But High Valuations May Limit Further Upside In The Stock
MANDHANA Industries' stock has nearly doubled since its public listing in May. Much of the appreciation tracks the company's robust performance in the September 2010 quarter. However, its current valuations seem to fully factor in the future growth expectations and, hence, a further upside looks limited.
Mandhana Industries is a textile company involved in yarn dyeing, fabrics and garments. It raised over . 108 crore through an initial public offer in April to fund the expansion of its weaving and garment capacities.
Mandhana earns four out of every five rupees of revenue from the fabrics segment; the garment division contributes the remaining. While it sells fabrics locally, most garments are exported to major retailers in Europe and the US.
The company has shown a strong momentum in both the segments. In the first six months of FY11, its total sales grew 31.4% to . 328.7 crore and net profit shot up by 64.2%. According to the management, its business grows faster in the second half of the year due to higher export order bookings. Hence, it anticipates an overall topline of . 800 crore on the higher side of the guidance for FY11, 28% more than the previous year's revenue.
Though the topline growth looks promising, it will not be easy to retain net margins given the rising input costs. Cotton prices have doubled over the past 12 months, propelling yarn prices by more than one-third. Mandhana has so far been able to fully pass on the impact of rising input costs but at the cost of expanding its working capital cycle. It has offered a higher credit period to its clients. This has increased the time to convert raw materials to cash by nearly two-fold to over 120 days. A higher working capital cycle increases the requirement of short-term funds, thereby putting pressure on margins.
During its post-results conference call for analysts a month ago, the company guided for a net margin of 9% for FY11. Considering this and its revenue guidance for the year, the stock trades at a forward P/E of around 12. This is much higher than P/Es of 5-7 for other textile companies such as Alok Industries and Sangam India. Bombay Rayon, a garment maker with marginally higher profitability than Mandhana, trades at a P/E of 12. Hence, the valuations of Mandhana look rich, thereby leaving no major room for a further increase in its stock price.
