Indo Count Industries ~ Global Home Textiles Bedding Segment Leader

As per the Q1 FY18 investor presentation,

“Credit Rating Agency ICRA, in its letter dated 10th August 2017 has reaffirmed the Long-term rating of
ICRA AA- (pronounced ICRA double A minus) and the Short-term rating of ICRA A1+ (pronounced ICRA A
one plus). The Outlook on the long-term rating has been revised to Positive from Stable.”

http://www.indocount.com/images/investor/Investor-Presentation-Q1FY18_170816_045054.pdf

I am not sure what is the exact reason for so much beating but I feel it could be good investment opportunity for long-term.

Experts - Please share your views if I am missing something very obvious

Disc - Invested

The company sees the following four as drivers of growth:

  1. Moving up the value chain with new products and own brand
  2. Entering new geographies to expand beyond the US
  3. Enhanced focus on existing institutional business
  4. Operating leverage created by the expanded capacity

In my view, lumpy growth can come in only when operating leverage kicks-in, which is unlikely before H2 FY19 or FY20 (demand growth for Indian textile/garment exporters has been slow over the past 12 months or so). All other drivers can offer incremental growth at best in the short to medium term since:

  1. moving from B2B to B2C, and establishing brand presence in the US is not very easy - it takes a lot of time (5 years or more) and investment
  2. expansion outside the US will also be slow since Indian exporters are challenged by the lack of FTA in the EU (as opposed to Pak, Bangladesh companies which have the FTA in place, and have a 4-5% cost advantage as a result). Other geographies (Middle East, Australia, etc) are small. On the Q1 call, the Welspun management indicated that while discussions are on-going for the EU FTA, but nothing concrete is on the horizon as yet.
  3. growth in institutional business is being challenged by the strengthening of the rupee, and Indian textile companies have lost business to Chinese competitors in past two quarters. This might reverse as and when the Dollar strengthens, but I have no views on if/when that might happen. The other challenge to institutional growth is that ICIL’s end-customers (large retailers) are being challenged by Amazon, so price hikes can be ruled-out in the near future (except those linked to RM movement). Online sales in this segment is very small right now.

On the positive side, cotton prices have started stabilizing so bottom-line of downstream guys like ICIL can be expected to remain steady, if not move higher, from Q3 onwards.

To your question on drivers of cheap cost – it is the low cost of manufacturing and abundant availability of cotton in India (a bigger driver). However, bare in mind that these two factors are applicable to all Indian exporters, so i wouldn’t really consider it a moat.

ICIL has one supply side moat – which is its asset light model wherein it outsources spinning and weaving work (vs. someone like Welspun which is vertically integrated). This is the core driver of the higher return ratios and profitability. This model will be put to test in the current weak demand environment, and I am going to closely monitor if it produces the desired hedge.

None of the Indian textile guys in this segment have any demand side moat (brand, purchasing power, etc). It might get built over time but not right now.

Once again, the hockey-stick growth in top-line that you are looking for can only be a by-product of institutional demand picking up (in absolute terms as well as migration of demand from other countries). Else, the ongoing capacity expansion by ICIL as well as other players will look like an asset bubble. Based on management commentary, such pick-up is a couple of years away, but should happen as it did post 2010. Either ways, trying to time that is futile, so you should invest only if you believe in the fundamentals of the business and the management quality.

I hope this helps.

Disclosure: Invested, but continuously looking for disconcerting evidence to re-evaluate my investment thesis.

13 Likes

I too have been wondering what is happening here. Sure, the textile industry is going through some tough times, esp Indo Count, but looking at the Shareholding pattern, institutional investors have been piling on this last year, and retail investor interest doesn’t seem to have waned much either.
I suspect this may be a little too much over reaction at quarterly figures by the market.

I had been a long time shareholder of Shakti Pumps and a similar weakness in earnings happened (albeit due to company specific reasons) and I ended up panic selling at the worst possible time. I am not going to let this happen to me again. I believe my investment thesis is still sound so I plan to stick with ICL for at least 1-1.5 years.

I entered just in July-Oct 2016 with a 10% position, which due to the recent bull run and lower price of ICL has now become 5%; depending on how the industry shapes up, I might average down.

2 Likes

Mr. Lalpuria came on TV today and explained that there is no loss of customer.hence stock went up almost 10% in a day

Please see the news item below

Problem with icil mgmt is that they keep putting up the rosy picture while their performance keeps on deteriorating. These guys apperaed on tv quite a few times in last 6 months. Never have they said anything negative…like margin pressure and stuff. I think when one invests in such companies, where rm prices form bulk of the expenses, it is must to track the rm price swings.

1 Like

If North America is their biggest market, then I believe its largely due to slowdown and uncertainty prevailing in the US market itself. Most retailers in the US are on a cost cutting spree ( even closing down stores ). The retailers themselves havent been able to give reliable guidance from their end so we cant expect much from their vendors.

Good to track what competition is telling .if company in focus n competition sing different songs , then one has to be wrong . Also, before trusting mgmt who guide through concall n tv,better to look their history . Considering the history of financial mess ups n complications IC has done, I think they should better be tracked independently of their own guidance . Disc : tracked n discarded due to promoter issues. Competition is GHCL which highlighted headwinds in USA textiles few quarters back

2 Likes

I am not sure if I understand/agree to the statement that “USA market is in slowdown”. USA has seen a big growth in the housing market since last 3 years and the trend still continues. Based on this, I think the demand in USA for textile should be robust and increasing, not facing uncertainty and slowdown.

What we need to explore is why Indo count or Indian textile companies are not seeing growth in such a scenario? Like many have pointed out, some of the reasons may have to do with the business going to China or other countries due to RM (cotton) price increase and rupee strengthening. And it is not easy to predict how these prices will move. But these orders will come back to Indian textile manufacturers when the cycle changes again. For long term investors, it is futile to worry about these, unless these are permanent changes.

Are there other reasons for the orders going away from Indian textile manufacturers? If we can answer this question, it will be easy to see if the long term story is intact or not.

Disclosure: Invested and planning to add at current level.

What I understood from GHCL concall is that the retail chains in US are facing strong competition from online peers . This is leading to contraction in count of retail stores and also pushing vendors to contract margin. Not sure if Indian textile players can penetrate deep into US online textile retail.

I think, it is worthwhile to look for following :

  1. Is the slowdown in US market due to market trends changing from retail to online players in past year or so?
  2. Is the market share of Indo Count going down in US market?
  3. Are these temporary trends and can we expect sales growth to normalize for Indo Count?

I have been thinking on these lines and business fundamentals look stable to me.
Business with ROE > 31% and ROCE of about 30%, with Debt/Equity ratio < 0.32, and reasonably good OPM is available at PE of about 10, looks story to be worth considering at Rs. 100 when it touched that figure few days back.

I have invested at higher levels earlier and have averaged down with recent correction, and there is no change in my belief that, this is still a good business.

Disc: Invested since 2016 on wards and views could be biased.

I guess its mostly the shift towards online. Go through this :-1:

Some of these retailers are listed companies so you can get more details from their SEC filings.

1 Like

Do we know how much of their sales/revenue is from online channels like Amazon - and how that has progressed in last two years - that will help to asssess if this market shift will be neutral or negative to the co

I am looking for more details like reason for revenue de-growth of about 16% in Q1 FY17-18.
One of the reasons is de-stocking by its customers in US, thus demand from US seems reducing.
Also, in spite of recent capacity expansion from 68 million meters to 90 million meters in FY16-17, it is going to take time to realize the benefits of this expansion.
Cotton prices going up by about 10% in past few months may put some additional burden on input costs. We need to see if Management can pass on this RM price increase to its customers soon.

Though the business fundamentals still look good, this story will take time to show some real uptrend in revenues. All said and done, things may turn out to be positive from here.

Disc: Invested since 2016.

1 Like

Cotton prices are going down. This should be good news for companies like Indo count

Textile companies have a huge problem of getting paid from their customers, especially if their business is commoditized. But, I guess Indo Count is managing it.

trade receivables
2015 264 cr
2016 288 cr
2017 367 cr

DSO is maintained for the most part.
2015 56 days
2016 51 days
2017 62 days

Non Current trade receivables of more than 6montsh is less than percent.

So far so good.

Company is on a good footing. However, we need some strong growth number in sales, which are missing.

Year Ending EPS was 11.55, Sales 1989

whereas, 30/6/17 Q1 EPS was 1.62 (prev 2.47), sales 399

Which pretty much indicates fall in EPS and sales.

So, it is very likely that Indo count share price will continue to take a dive. And if markets, overall, were to sneeze, then Indo Count will surely get very cheap.

The price is nose diving. It has corrected 50% in last six months, and another 50% fall to 2015 low is a strong possibility.

Lets first see where the price settles.

Given the tough times, my objective with Indo Count would be to get a good entry price. And leave it at that.

From its website and annual report, and the chairman’s dialogue, it is clear that they are ambitious. And they have the resources: bank funding, position in the market and the know how.

When the time is favourable for them, and they catch a good run-up of two to five years, this share is very likely to do well.

Textiles are usually commoditized businesses, but Indo Count is relying on its own brand. Unlike Kitex, which is a supplier.

1 Like

Further news of bumper cotton crop, although the news is related to unfortunate death of the farmers in Maharashtra. I have copied important paragraph from that news below -

"The Bt cotton crop at this time is standing at least one or two feet taller than previous years and with heavy foliage…. So, the farmers sprayed at head level. The area under cotton, too, has grown from about 37 lakh hectares to about 42 lakh hectares in the Maharashtra. Also, from the past 4-5 years, farmers have been extending the crop beyond December right till February-March to get extra quintals,” Waghmare said.

Entire news can be seen below

Another news related to cotton prices

I think all companies like Ambika, Welspun, Trident, Indocount would be beneficiary of falling cotton prices.

Disclosure - invested in Indocount @105 range

3 Likes

i feel contra investors can enter here as downside seems to be limited but good upside possible once company comes out of the current difficulties.

1 Like