Monte Carlo Fashions-Branded Apparel Stock at Good Valuation

Hello. I had just started tracking this company. As I was searching the news for monte carlo, I saw one interview in September of Sandeep Jain. This was regarding the wool price, that are now at a record high. He explained that this year monte carlo will not be effected by the higher wool prices because they had ordered the yarn in march. Hence, this year is covered.
I wanna know/understand that this means that the coming year the prices will be higher. So will it have any effect on the margins of the company. I mean since they order the yarn in march, hence higher prices will be taken care in the selling price of the final product. That may have an effect on the sales as the price will be higher. Also, I want to understand regarding the effect on end of season sales and e-commerce on this company. Where can I find any news regarding that?

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With emphasis on Cotton and kids wear and new E-Commerce tie-ups Monte carlo seems to be ready for big growth in around the year(Winter & Summer) sales.
Nice Presentation https://www.bseindia.com/xml-data/corpfiling/AttachLive/8a0b1fc9-3f0c-404b-a81c-1931b6419833.pdf

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I was following this stock and read all the thread above.

Currently the stock is trading at 154.6 with P/BV of .66. Moreover, the debt to equity is .55 which is manageable.

Moreover, the biggest factor of my interest is that more than 50% of the sales happen in Q3 in which it was able to garnish good returns.

Moreover, the mgmt has bee clarifying that the wool and cotton price has been on the rise , which has been affecting its profits.

What’s the opinion of other people.

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I am from apparel retail.

I have not personally followed this stock but from experience in the field, I have observed that the company products doesn’t have that kind of pull that will bring customer in the shop.

Though monte Carlo has started a long time back, it has very limited reach in MBO network

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We used to buy their products which are always sold in sale in winter season. The products are sub standard with quality not commensurate with MRP .Monte Carlo is Nahar group which had companies like Nahar spinning , Nahar industrial and was also in oil and fats, castings etc some 3 decades back.Most of the companies were very poor on stock market and became penny stocks.

Nahar is big in manufacturing (they have very big denim manufacturing capacity)

But on brand building and distribution, they failed to crack the market

Q2FY21 Concall Notes

  • The cotton segment now contributes around 41.7% of total revenues as reported in Q2 of financial '21. The T-shirt, shirts, denim jackets forms a major share in cottons product category. Home textile segment continued to grow at a healthy rate. Home textile segment contributed approximately 35.2% in Q2 of financial '21.

  • One of our key strength has been our wide and growing distribution network with a holistic presence across India. We have a deep presence across India through 2,500 plus multi-brand outlets, 25 EBOs and 279 national chain store outlets and 146 shop in shop. Majority of our revenues comes from MBOs and franchise EBOs, where we primarily sell on pre-order and outright basis. By virtue of this business model, there is no major inventory risk, and we remain adequately protected from the normal result sales – discount sales in the branded apparel business.

  • We have strategically right for increased revenue contribution from online sales and happy to share that the increased traction from this channel, online sales from Q2 financial '21 stood at INR 7 crore against INR 6.7 crore during the same period last financial year.

  • As far as our growth strategy, we are building our pan-India presence with current emphasis on western and southern region. We have already made an encouraging beginning towards this goal to increase the retail Monte Carlo product to the end user. We also have a strategic tie up with Ajio, FirstCry, Tata Cliq along with our existing tie-ups with Amazon, Paytm, Flipkart and others.

  • First to come back to the first question, which is you asked about how this winter season is going as compared to last financial year? See, well, if we see the sales of approval and if we compare with the last year, we have reached almost 90% of pre-COVID sales as we did in last year. So that is the status of EBOs. As far as MBOs and SIS are concerned, still, we have to get this data from that channel. But we believe that they have also at par what we achieved in our retail outlets.

  • And your second question was on manufacturing will contribute more or the outsourced manufacturing? Yes, this year, definitely, I think there will be a little more contribution from the own manufacturing as digit number one, where we make sweaters, basically, we don’t say – we don’t see much fall as compared to the last year’s level. But definitely, in the case of the goods which are manufactured outside like the jackets, where there have been labor shortages, and we have also reduced production as compared to last year. So there will be proportionately – the in-house manufacturing will be more as compared to last year’s level. So the season has started well for us, and of course, there has been less fear in the minds of consumer as compared to the last quarter, where people are not venturing out of their homes, and they were not going for shopping, and they were not like going on high streets where we have most of the stores located as far as EBOs are concerned. So we are very positive to begin in this quarter.

  • I have told you the October sales had been 90% of last year October sales. So November and December sales are still to come, and we believe if the second wave doesn’t hit us very badly, I think we should have the same levels in November and December as well.

  • uring the lockdown, as already mentioned in the opening sweet, we maintained the sales figures of last year. A nd this year, in the winter, we are targeting a 25% growth in the online sales segment while doubling our own website sales. So the key focus for this year is focusing on our own website, where we enjoy extra margins also. So that is the way going forward. Also, all our advertisements focus has been shifted towards e-commerce sales, so we are focusing more on social media and Google adverts to direct more customers to our own website .

  • if we see the discounting percentage in the online segment for our brand Monte Carlo, it’s almost at par with the offline channels with an increase of 3% to 4%. And when we sell-through third-party websites like Myntra and Jabong, we have clauses written in our agreement, but our ability to control the discounting, it’s still dependent on them so that is why the shift in focus towards our own website. And also, we have started developing some special merchandise only for the online segment in order to avoid the clashes with the discounting when it comes to the offline channels. So in the next 3 years, I think we should be able to contribute 10% to 12% of the company’s turnover from the online channel .

  • See, why we are mentioning this thing is that the percentage of discounting in overall sales is actually growing every year. Earlier, there have been a – fresh percentage is approximately 60% of the sales. But now the fresh percentages have gone down to almost 40% of the sales. So 60% of the sales is happening basically in the discounting end of the season sales. So at that time, the offline and online channels are offering the same discounts. So people have the option of purchasing online as well as offline. So people who just want to sit at home and order. So that will definitely push the online sales in discounting season as compared to offline sales. So that’s the reason which you mentioned that in the coming few years, we will see definitely the increase online sales even if it comes from a discount as far as the whole total channel is concerned.

  • See, home textiles, as we mentioned, I think in last year also that it is one segment where the competition is relatively less as compared to the garments. So that’s the reason it’s not that much affected from the competition as our other garments are. So home textile contributes – last year, I think it contributed to almost around 12% of the revenues. And this year, it will increase. The reason being is that as the other revenue is coming down in garments – but in case of home textiles, the fall will not be that much. We anticipate the fall around 25% in case of our other Monte Carlo garments in this financial year because of less production because of COVID. But in case of home textiles, we see a fall of only 10% to 15%. So definitely, the growth will be much more in the coming years as well.

  • The another reason why the home textile is not dropping this year – the reason is that because home textile is normally, in India, and particularly in the northern region, it’s normally being taken in the gifting sales also. So as we as – beginning of the wedding seasons, people normally gift blankets in, in our case, Monte Carlo blankets in the weddings and other also as well, and that is mainly for in the rural region, not in the urban, mainly in the rural region. And the rural sales are not that much affected if we compare with the urban sales. So that is another reason it has not dropped as such the other Monte Carlo houses.

  • See, if we see the net realized winter sales of Autumn/Winter '19, it was approximately 50.53% for MBOs, if you compare to MRP sales, it was around 49.29% in case of EBOs, and 46.78% in case of online. And it is mostly similar in Autumn/Winter '18 also, where we have little lesser sales in NRV in online, which is 43.8%, but in MBOs and EBOs, it is almost equal.

  • if we talk about the men’s sweater, the average realization in September '19 was 1,453. And this year, it is 1,523 events. Women, it was 1,432 and this year, it is 1,379. And in case of Cloak & Decker, which is our economy segment, it was 776 in September '19, and it is 679 this financial year.

  • And what would be the difference between – just the ballpark number, the difference between average realizations through our own shops and through the online channel? Or would it be the same?It’s almost 4% as discounted. It is more in online channels as compared to offline channels.

  • in case of online, I think the average realization will go up as we have seen the trend that given the fresh sales are contributing now more as compared to discount sales as people are becoming used to buy online also . So I think the realization in online channels will improve going forward. And I see that the realizations in the offline channels should remain same.

  • If we see the revenues in, i.e, '16, '17 and '17, '18, it was around INR 575 crores. In '18, '19, it was INR 655 crores and in financial, last financial, it was INR 724 crores. The reason in last 3 years, why the revenues have not grown proportionately as compared to 2014, '15 and '15, '16 because at that time, the discounts were considered as an expense. And now we are actually reducing the discount part on the overall sales. So if we include the discounts as expense, the sale will proportionately go up from 2014, '15 level and '15, '16 level because after that, we – method have changed. So we now – as of now, we are reducing all our discounts from the net – from the total sales. But earlier, we used to put that as expense. So the revenue used to look up . So that is the reason that if you see the growth from 2014/'15 and till 2019/'20, it’s not showing as that much. But if we compare the growth of '17/'18 and '18/'19 and '19/'20, which is on the same method. In '17, '18, the turnover was INR 575 crores. It’s grown around 11% to INR 655 crores. Again, I think, grown around 13% to INR 724 crores if we compare to last week. Even though economy was not growing very well in last 2 financial year also, if you see the Indian economy was growing only at just 5% of GDP, even outperforming the economy almost by double the rate.

  • Major growth drivers going forward

    • definitely will be our SIS, EBOs and online channels and modern retail, where we are penetrating and increasing our presence year by year.

    • And definitely, in the geographical expansion also, we are increasing our presence in west right now, where we are opening our exclusive outlets, almost – I think this will be adding around 3 outlets more in western region.

    • And then we are putting a lot of emphasis on the Northern Eastern region also, where we are opening our exclusive stores and increasing our parent in MBOs.

    • Definitely, we are a little weak in southern region as we have not been able to penetrate that much in southern region. And the growth will definitely come from the existing categories.

    • And also the newer categories, which we have added over the years, like Cloak & Decker economy segment and also our accessories, which are increasing every year.

    • And definitely, the home textile segment, which is growing almost double-digit from last 4, 5 years.

    • So it’s basically growth in the existing categories, growth coming from the newer categories and also from the geographical expansion.

  • Actually, we are closing some of our smaller MBOs because they are not able to survive because of the increasing competition, and we’re increasing our presence in the larger MBOs. So some of the numbers have still gone down, even though we have increased numbers in western and southern region. But some of the MBOs have closed down in the northern eastern region, which are not able to compete with the larger MBOs. So there’s another reason that’s almost constant in last 2 years.

  • EBOs have improved. If you see the EBOs, it was – last year, it was 272 in September '19. But this year, it has increased to 287. So we have opened 15 EBOs in last 1 year as compared to last year.

  • We imported a few machines for making mask as it was a need of the hour at that point of time. And we also did a sale of around INR 2.1 crores in masks. And we also earned around INR 90 lakh of profit out of that sales. So that INR 2 crores to INR 3.5 crores was basically for masks. And we also purchased a warehouse for our textile division, which we incurred around INR 9 crores. So the total CapEx this year, we projected, was around INR 12 crores to INR 15 crores a year, and we’ll land in that only. But for the next 2 financial year, we don’t see much CapEx, and we see in the line of the normal cap of around INR 10 crores.

  • as we have seen that there have been lockdown and the production could not be started before July itself. Workers have gone back to their homes. So by the time they came back and the production started and everything is normalized, we were almost in mid-June or end June. So I think it’s for same for everyone in Ludhiana. If you see the smaller hosieries as well, even every one, they have cut down their production around 40% to 50%. But fortunately, in case of Monte Carlo, I think we’ll be reaching around 80% to 85% of our sweater production as we did in last year. So that is a great achievement as we have been able to do it in spite of we have lesser workers in spite that there have been a lot of issues in transportation and logistics, but we have been able to maintain our production. Even in case of our outsourced production also, we’ll be reaching around 75% to 80% of the levels, which I think in industry, as far as Ludhiana is concerned, we’ll be doing only 55% to 60%. So we are better placed as far as production levels are concerned as compared to Ludhiana industry. But definitely, we have less 20% to 25% as compared to last year’s level as there have been disruptions in the production in the initial 2, 3 months. B ut we are hopeful, as the guidance we have given in the beginning of the year, we’ll be doing around 75% to 80% of the sales, which we did in last financial year despite all the disruptions we have faced in production and sales.

  • I think the volume will degrow by 15% to 20% as compared to last year’s level, and it would be around 25% in case of cotton segment. So in the woolen, the drop will be lesser, but in the cotton segment, it will be more. So the volume drop, overall, we will see around 20% of total financial year.

  • I think the advertising will be saving a lot in this financial year. There are 2 reasons for that. We used to hold trade shows for our retail bookings twice in a year where we used to spend almost around INR 4.5 crores to INR 5 crores expense, but that has been cut down, and we are doing virtual booking and door-to-door bookings. So that expense has actually have come down a lot. And so that was one part for business promotion expenses. And secondly, advertisement expense, which was around 3% to 4% last year will come down to 1% to 2% because we are reducing our dependence on codings and also on some of the print media, but we are increasing our spend on digital and social media spend, where people are looking up these days as and when the lockdown has started. So definitely, there will be a reduction in the advertisement expense. In the percentage terms, we expect it to be around 1% to 2% of total revenues in this financial year as compared to 3% to 4% of last year’s revenues.

  • Home textile contributed almost, I think, around 12% in last financial year. But this year, I think the contribution from the home textile should be around 18% to 20% of the total sales because home textile sales is not decreasing, but the overall sales have decreased. So the home textile contribution will improve around 18% to 20%.

  • And now when it come to healthcare. See healthcare, the sales depends on definitely the COVID crisis is because the demand of mask actually have gone down as compared to last quarter. And everyone is actually manufacturing masks now and almost 800 machines have come up in India in the last 2 months. So the price has considerably reduced, and the demand has also gone down a lot. So I’m not very optimistic about the healthcare division, and we expect lesser sales in this quarter as compared to last quarter unless and until – which I don’t want that the COVID cases goes up, which is not our interest and your interest as well. So what we see as the health care division should have very lesser sales as compared to last quarter because of very less demand in masks now.

Regards
Harshit Goel

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Superb details. Thanks

High share of replated party transactions

30% of the COGS are sourced from group companies. The wider Nahar group has always been into yarn and fabric manufacturing, so it is natural that MCFL sources some stuff from these companies. For woolens, the group company OWM is the largest player and one of the few with high quality supplies so naturally it supplies to MCFL. Also, earlier MCFL was a forward integration project for OWM and that business relationship has continued post the demerger.

Grant Thornton is the auditor for these transactions so there is some credibility to the same. However, there is always a conflict of interest when promoters are 100% owners in the related party and share the ownership with minority shareholders in MCFL.

The entire CSR expense of Rs16mn goes to a related party – Oswal Foundation.

Family members take a hefty cut with low pay for professionals

Jawaharlal Oswal is the MD of the company. He does not take any salary but has appointed his two daughters – Ruchika and Monica Oswal as executive directors in the company. Each of them get about ~Rs9mn in compensation without any active role in management.

Sandeep Jain, the husband of Monica Oswal is also an executive director and is the main person running the show for the family. He takes home Rs20mn. His son, Rishabh Oswal, who is 28 years old, was directly appointed as an executive director and takes home Rs10 mn. I doubt he currently contributes in a meaningful way to justify the position or the pay.

All put together, the promoters together take a salary of ~Rs50 mn, which while high, is within the limits stipulated by the company’s act.

The CFO is paid only Rs 2 mn, which is lower than industry standards for a company of this size. KKCL, who is conservative, pays its CFO Rs 6.5 mn and TCNS pays its CFO Rs 12mn.

All other senior professionals in the company make Rs2-3mn which is less than half of what Oswal sisters and make seems lower versus industry standards. If we make a like for like comparison of the top 5 nonfamily professionals, MCFL would rate much lower on professional pay versus peers.

Capex seems a bit overstated

I had highlighted earlier that net fixed asset turns for MCFL are much lower versus peers. For MCFL it is 3.5x while for Page/TCNS/KKCL it is 10x/20x/6x.

Last five years capex is of sales is 3.5% for MCFL while for Page/TCNS/KKCL is ~2% of sales.

Higher capex and higher fixed asset base leads to higher depreciation charges which average at 4.5% for MCFL while for Page/TCNS/KKCL they are 1-2% of sales.

Note that MCFL does not need a lot of capex given most of its EBO expansion is through the franchise route. Only the woolens are made in-house (~30% of sales) while cottons and others are outsourced.

High cash balances yet keep debt on books

Over the last 8-10 years, average cash on books has been ~Rs 750mn while the average debt on books has been Rs800mn. Although, debt has come down to Rs 300mn over the last two years.

But I did not understand the logic of having high cash and debt on books at the same time. For example, in FY16, they had Rs1,200mn in cash with Rs 1,000mn in debt. The cash earns an interest at ~10-12% while the debt costs 14-15%. Why pay the spread? (the interest earned and paid is calculated using their P&L and BS figures).

The cost of debt has trended around ~15% which seems on the higher side. Initially I suspected this may be related parties lending to MCFL to pocket a higher interest rate but that does not seem to be the case. So, I am not clear on what could be the reason.

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  • Why don’t use the Rs200cr cash on books instead of using short term debt (total debt of Rs170cr Sep-21). Did not get a clear answer from mgmt – saying need it for events like COVID and other business opportunities. Cash at ~25% of sales is too high for comfort especially if it sits alongside a sporadic increase in debt.
  • The new home textiles subsidiary being set-up is for manufacturing and selling rugs, blankets, and other home furnishings fabrics for the export markets. They see a large opportunity there. Co will invest Rs355cr (annual FCF currently is about Rs50-60cr and current net block is 250cr) in this sub over the next 5-6 years with a targeted asset turn of 2x which is sales of Rs600cr which is almost equal to current sales of the Co. Debt funding would be 25-30% of total. 90% of the sales would be exports but some of the fabrics made would be sold to the parent MCFL to convert to blankets and sell domestically. The new plant would be getting PLI benefits worth Rs50cr as well. Again, personally not very comfortable with this
    • We have an India branded apparel business diverting its FCF to a B2B non-branded asset heavy textiles business. This will be a low ROCE business with 1-1.5x turns including working capital and low margins. The parent manages ~15% ROCE in best years so this new business would be worse than that for sure. Such businesses typically come with large receivables and customer concentration.
    • This will make new investors looking at MCFL uncomfortable. The positive spin is more investment, more sales, and more profits; the counter is poor and has questionable capital allocation and worsening return ratios. Historically, investors have gotten jittery when solid B2C cashflows have been used to fund capex heavy b2B businesses. One can take exposure to textile cos directly and need do so via MCFL.
    • The promoters could have easily set up another group company to do this. Remember, the very reason Samara Capital got MCFL demerged from Oswal Woolen Mills was to carve out the B2C branded business from the manufacturing operation. We are now going back in reverse. There will be more debt taken for this new sub.
    • Asset turns for this company already look too low versus peers (suggesting overstated capex) and will go lower as the new capex unfolds.
  • The base business is doing fine, and they should report a good 3Q as well but the above is worth keeping in mind. Suddenly when sentiment and tide turns, these questions may take center stage.
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NOTES FROM Monte Carlo Q2 CONCALL -

  1. Sales - 238 cr vs 98 cr YoY. ( out of this, 65 cr revenues were from home textiles division ) /['Online sales at 19 cr vs 7 cr YoY - encouraging. EBITDA at 52 cr vs 15 cr. EBITDA margins at 22 vs 15 pc YoY. PAT at 33 cr vs 4.5 cr. Cash and cash equivalents on balance sheet at 197 cr with nearly zero debt.
  2. Well diversified portfolio across cotton, wooden, kids and home furnishings. Under cotton segment company makes jackets, coats, T Shirts, shirts, Denims, trousers and suits. Also make cotton and cotton blended T Shirts in economic category under the Cloak and Decker brand.
  3. Has 307 EBOs( exclusive brand outlets ) and presence in 1400 MBOs ( multi brand outlets ). 14 new outlets opened in the last 01 Qtr.
  4. Board has approved incorporation of a new subsidiary ( Monte Carlo Home Furnishings ) to make rugs and blankets for a total investment outlay of 350 cr over a period of next 5 yrs. Main aim is to drive exports of Rugs and Mink Blankets where the company is seeing huge opportunities due China +1 strategy. Plus they ll get PLI benefits. Plus the company is creating a wholly owned subsidiary and not a separate operating division so as to avail Govt incentives like tax cuts which would otherwise not be avlb.
  5. Instead of appointing and spending on brand ambassadors and adv, company is opening EBOs at good locations to create brand awareness. This strategy is working out well.
  6. Company guiding for 25 -30 pc growth this year ( that too on a conservative basis ). This despite rapid rise in RM costs ( cotton ). Shows the brand strength that Monte Carlo enjoys. Also, company is making active efforts to improve its sales performance from Q1 and Q4 which are otherwise lean Qtrs for the company. Results are likely to show up very soon.
  7. Company already imports a lot of Mink Blankets from China and pays a lot of duties and logistics costs. The new expansion into rugs and blankets will also help them offset some of that.

Disc : not invested

Planning to take up a tracking position

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Looking like a very good bet at this price. Quarterly results just got out. My reasoning is:

  1. The EPS is now touching Rs. 47 per year. Effectively the stock is trading at 13x earnings.
  2. Dividend yield is nearly 2.5%
  3. Company is targeting Rs. 600 crore in revenue from new mink blanket subsidiary in next 5 years. And with similar 15% margin - This can have huge upside.
  4. The management is very bullish and as cotton sales grow we can see business becoming less cyclic.

The competitors are trading at significantly higher PE (25x - 50x) compared to Monte Carlo fashions 13x.

I am keeping close watch on Capex and borrowings for next year or so. Very positive on this and if management is able to deliver in terms of Mink blanket facility and cotton growth - We are looking at a multibagger.

Disclosure: Invested and adding.

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I fully concur with your view, that at this price the stock is going cheap on all parameters . If one looks at FY-22 (nine months sales) contribution from cotton segment it is at 50.3 % vs 46.5 % of FY-21 . If one adds Home Textiles & Kids segment contribution it is another 23 % , so close to 73 % of the revenue is from non-woollen segment. Further, in Q3-FY-22 , woollen segment sales is only Rs 151 crs (33 %) out of the total sales of Rs 459 crs . So going by the trend of last few quarters even if in Q4-FY-22 - sales from woollen segment is NIL, the sales from other segments will be easily in excess of Rs 200 crs with PAT of Rs 10 crs , which can give annualised EPS of Rs 54 ,( sales and profit will be much higher) so my view is that mkt has still not understood fully ,the impact on annual sales, which the change in product mix of Monte Carlo business that has happened in last few years . So quite certain this stock will get re-rated going forward sooner or later.

Disc: Invested and adding at lower levels

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I agree that the company has pricing power…
1.This quarter PAT was less compared to YOY because of increase in advt exp (5 cr), other exp such as commision, power cost and logistics (14 cr) and employee cost (08 cr). However the sales volumes seems to be flat

  1. The cotton segment share has decreased over the years. More over jackets and coats constitute 33% of cotton revenue…

  2. Bumper September qtr may be because of low cost piled up inventory. May have to wait till next qtr to come to solid conclusion…

  3. Market price of share shoot up seems to be because of Dolly Khanna’s entry…

Kindly correct me, if I am wrong…

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Historically also, the company has been quoting at a PE of 15-20 times, so it does have potential to move up price-wise. I guess the mgmt concall will provide better clarity on the sales trend going forward . The sales volume looks flat in Q3 , as the woollen segment has de-grown in Q3 marginally on y-o-y basis

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Was going through past posts in the thread. Management has been guiding consistently of a sustainable 15-20% growth since 2017. Annual sales have however remained flattish from 622 crores in FY16 to 622 crores in FY21.
Can the management’s guidance be trusted ?

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One of the rating agencies recently withdrew their rating on this company; not sure why. But very curious and unusual development.

Mink blanket is highly competitive market.
Also there are existing players who already exports lots of Mink blanket.

How monte Carlo can Crack this market so easily?
They may have brand power in India but how that brand will be helpful in export market? Many of existing manufacturer have already good relationship with foreign retailers and I belive they would be much better position to take advantage of China issue. They already have good relationship and ready plant to supply, whereas Monte Carlo is planning to invest over 5 years.

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Anyone has any idea why stock is up 20% since last 2 days?

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With Several global brands exiting russia,there is a possibility of Indian fashion wear brands setting up stores in russia. The franchisees are looking for opportunities with other brands. I think Monte Carlo, has the experience of setting stores, capacity for high quality woolens. Its just they should be daring enough to grab this opportunity.

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