The surge in the price line has been achieved on the back of unusually increasing trading volumes at the Zodiac counter over the last few months. Unusual because Zodiac Clothing Co Ltd (ZCCL), promoted by MY Noorani and others in 1984, has always led a low-profile existence in spite of being the licensee of a strong brand like "Zodiac".

Ever since ZCCL's market debut in 1994 following a premium public offer for sale by its promoters, the trading interest in the counter has generally been sporadic. This lack of trading activity in the ZCCL scrip, till not very long ago, could be traced to its low floating stock. ZCCL's promoters control 75 per cent of the company's tiny Rs 3.39-crore equity. Another 7per cent equity holding is in the joint hands of FIIs and domestic institutions. The company has over 3,000 shareholders. Therefore, even a low floating stock of 5.7 lakh shares was widely-spread amongst the small shareholders, with the average holding being about 200 shares.

In the last four years, the scrip, which began its BSE innings with a maiden quotation of Rs 135 in October 1994, saw a high of Rs 160 in November 1994 before gradually sliding to record a low of Rs 34 in March 1998. The slide in the price was accompanied by poor volume.

Even as late as the beginning of calendar 1998, January, for example, saw transactions in just 300 shares of ZCCL on 2 trading days. However, there has been a gradual increase in the trading activity in the ZCCL counter since July 1998. It gathered momentum from September, culminating in the scrip touching the offer price of Rs 110 on October 13 for the first time in the last three years. Each of the last four months have witnessed a monthly trading volume higherthan the preceding month.

Market pundits are not surprised at the impressive gains by Zodiac. They are of the view that the rise is richly deserving. Of course, the popular "Zodiac" brand employed by ZCCL is owned by a private company exclusively belonging to the promoters. It can be held as a major blemish on the track record of the promoters. However, over a period of time, the promoters have admirably demonstrated their commitment for the public shareholders of ZCCL.

For one, they have firmly held on to their 75 per cent stake, despite tempting offers from some of the leading foreign institutional buyers to strike a private deal. Also, sources confirm that the promoters have scrupulously not entertained the cheap jobbers and market manipulators to make a fast buck at the expense of the retail investors. Besides, the dominant owners have devotedly guided the company to stage an impressive financial performance.

As the company derives its bread and butter from the exports of branded readymade garmentsto the quality-conscious European Union and US, its performance is all the more remarkable. In the last four fiscals, ZCCL has surely hit upon the growth path, increasing its turnover from Rs 23.90 crore in fiscal 1995 to Rs 59.27 crore, a compound annual growth rate (CAGR) of over 35 per cent.

During this period, the net profit also grew impressively from Rs 3.5 crore to Rs 5.7 crore, a CAGR of nearly 18 per cent. The profitability at the net level might have been still higher, but for the lack of return on the nearly Rs 10-crore investment in ZCCL's subsidiaries.

The financial performance of the company was largely in tune with its projections made at the time of the offer for sale of equity shares by its promoters. During fiscal 1998, ZCCL retired all its debts and became a `no-debt company' since it did not need the tax shelter provided by borrowings, as its turnover came largely from exports.

During the current fiscal, for the first quarter ended June, ZCCL reported a 50 per cent growth inprofitability to Rs 1.54 crore on a turnover of Rs 13.58 crore. No doubt, the company's second quarter results, which are expected to be announced on October 30, will give a better insight into ZCCL's performance for this fiscal. Even if the company maintains its last year's performance in the last three quarters of the current fiscal, it can end up with a net profit of Rs 6.2 crore.

However, marketmen monitoring the ZCCL counter are very bullish and over-optimistic to predict that the company will improve upon its last year's performance by 50 per cent, as it has done in the first quarter. In that event, it could post a net profit of Rs 8 crore.

If this growth-on-course materialises, then ZCCL's projected earnings for the current fiscal could be between Rs 6.2 crore and Rs 8 crore, which translates into an EPS of Rs 18 to Rs 24. The top brass of ZCCL, meanwhile, predict another bounty for this fiscal. ZCCL has contributed Rs 7 crore as 11 per cent redeemable cumulative preference shares to its mainsubsidiary, Mayfair (Bombay) Ltd (MFL), which handles the domestic sales of the Zodiac range of products.

Over the last four years, difficult market conditions have resulted in the stagnation of MFL's turnover and an unhealthy bottomline. As a consequence, ZCCL has not realised the preference dividend due to it. But now, according to managing director Anees Noorani, with MFL doing well, ZCCL is better placed to recover its accrued preference dividend. If ZCCL were to really receive up-to-date the preference dividend due to it, its net profit could soar above Rs 10 crore, resulting in an EPS of over Rs 30. In any case, it will be safe to concede that the company can be expected to have an EPS of Rs 18 at the lowest, going by current indications.

The average P/E ratio applicable to the readymade garment industry is about 3.5. However, this could be misleading since ZCCL, being the industry leader, sets the pace rather than following the pack. The current market price of Rs 94 discounts its projected minimumEPS of Rs 18 a little over 5 times. Considering that ZCCL is on an upward growth curve, it can attract a better discounting. And if the contemplated increase in profitability does materialise, the scrip could do a market jig in the near term. For ZCCL's loyal shareholders, there cannot be any better news. But, beware that is still not ready-to-wear.

Arranged by Investar -- The Aarthik News & Research Syndicate