Buy: Sangam (India) CMP: Rs 64 with a Target of : Rs 95

(BSE: 514234 | NSE: SANGAMIND | ISIN: INE495C01010)

Sangam ( India ) has entered into a strategic supply agreement with Portugal- based Riopele Texteis, a leading global manufacturer of value-added polyester- viscose yarn and fabric. Under the agreement, Sangam will manufacture high- end lycra fabric using Riopele’s technological expertise, and supply the same to Riopele. We expect Sangam to supply 5mn mt of fabric to Riopele every year, generating revenues of Rs 100mn in FY08 and Rs 500mn in FY09. Sangam is also likely to witness stronger margins due to value additions on its own products derived from its partner’s expertise. We maintain Buy with a target of Rs 95.

Strategic supply agreement with Riopele of Portugal

Sangam has entered into a strategic supply agreement with Riopele Texteis, a Portugal-based MNC with an annual turnoverof €64mn. Riopele is one of the world’s largest manufacturers of value-added polyester-viscose bi-stretch yarn and fabric, and is a major supplier to leading retail chains in Europe and the US . Under the agreement, Riopele will outsourcehigh value-added polyester viscose bi-stretch lycra fabric from Sangam, in order to derive the benefits of a cost- competitive sourcing base. In turn, Sangam will have access to Riopele’s technological expertise and designing patterns. The agreement will be for an initial period of one year and may be renewed thereafter.

Expected annual revenues of Rs 500mn

As per the agreement, Sangam will develop new products using Riopele’s technical expertise over the next 3-4 months. We expect 5mn mt of lycra fabric to be supplied to Riopele every year, with revenues touching Rs 100mn (for four
months) in FY08 and Rs 500mn in FY09. Depending on the success of this tie-up, Sangam intends to later expand the Riopele partnership into a joint venture.

Opens the door to expansion in the global market

The agreement with Riopele is the first step towards Sangam’s vision of expanding in the global market. Sangam has virtually quadrupled its export sales of yarn and fabric during the last three years, with 30% of revenues coming from exports in FY07. The fabric division contributed only 10% of total sales in FY07. With this tie-up, Sangam is targeting a10-15% revenue share from fabrics.

Improvement in margins

Riopele is a high-volume player in polyester-viscose bi-stretch lycra fabric. The company is able to sell its fabric at a higher margin due to its superior technological and design capabilities, and wide range of fabric on offer. Sangam too expects the operating margin on fabric being supplied to Riopele to improve to 25%, from ~20% at present. Sangam is also likely to witness stronger margins on domestic sales considering that it will benefit from its partner’s technological strength and designing expertise, leading to higher value addition on its products.

Maintain Buy with a target of Rs 95

At the current price, the stock trades at a P/E of 6.8x on the diluted FY08E EPS of Rs 9.5. We maintain Buy with a target of Rs 95, at which the stock would trade at a P/E multiple of 10x on FY08E EPS.

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