Overall, the textile sector may have got a thumbs down from the stock market due to fear of competition from low-cost countries but there are individual stocks that seem to be weaving a success story.

Hanung Toys and Textiles is one example. Even as shares of most textile players have been languishing on the bourses, the scrip of this toy and textile manufacturer and exporter has seen a 43 per cent rise since its listing in September last year.

While investors have flocked to the counter because of its distinct business model and growth prospects, the valuations look tempting even after the recent rise.

At the current market price of Rs 136, the stock trades at 5.7 times and 3.9 times for FY08 and FY09 estimated earnings respectively. This is attractive for a company that has demonstrated a year-on-year growth of over 50 per cent both in revenue and profit over the past few quarters.

Textiles and toys

Starting with a sales turnover of just Rs 92 lakh (Rs 9.2 million) in the year 1991-92 -- its first year of commercial operations, Delhi-based Hanung has grown leaps and bounds achieving a turnover of over Rs 250 crore (Rs 2.50 billion) in FY07. Hanung is the largest Indian exporter of toys to developed markets.

Its textile business has been growing rapidly too. The company has the license to manufacture soft toys resembling characters such as Mickey Mouse and Nemo, the fish from Disney.

Similarly, it has tied up with Percept Picture Company for manufacturing and selling rights of characters in the hit Indian animation film Hanuman. The company also has a large well-known customer base overseas for its textiles.

In the domestic market, the company sells under its own brands like Play n Pets and Muskan for toys, and Splash for home furnishings. The exponential growth expected in the Indian retail industry with the entry of large players will only create more demand for its products.

The company is already a major supplier to major retail chains like Landmark and Pantaloon [Get Quote] and has started getting business from Reliance [Get Quote] Retail too. It is also expecting orders from Bharti-Walmart.

The Rs 1,000 crore reality

The company aims to achieve a turnover of Rs 1,000 crore (Rs 10 billion) by March 2010. Surprisingly, most of this revenue (around Rs 700 crore -- Rs 7 billion) will come from the textile business which consists of total home solutions.

For this, the company is expanding its current capacity of six million metres by more than six times. This will commence operation by August 2007.

The company is also expanding its toys capacity by 46 per cent to 200,000 pieces, which will be ready by September 2007. Thus the company hopes to achieve a turnover of Rs 600 crore (Rs 6 billion) and profit of Rs 60 crore (Rs 600 million). Last fiscal, it clocked sales of Rs 275 crore (Rs 2.75 billion) and Rs 27 crore (Rs 270 million).

With huge expansion planned for textiles, this will be the key growth driver in future. Textiles will constitute over 65-70 per cent of revenues from FY08 onwards up from 46 per cent in FY07.

While the textiles business enjoys an EBITDA margin of 16 per cent and PAT margin of 10 per cent, the toys business enjoys better profitability with EBITDA margin of 22 per cent and PAT margin of 12 per cent. However this does not seem to be a cause of concern for the company.

Says the company's chairman, Ashok Kumar Bansal, "While our toys business has been growing at 25-30 per cent annually, textiles business has been witnessing a multiplying growth." Further, the company does not fear competition and is confident of maintaining profitability due to its positioning in the higher end of the market.

The company supplies fabric of higher thread counts i.e. above 60s which fetches better realisations due to less competition from other low-cost destinations like China, Pakistan and Bangladesh, that produce more of lower thread counts (20s-40s). Even in toys, the company enjoys better realisations compared to the cheap Chinese toys.

Further, while the company's textile plant is located at the tax free zone in Uttaranchal, its toy expansion is planned in Noida SEZ leading to substantial tax savings.

Also, the company is likely to maintain a favourable domestic and exports mix in the ratio of about 25:75 overall as well as for individual businesses.

Thus while the latter will give the much needed volumes, the former will support margins thanks to better pricing power. Moreover the company hedges its exports sales by immediately covering its position, thus insulating itself form sharp fluctuations in currencies.

Financial performance

For FY07, the company's net sales rose 88 per cent to Rs 275 crore. Both operating profit and net profit more than doubled to Rs 47 crore (Rs 470 million) and Rs 27 crore, respectively, leading to substantial expansion in margins.

RAPID GROWTH
Growth rates (%)	FY06	Q2FY07	Q3FY07	Q4FY07	FY07
Net sales	82.5	15	70	60	88
Operating profit	164	25	89	148	105
Net profit	211	87	106	109	115
% change is year on year

The robust performance was largely driven by the staggering growth in its textile business which witnessed a more than two-fold jump in sales and tripling of profit before interest and tax.

The company recently received a $65 million order for supplying home furnishings to be spread over three years. Starting with supplies of $15 million this calendar, the company would supply $20 million next year and $30 million in 2009.

More significantly, Hanung is planning to acquire a Chinese toy company, as globally, 75 per cent of the toys made are Chinese. All these developments will help it achieve its mission of becoming a Rs 1,000 crore company.