Siyaram Silk Mills Limited: Favourable industry dynamics and strong brand recall should support next leg of growth

• Given financial strength, strong brands, manufacturing expertise, technical capabilities, and widespread distribution of Siyaram Silk Mills Limited, the company targets to pursue sustainable and profitable sales growth over long run. The company’s financial discipline, strong corporate governance, and astute risk management should continue to support balance sheet of the company.

Siyaram Silk Mills Limited

Siyaram Silk Mills Limited was incorporated in 1978 and has its headquarters in Mumbai, India. It benefits from resilient portfolios of brands within India. The company has been categorised as India’s most renowned brands and marketers of fabrics, readymade garments, and other textiles products. It has been able to make a mark for its high-quality fabrics and apparel using different blends made from poly viscose, cotton, wool, linen, bamboo and stretch. Siyaram Silk Mills Limited operates and franchises a chain of retail stores, offering menswear fashion fabrics, apparel, and accessories.

Business model

The company sells its products under different brands which have high recall value with consumers. Such brand names are Siyaram, J. Hampstead, Oxemberg, and Cadini. It has an extensive distribution network which permeates India, offering vast population ready access to high-quality fabrics and apparel at attractive price points. Therefore, Siyaram’s brands are preferred choice in India’s fast-growing yet untapped market. The company is supported by highly integrated and state-of-art manufacturing and retailing capabilities.

Brand portfolio

The company carries business operations under different brands such as Siyaram's (Suitings And Shirtings), J. Hampstead, Cadini, Oxemberg, Siyaram's Mozzo. The company benefits from having longest surviving and resilient serving portfolios of brands within India. It sells its products under multiple brands and such brands have high recall value with consumers.

Strong track record of management

Management of Siyaram Silk Mills Limited has a strong track record and the company is headed by Mr. Ramesh Poddar, who is a Chairman & Managing Director. Mr. Poddar joined Siyaram’s in 1978 and made it a revered brand that it is today. Experience of promoters and established track record in textile industry should support growth of Siyaram Silk Mills Limited.

In 1978, Mr. Pawan Poddar has been helping Mr. Ramesh Poddar to make it a successful fabric manufacturing company. He area of focus was on elevating Yarns as a brand and set up processes to produce innovative hues and designs in yarn dyeing.

Financial performance of Siyaram Silk Mills Limited

In FY23, Siyaram Silk Mills Limited achieved significant growth in revenue while it maintained healthy EBITDA margins. Focused approach on achieving balanced distribution strategy and expanding product categories, alongside strong branding initiatives and launch of new products were key enablers behind strong performance. The company is optimistic about its product categories, and it confident that its product design and upcoming new categories will be able to support growth.

On a standalone basis, the company’s total revenue increased 17% year-over-year to INR2,229 Crores, while its EBITDA grew by 10% to INR369 Crores. Value growth was led by better product mix as sale of premium fabrics was higher in previous fiscal year. Exports were able to contribute 12.80% of revenues in FY23. Raw material prices were volatile in previous year and price increase was passed on to end customers with lag effect. Despite higher raw material prices, EBITDA margins were maintained consistently ~17%. On a standalone basis, net debt for March 2023 was INR208 Crores.

Given its strong growth drivers in businesses, the company believes that India will continue to move forward along a strong growth trajectory.

Over past 5 years, the company was able to compound its sales at ~5% while, over 3 years, it compounded at ~10%. On a TTM basis, Siyaram Silk Mills Limited compounded its sales at ~17%. Such strong growth was supported by strong business risk profile marked by established brand, strong distribution network and presence across value chain. The company has multiple brands of fabric and apparel, of which 4-5 are established and make up significantly to revenue. Siyaram Silk Mills Limited is an established brand, especially in middle-income segment and is recognised pan India.

The company was able to deliver an all-time high performance in FY22, mirroring business trends it was experiencing before Covid-19. Operational efficiency, cost optimisation initiatives, an improved product mix and rationalised marketing initiatives supported the company’s results in FY22. It posted INR1,903.07 Crore in Revenues, rising 75% year-over-year to produce INR212.52 crore in PAT, up by 39x year-over-year. EBITDA remained healthy at 19% of its revenue, and was up by 280% year-over-year because of efficient marketing strategies and positioning.

Shareholding pattern

By end of March 2023 quarter, the company was majorly controlled by its promoters as they collectively made ~67.18% of pie chart. This means that its promoters stands to benefit most if stock rises.

Public shareholders hold ~25.94% of total shareholding of Siyaram Silk Mills Limited. Mr. Ramesh Kumar Poddar has 4.17% stake, while Mr. Anurag Poddar has ~3.82% interest in the company.

Industry analysis

Experts believe, like many other industries, textile industry was adversely impacted by COVID-19 disruptions over previous 2 years. Nevertheless, Indian Textile and Apparel production market stood at $106 billion as of FY21, with 70% of demand coming from domestic market. Between FY19- FY21, cotton and cotton yarn exports from India have been compounded at 34%, a trend which shows no signs of slowing going forward.

Estimates reflect that given India’s solid economic and consumption fundamentals, overall sector should be able to compound at 16% over next 5 years. Indian textile market continues to gain global share of business as buyers from several countries strategically replace China as their primary suppliers by adding additional sourcing countries to their outsourcing portfolios. Indian players are ideally suited competitively to capture a good portion of this global shift.

From allowing 100% FDI in Indian textile sector to launching various schemes from time to time, Government of India plans an overall improvement within textile industry. Production linked Incentive (PLI) Scheme for textile industry targets to promote production of higher-value man-made fabrics, garments, and technical textiles. Several fundamental and long-term growth enablers and opportunities continue to influence industry’s growth and evolution. Given its balance sheet strength and brand recall, Siyaram Silk Mills Limited should be able to capture growth trends.   

Company outlook

Siyaram Silk Mills Limited plans to strengthen its distribution network, start manufacturing through outsourcing partners, leverage brand Siyaram’s, and expand stores through franchise model. The company has reduced SKUs and focused on fast-moving products and preferred designs to avoid inventory blockage, leading to enhanced profitability and receivables. Strong distribution and franchise network and well-balanced Indian market penetration are expected to support the company’s growth targets.

The company’s market penetration strategy provides great importance to Tier II and Tier III cities. Establishing a solid presence in inner India is a gainful move, as the company is able to root itself in a fragmented and under-penetrated market, which is beginning to grow well. It continues to target to capture share from unorganised players in Tier II and Tier III cities, who cover a considerable percentage of Indian textile market.

The company has a powerful distribution and franchisee network through which it is targeting sizeable unorganised market of India. The company opted to adopt an asset-light model in manufacturing and distribution front, allowing it to moderate its capital investment and improve its ROCE (Return on Capital Employed). For FY22, ROCE came in at 25.3%. This means that for every rupee invested in capital, it generated 25.3 paise in operating income during FY22. It has a product portfolio which is well-balanced mix of affordable and luxury products, appealing to both mass and premium consumer segments.

Risks

Siyaram Silk Mills Limited operates in a wide range of markets and can face challenges such as changing economic, regulatory, social and political developments that may impact consumer demand and disrupt its operations. Adverse global conditions or country-specific changes to operating or regulatory environment may impact spending habits of key consumer groups, leading to increased operational costs.

Performance of the company depends on demand situation. Any sort of slowdown in demand can lead to a decline in production/ sales and can impact profitability. Given multiple segments in which it operates and challenges of understanding, responsibility to understand and cater to customer’s needs is a substantial risk.

Valuation and investment rationale

Stock of the company trades at ~11.8x of FY22 EPS of INR46.14, which is at a deep discount to sectoral average of ~19.54x. Therefore, significant growth potential lies ahead for the company. Growth is expected to be supported by redefining of its sales strategy, improvement of market dynamics and acceleration of digital adoption. The company focuses on enhancing market dynamics by improving receivable and payables terms and reducing working capital cycle. Production team has reduced number of SKUs and concentrated mainly on fast-moving products and most preferred designs to avoid inventory blockage and dead stock. This helps the company in enhancing its receivables and profitability.

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