In the recent quarterly update posted by the company shows 5 % yoy revenue growth which is dissaponting for a good branded player in the consumption boom period
The company books sales in the prior quarter, meaning the goods which are sold in this qtr are for next qtr only. Although we see great footfall in stores,most of the sales is at retail end already booked by the company in previous quarters.
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Monte Carlo Fashions Ltd. (MCFL) Detailed Report.pdf (2.4 MB)
Initiating Coverage on Monte Carlo
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The winter in North India this time around has been quite severe. Hope Monte Carlo is able to jack up decent sales.
Holding as a tracking position.
Biased.
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Hi recently visited a trade exhibition and came across entire monte Carlo brand products.
In my mind, of Monte Carlo as a brand always represent Winter Products especially heavy woolen items.
I was surprised to find entire Linen shirt collection (Linen are usually summer products).
They also have good quality T-shirts.
Products are of good quality and they are planning to become all season apparel brand as per company representative who met me there.
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Results announced for Q3-FY23. Now 9 months EPS equal to FY22,eps… unable to understand why it trades at such dismal valuations —1.3x sales for a 25% gross margin superbrand and 12x PE.
a6686f39-3ee3-47f9-9f9a-2045cc470ce8.pdf (5.0 MB)
Their brand moat is only for woolens which is only 25% of revenue, seasonal in nature and low growth.
Cotton products and home furnishing does not benefit from brand.
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Yesterday I visited one of the mall in Mumbai and as per sales person, Monte Carlo Cotton cloths are doing excellent. Also, personally I checked the quality of Products and its really good.
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That doesn’t help. There are just so many T-shirt competing brands. Very unlikely someone will buy a premium Monte Carlo .
Monte Carlo fashions Q3 concall -
Indian apparel mkt growing at 10 pc CAGR with shift towards branded apparels
Revenues up 12 pc at 520 vs 462 cr , Ebitda at 130 vs 114 cr, PAT at 86 vs 77 cr
9M revenues up 19 pc, EBITDA up 18 pc, PAT up 12 pc
Company net debt free
Current cash balance of 265 cr
Total EBOs at 347 stores. Aim to open 50-60 stores next year
Company follows no credit policy for Franchise owned EBOs and most other channels. Have never had bad debts in company’s history
Guidance for FY 24 can only be shared post Q4 results
Seeing the sales trend in Jan,Feb… the inventory levels should be at or below last yr’s levels
To continue with 3-4 pc of revenues being spent towards advertising
Home textiles, Kids wear likely to hit 30 pc growth for full FY 23
Jan 23 demand was robust
Cotton, Wool prices trending down. To benefit the company. Not going to cut prices
Planning to onboard celebs for ads
20 pc of new store openings to be in South and West India
Current contribution from South + West is at 6 pc
Aim to touch 15 pc in 3-4 yrs
Capex guidance for next yr -125 cr, mainly towards Greenfield blanket manufacturing facility in Jammu
Famous investor - Vikas Khemani was also present on the call
Disc : invested, biased
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Monte Carlo results highlights
Positives :-
Sales up 45% YOY (QOQ is not relevant due to seasonality) however such sales growth in non peak quarter exhibits business momentum in non winter products. Company is on track in becoming an all weather apparel company.
Profit before tax up 32% (margin dip, may be they are pushing sales as of now, margins they may focus later on as advertising spends has increased by 50%)
PAT up 55% but that’s because deferred tax credit & earlier years tax adjustments.
Negatives :-
Alarming increase in working capital. Inventories increased from 289 to 460 (up by 171 crores) and trade receivables increased from 259 to 380 (up by 121 crores) a total increase of 292 crores in current assets. This increase in current asset is offset in balance sheet by increase in trade payables by 55 crores, increase in other current liability by 23 crores, reduction in bank balance other than cash by 35 crores and increase in short term borrowings by 139 crores. That’s quite alarming because the increase in working capital is more than even the sales growth which in turn is funded by short term debt and reduction in financial assets. All these resulted in negative cash flow at operating level.
Stock remains cheap as per traditional parameters like PE multiples at P&L level. Will have to wait for concall for these concerns.
Disclosure: one of the major holding in my portfolio. Ready to give more time due still cheap valuations but will track cash flow very critically from here. Any positive improvement related to these concerns may lead to substantial rerating from current levels.
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Good Insights about working capital and inventory management ,Niraj. Maybe the market is sensing the same thats why allocating a lower multiple on PE basis…Other fashion wear brands are valued way upwards of 30-40 PE multiples.
They are valued cheaper as they are a winter wear brand , there is a seasonality discount. I expect this discount of seasonality to reduce as there is better traction in summer wear products and going forward home furnishings will also reduce the overall seasonality of the business. This should help in re-rating of the multiple
Disc - invested and recommended by my firm at Rs 726
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Do you have any updates/insights since its now winter time? Seasonality discount has actually not gone away. How was summer wear product sale since the summer is gone?
As per my understanding the company and the management had some plans as to how they are going to grow thier non winter products and become an all weather fashion retailer. That would have rerated the stock as it was quite cheap compared to peers. And that was the precise reason for my investing. But there was a major risk which has actually played out in last few quarters. That was the execution risk.
I had highlighted after Q4 FY 23 results, how working capital is getting stretched and the cash flows are not able to service the debt obligations (which led to further increase in short term borrowing). I exited the stock completely after Q1 FY 24 and accepted humbly that my thesis has been broken, when there was no reversal in this trend of ever increasing short term loans. Even after my last post, the short term loans has increased from 195 crores to 350 crores by Q2 FY 24. That led to further rise in interest cost and even less profit. Still i was able to make 30% profit in my total holding period of about 6 months.
So, what is the learning here? How did i got saved even after the story which i was playing, fall flat on my face? What saved me here is the cheap starting valuations. The story of monte carlo becoming an all season fashion retailer with good growth was not baked into the price at the time of my buying (it was always cheap). Thatswhy we say in investing, the optionality makes you the money (if gets played out) and the cheap starting valuations saves your capital even if the optionality does not play out.
Disclosure: not invested (found better opportunities in retail sector like Aditya vision, Senco gold and Redtape), somebody who is still invested or looking to buy now must track the working capital and cash flow trends from here very critically.
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monte carlo has always had low PE due to the uncertainty in sales…
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