‘Get it right-first time and every time’, this is the phrase used by the Alok Industries in their website while talking about the Quality. I am pretty sure that Alok Industries does its best to keep their quality high and achieve 100% customer satisfaction.

Many people emailed me about what I think of Alok Industries. So this is my answer to all of them. For me Alok Industries is in my watch list but not on wish list.

Without wasting any more time let’s start talking about the facts which all investors should look for before investing. These are the following facts I like about the company:

  • I like the gross profit and operating profit margins of Alok Industries.
  • Alok Industries is rich with cash on its balance sheet.
  • I like the profit margins before depreciation and Interest cost.
  • I like cash flow the company generates through its operations.

Like every coin has two sides, there are few things which I don’t like about this business:

  • I am not happy the way they are using their assets for business.
  • Too high interest rate cost.
  • Alok Industries is highly leveraged or too much debt on its balance sheet.

If we look at aggregate figures for this business for last 5 years are as follows:

Share holders equity invested

INR 10,020.10 crore

Averaging INR 2,004.02 crore

Net profits

INR 1,115.50 crore

Averaging INR 223.10 crore

Net operating cash flows

INR 1,842.64 crore

Averaging INR 368.53 crore

Net cash used in investing

INR 7,581.03 crore

Averaging INR 1,516.21 crore

Net cash generated through finance

INR 6,524.60 crore

Averaging INR 1,304.92 crore

Interest and depreciation expenses

INR 3,377.77 crore

Averaging INR 675.55 crore

The concern I see is the interest and depreciation cost, which is rising every year. Textile weaving business requires a lot of regular investment within its business and that reflects in ‘ net cash used in investing’. The concern is that 86% of those investments are sourced through borrowings.

We at Valueoperations rate Alok Industries as A2 Company. That means we are satisfied with the financial standing at this stage but don’t feel strong to invest within it.

Something to remember about quality and performance ratings…

Rated A1, A2, B1, B2 and C, every listed company is rated based on a series of over 30 separate metrics, measured at both a point in time and over time. Most importantly, the Quality and Performance Rating is applied without any subjectivity. All companies are judged according to the metrics they generate. A1s have the lowest probability of a liquidation event. “Lowest probability” however doesn’t mean a liquidity event won’t occur. It just means far fewer A1s will have a liquidity event imposed on them compared to C. A liquidity event includes a capital raising, debt default or renegotiation, administration, receivership etc. An A1 company could of course raise capital if it needs to fast track construction of a new factory. Sticking to A1s and avoiding C’s should, over time, produce better returns.