipes and others

- Garments

Geographic

presence

- Export-oriented company; international operations contribute 66% of FY10 revenues

Market position• Very small player in the highly fragmented yarn market

• Has the first-mover advantage in the non woven market

Industry growthexpectations

• Yarn will grow at a 5.1% CAGR over the next four years

• Non woven industry is expected to grow at 8-9% in line with the meditech industry

Sales growth (FY08-

FY10 – 2-yr CAGR)

11% 182% 17.8%

Sales forecast

(FY10-FY12 – 2-yr

CAGR)

8.4% 10.6% 12.6%

Demand drivers • Recovery in global demand

• Drying up of global inventory

• Increase in spending on healthcare

• Competitive advantage of producing

from India, approvals/certificates

obtained, first-mover advantage

• The company’s focus on reducing

its exposure/dependence on the

yarn division

Key competitors • Alok Industries, Suominen Corporation, Ahlstrom Osnabruck GmbH

Source: Company, CRIS IL Equ i t i es



CRISIL Equities


3

Grading Rationale

Diversified product mix improves GFL’s prospects

Over the past three years, GFL has consistently reduced its dependence on the yarn

division by diversifying its product offerings. The company has forayed into garments,

non woven fabrics and the wipes market which has helped GFL remain operationally

(EBITDA) profitable during the tough FY08-09 period.

Figure 1: Division-wise revenue contribution Figure 2: Division-wise EBITDA contribution

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY08 FY09 FY10 FY11E FY12E


-200%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%



Source: Company, CRISIL Equities Source: Company, CRISIL Equities

But dependence on yarn remains

GFL’s efforts to diversify its operations have been moderately successful. Yarn remainsthe key segment with 55% contribution to revenues and 51% to EBITDA in FY10 (78%

of total revenues and 100% of EBITDA in FY07). We expect yarn contribution to stay

firm at these levels till FY12 (53% of total revenues and 52% of EBITDA). Cotton yarn

is a commodity and, hence, there is limited scope of differentiation in this market. The

commoditised nature of the industry puts it at an inherent disadvantage - companies

are unable to completely pass on hikes in raw material prices owing to the higher

bargaining power of downstream companies. The cotton yarn market logged a CAGR

of 5% between 2005-06 and 2009-10. GFL’s yarn division clocked a CAGR of 16%

during FY06-10, outpacing growth in both domestic (5.6% between 2005-06 and 2009-

10) and export markets (4.2% between 2005-06 and 2009-10). A fall in volumes in

FY09 coupled with the company’s inability to pass on hikes in raw material prices in

FY08 and FY09 affected its profitability. While EBITDA margins were 2% in FY08, the

company made losses in FY09. However, the yarn division has staged a recovery in

FY10 (10% margins), albeit still lower than peak margins of 17% in FY07.

The yarn industry has low scope

of passing on hikes in raw

material prices owing to limited

bargaining power with

downstream companies





CRISIL Equities


5

12,000 tonnes per annum. The mechanised hydro entanglement technology ensures a

high level of hygiene - the value proposition of this product. High hygiene levels and the

high absorption characteristic of non woven products make it an ideal component for

multiple uses like wiping (both dry and wet) and hygiene applications (surgical gowns

and bandages).

GFL primarily supplies non woven fabrics to the meditech and hometech segments of

the technical textile industry. Amongst the two, GFL generates higher revenues from

sales in the meditech segment which is dependent on the growth of the health sector.

Products in this segment typically need sterilisation, should be non-carcinogenic and

anti-allergen in nature.

According to the Office of the Textile Commissioner, the meditech industry is expected

to grow at a CAGR of 8.3% over FY08-FY13, which pegs the market at Rs 2,298 mn in

FY12. During the same period the hometech segment is expected to grow at a CAGR

of 11.7% to Rs 78,299 mn in FY12. The hometech industry comprises textile

components used for domestic applications. Its usage varies from components for

mattresses and pillows to mosquito nets. However, within the hometech industry, GFL

supplies mostly to the non woven wipes category which was valued at Rs 100 mn in

FY08. It is expected to grow at a CAGR of 14.9% during FY08-13 to touch Rs 174 mn

in FY12.

GFL’s growth in terms of revenues and profitability is aided by four main factors:

• Being one of the first domestic manufacturers in this sphere, GFL has a lead time

of ~18 months (12 months to set up the plant + six months of stringent client

approvals) over its competitors.

• Being a product in which cleanliness and hygiene levels are paramount, buyer

loyalty will be high as they would prefer to deal with a tried and tested player in the

market.

• GFL has cost competitiveness compared to international players due to the natural

advantages of producing in India: 1) the availability of fibre - polyester and viscose

- at competitive rates in India; 2) the Central government’s TUF scheme; and 3)captive generation of power, at Panoli, at relatively low prices give GFL a cost

advantage.

GFL does not involve agents in this line of business as the product is too technical and

the buyers typically are large corporates. This means that GFL ends up cornering a

higher amount of profit for itself.

GFL’s non woven products

cater mainly to the hometech

and meditech segments of technical textile industry



CRISIL Equities


6

Figure 5: Technical textile industry in 2008-09E

( ~Rs 463 bn)

Figure 6: Technical textile industry in 2011-12E

(~Rs 632 bn)

Agrot ech1%

Medi t ech4%

Mobi l t ech7%

Packt ech36%

Sport ech7%

Bui l dtech5%

Cl otht ech16%

Homet ech12%

Prot ech3%

Geot ech1%

I ndutech8%

Agrot ech1%

Medi t ech4%

Mobi l t ech7%

Packt ech37%

Sport ech7%

Buil dt ech5%

Cl otht ech15%

Homet ech12%

Pr otech3%

Geot ech1%

I ndut ech8%

Source: O f f i ce o f the Text i l e Commiss ioner Source: O f f i ce o f the Text i l e Commiss ioner

The success of the non woven fabric division during the FY08-09 period helped GFL

stay profitable at the EBITDA level. Despite difficult times, the high acceptance of this

product has helped it grow consistently over the past three years. Currently, the

company exports 90% of production. We expect domestic sales to contribute 20% of

revenues over the next two years as the company would want to tap the hitherto

untouched domestic market, which would also give higher realisations owing to minimal

competition.

Table 3: Non woven fabric division snapshot

FY08 FY09 FY10

Revenues (Rs mn) 145 864 1156

Y-o-y 496% 34%

EBITDA (Rs mn) 39 206 259

Y-o-y 427% 25%

Margins (%) 27% 23% 21%

Volume growth (CAGR FY08-10) 181%

Revenue growth (CAGR FY10-12E) 10.6%

Source: Company, CRISIL Equities

The company’s plans of doubling production capacity are expected to come on stream

by March 2012. This bodes well for GFL as it will help reduce dependence on the yarn

division and also help garner a higher market share in the non woven market. We

expect the non woven fabric division to grow at a CAGR of 10.6% during FY10-12 and

expect a small drop in average EBITDA margin to ~20% owing to the entry of

competitors in the medium term.

A host of other products aid in product diversification

In line with its strategy to reduce dependence on yarn, GFL’s product stable includes

grey fabric, processed fabric, garments, wipes and others. In FY10, these products

contributed 19% to revenues and 8% to EBITDA. We expect their contribution to

improve in the medium term (20% to revenues and 11% to EBITDA).

The company has forward integrated its non woven operations by entering the wipes

and others category. The Office of the Textile Commissioner expects the Rs 100 mn

The non woven fabric segment

is the key growth driver for GFL

in the future

The growth of other products

over the past few years has helped reduce the dependence

on the yarn division



CRISIL Equities


7

wipes market to double over the next five years. Though the division has been making

losses since inception, we expect this product line to turn profitable in the current fiscal

owing to higher volume growth. We expect wipes to breach the Rs 60 mn break-even

mark in terms of sales in this fiscal.

Processed fabrics, grey fabrics and conversion have steadily grown at a CAGR of 11%

during FY08-10 with average EBITDA margin of 7.1%. GFL’s expansion plans (from 9

tpd to 14.5 tpd) for the processed fabrics segment is expected to be commissioned by

March 2013. Post expansion, we expect better utilisation to drive this division’s average

margin to ~ 9%.

Garments: GFL entered the garments business in FY07 and has grown at a CAGR of

51% over FY08-10. We expect this product line to continue growing, albeit at a slower

pace. The garments division has become EBITDA accretive since FY10. We expect

garments to generate average EBITDA margin of 12% during FY10-12 owing to better

capacity utilisation to aid robust demand. GFL’s planned capacity expansion in the

garment segment, from 3.6 mn pieces to 6 mn pieces per annum, is expected to be

commissioned by March 2013.

A TUF capex call

Taking a cue from the recovery in demand in the textile industry, the company plans to

expand capacities over the next two years. It plans to invest ~ Rs 1,400 mn in two

phases.

• Phase I entails an investment of ~ Rs 1,070 mn in doubling the non wovencapacity to 24,000 MT per annum, increasing the spinning capacity by 10,464

spindles and adding three knitting machines, which will increase output by 2 tpd.

GFL is expected to raise TUF loans to the tune of Rs 713 mn in this phase. The

rest will be funded through internal accruals. Phase I is expected to be

commissioned by March 2012.

• Phase II demands an expenditure of ~ Rs 330 mn in increasing the processing

capacity from 9 tpd to 14.5 tpd. GFL is also expected to set up another garmenting

unit for producing 3.6 mn pieces, taking the total production to 6.0 mn pieces per

annum. A majority of expansion in this phase is also expected to be funded by TUFloans (~Rs 217 mn), the promoter is expected to invest Rs 50 mn by way of

preference shares and the rest is expected to be funded by internal accruals.

Phase II is expected to be commissioned by March 2013.

We expect product mix to change post expansion. The contributions of various

segments would be as follows:

• Yarn contribution to moderate to 38% of total revenues and 32% of EBITDA in

FY15 (53% of total revenues and 48% of EBITDA in FY12).

• Non woven fabric contribution to improve to 34% in revenues and 46% in EBITDA

in FY15 (24% of total revenues and 39% of EBITDA in FY12).

• Others contribution to improve to 26% of revenues and 22% of EBITDA in FY15

(20% of revenues and 13% of EBITDA in FY12).

Taking the cue from a pick-up in

demand, GFL is expanding

capacities



CRISIL Equities


8

Key risks

Slower-than-expected recovery in developed nations

International markets constituted 66% of GFL’s sales in FY10. The company is firm in

its strategy of catering to the international markets. However, in the event of a slower-

than-expected global economic recovery, GFL would face a strain on its financials due

to high leverage and payment obligations under corporate debt restructuring (CDR).

High gearing a worry

Historically, akin to the textile industry, GFL has favoured high gearing and used debt

to expand capacities. The minor improvement in GFL’s gearing 3.9x in FY10 (5.0x

FY09) is mainly due to the (CDR) activity in FY10 where the promoters had to convert

unsecured loans to equity. The restructuring activity also meant that the loans will be

heavily back-loaded and repayment must be made in 40 quarterly instalments in aballooning fashion. This puts considerable pressure on the company’s finances in the

future. Additional debt by way of planned capex (aforementioned) over the next two

years will only add to the strain on the company’s finances, especially in the event of a

slowdown in demand.

Figure 6: GFL’s debt repayment schedule as of FY10

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2 0 0 9

2 0 1 0

2 0 1 1 E

2 0 1 2 E

2 0 1 3 E

2 0 1 4 E

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E

2 0 1 9 E

Rs mn

Long term loan (in Rs mn) Working capital term loan (in Rs mn)


Vulnerable to fluctuations in forex rates and raw material prices

As the company focuses on generating a majority of its sales internationally, it is

vulnerable to fluctuations in forex rates. Additionally, it is also exposed to fluctuations in

prices of key raw materials - cotton, polyester and viscose - which it may be unable to

pass on to the customers, as was the case in FY08. Hence, any wild fluctuations in

forex rates and the prices of raw materials would adversely affect GFL’s margins.

Exposure to international

markets and vulnerability to raw

material price fluctuations are

major risks for GFL



CRISIL Equities


9

Financial Outlook

Revenues to grow at two-year CAGR of 9.8% to Rs 5,714 mn in FY12

We expect a recovery in the yarn segment owing to an uptick in volumes and

improvement in realisations to drive GFL’s growth over the next two years. GFL’s

revenues are estimated to grow at a CAGR of 9.8% to Rs 5,714 mn in FY12. In

addition, we also forecast better utilisation in the non woven and processed fabric

segments to cater to robust demand growth. The non woven and fabrics segments are

estimated to grow at a CAGR of 10.6% and 14.4%, respectively, during FY10-12.

Figure 7: Revenues expected to grow at two-year CAGR of 9.8%

0

1000

2000

3000

4000

5000

6000

FY07 FY08 FY09 FY10 FY11 FY12

Rs mn

Net sales

Source: Company, CRIS IL Equ i t i es

EBITDA margins to improve in the medium term due to stable yarn

market

GFL will reap the benefits of procuring raw cotton at lower prices during the start of the

season in FY11. This will help it garner higher EBITDA margins of 15.0% (12.9% in

FY10) at the group level. We expect the company to have adequate cash to procure

cotton at the start of the next season as well. A moderate change in the product mix

towards higher-margin products, i.e. non wovens (average margin 22% during FY10-12

period) and others (average margin 9% during FY10-12) is also expected to drive

EBITDA margins and improve profitability.

Revenues likely to grow at a CAGR of 9.8% driven by a

spike in yarn realisations



CRISIL Equities


10

Figure 8: EBITDA and EBITDA margins

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1000.0

0%

2%

4%

6%

8%

10%

12%

14%

16%

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Rs mn(%)

EBITDA Margin


PAT to grow at a two-year CAGR of 73.3%, EPS to increase from Rs

0.8 in FY10 to Rs 2.1 in FY12

GFL’s consolidated adjusted PAT (excludes extraordinary items) is expected to grow

from Rs 54 mn in FY10 to Rs 161 mn in FY12, driven by growth in top line and an

improvement in margins. FY11 is expected to witness an increase in net profits to Rs

289 mn owing to better realisations in the yarn division and a carry-forward of

accumulated losses which gives the company tax breaks. The company’s EPS is

expected to increase from Rs 0.8 in FY10 to Rs 2.1 in FY121

. RoCE is expected toimprove to 9.0% in FY12 from 8.4% in FY10 due to improvement in both revenues and

margins. RoE is expected to improve to 11.8% in FY12 from 6.0% in FY10.

Figure 9: EPS to witness high growth in FY11 Figure 10: RoCE and RoE

(6.00)

(5.00)

(4.00)

(3.00)

(2.00)

(1.00)

-

1.00

2.00

3.00

4.00

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Rs

EPS

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(%)(%)

RoCE RoE

Source: Company, CRIS IL Equ i t i es Source: Company, CRIS IL Equ i t i es

1NOTE: EPS is calculated after making payments of 8% dividends towards preference shares

Strong bottom-line growth led

by revenue growth and

improvement in margins



CRISIL Equities


11

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of

management quality, apart from other key factors such as industry and business

prospects, and financial performance.

Mixed results from an experienced management

GFL has an experienced management headed by Mr Shishir Jaipuria, vice chairman

and managing director, who has more than two decades of experience in varied

industries including textiles, sugar, polyester fibre and print media. Mr Jaipuria is a

second generation promoter of the group. Despite being a promoter-driven company,

we believe that GFL’s management has a professional approach towards managing the

company.

The management’s decisions with respect to debt-funded capex programmes and its

negative experience with forex/derivatives transactions coincided with the global

economic slowdown. This put a strain on the company’s financials and, consequently,

GFL had to go in for corporate debt restructuring in FY09. Currently, the management

seems undeterred by high gearing levels and has decided to fund capacity expansion

plans through additional debt in the medium term. The additional financial burden could

prove detrimental in case of a slowdown in demand or increased competition.

To its credit, GFL’s management has focussed on diversifying its product portfolio over

the past three years. It forayed into garments in FY07 and non woven fabrics in FY08.

In FY08-09 during the slowdown, the high-margin non woven fabrics products helped

the company remain operationally profitable despite incurring huge losses in the yarn

division.

Second line of management

Based on our interactions, we believe that the company’s second line is reasonably

experienced. Key managerial personnel have more than 10 years of experience in their

respective fields.

Despite having adequate

experience and knowledge,

GFL’s management has

shown mixed results



CRISIL Equities


12

Corporate Governance

CRISIL’s fundamental grading methodology includes a broad assessment of corporate

governance as well, apart from other key factors such as industry and businessprospects, financial performance and management quality. In this context, CRISIL

analyses the shareholding structure, board composition, typical board processes,

disclosure standards and related-party transactions. Any qualifications by regulators or

auditors also serve as useful inputs while assessing a company’s corporate

governance.

Overall, corporate governance practices at GFL are good supported by reasonably

sound board practices and an independent board.

Board compositionGFL’s board comprises 10 members, of whom six are independent directors, which is

in line with the requirements under Clause 49 of SEBI’s listing guidelines. The directors

have strong industry experience. The board has inducted two independent directors on

August 2010 - Mr Nripendra Misra and Mr O. P. Vaish. This was prompted by the

demise of Mr Gian Prakash and retirement of Mr M. P. Wadhwan owing to health

reasons. The other directors have been associated with the company for a long time.

Given the background of directors, we believe the board is fairly experienced. The

independent directors have a good understanding of the company’s business and its

processes.

Board’s processes

The company’s quality of disclosure can be considered good judged by the level of

information and details furnished in the annual report, websites and other publicly

available data. The company does not have any inter-group transactions. It has all the

necessary committees – audit, remuneration and investor grievance - in place to

support corporate governance practices. The audit committee is chaired by an

independent director, Mr J. P. Kundra, who has held many high profile posts like the

managing director of SBI, managing director of State Bank of Bikaner and Jaipur, and

chairman of Banking Services Board.

We would like to note that GFL holds ~20% stake in Ginni International (GI), which was

a group company. It got separated during the division of GFL between the promoter’s

sons. Ginni International competes with GFL in the texti le market and is present in most

areas where GFL operates. The management has been trying to find a suitable buyer

to offload its stake in GI, but it has been unsuccessful in doing so over the past two

years.

Corporate governance

practices at GFL are good



CRISIL Equities


13

Valuation Grade: 4/5

We have used the DCF method to value GFL and arrived at a fair value of Rs 18.2 per

share. This fair value implies a forward P/E of 4.5x FY11E EPS of Rs 4.0 and 8.5x

FY12E EPS of Rs 2.1. We initiate coverage on GFL with a valuation grade of 4/5,indicating that the market price has an “upside” from the current levels.

Table 4: Key assumptions of our valuations

Explicit project period FY11-FY16

Terminal growth rate 3%

Cost of equity 17.8%

Table 5: Sensitivity analysis

Terminal growth rate

340 1.0% 2.0% 3.0% 4.0% 5.0%

9.9% 22 31 44 60 84

WACC 10.9% 12 20 29 41 58

11.9% 5 11 18 27 39

12.9% (1) 3 9 16 25

13.9% (7) (3) 2 8 15

Source: CRIS IL Equ i t i es

The fair value implies a price to book value of 0.9x in FY11 and 0.8x in FY12 which

compares with a five-year historical average of 0.7x. According to our estimates, GFL’s

enterprise value to EBITDA stands at 6.4x in FY11 and 7.3x in FY12 which compares

with a five-year historical average of 10.3x.

Figure 11: Historical EV/EBITDA Figure 12: Historical P/BV

8.2x

7.1x

11.5x

18.5x

12.3x

7.1x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2005 2006 2007 2008 2009 2010

(x)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1-Apr-05 1-Apr-06 1-Apr-07 1-Apr-08 1-Apr-09 1-Apr-10

(x)

P/BV multiple


Table 6: Peer valuation

Companies M Cap.

(Rs mn)

EPS (Rs) Price/earnings (x) RoE (%)

FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E

Ginni Filaments 984 -5.3 0.8 2.8 2.3 -6.1 22.4 6.2 7.4 -33.5 6.0 17.7 12.8

( CRISIL Equities estimates )

Consensus estimates

Alok Industries 16661.9 3.8 2.6 3.8 5.6 3.3 8.7 5.6 3.8 4.4 5.9 9.4 12.5

Suominen Corporation 1882.4 1.6 -2.1 1.5 2.4 43.8 -19.0 26 16.3 2.4 -8 1.2 4.6

Ahlstrom Osnabruck GmbH 47335.6 -47.5 62.1 80.1 89.5 -20.4 16.2 13.6 12.2 -5.0 7.2 9.4 10.4Albaad Massuot Yitzhak Ltd 6338.6 108.2 6.6 19.9

Mean 8.3 13.9 14.7 10.8 -26.5 -17.8 7.3 11.6

Median 3.3 8.7 13.6 11.1 -5.0 -17.8 9.4 12.4

Source: CRIS IL Equ i t i es , i ndust ry est imates

Fair value estimate of Rs 18.2

based on DCF



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Company Overview

GFL, an integrated textile manufacturer, was commissioned in 1990 with a focus on

producing ultrafine combed cotton yarn for the export market. GFL has expanded its

activities since then and is now present across the textile value chain with operations in

open end yarn, knitted fabrics, processed knitted fabrics and garments. The fibre-to-

fashion company currently operates through two broad divisions - textiles and others.

Within the textiles division, GFL produces yarn, fabrics, non woven fabrics and

garments. Others comprise consumer products such as wet wipes, medical

disposables and wound care products amongst others.

Figure 11: Geographic distribution of revenues in FY10 Figure 12: Segmental distribution of revenues in FY10

Domestic34%

International66%

Yarn55.9%

Fabrics grey0.4%

Processedfabrics11.2%

Conversioncharges

0.2%

Garments6.8%

Wipes andothers1.1%

Non wovenfabrics24.5%


GFL focuses primarily on the international markets; exports contributed 66% of sales in

FY10. The company has production facilities in Panoli (Gujarat), Mathura (Uttar

Pradesh), Haridwar (Uttarakhand) and Noida (Uttar Pradesh). Production capacity

includes 89,808 spindles, 1,680 rotors, 41 knitting machines, garment capacity of 2.4

mn pieces per annum and 128.4 mn pieces of wipes and others.

In FY09, the company proposed restructuring of its debt liability, which was approved

by the CDR cell of the Reserve Bank of India on condition that the promoters invest Rs

75 mn in the company through preference shares. The promoters have invested the

requisite amount in FY10. Also, in FY10 GFL amalgamated Abhinav Investments Pvt

Ltd, Ganesh Synthetics Pvt Ltd, Ginni Power Ltd and Goodworth Merchants Pvt Ltd

with itself on approval by the Allahabad High Court.



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Table 7: Key milestones

1990 Commenced production with capacity of 23,208 spindles

1995 Installed capacity of spindles increased to 54,432

2005 A knit processing house with a capacity of 250 tonnes/ month was set up

2006 Installation of 1,680 rotors

Spindles capacity increased to 90,508

Venture into non-woven consumer products

Venture into knit garmenting with a capacity of 250,000/month

2007 Venture into spunlace non woven with a capacity of 12,000mts/pa

Venture into consumer products made from spunlace fabrics

Relatively calm after the storm

Though FY10 was a relatively stable year for GFL, it endured a tough FY07-09 period

wherein it had to recommend itself for CDR. There are three broad factors which led to

this situation:

•

The loss-making yarn division: The company suffered a serious setback as itslargest division, in terms of revenues, recorded heavy losses in FY09. The

company could not pass on the increase in raw material prices to its customers

and, hence, was loss-making at the EBITDA level. The company was able to

remain profitable due to the non woven segment which started operating at higher

capacities in FY09 as the company got all the needed approvals to start

production.

• High gearing: GFL’s high debt added to its woes as it had to make interest

payments for the large amount of debt on its books.

• Forex bets went wrong: GFL incurred Rs 140 mn loss in FY09 owing to bets that

went wrong. The company swapped its rupee loan with Swiss franc and yen, and

these currencies fell in value drastically resulting in losses which were booked. The

current hedging strategy adopted by the company is to fully cover exposures, debts

outstanding and orders that have already been received from buyers through

simple forward contracts.

Features of the CDR plan

Rescheduling of principal of long-term loans including NCDs which are

payable in 40 quarterly installments commencing from September 30, 2008

and ending on June 30, 2018 in a ballooning fashion. Working capital term loan of Rs 290 mn on account of derivatives / forex

losses which are payable in 37 quarterly installments commencing from

June 30, 2009 and ending on June 30, 2018 in a ballooning fashion.

Reduction in interest rate for long-term loans including NCDs and working

capital. Net benefit of 1.5% on interest cost.

The company had to

recommended itself for CDR in

FY09



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Annexure: Financials

FINANCIAL STATEMENTS

Income Statement

(Rs Mn) FY08 FY09 FY10 FY11E FY12ENet sales 2,910 3,833 4,737 5,495 5,714

Operating Income 3,069 4,152 5,112 5,875 6,097

EBITDA 212 333 659 879 848

Depreciation 189 256 257 267 294

Interest 336 559 325 316 362

Other Income 27 5 8 9 9

PBT (287) (477) 85 304 201

PAT (176) (315) 54 289 161

No. of shares 59 59 71 71 71

Earnings per share (EPS) (3.0) (5.3) 0.8 4.0 2.1

17

Balance Sheet 22

(Rs Mn) FY08 FY09 FY10 FY11E FY12E

Equity capital (FV - Rs XX) 593 593 707 707 707

Reserves and surplus 512 186 301 583 734

Debt 3,438 3,901 3,942 4,511 5,042

Current Liabilities and Provisions 619 467 883 984 1,056

Deferred Tax Liability/(Asset) 115 (49) (19) (19) (19)

Minority Interest - - - - -

Capital Employed 5,276 5,097 5,813 6,766 7,520

Net Fixed Assets 3,745 3,582 3,334 3,274 4,439

Capital WIP 25 2 7 707 182

Intangible assets - - - - -

Investments 105 105 76 76 76

Loans and advances 471 413 377 434 450

Inventory 578 508 1,445 1,620 1,690

Receivables 290 416 526 613 644

Cash & Bank Balance 62 73 48 43 38

Applications of Funds 5,276 5,097 5,813 6,766 7,520

Source: Company, CRIS IL Equ i t i es est imate



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Cash Flow

(Rs Mn) FY08 FY09 FY10 FY11E FY12E

Pre-tax profit (287) (477) 85 304 201

Total tax paid (3) (3) (0) (15) (40)

Depreciation 189 256 257 267 294

Change in working capital 199 (149) (597) (216) (46)

Cash flow from operating activities 99 (372) (255) 340 409

Capital expenditure (487) (70) (15) (907) (934)

Investments and others (2) - 29 - -

Cash flow from investing activities (489) (70) 14 (907) (934)

Equity raised/(repaid) - - 178 - -

Debt raised/(repaid) 372 463 41 569 531

Dividend (incl. tax) - - - - -

Others (incl extraordinaries) 2 (11) (3) (6) (10)

Cash flow from financing activities 374 452 216 563 521

Change in cash position (16) 11 (25) (5) (4)

Opening Cash 78 62 73 48 43Closing Cash 62 73 48 43 38

Ratios


Growth ratios

Sales growth (%) 34.6 35.3 23.1 14.9 3.8

EBITDA growth (%) (37.2) 57.2 97.7 33.4 (3.5)

EPS growth (%) (824.0) 85.6 (112.7) 468.4 (46.6)

Profitability Ratios

EBITDA Margin (%) 6.9 8.0 12.9 15.0 13.9

PAT Margin (%) (5.7) (7.6) 1.0 4.9 2.6

Return on Capital Employed (RoCE) (%) 0.5 1.7 8.4 11.4 9.0

Return on equity (RoE) (%) (14.8) (33.5) 6.0 25.1 11.8

Dividend and Earnings

Dividend per share (Rs) 0.0 0.0 0.0 0.0 0.0

Dividend payout ratio (%) 0.0 0.0 0.0 0.0 0.0

Dividend yield (%) - - - - -

Earnings Per Share (Rs) -3.0 -5.3 0.8 4.0 2.1

Efficiency ratios

Asset Turnover (Sales/GFA) 0.7x 0.8x 1.0x 1.1x 1.0x

Asset Turnover (Sales/NFA) 1.0x 1.1x 1.5x 1.8x 1.6x

Sales/Working Capital 3.7x 5.2x 4.4x 3.7x 3.6x

Financial stability

Net Debt-equity 3.1 4.9 3.9 3.5 3.5

Interest Coverage 0.1 0.1 1.2 1.9 1.5

Current Ratio 2.3 3.0 2.7 2.8 2.7

Valuation Multiples

Price-earnings -3.1x -0.8x 14.2x 4.0x 7.1x

Price-book 0.5x 0.3x 0.8x 0.9x 0.8x

EV/EBITDA 18.5x 12.3x 7.1x 6.4x 7.2x

Source: Company, CRIS IL Equ i t i es est imate



CRISIL Equities


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Focus Charts

Division-wise revenue contribution Division-wise EBITDA contribution

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



-200%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%




PAT and EBITDA margins P/BV and EV/EBITDA

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0


(%)

EBITDA margins PAT margins

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0

2

4

6

8

10

12

14

16

18

20


(x)(x)

EV/EBITDA (x) P/BV (x)


Planned capex Shareholding pattern

Capacity

improvement

Investment

(in Rs mn)

Commissioned

by

Phase I

Spinning 1.5 tpd 210 June 2012

Non woven fabrics 12000 MT 860

Phase II

Dyeing and

processing house 5.5 tpd 130

June 2013

Garments 3.6 mn 210

Promoter54.2%

FII0.0%

DII5.5%

Others40.4%




CRISIL Independent Equity Research Team

Mukesh Agarwal [email protected] +91 (22) 3342 3035

Director

Tarun Bhatia [email protected] +91 (22) 3342 3226

Director- Capital Markets

Analytical Contacts

Chetan Majithia [email protected] +91 (22) 3342 4148

Sudhir Nair [email protected] +91 (22) 3342 3526

Sector Contacts

Nagarajan Narasimhan [email protected] +91 (22) 3342 3536 Ajay D'Souza [email protected] +91 (22) 3342 3567

Manoj Mohta [email protected] +91 (22) 3342 3554

Sachin Mathur [email protected] +91 (22) 3342 3541

Sridhar C [email protected] +91 (22) 3342 3546

Business Development Contacts

Vinaya Dongre [email protected] +91 99 202 25174

Sagar Sawarkar [email protected] +91 98 216 38322

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Documents

Ginni Filaments Crisil 261010