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

[karanmaroo]

Hi all,

Great to see the discussion on Premco Global. I had looked at this company sometime back, and had invested small amounts (Due to a lack of complete conviction). Most of what I had researched has been covered beautifully here by posters. A few things, which I can add:

Does the company have pricing power?:

It certainly does, but : a) Not to a 1:1 extent b) With a time lag (I presume the contracts must be fixed for 3-6 months and renegotiated thereafter). Certainly shows reasonable bargaining power, which is critical when you are dealing with giants.

If you look at last 6 years, polyster (which forms more than 50% of RM costs) has increased at a CAGR of 10.5%, where realizations have only increased at a CAGR of 7.9%. Here is the data to back it up:

So whats driving margins and return ratios?:

Clearly, pricing power is not enough for increasing margins (realizations have increased at the same rate as raw material prices). So whats driving margins?

1. From the above data, it seems that the company might be moving towards more efficient production. For example, for every lakh meter of elastic produced, the company was using 1.46 MT of polyster in FY09, a figure which came down to 1.11 MT in FY14. This implies either better machines being used, or lesser wastages due to better processes being implemented or a change in product mix

2. Other expenses, including electricity and processing coming down. This clearly points to more efficient processes/machinery in place.

3. Better absorption of fixed charges like admin expenses due to higher sales turnover

Clearly, this has happened with a graduation of the next generation of management into the company (as has been established in this thread already). In textile business, management plays a more important role than most other businesses (Hence, you find most textile companies in the hands of families and less of professionalism). In this regards, I think its important to get some sense from the management on what processes/machines have been implemented to improve efficiencies in the production processes.

That was something I could not establish, and hence the lower conviction.

[varadharajanr]

Karan

the company is improving its product mix and improving its asset turns (improving cap. utilization) and focussing on exports more and more which is helping them across.

What I am worried about is

• where is the capex for vietnam plant reflecting ?
• is it going to be a subsidiary of the company or not - the CS told me vaguely it will be folded in - but I have no conviction on it
• if not, where are they adding capex in india to ramp up

there is no commentary at all from the company and that makes this quite a black box.

[Anant]

Great set of questions about the Vietnam Black box. If you look at the ARs of this company it hardly talks about anything Vietnam. Further for the first half of FY15 there non current investments jumped by 8 crores and there is no explanation to that.Last year they added around 4 crores in MF as long term investments and this is where I suppose it is going too.

[karanmaroo]

Raghu,

Yes, the margins have improved because of exports and better capacity utilization. However, the additional point which I was trying to make was that better efficiencies/production processes seem to have played an equally important role towards better margins. Ultimately, realizations have kept pace with increase in RM prices over the last 6 years. However, whats changed is the usage of RM in terms of quantity indicating lesser wastage, better technology or a change in product mix. This, to my mind, should be more sustainable than most other factors (Trying to answer the question which @rohitbalakrish_ raised).

Again, this seems to be tying up with Mr. Lokesh Harjani coming in to manage the company (As @Vivek_6954 and @ayushmit have already pointed out). Actually, in a company like this, judging the promoter becomes very important; as suppliers to large branded garmenters are generally run by traditional families. Most other businesses have graduated to a more professional system, but spinning/weaving/processing remains concentrated in the hands of families. I have not seen any suppliers to garmenters/upstream players in the textile value chain who’ve seamlessly moved to a professional management (Except for Vardhman). Hence, in this case also, I think its important to try and judge the management, what they have been doing (Have read upgradation of machines in one of the reports, ties up with my theory) etc. True conviction will probably come only after that (Especially at the current PE levels ). Also, its because of these reasons (spinners/weavers/processors have very low bargaining power), and the importance of judging management, it is difficult to invest in spinning/weaving/processing companies (which do not have brands) with true conviction.

[karanmaroo]

Regarding Vietnam - Frankly, I had no clue about it till @Vivek_6954 mentioned it. Certainly a pointer towards the next leg of growth; however, as you’ve correctly pointed out - its a black box thus far.

On a side note, an interesting quote which I read somewhere (attributable to Alan Greenspan):

During a recession, underwear is among the first things that people stop buying—because hardly anybody actually sees them. This creates pent-up demand, and so when underwear sales level off and increase, it should signal an uptick in consumer demand.

[varadharajanr]

request you to not just ask these blind questions - if you want an opinion on rubfila, it will help clarify how this is related to premco and a set of basic facts on rubfila and premco or a comparison.

[ashwinidamani]

Also if one notes, every year the company seems to be taking writeoff for Non Moving/Slow Moving products.

In FY 14 the writeoff was 2.3 Crores (almost 3% of sales)
In FY 14 the writeoff was 2.5 Crores (almost 5% of sales)

Why is this happening on a regular basis

[rohitkawathekar]

Company just notified to BSE about the expansion plan in Vietnam through 85% owned subsidiary. Details from the release as follows (link included in case I missed any important points)

• Export to Vietnam has grown from 28cr to 38cr
• Two phases with PPE capex of USD 425,000 each
• Premco will own 85% equity (15% to be owned by NRI) plus there will be USD 800,000 unsecured loan from Indian parent to subsidiary (for each phase)
• Capacity addition: 300 LAC mtrs per phase
• Reason cited: Business continuity with Hanes due to various sanctions imposed by US

Those who have been following this closely: Can someone please throw some light on the sanctions imposed and how they affect the company?

http://www.bseindia.com/xml-data/corpfiling/AttachLive/ABDF3F15_5CFF_43D6_9290_D50F11BB170D_190717.pdf

[ashwinidamani]

If we had to pinpoint the reasons for sudden increase in Premco’s margins and profitability from 2012 onwards, what would it be.

1. Were new customers added
2. Did Product mix change - See consumption pattern of Polyster and Nylonf (has been changing gradually)
3. Realisation/mtr hasnt been increasing too much.

This is an important question to pin point and only then can we understand the reasons for the performance of the company

[dubyrex]

At a new factory in Vietnam owned by the American underwear company Hanesbrands, workers are turning out men’s briefs to be sold in the United States.

This plant in Wei, in central Vietnam, is one of the firm’s five new Asia factories, two in Vietnam, two in Thailand, and one in China. Hanesbrands’ Asia facilities opened in the past two-and-a-half years employ about 6,000 people.

JAVIER CHACON, Vice President, Hanesbrands, Inc.: Vietnam has, you know, a good labor force, you know, good labor costs, you know, good infrastructure, good energy costs, and it is convenient for our fabric location in China.

http://www.pbs.org/newshour/bb/business-jan-june09-hanes_02-19/

Hanes has 3 manufacturing plants in Vietnam

By end of 2014, the company expects to employ almost 10,000 employees in Vietnam, accounting for nearly 20 per cent of Hanesbrands’ global workforce

The company’s expansion is partly motivated by the benefit it hopes to enjoy after Vietnam joins the Trans-Pacific Partnership next year.

Src : http://www.vir.com.vn/hanesbrands-vietnam-opens-third-factory.html

The Trans-Pacific Partnership (TPP) is a proposed regional regulatory and investment treaty. As of 2014, twelve countries throughout the Asia Pacific region have participated in negotiations on the TPP: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.

The proposed agreement began in 2005 as the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP or P4). Participating countries set the goal of wrapping up negotiations in 2012, but contentious issues such as agriculture, intellectual property, and services and investments have caused negotiations to continue into the present,[7] with the last round meeting in Ottawa from 3–12 July 2014.[8][9] Implementation of the TPP is one of the primary goals of the trade agenda of the Obama administration in the United States of America

Src : http://en.wikipedia.org/wiki/Trans-Pacific_Partnership

[dubyrex]

I would guess that the spectacular jump in exports and the stability of operations of the new unit in Vapi lead to the increased profits from 2012

[ayushmit]

Hi @ashwinidamani I couldn’t find the write offs. I did find the mentioning and details of slow moving inventory but the amount was quite small at about 25-30 Lacs pa.

[ashwinidamani]

@ayushmit : My bad…It is 25 lacs and 23 lacs respectively. Dont know how I added an extra zero in my notes. Apologies.

[rohitbalakrish_]

@varadharajanr Do you have the numbers for Spica Global? If yes, can you please share them here… I want to see how Spica has done over the last 4-5 years in terms of margins and RoCE… to see if it was more an industry tailwind or something specific to Premco

[aveekmitra]

@rohitbalakrish_ @varadharajanr

Spica Global (all figures in Crs)

2013 : Sales – 79.48; GP before depreciation — 11.69; Depreciation – 3.47; Net Profit – 5.55; Export — 59.79

2012 : Sales – 73.26; GP before depreciation — 14.33; Depreciation – 3.58; Net Profit – 7.20; Export — 55.36

Narrow Fabric Production — 2013 — 10.44 Cr. meter; 2012 — 9.61 Cr. meter

I am yet to get 2014 data.

[rohitbalakrish_]

@aveekmitra @varadharajanr Hi Aveek. Thanks for sharing this data. I managed to get some data on Spica. There is some discrepancy in the sales number in what you posted and what I have. Nevertheless, sharing my findings below:

• Premco clearly stands out in terms of Margins and growth. Spica used to be doing earning fairly good RoE’s but post FY11, there numbers have been pretty poor. Spica set up their Vietnam subsidiary in 2011 and was operational in 2012. Their performance also started to decline post FY11. I am not sure those two points are causal in anyway, but maybe worth checking if the Vietnam plant is really a game changer for Premco, given Spica’s performance since FY12
• Kohinoor Elastics is doing pretty well too. As per their FY13 data, they exported 46% of their sales. In FY14, exports on an absolute basis declined marginally for them. If we can speak to someone there…to understand where do they operate, what do they think of Premco etc.

[rohitbalakrish_]

@aveekmitra @varadharajanr @karanmaroo @ayushmit Another competitor for Premco is Bala Techno Industries. The company is listed. It is perhaps the largest company in this space with ~ 160 Crores sales in FY14. Profit margins are hopeless - EBITDA is 3% only. The company claims to have Sara Lee and couple of other biggies as its customers but the reported exports are only of INR 2 Crores. Their domestic sales in FY14 was 156 Crores.

All this points out that Premco is certainly doing something different than others and its not just falling RM prices that benefited it.

[ayushmit]

Yes, Rohit. From the limited data I had till now, its evident that Premco seems to be doing something different. As elastics is a simple business, there would be large no of small players throwing tough competition. This is why I indicated earlier that we should work more on the customer relationship side (growing exports)- as that won’t be easy for small players to penetrate and for big companies its a critical input and they do need good vendors who can be consistent on quality and other parameters.

Ayush

[cool_aksh]

I also bought into this at much lower levels but what got me off of this was, as rightly pointed out by few boarders before, almost no diclosure by the company thru public reports with regards to Vietnam plans, though the same was rumoured in few public forums.

I tried to confirm the same from the mgmt and after much pursuance they only revealed as much that they have some plans with regards to Vietnam but didn’t reaveal anything further. Apart from this, Price Volatality and commodity nature of the business also got me off. At the CMP, It looks quite expensive to me.

[rohitbalakrish_]

Agree with you Ayush. I am posting the open questions that I have on this to get more understanding about their customer relationships. If we are able to get a good handle on this, then we can be more confident of the story.

1. What has enabled us to grow in exports? Anything that we did that enabled us to grow rapidly
2. Since when are we supplying to global players like Fruit of the loom, GAP, Sara Lee, Walmart etc; nature of contract - fixed price, duration? How easy or tough to increase prices to pass on RM price hike?
3. How do we view from competition from other low cost countries in our segment? Which countries are major competitors for us and why? Competition in India
4. Customer concentration - exports
5. Our margins have increased sharply over the last two years, what is the reason for the same- change in product mix, raw material prices declined like for ex- Rubber?
6. What is the reason for slow growth in domestic sales also , why is it volatile?
7. How easy difficult to get a new reputed clinet on board? Revenue per major client such as GAP? How much time did it take to convert a client. What is the process…
8. Understand more about the expansion in Vietnam. What are the benefits for going to Vietnam - do we get access to more customers? Do we have any cost advantages there?