Premco Global --- Narrow Fabric (A critical component for inner wear)


(Aveek Mitra) #1

(Declaration: I am terrible in writing long report type stuff and never done it after college days! But, finding that the company is not having a discussion thread so starting one…… Critics and views invited to make the discussion better. I have many data point and rationale in the head…. Your questions can help me to bring that out cogently. So please contribute profusely…… )

Premco Global is a Rs. 66 Cr company manufacturing Narrow Fabric. The product show case is available here http://www.premcoglobal.com/showcase.html

Narrow fabric includes elastic and non – elastic ribbons, straps, bands, packing tapes used in inner wear, packaging, sports, medical, furnishing and automotive industry.

Sales and profit have grown for the company at 17% and 44% CAGR in last 5 years (refer screener data). ROCE as per my calculation is around 40% last year. Company is virtually debt free, don’t need much cap-ex till productivity is optimized. 85% of the product is exported.

Indian inner wear industry Is 17K Cr in 2014, going to be Rs. 32K Cr in ’18 and 59K Cr in ’23; 60% is market for women growing at 15% and 40% is market for men growing at 9% (as per estimate in Page industries AR 2014).

World market is growing slowly and many paid reports are available where the total market size is pegged to be anywhere between US$ 25 billion to 35 billion and growing about 3% to 5% range.

I am unable to come across name of any large global player in this field and seems industry is fragmented with too many small players. Some names are : Bowmer Bond, Kikuchi Narrow Fabric, Landwell Corp etc and in India Shivam Narrow fabric claims to be the largest player (any information about this company is welcome value addition). But I know of umpteen very small scale elastic manufacturer in Delhi and Kolkata.

Premco claims to supply to some marquee brands (http://www.premcoglobal.com/credentials.html) however, more realistic would be to assume they supply to tier one or tier two level of vendors to these large behemoths. Their top 3 shipments destinations were to …

QST Industries De Mexico; Elastica Surqui SA (Costa Rica); Telas Elasticas (Mexico) — These companies are the intermediaries for the final buyer like Hanesbrand, Fruit of the Loom, Limited Brands Inc etc.

Main raw materials are Polyester, Nylon and Rubber and all are produced locally and RM constitute 50% of sales. Out of these Polyester is 25% of the total Sales.

Last year they sold 929 Lakh Meter of Narrow Fabric at average realization of Rs. 7.5 /- meter. An pdf file is enclosed which gives a rough estimate of setting up a basic narrow elastic business in SME sector. The “bazar” price of per meter of narrow fabric appears to be Rs. 6.5/- per meter.

The company I found worth investigating due to high profit growth, strong return ratios, company’s export focus targeting quality customer (so can assume quality better than rest) and increasing growth of premium category inner ware in India and other places compared to the overall growth.

Elastic is one of the most critical part of an inner ware and it constitute less than 5% of the sell price of an inner ware (assuming average sell price 200 and average premium quality per meter is Rs. 8/-). I conjecture that like sanitary ware sector where shift from unorganized to organized sector has happened, a similar trend may be possible in this industry for premium and consistent quality requirement. Secondly, GST, at rate below 25% would surely help the organized sector.

Quality of accounts: Nothing abnormal. Seems to have over valued the finished goods inventory. If the closing stock is valued at average sale price for the year, then profit would be reduced by about Rs. 2 Cr for the year 2014.

Quality of Management: Unknown. They take very low salary but I am told that they own Beachfront Villa in Florida. Also, a non-promoter shareholder holding 6% plus share appears to be a relative of the promoters. Both these may be rumors and I can’t vouch for its veracity. But the company performance has surely started looking up since Lokesh Harjani took over management. They guided only about 20% growth in sales in 2015. Profit and cash is growing faster.

Questions please……

Disc. : Invested from a much lower level and less than 2% of portfolio.


(Aveek Mitra) #2

I am unable to upload the said PDF file … seems some problem.


(Rohit Balakrishnan) #3

Hi Aveek,

A very detailed post. I had looked at this company @ around 90 bucks… but I had more questions than answers at that point of time. The price shot up quite a bit from that level. It would be great to discuss this here, given you have done a lot of work on this company.

I had looked at their historical numbers - and they were only able to generate good return metrics in FY14 and FY13. My cursory look told me that its largely because of falling rubber prices…has a much larger role. I maybe obviously wrong here. What do you think changed in the last couple of years that enabled them to earn good margins and thus good return ratios?


(Vivek Gautam) #4

One of Indias renowned small cap investor Boscoe Menzes alias Zeenut had attended Premco last AGM
Attended the Premco Global AGM last week (14th Aug).
As with many other AGM’s, it was quite an “experience” with lots of non-serious actors.
Standing in line to register my attendance, I noticed that most of the shareholders in front of me had not mentioned the number of shares they held in the respective column of the attendance form. However the registrar present was checking the shareholding & filling in this information in the column left blank, and on the attendance register. I noticed from the attendance registrar that most had shareholdings of a single share (and occasionally 2 or 4 shares), so I realized that they were “professional” investors (not to be confused with ordinary small investors / retail investors who might typically hold 50-100-200 shares, and are close to my heart). If I am not mistaken, one such shareholder had even brought his “joint holder” too to attend the AGM.
So I was not surprised that when the floor was opened to the shareholders to ask queries, the speakers concentrated on procedural matters, and mostly non-serious queries & observations (except on dividend – this was a valid issue which I agreed with). I also asked a few questions of my own .
When the management replied, I found that my list of queries had been skipped, so I reminded them & one of the directors started replying to the same (I would ask the question, he would answer). To my surprise (and mirth) , couple of the shareholders protested, saying that it would take all day & they had other AGMs to attend   …. obviously with just Rs 100 in the game, there was no real need for them to try to learn anything new about the company they were invested in …… and I must add that I saw them later partaking of the refreshments in quite leisurely fashion, and showing no hurry to scamper off to the next AGM  
Anyway, I agreed not to “hold up” the AGM, and so I spoke to one of the directors later. My notes are as follows :
• Though AR mentions only upgradation of plant/machinery at Dadra/Vapi, the company also has a significant expansion planned in Vietnam, which has a low-cost advantage. While they did not share numbers on this, it will be a project in 3-phases, and they will lease the land, rather than buy the land outright for this project.
• Haynes continues to be by far their largest buyer, but they do not feel it is a disadvantage, as they feel they are just “scraping the barrel” as far as potential sales (primarily of higher value products) to Haynes is concerned.
• They believe a presence in Vietnam will help them “get to market” in far-east far quicker (which is an advantage) & also enable them to target the China market. In fact Haynes has been asking them to expand their base there since some time.
• Exports face a lull couple of times a year, so to even things out, they are expanding their range of products catered to in local market, targeting products for seamstresses for example (so that dependence on innerwear market is reduced).So in the lull period they will not need to idle capacity .
• Competition in the market is very stiff, and (i) speed & (ii) volume capability is of essence, besides quality of course. Industry is also working capital intensive.
• Crude Oil / Rubber prices affect their raw material prices
• They are constantly expanding into higher value segments , where margins are higher. They are confident of maintaining margins at current levels going forward too.
• They are constantly upgrading their plant & machinery, and are proud of the same. The director I spoke to gave an analogy about how India moved from black-and-white tv’s to HD now, similarly they have moved from old outdated technology to the most superior technology.
• They were happy to inform that local manufacturers like Rupa, Maxwell etc which earlier used to be interested only in the Rs.5-6-7 / metre elastic segment, were enquiring about Rs 12/- per meter products nowadays.
• Jockey is a buyer (I enquired specifically), but they sell more to Jockey in Asia than in India (Page).
• Current Order book is 4-months of capacity. Better numbers are expected in the coming quarters.
• Dividend policy – they explained that they have kept dividend at current levels keeping in mind their forthcoming Vietnam expansion, however , without making any promises, they did indicate that they are open to all options (including increasing dividend / declaring interim dividend) to reward shareholders at an appropriate time.
• On related party transactions , they clarified that these are largely loans from promoters to take advantage of export opportunities, as raising money from banks would take time & speed is of essence. These loans are usually taken at a slightly lower rate than rate given to them by banks.

My conclusions :
To the layperson, like you & me, it would appear that there is little more to elastic than, well, elastic  …. To us it would seem to be a volumes & price game, and nothing more to it. Actually there does appear to be some more to it, and some differentiation , in terms of variety of products, quality, reliability , scale etc is possible.
I feel that Premco Global management has pretty much mastered their niche, and understood their game. I feel they will manage to keep the company ahead in the game by focusing on best technology , quality & innovation, and constant focus on expanding their premium offerings, thus managing to stay relevant in a competitive market.
While it is not a stock to put a concentrated position in, I feel that at lower levels (80-ish) it would be a pretty tension free investment. I reserve the right to be wrong, as I often am 


(Vivek Gautam) #5

I am invested in Premco since last few months.

The company is very decently valued at sub 11 PE,ROCE of 44%,OPM of 27% and mkt cap of only 110 Cr and mktcap sales of 1.54.

The key catalyst behind Premco imho seems to be the new ED Mr Lokesh Harjani the nephew of founder Mr Ashok Harjani who is childless unfortunately.He is born and brought up in Florida USA is a lawyer who speaks to mostly American customers in their own accent.

The opp size of the co seems huge as and when Vietnam plant starts productions.Vietnam is now the textile capital of world with majors like Hanes,GAP and others putting up factories there.

Besides quality,scale and capacity to supply at short notice the ongoing long term relationship with International majors acts as a big moat for the co imo.


(Gyan Roy) #6

Thanks Aveek for starting the discussion on this company. I wanted to understand couple of things.

a. What is the current capacity utilization? How long they can grow at 20+% rates without putting extra capex in India?

b. When is the Vietnam plant going to start and with what capacity?

c.Based on your estimates, there will be a need for roughly 1 billion worth of narrow fabric in the whole world. So, even if a company corners 20% of the world consumption (highly unlikely IMO), they are looking at the size of opportunity of 1000 crore. That will be roughly 10X from the current size. So, is company looking into any new area to sustain its growth momentum?

d. Do we know the contribution of rubber in the overall raw material cost? That will help us narrow down the fluctuation in profit margins that we can expect because of the rubber price changes.

Disclosure - Have a tracking position(less than 1%) from lower levels.


(Rohit Balakrishnan) #7

@gyansr As per my calculations Rubber would be ~25% of the total RM cost. Polyester would be ~ 50-55%


(Aveek Mitra) #8

Rohit Balakrishnan / Vivek Gautam,

Thanks for taking the discussion forward…It helps a lot…

I possibly missed to add the Vietnam story… And I know they discussed something about Vietnam expansion in AGM … They probably want to set up few third party certified sourcing unit with a small set up of their own. I don’t think it would be a large expansion. Their four units possibly have enough capacity to cater as incremental investment in increasing capacity is not high. It is better to check the development as no public announcement have been made and no movement of Balance Sheet happened in Sep '14 which points towards that.

Regarding average realization, I find it is increasing from from Rs. 4.80 / meter in 2010 to Rs. 7.50 / meter in 2014. And quantity is also gradually improved from 538 Lakh meter to 929 lakh meter.

Yes, Crude and rubber price affects their profitability but rubber constitute around 12% - 15% of sales price and Nylon about 25%. If someone can draw an excel, it would be easy to showcase. I have stuff written in scribbled note :smile:

With moving up the value chain, how and to what extent they are protected from the vagaries of commodity movement is worth watching.

Noticed the related party transaction but I didn’t consider it is having any material impact… If it grows as % of business size then may be a point of concern.

I have not understood the the ROCE calculation of 30% in 2014 as given in the above excel file of Ravi. If you explain it would be great. My formula is simple EBIT / (Total Asset - Current Liability). Did I make any mistake in calculation?

The net tax paid is increasing substantially which I find a good sign.


(Santosh Sinha) #9

I think Ayush and Vivek already own it for some time, along with few others in VP, Request them to give their rational within SEBI guidelines
Q3 numbers were superb, but it is highly illiquid, I think they bought through SEBI Open auction route like Kovai medical etc


(krishna) #10

Even i tracked it at 90 and in a span of months it moved to 180. When i searched for comparable player and bought arrow textiles at 11 rupees though not a bigger player like premco but with customers like jockey, amul , vip and others i felt considering i am a small investor i selected arrow textiles rather than premco. They are also doing good and reporting good results quarter by quarter.


(Aveek Mitra) #11

Rohit Balakrishnan,

Read your last post now… RM is 50% of sales and out of that total RM, Polyesters is 50% and Rubber is 20 - 25%.

Gyan Roy… Your observation is very pertinent … I don’t have a ready answer but what I gathered from different publicly available sources is something like 1) huge demand of narrow fabric is expected from packaging segment as replacement of steel straps and other types of binding material; 2) Narrow Fabric as % of sale price may grow up in premium segment of inner wear; 3) Demand from medical industry and automotive industry and labeling is growing…

I think company has capacity to cater to medical elastic segment as Elastica Surqui is one of their customers who deal in Medical elastic and accessories only. I am not sure about other categories.


(Rohit Balakrishnan) #12

@aveekmitra The ROCE should be 35% I didn’t exclude 4 Cr which is in liquid investments from the total the capital employed. The way I calculate Capital employed is Fixed Assets + Net Working capital - Liquid Investments - Cash.

But my broader question is what contributed to this spike suddenly? Could it be that they signed new customers which is contributing to better utilization and margins? Would love to understand your argument here…

Couple of points I noted that looked interesting was

  • Growth is largely driven by exports look at the sales mix and the export CAGR

Realizations have been increasing, but nothing stellar here…

My conclusion from the above data was they would have signed up new clients in the overseas markets and the fact that exchange rates helped them with a falling rubber cycle adding to their margins…In the absence of any other data I concluded that sustainability of these margins would be difficult. Needless to say, I may be completely wrong here.

Also pasting below is the chart on RM break up


(Dhiraj Dave) #13

I have also invested in the company from 200 levels. Find enclosed my excel working, specifically on contribution margin. It has really done very well on margin front and that suggest good bargaining power. Despite decline in raw material price, it managed to increase in price which is what I like most.


(BeingGraham) #14

Isn’t narrow fabric a cut-throat competetive industry with almost zero differentiation? If it is, then the current high ROCEs of 30% may return to historical mean ROCEs of 13% soon. Similarly, if the margins of 24% are temporary and return to average 12%, then the PE ratio might actually be of around 25 times.

There is another listed company in the same business - SKY Industries. It even claims to be the largest player

We are proud to be INDIA’S LARGEST MANUFACTURER OF HOOK AND LOOP TAPE FASTENERS with a monthly production capacity of 86 lac meters from our state of art manufacturing facility at New Bombay. We are also the LARGEST MANUFACTURER of all kinds of elastics and other narrow fabrics and recipient of Golden Trophy from the Government of India, for the highest exports from India.

The market capitalization of SKY Industries is 4 Crore vs 106 Crores of Premco. Enterprise Value is 25 Crores of SKY vs 110 of Premco.

How can we establish that the results of Premco can be sustained in long run?


(Aveek Mitra) #15

My be of interest … There are few paragraphs on Narrow Fabric market in non-apparel industries in USA

http://advancedtextilessource.com/2015/02/the-state-of-the-industry-part-ii/


(Aveek Mitra) #17

@prasadjadhav7

Yes it is very much possible for some companies to make things in house. Page has a significant in house capacity and expanding both woven and knitted elastic plants. However, they imported good amount of elastic too.

I have compiled an excel sheet with data from Page and Lovable. Rupa and Maxwell don’t provide these data in any meaningful way. At least I was unable to find.

But if you see worldwide, the trend is not to make it inhouse,… Hanesbrand, Fruit of the Loom or Victoria’s Secret, none have in house elastic making capability. All procure from their certified vendors.

What appears from Shipment records, Premco sends regular shipments to few companies who are suppliers to Hanesbrand, GAP etc. From this it may be surmised that they have some long term engagement. And if you followed the entire thread, you would realize that they supply to suppliers of Hanes / GAP etc. (Tier 2 vendors possibly). ELASTIC in Ind IW V.1.xlsx (10.7 KB)


(Ayush Mittal) #18

Hi @aveekmitra,

Thanks for starting a thread on Premco, I’m surprised that it was not there earlier.

I have been invested in Premco for sometime now - when we started it was just on the basis of pure undervaluation and starting of good performance - http://dalal-street.in/2013/10/micro-caps/. However the way the nos have been coming out now since last several quarters, it deserves a proper homework.

You and @rohitbalakrish_ have covered most of the important points. Initially, I was also thinking that the margin expansion is temporary due to fall in price of crude and rubber but its been more than 10 quarters now that the co is delivering more than 18% OPMs and in a competitive industry like elastics companies can’t sit on such temporary benefits for long. So I feel the good performance also has to do with the involvement of the next generation in the business - perhaps Lokesh Harjani is the person bringing in the needed changes. As rightly pointed out by you - quality is really important for the big undergarment players and hence there should be opportunity for organised players like Premco. Perhaps this is the reason why exports have scaled up big time.

Regards,
Ayush


(Duby) #19

Page does in house production but to a lesser % of its total needs. I think companies are moving towards light asset models. Instead of having to spend capex and saving on margins, they can put the money into better use like R&D / marketing wherein the returns would be much higher.

Companies are also wary of spending to much on capacities. In case there is a downturn they will be hurt v badly. So in the case of Page, they have a high margin core business. Why would they want to spend on capex to save on margins in a commodity product like elastic?


(Kunal) #20

Dear Aveek,

You have filled the gap where other investors didn’t see. I was too missing Premco thread.

One more worthy business is Indo Count which is ignored here. Company, like phoenix bird, came out of series of trouble and started posting solid growth. True sign of able management.


(Varadharajan Ragunathan) #22

Hi

I did some research on premco by talking to their CS - who I must admit is very reluctant. These are some pointers ;

  • more than 70% of the company’s revenues is coming from exports as the company gets much better realizations from exports. they are not focussing on domestic markets

  • biggest competitor is spica global - a pune based company whose revenue growth and margins have been going down with premco’s rise. The company does 20 % ROCE’s though and has been doing it for many years - so it seems like this business is not that bad after all

  • spica is already in vietnam and premco is a late bloomer there - so it remains to be seen how the cap. util of their vietnam subsidiary will shape up.

  • realizations are moving up on the back of 1. improving product mix 2. increasing share of exports. It’s the company’s view that this is not a labour heavy business but is a lot dependent on the quality of the machines installed - the company has german machines instead of chinese and hence have a lot more perfection in their products.

  • bombay agarwal elastics and kohinoor are the other competitors.

I think there was enough MOS below 250- but at 10 x fy 15 and say 7 x FY 16 assuming a 30 % eps growth, I think its fairly valued. I would want to see the roce and ebitda impact of vietnam subsidiary before taking a call.

does anyone have lokesh harjani’s email ? thought of writing to him to talk to him