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Ginni Filaments Limited

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)

FundamentalGrade
CRISILs 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 companys 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) CRISILFundamentalGrade 5/5 4/5 3/5 2/5 1/5 Assessment Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

ValuationGrade
CRISILs 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). CRISILValuationGrade 5/5 4/5 3/5 2/5 1/5 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.

Assessment Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

Disclaimer:
This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

Independent Research Report Ginni Filaments Ltd

Spinning an expansion yarn Industry Date Textile October 26, 2010 CFV matrix
Excellent Fundamentals

Fundamental Grade

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 fundamentals are 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 segments contribution to overall revenues bodes well for the company. Moreover, we forecast higher-than-grouplevel 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, GFLs high dependence on debt, albeit low cost, in addition 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), GFLs 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 GFLs 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) Operating income EBITDA Adj Net income EPS-Rs EPS growth (%) PE (x) P/BV (x) RoCE (%) RoE (%) EV/EBITDA (x) FY08 3,069 212 (176) (3.0) (824.0) (3.1) 0.5 0.5 (14.8) 18.5 FY09 4,152 333 (315) (5.3) 85.6 (0.8) 0.3 1.7 (33.5) 12.3 FY10 5,112 659 54 0.8 (112.7) 14.2 0.8 8.4 6.0 7.1 FY11E 5,875 879 289 4.0 468.4 4.0 0.9 11.4 25.1 6.4 FY12E 6,097 848 161 2.1 (46.6) 7.1 0.8 9.0 11.8 7.2

5 4 3 2 1

Poor Fundamentals

Strong Downside

Valuation Grade
Strong Upside

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

Key stock statistics

BSE/NSE Ticker Fair value (Rs per share) Current market price (as on Oct 26, 2010) Shares outstanding (mn) Market cap (Rs mn) Enterprise value (Rs mn) 52-week range (Rs) (H/L) P/E on EPS estimate (FY11E) Beta Free float (%) Average daily volumes (three months) 99,183 16.2 71 1,150 5,140 17.9/6.5 3.8 0.9 18.9 GINNIF/GINNIFILA 18.2

Share price movement

300 240 180 120 60 0

May-09

May-10

Jan-09

Sep-08

Sep-09

Jan-10

GFL closing share price

Nifty

Indexed to 100

Analytical contact
Sudhir Nair (Head, Equities) Arjun Gopalakrishnan Arun Vasu Email: clientservicing@CRISIL.com +91 22 3342 3526 +91 22 3342 3503 +91 22 3342 3529 +91 22 3342 3561

Sou rce: Co mpany, CRI SI L Eq uit ies est imat es

CRISIL Equities

Sep-10

Ginni Filaments Limited

Table: 1 GFL: Business environment

Parameter Revenue contribution (FY10) Revenue contribution (FY12E) Product / service offering Cotton yarn Non woven fabrics Geographic presence Market position Very small player in the highly fragmented yarn market Has the first-mover advantage in the non woven market Industry growth expectations Sales growth (FY08FY10 2-yr CAGR) Sales forecast (FY10-FY12 2-yr CAGR) 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 Key competitors Alok Industries, Suominen Corporation, Ahlstrom Osnabruck GmbH The companys focus on reducing its exposure/dependence on the yarn division 8.4% 10.6% 12.6% 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 11% 182% 17.8% Export-oriented company; international operations contribute 66% of FY10 revenues Grey cloth Processed fabrics Wipes and others Garments 53% 24% 23% Textiles Yarn 55% Non woven 24% Others 21%

Sou rce: Co mpany, CRI SI L Eq uit ies

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Grading Rationale
Diversified product mix improves GFLs 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
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY08 FY09 Yarn FY10 Non woven Others FY11E FY12E

Figure 2: Division-wise EBITDA contribution

300% 250% 200% 150% 100% 50% 0% -50% -100% -150% -200% Yarn Non woven Others FY08 FY09 FY10 FY11E FY12E

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

But dependence on yarn remains

GFLs efforts to diversify its operations have been moderately successful. Yarn remains the 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
The yarn industry has low scope of passing on hikes in raw material prices owing to limited bargaining power with downstream companies

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. GFLs yarn division clocked a CAGR of 16% during FY06-10, outpacing growth in both domestic (5.6% between 2005-06 and 200910) and export markets (4.2% between 2005-06 and 2009-10). A fall in volumes in FY09 coupled with the companys 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.

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Table 2: Cotton yarn division snapshot

FY07 Revenues (Rs mn) Y-o-y EBITDA (Rs mn) Y-o-y Margins (%) Volume growth (CAGR FY08-10) Revenue growth (CAGR FY10-12E) Source: Company, CRISIL Equities 1771 23% 328 19% 19% 3% 8.4% FY08 2143 21% 46 -86% 2% FY09 2217 3% -150 Na Na FY10 2640 19% 324 Na 12%

We expect demand for cotton yarn to grow at a CAGR of 4.8% during 2009-12. The growth will be slow owing to substitution of cotton yarn with polyester filament yarn (PFY) due to lower prices. Decline in global production and consequent depletion of inventory levels for two consecutive years (2008-09 and 2009-10) have led to a sharp spike in cotton prices. Going forward, despite a 13% increase in global cotton production, prices are expected to rise on account of healthy demand and tight inventory position. In line with the increase in cotton prices, cotton yarn prices (40s count) have shot up sharply by 42% y-o-y to Rs 180 per kg in July 2010.
Figure 3: Demand for cotton yarn
Kgs 4,500 4,000 3,500 3,000 2,500 2,000 Derived Demand 17%

Figure 4: Components of cotton yarn 2009-10

Direct yarn exports 20%

2008/09

2009/10

2010/11(E)

2011/12(P)

2012/13(P)

2013/14(P)

Total yarn demand

Sou rce: Co mpany, CRI SI L Eq uit ies

2014/15(P)

Domestic Demand 63%

Sou rce: Co mpany, CRI SI L Eq uit ies

According to CRISIL Research, current prices are difficult to sustain due to stronger bargaining power of the downstream industries. Hence, we expect cotton yarn prices to
Cotton yarn prices are expected to correct by about 15% from the current levels

soften and settle down at around Rs 155-165 per kg during 2010-11 to 2011-12. In line with the historical trend, we expect revenues from the yarn division to outpace the broader market and grow at a CAGR of 8.4% over FY10-12. We expect the segment to record average EBITDA margins of 13% during the same period.

Future growth hinges on non woven fabrics

GFL forayed into the non woven fabrics segment in FY08. We expect revenues and EBITDA contribution in FY12 (24% and 39% respectively) to broadly be in line with FY10 levels (24% and 41% respectively). GFLs manufacturing facility for this product is in Panoli, Gujarat with a capacity of
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Ginni Filaments Limited

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
GFLs non woven products cater mainly to the hometech and meditech segments of technical textile industry

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. GFLs 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 governments 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.

CRISIL Equities

Ginni Filaments Limited

Figure 5: Technical textile industry in 2008-09E ( ~Rs 463 bn)

G ech eot 1% Pr ot ech 3% I ndut ech 8% Agr ot ech 1% M t ech edi 4% M l t ech obi 7%

Figure 6: Technical textile industry in 2011-12E (~Rs 632 bn)

G ech eot 1% Pr ot ech 3% I ndut ech 8% Agr ot ech 1% M t ech edi 4% M l t ech obi 7%

H et ech om 12%

H et ech om 12%

C ot ht ech l 16%

Packt ech 36% Bui l dt ech 5% Spor t ech 7%

C ot ht ech l 15%

Bui l dt ech 5% Spor t ech 7%

Packt ech 37%

Sou rc e: Off ic e of t he T e xti le C om m is si o ner

Sou rc e: Off ic e of t he T e xti le C om m is si o ner

The success of the non woven fabric division during the FY08-09 period helped GFL
The non woven fabric segment is the key growth driver for GFL in the future

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 Revenues (Rs mn) Y-o-y EBITDA (Rs mn) Y-o-y Margins (%) Volume growth (CAGR FY08-10) Revenue growth (CAGR FY10-12E) Source: Company, CRISIL Equities 27% 181% 10.6% 39 145 FY09 864 496% 206 427% 23% FY10 1156 34% 259 25% 21%

The companys 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, GFLs product stable includes
The growth of other products over the past few years has helped reduce the dependence on the yarn division

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

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Ginni Filaments Limited

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%. GFLs 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 divisions 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. GFLs 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.
Taking the cue from a pick-up in demand, GFL is expanding capacities

Phase I entails an investment of ~ Rs 1,070 mn in doubling the non woven capacity 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 TUF loans (~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).

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Ginni Filaments Limited

Key risks
Slower-than-expected recovery in developed nations
International markets constituted 66% of GFLs sales in FY10. The company is firm in its strategy of catering to the international markets. However, in the event of a slowerthan-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 GFLs 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 a ballooning fashion. This puts considerable pressure on the companys 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 companys finances, especially in the event of a slowdown in demand.
Figure 6: GFLs debt repayment schedule as of FY10
Rs mn 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

Long term loan (in Rs mn)

Working capital term loan (in Rs mn)

Source: Company, CRISIL Equities

Exposure to international markets and vulnerability to raw material price fluctuations are major risks for GFL

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 GFLs margins.

CRISIL Equities

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Ginni Filaments Limited

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
Revenues likely to grow at a CAGR of 9.8% driven by a spike in yarn realisations

improvement in realisations to drive GFLs growth over the next two years. GFLs 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%
Rs mn 6000 5000 4000 3000 2000 1000 0 FY07 FY08 FY09 Net sales FY10 FY11 FY12

Sou rce: Co mpany, CRI SI L Eq uit ies

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.

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Figure 8: EBITDA and EBITDA margins

(%) 16% 14% 12% 10% 8% 6% 4% 2% 0% Rs mn 1000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

EBITDA

Margin

Source: Company, CRISIL Equities

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
GFLs consolidated adjusted PAT (excludes extraordinary items) is expected to grow
Strong bottom-line growth led by revenue growth and improvement in margins

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 companys EPS is expected to increase from Rs 0.8 in FY10 to Rs 2.1 in FY121. RoCE is expected to improve 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

Rs 4.00
3.00 2.00 1.00 (1.00) (2.00) (3.00) (4.00) (5.00) (6.00) EPS FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Figure 10: RoCE and RoE

(%)
30.00 20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00 FY05 FY06 FY07 FY08 RoCE FY09 FY10 RoE FY11E FY12E

FY12E

(%)
16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 -

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

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

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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 GFLs management has a professional approach towards managing the company. The managements 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 companys financials and, consequently,
Despite having adequate experience and knowledge, GFLs management has shown mixed results

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, GFLs 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 companys second line is reasonably experienced. Key managerial personnel have more than 10 years of experience in their respective fields.

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Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance as well, apart from other key factors such as industry and business prospects, 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 companys corporate governance.
Corporate governance practices at GFL are good

Overall, corporate governance practices at GFL are good supported by reasonably sound board practices and an independent board.

Board composition
GFLs board comprises 10 members, of whom six are independent directors, which is in line with the requirements under Clause 49 of SEBIs 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 companys business and its processes.

Boards processes
The companys 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 promoters sons. Ginni International competes with GFL in the textile 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.

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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
Fair value estimate of Rs 18.2 based on DCF

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 Terminal growth rate Cost of equity FY11-FY16 3% 17.8%

Table 5: Sensitivity analysis

Terminal growth rate 340 9.9% WACC 10.9% 11.9% 12.9% 13.9% Sou rce: CR ISI L Eq uit i es 1.0% 22 12 5 (1) (7) 2.0% 31 20 11 3 (3) 3.0% 44 29 18 9 2 4.0% 60 41 27 16 8 5.0% 84 58 39 25 15

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, GFLs 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
(x)
20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2005 2006 2007 2008 2009 2010 8.2x 7.1x 11.5x 7.1x 12.3x 18.5x

Figure 12: Historical P/BV

(x)
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1-Apr-05 1-Apr-06 1-Apr-07 1-Apr-08 P/BV multiple 1-Apr-09 1-Apr-10

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

Table 6: Peer valuation

Companies Ginni Filaments ( CRISIL Equities estimates ) Consensus estimates Alok Industries Suominen Corporation Ahlstrom Osnabruck GmbH Albaad Massuot Yitzhak Ltd Mean Median Sou rce: CR ISI L Eq uit i es, in du stry est imat es 16661.9 1882.4 47335.6 6338.6 3.8 1.6 -47.5 108.2 2.6 -2.1 62.1 3.8 1.5 80.1 5.6 2.4 89.5 3.3 43.8 -20.4 6.6 8.3 3.3 13.9 8.7 14.7 13.6 10.8 11.1 8.7 -19.0 16.2 5.6 26 13.6 3.8 16.3 12.2 4.4 2.4 -5.0 19.9 -26.5 -5.0 -17.8 -17.8 7.3 9.4 11.6 12.4 5.9 -8 7.2 9.4 1.2 9.4 12.5 4.6 10.4 M Cap. (Rs mn) 984 FY09 -5.3 EPS (Rs) FY10 FY11E 0.8 2.8 FY12E 2.3 FY09 -6.1 Price/earnings (x) FY10 22.4 FY11E 6.2 FY12E 7.4 FY09 -33.5 RoE (%) FY10 FY11E FY12E 6.0 17.7 12.8

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Ginni Filaments Limited

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-tofashion 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
Non woven fabrics 24.5% Domestic 34%

Wipes and others 1.1% Garments 6.8% Conversion charges 0.2% Processed fabrics Fabrics grey 11.2% 0.4%

International 66%

Yarn 55.9%

Sou rce: Co mpany, CRI SI L Eq uit ies

Sou rce: Co mpany, CRI SI L Eq uit ies

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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Ginni Filaments Limited

Table 7: Key milestones

1990 1995 2005 2006 Commenced production with capacity of 23,208 spindles Installed capacity of spindles increased to 54,432 A knit processing house with a capacity of 250 tonnes/ month was set up 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 its largest 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.

The company had to recommended itself for CDR in FY09

High gearing: GFLs 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.

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Ginni Filaments Limited

Annexure: Financials
FINANCIAL STATEMENTS
Income Statement (Rs Mn) Net sales Operating Income EBITDA Depreciation Interest Other Income PBT PAT No. of shares Earnings per share (EPS) Balance Sheet (Rs Mn) Equity capital (FV - Rs XX) Reserves and surplus Debt Current Liabilities and Provisions Deferred Tax Liability/(Asset) Minority Interest Capital Employed Net Fixed Assets Capital WIP Intangible assets Investments Loans and advances Inventory Receivables Cash & Bank Balance Applications of Funds Sou rce: Co mpany, CRI SI L Eq uit ies est imat e FY08 593 512 3,438 619 115 5,276 3,745 25 105 471 578 290 62 5,276 FY09 593 186 3,901 467 (49) 5,097 3,582 2 105 413 508 416 73 5,097 FY08 2,910 3,069 212 189 336 27 (287) (176) 59 (3.0) FY09 3,833 4,152 333 256 559 5 (477) (315) 59 (5.3) FY10 4,737 5,112 659 257 325 8 85 54 71 0.8 17 22 FY10 707 301 3,942 883 (19) 5,813 3,334 7 76 377 1,445 526 48 5,813 FY11E 707 583 4,511 984 (19) 6,766 3,274 707 76 434 1,620 613 43 6,766 FY12E 707 734 5,042 1,056 (19) 7,520 4,439 182 76 450 1,690 644 38 7,520 FY11E 5,495 5,875 879 267 316 9 304 289 71 4.0 FY12E 5,714 6,097 848 294 362 9 201 161 71 2.1

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Ginni Filaments Limited

Cash Flow (Rs Mn) Pre-tax profit Total tax paid Depreciation Change in working capital Cash flow from operating activities Capital expenditure Investments and others Cash flow from investing activities Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Cash flow from financing activities Change in cash position Opening Cash Closing Cash Ratios FY08 Growth ratios Sales growth (%) EBITDA growth (%) EPS growth (%) Profitability Ratios EBITDA Margin (%) PAT Margin (%) Return on Capital Employed (RoCE) (%) Return on equity (RoE) (%) Dividend and Earnings Dividend per share (Rs) Dividend payout ratio (%) Dividend yield (%) Earnings Per Share (Rs) Efficiency ratios Asset Turnover (Sales/GFA) Asset Turnover (Sales/NFA) Sales/Working Capital Financial stability Net Debt-equity Interest Coverage Current Ratio Valuation Multiples Price-earnings Price-book EV/EBITDA Sou rce: Co mpany, CRI SI L Eq uit ies est imat e -3.1x 0.5x 18.5x -0.8x 0.3x 12.3x 14.2x 0.8x 7.1x 4.0x 0.9x 6.4x 7.1x 0.8x 7.2x 3.1 0.1 2.3 4.9 0.1 3.0 3.9 1.2 2.7 3.5 1.9 2.8 3.5 1.5 2.7 0.7x 1.0x 3.7x 0.8x 1.1x 5.2x 1.0x 1.5x 4.4x 1.1x 1.8x 3.7x 1.0x 1.6x 3.6x 0.0 0.0 -3.0 0.0 0.0 -5.3 0.0 0.0 0.8 0.0 0.0 4.0 0.0 0.0 2.1 6.9 (5.7) 0.5 (14.8) 8.0 (7.6) 1.7 (33.5) 12.9 1.0 8.4 6.0 15.0 4.9 11.4 25.1 13.9 2.6 9.0 11.8 34.6 (37.2) (824.0) 35.3 57.2 85.6 23.1 97.7 (112.7) 14.9 33.4 468.4 3.8 (3.5) (46.6) FY09 FY10 FY11E FY12E FY08 (287) (3) 189 199 99 (487) (2) (489) 372 2 374 (16) 78 62 FY09 (477) (3) 256 (149) (372) (70) (70) 463 (11) 452 11 62 73 FY10 85 (0) 257 (597) (255) (15) 29 14 178 41 (3) 216 (25) 73 48 FY11E 304 (15) 267 (216) 340 (907) (907) 569 (6) 563 (5) 48 43 FY12E 201 (40) 294 (46) 409 (934) (934) 531 (10) 521 (4) 43 38

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Ginni Filaments Limited

Focus Charts
Division-wise revenue contribution
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY08 FY09 Yarn FY10 Non woven Others FY11E FY12E

Division-wise EBITDA contribution

300% 250% 200% 150% 100% 50% 0% -50% -100% -150% -200% Yarn Non woven Others FY08 FY09 FY10 FY11E FY12E

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

PAT and EBITDA margins

(%) 20.0
15.0 10.0 5.0 0.0 FY08 -5.0 -10.0 FY09 FY10 FY11E FY12E

P/BV and EV/EBITDA

20 18 16 14 12 10 8 6 4 2 0 FY08 FY09 FY10 EV/EBITDA (x) FY11E FY12E P/BV (x)

(x)

(x)

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

EBITDA margins

PAT margins

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

Planned capex

Shareholding pattern

Capacity Investment improvement Phase I Spinning Non woven fabrics Phase II Dyeing and processing house Garments 5.5 tpd 3.6 mn 130 210 1.5 tpd 12000 MT 210 860 (in Rs mn)

Commissioned by June 2012

Others 40.4% Promoter 54.2%

June 2013

DII 5.5%

FII 0.0%

Source: Company, CRISIL Equities

Source: Company, CRISIL Equities

CRISIL Equities

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CRISIL Independent Equity Research Team

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