Indocount - Textile Stock

(Tarun) #103

ROCE ((EBIT/Capital Employed)) working for the three. Another way to establish capital/asset light model claim:


(Tarun) #106

I For past few days I am spending some time on IndoCount as the numbers are looking tempting. Standalone great and way ahead of sectoral peers. Some visuals:

Firstly some trivia to understand what the company does:

  • Niche: Focused solely on bedding (sheets, comfortors, fashion bedding etc).
  • Strength: ~80,000 spindles weaving 68 Mn Meter/Annum. Additional capacity of ~22mn about to come on steem. Utilization expected to be ~98% (from the levels of 65% in Q3’16.)
  • Scale: Export to 49 countries and 4th largest global supplier to US in bed linen category. 2nd biggest supplier from India in the category. 13th biggest in US within overall textile segment.
  • Scope: As per industry estimates, India market share currently 45% set to increase to 70%. Growth of 11% against china growth of 7%.
  • De-risk: ~45 - 50% sales comes from top 10 customers (WalMark, Target, JCP and Bed, Bath, Beyond etc.)
  • Value Ladder: Trying to move up the perception slot in US market with three licensed brands Harlequin, Sanderson and Scion. All three are from same stable and have a rich legacy behind them.
  • New Markets:
    Custom created brand ‘Color Sense’ for US online market.
    In India, trying to capture aspiration brand position with ‘Boutique Leaving’ Brand. Current reach 200 MBOs. To be expended to 600 MBO. Products positioned at the range of 2000- 8000. Are pure cotton with >400 TC fineness. (some murmurs around the partner heading this India venture)
  • EBIT improvement: D/E reduced from 6.71 in 2013 to 0.52 as on FY16. Approx 200 Cr INR CFO for FY’16 hence most of the proposed and under progress CapEx can be taken care by accruals only.

Some Open questions:

  1. Few days back I had worked on a DuPont analysis for IndoCount and other peers. Itwas evident that a very asset light model is helping them immensely in posting superior ROE/RoIC etc. From FY’16 AR the company mentioned that '70% of the spinning and weaving work is being outsourced.) This looks to be case since IndoCount has approx 80,000 spindles and generated a top line of 2031 Cr. whereas WelSpun got approx 300,000 splindles yet only meeting 75% of yarn requirements on Top line of 5979 Cr.

1 (a)However, thinking rationally, (and actually thinking aloud here) this outsourced spinning and weaving work should reflect somewhere on the book of accounts. It should have caused some bit of dent on P&L. My uneducated guess, it should have caused at least higher COGS (cost of goods sold) in case of IndoCount (assuming that outsourced is making at least some money in the contract.)

Below is a table of COGS as % of total sales for the three. As evident, verymarginal difference in COGS between the three.

1 (b). If not for the COGS (lets assume that they got a very good deal where outsourcing vendor is playing on a volume game and ok to survive on wafer thin margins only), at least some part of this should trickle as higher Account payable/liability in the BS to some extent since quantum of outsourced work is huge. Strange that proportionately this number is still very reasonable for IndoCount.

In summary, at this juncture, I am not suggesting any flag (of either colour). This counter looks to be very interesting with tempting numbers (can sustain and improve as well in future with debt reduction). However this asset light model deserves to be understood well and validated firmly.

If this asset light model is true than they have found/created a unique proposition for themselves and may work very very favorably. With the textile industry shift this can be an interesting play. Withing a “processor type” someone became 'Smart processor type".

Disc: Not invested, curious.


(Sameer_srj) #107

Any reason why the stock is falling day by day. No announcement from company. AGM on 21st August.

(tapas dash) #108

Couple of shares in textile sector are going down after kitex results. Like, icil,trident. Also icil trend is down ward in technical chart in last month.

(sandeep17) #109

My view is that this could be because of the rupee appreciation. There is a big chance that the rupee can appreciate very significantly from current levels.

(Kumar Saurabh) #110

GHCL has already given negative commentary during mar’17 results on textile bed sheet business which directly compete with indo count. Would be good to read that in case indo count mgmt is giving all is well message


Indo Count Industries Limited (‘the Company’) held on 10th August, 2017, the Board has inter- alia approved the setting up of a Wholly Owned Subsidiary in United Arab Emirates (UAE) towards promotion of business in UAE and MENA countries.

(Dhaliwal) #112

Massive decline in today’s session. While the stock recovered from 52-week low of 107 to close at 115, the short term outlook still looks negative.

I am planning to invest in ICIL but waiting for the right level for entry.

(maheshkumar) #114

Growth to remain subduded till q4
Hence daily beating down

(sarangg) #115

What do we see as a driver of current/future growth? As far as I can see, the massive growth has not been in the end markets, but rather a geographical shift due to changes in relative cost of production. It seems like it could be a secular shift to me, as cost of labour production is significantly lower in India vis-a-vis china, although employee costs aren’t a big factor - only 5% of total cost. Any ideas on drivers of cheaper costs in India?

If India is a cheaper place to produce though, it seems like Indo-Count could have a temporary moat (say 4-5 years) owing to the higher value part of the chain it occupies vis-a-vis spinning/weaving, and its healthy return ratios could mean profitable growth at 20%+ for next couple years. Thoughts?

Disc. Not invested, but examining an investment at lower levels

(harjotsingh87) #116

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.”

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

(Ankit) #117

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.

(RICHAJ) #118

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.

(Marathondreams) #119

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

(Mridul) #120

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.

(sandeep17) #121

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.

(Kumar Saurabh) #122

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

(Lav) #123

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.

(Kumar Saurabh) #124

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.

(GSApte) #125

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.