Mirza International - consistent performer but undervalues at present?

parkhi_nazar · August 31, 2018, 2:25am

Firstly, many thanks to @vigneshb

I’m never comfortable with related party dealings, especially ones such as their UK distribution business - whose only purpose in life seemed to be to act as middleman between MIL and the UK. “Why should it not be a 100% subsidiary”, was always a niggling question. Vignesh’s hypothesis gives a potential reason for this. Taking some debt off balance sheet could be a motivator. Frankly, I’d rather have this than other reasons for the existence of the UK entity (every other reason I can think of is worse than this one - and there well might be more than one reason for its existence).

For me, it’s a red flag - and the company clearly has got a set of flags flying in the corporate gov department.

Still, I’d disagree with @Multiplier777. Integrity is not digital. Neither is corp gov. Would you put a person who takes a printout of a (personal) holiday ticket from the office printer in the same bucket as someone who embezzles millions from his workplace? If you are an all or nothing person, then you would. Yet, I see a world of difference between the two.

A Satyam-like scenario where the even the balance sheet “cash” number was fake, is a very different beast.

In the end, it’s an individual call on how comfortable you are with light gray corporate governance, in the face of an otherwise attractive market opportunity. I’ve seen companies with gray corp gov doing quite well, and breaking many records. I doubt you can be 100% clean anyway - there are thorns in Infy and Tata…

This forum has been very helpful in calibrating where the company stands on the corporate governance spectrum.

Discl: Invested, from low levels

parkhi_nazar · August 31, 2018, 2:35am

Bhai, it’s a letter-versus-spirit sort of thing. I would have given more marks to a company that would choose to take a WC loan path, than a bill discounting path (on bills raised to a related party). Such a thing would tell me that the company has chosen to show a “truer” (in my view) picture to stakeholders - minority shareholders, lenders etc. I would also see such a choice as an indicator that the company is in a very strong position - and can afford to show more debt on the balance sheet without repercussions (e.g. higher interest rate if banks see more debt on your balance sheet).

Does this make the company a bet-off? Of course not; I appreciate that entrepreneurs have to hustle, and try various tricks. Yet, there is no denying that knowing about the possibility suggested by @vigneshb is useful! Make of it what you will.

Multiplier777 · August 31, 2018, 6:20am

In a scenario where the promoters were to approach you for a new joint venture business (70:30) and the agreement was that the promoters are to run the company and you will not have any say but just trust the promoters to do the right thing, would you go ahead? I doubt it after seeing their track record in Mirza International.

The point I am trying to make is that the need to go clean is purely dictated by the attractiveness of the stock market. If the market were to turn lackluster, the promoters will lose interest and go back to their old ways.

dua · August 31, 2018, 6:21am

Bill discounting make sense as costs come around to be 7% ( due interest subvention etc )
saving of 4 %. The second point though meaning less cost is less than normal debt, still if you add it to debt way, total debt increases, your rating decreases and interest cost on whole debt increases.

dineshssairam · August 31, 2018, 7:56am

I think it’s laughable to assume that retail investors have any say in the business of any company. The only sensible thing we can do is monitor whether the management makes good capital allocation decisions. Ultimately, that’s what creates wealth.

Mirza International has fallen by more than 40% in the last year or so. Are you terming this as an attractive proposition for the management of Mirza? IIRC, the management holds more than 70% stake in the firm.

Shikhar · August 31, 2018, 11:13am

i think the customers of MIL in UK will be more comfortable of buying their stuff from a UK based company( Mirza UK) rather than an Indian one( MIL). This explains the reason behind having Mirza UK as the distributor of goods in UK.UK customers are more happy dealing with an UK based company . Even Kitex Garments have given a similar reason for creating Kitex USA LLC.
Disc - Invested

parkhi_nazar · August 31, 2018, 1:14pm

Why not have a wholly owned subsidiary in the UK? A cursory Google search suggests this is possible:

An overseas subsidiary setup in the UK is a UK limited company whose shares are wholly owned by the overseas parent company. The UK subsidiary is a separate legal entity, governed under UK law. The UK subsidiary is separate from its parent company owner. The minimum share-capital requirement can be as low as £1."

And Kitex has been pilloried for this reason as well. Please read Amit Mantri’s blog post (2point2capital) if you haven’t already.

dineshssairam · August 31, 2018, 4:41pm

What’s the difference?

Let’s say that there’s no entity called Mirza (UK) and Mirza (India) is selling in the UK through a tie-up with a distributor named ABC Limited. Are you telling me that you’ll place more trust in ABC Limited carrying out the business for Mirza (india)?

I understand the risks with related party transactions. But it’s imprudent to assume that every company with a related party is crooked. If any such risk materializes, the correct action would be to question the management. If they cannot justify it, then exit the stock.

If a specific group of people would rather avoid all these steps and skip buying into the company all together, then that is also fine. In the end, it’s opinions that forms the market.

parkhi_nazar · August 31, 2018, 5:52pm

The difference is that a 100% subsidiary is the straight, clean way, with fewer options for hanky-panky. And yes, I would actually prefer if they had an outside distributor ABC than a related party.

I am invested in the company, and have been for some years now. But my eyes are open, and for me this related party business is a red flag / risk factor. The reason I am invested is that I feel the potential is large enough to justify the purchase, even with strictly average corporate governance.

aveekmitra · September 2, 2018, 4:29pm

Thanks a lot … These are interesting documents … In Mirza UK AR it is clearly written that

It is surely a company floated by promoters of Mirza. On face of it nothing wrong for it … Else they would have to deploy a local distributor. But we need validation of the following data points

Mirza has only 10% branded sales in overseas market out of it’s total export sales (AR 18) … So entire balance is white level manufacture. Why then this distribution set up is needed which eats up 17% margin (gross margin of Mirza UK is 17%). Why can’t supply simply to end customers from India?
Why they pay after 4 months to Mirza International India where they get the money in 50 days?
How a pure shrink wrap distribution business enjoy a Gross Margin of 17% ? Apparently seems too high as can be seen from bloated cost structure … 21 people working in distribution gets 1 million pound salary where average salary in UK is about max 30000/- pound for these types of jobs. One director gets 193000 pound salary in a pure distribution company!!! … All they need to do is get product from one source and send it to pre designated addresses (except the sales of branded ones which is pretty small)

However the composite margin of Mirza International India is quite respectable at 17% but it may be possible that they leave something on table for Mirza UK

ayushmit · September 3, 2018, 7:07am

Its pretty disappointing to see these issues. I used to feel that given the margins of 17-18% for last few years (which are kind of highest in the industry), they won’t be making much money in the unlisted companies or there would be reasons for those structures in place.
Looking at the involvement of next generation and their hard work in trying to grow the brand and domestic operations, I hope they take note of these issues and address them.

dua · September 3, 2018, 7:50am

I think Net Margin of Uk mirza ( 2% ) ( add director salary to net margin ) .is to been seen as admin cost and distribution cost will be there for Mirza india if done by himself… More over tangible assets like warehouse etc are to put by Mirza India to do himself… But everybody is missing Real question. Can mirza reach 1000 cr domestic sale in next 3 years

parkhi_nazar · September 3, 2018, 8:32am

Dear Aveek,

UK revenue is around INR 400 cr; 10% branded would mean sales of Red Tape, Oaktrak etc. of INR 40 cr
Their brand is present in 1,200+ multi-brand outlets in the UK, and 500+ in the US (AR 2017). I am principally OK with an employee base of 21 looking after this (8 in distribution; 9 in sales; 4 in admin)
These employees cost around INR 9 cr in toto, which I am also OK with. They have to have a sense check on the above network, which generates revenue of INR 40 cr in branded sales. This 9 cr total salary cost will also include a few guys looking for more business, and working on the white label piece - the white label piece gives them 350 cr of revenue
The reason I think Mirza UK gets paid in 48 days, but pays MIL in 146 days, is because of the 86 days of inventory that they need to hold. 48 + 86 = 134, and now 146 days makes some sense. Similary, if I look at 2016 numbers 47 (receivable days) + 54 (inventory days) = 101, and Mirza UK paid MIL in 108 days. The promoters have basically passed on the Working Cap cost to MIL. Again, I am OK with this
I do note that Mirza UK is quite cash rich!

I don’t personally see alarm in these numbers. But as a principle, I am wary of related party transactions. Still, these are lesser transgressions, in my book. I think of these as “light gray” corporate governance. I tag these as light gray, since these are decoded from disclosures - and I think promoters have been OK in terms of disclosures. The real devils are the ones who push things under the carpet, below the surface of disclosure. If promoters disclose that they charge the company a guarantee commission of INR 8 cr, I can calibrate that and decide if I am ok with this, in the larger context of the market opportunity. But if they cook the books, or actively paint a false picture, that is a no-no for me. So far, I haven’t seen the promoters here do the more shady things - it’s always been within the boundaries of disclosure. Hopefully, things will get only better from here as the next generation takes over

prateekchaudha_ · September 14, 2018, 7:46am

The picture above clicked at a local multi-brand footwear retailer in Dwarka, New Delhi.

Shows the efforts being put in by Red Tape (Mirza) management team in increasing brand visibility and pull.

It’s also been encouraging to see numerous times people wearing bond street collection and red tape sports shoes (as these are clearly distinguishable through their brand logo), in and around Delhi while travelling through the Delhi Metro, in exhibitions, shopping marketplaces etc.

zygo23554 · September 14, 2018, 1:10pm

From a cursory glance of the annual report -

MIL has amalgamated Hi tech Fabricators during FY 2017-18 since they were more or less into the same business segment
Mirza HK is now a wholly owned subsidiary
Guarantee Commission continues but has not scaled with increasing profits during FY2018
Employee costs have spiked by almost 30% - probably due to the amalgamation
Sales through the E Commerce vertical are up by more then 2X during the year, there are references in the annual report that their tie ups on the marketplace model are working very well
Domestic business growth has been spectacular while exports continue to de grow for the time being
EBITDA, EBIT and PAT higher for FY18 over FY17

A lot of positives about the hunger shown by the management in scaling the branded business
Operating cash flow into negative territory due to the huge investments into working capital (165-170 Cr)
Capital efficiency taking a hit as expected
50 more stores to be opened during FY19
New product launches are flying off the shelves everywhere (too early to conclude anything about Mode)

Come to your own conclusions

sandeep1985 · September 16, 2018, 11:14am

Hi Vikrant,
I believe I understand that your question is valid from the standpoint of product recall. My experience is that the shoes do have product recall and redtape can have a Brand recall.
Regardless, Mirza has entered into the category of retail in India. Retail commerce (online and offline) is definitely brutal. However, if we look at recent numbers we see that the growth has been explosive for Mirza’s Indian retail business. I am slightly worried about the fact that inventory/sales ratio is increasing drastically and need to kept close eye on

Having said that, given the current price the stock is, I believe, the stock is worth accumulating. There is a definite execution risk. I hope that product design and quality apart from right marketing helps Mirza to take into another orbit.

My suggestion: Try a pair of RedTape once regardless of the salesman influence on you. Nobody should influence you on what you should buy. Same is true for investing

sandeep1985 · September 16, 2018, 11:56am

hi All,
If I were to value the overall business on no growth basis, I find that the company should be valued around 750-900 cr. Given that company is going profitably, I believe can be fairly valued at twice of this Earnings Power Value (given high growth expectation from Indian Retail business going forward).

However, If I need to be really sure and superbly picky (which I believe every investor should be to accommodate for margin of error) , I wouldn’t bother about growth as it has disappointing investor in the last 3 years. On top of that, management and business performance indicators have definitely degraded (you can refer to the tables below)

Additionally, I do not believe that management would be able to build the Indian brand without there fair share of misses (given there prior background and will to export shoes while other players captured some good share of Indian retail shoe market)

Lastly, I am also not sure of the management will to uphold best corporate governance standards.

Disclosure:

This is not a buy/sell recommendation. These are just my thoughts on this stock
Not invested but watching the stock carefully to drop at 70 levels or below (Can happen given that roil in midcap and smallcap space)

ayushmit · September 21, 2018, 6:22am

Full page ad focused on ladies segment. Another store coming up shortly in Lucknow.

Bikram11206178 · September 21, 2018, 7:21am

Red tape sneakers are getting awesome review.Yesterday my friend bought one white sneaker and his reaction was " I got Gucci like product in 1200" .Design,look and comfort wise they are perfect

I am very much excited based on their product quality,brand visibility,aggressively expanding stores across the country,cross selling concept which will improve their brand visibility as well as it will increase the billing amount .They are focused on capturing the tier 2 city market share by introducing bond street brand.I think once they capture a good percentage of market share in domestic market then they can easily sell their product with higher price.
spending lot of money in advertisement clearly shows management are fully committed towards taking the business to the next level .
@ayushmit sir ,red tape shoes for ladies is not good as compared to men.It’s good sign that they are focusing on ladies segment also.
I think they are doing all the good work and hopefully they will able to fully execute the plan .They needs to come out of clean in case of any corporate governance issue also.My conviction is getting stronger by hearing pretty good feedback regarding the product.

ashish_agarwal · September 22, 2018, 6:01pm

I am in lucknow today and visited RED TAPE store at aligang(normal store of 1000-1500 Sq ft) and store at near shyam swad (online store of 3000 Sq ft opened in May 2018). I have made a detailed conversation with the manager Mr F(he is from kanpur and manager of online store). Few points of my conversation and my observations in the store I would like to share
1:Normal footfall fall is low as compared to other retail shop but he told me that 85-90 out of 100 walk in customer will buy the products (which is good I think)

2:Avg monthly sale is near about 15 lac and only in one month they have clocked sales of 22 lac due to higher discount(more than 50% discount in that month to clear inventories)

3:They have recently launched Men’s undergarments (priced 499/-aprox)and student bags (priced 2800/-aprox not sure but more than 2000)which are available on display but not for sale because they have some issues with the billing due to some problem in software.

4:Women shoes are there but inventory is less as compared to men’s

5:By Dec or Jan they are going to launch women casual wear

6:Sports shoes are priced generally 4785/- leather shoes are in the range of 3200 to 3999/-

7:All items are on 50%discount

8:During my time in the store there are few coustomers
Some ladies bought casual shoes for them and one young boys sports shoes.

9:Sales representative are friendly with me and customers

10:They have good collection in my view on men’s wear shirts t-shirts Denims Sweaters etc and are reasonably priced after discount

Now conversation with sales representatives of normal store:
1:This one is also company owned store around 8-10 years old
2:They told me one most important thing that go to their factory site and pick the design in sport shoe and order them at a Avg price of 500-600/-and sell them in you shop at 700 or 800 or even more. (quiet surprising to know that one sport shoe they are selling at 500-600 to local retailers. If they are selling the same shoe at their own showroom at 1500 what kind of profit they are generating. Later I thought may be they are telling wrong things).

3:Avg monthly sales is near about 10 lac.

Some other points I noticed :
1: Products of both the stores are diff (around 90%.)

2:10% person products are common but pricing are diff especially in sports shoes.

3:Distance Both the stores is near about 7-8 km and there is stores of bata near to both the stores.

4:Today I have noticed bata is also opening stores aggressively.

THANKS AND REGARDS
ASHISH AGARWAL
Note:If something comes up in my mind I will share. Views are invited