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


(Aveek Mitra) #44

Rohit Balakrishnan,

I don’t know answer to question 1 to 7 any better than any of you…

Regarding question 8, the answer may possibly be, — presently from shipment records, it seems 85% of Elastic Narrow Fabric is shipped to Vietnam, Sri Lanka and Bangladesh. And Vietnam alone constitutes 62% by Value and 64% by Value of all Elastic Narrow Fabric Export from India.

Also, here is the excerpts from the Annual Report of Luen Thai (a large Hong Kong based apparel company) which cites reason for their moving to Vietnam.

Quote

“Increase Investment in Vietnam
Vietnam has already entered into free trade agreement (“FTA”) with China and Japan and it is also generally expected
by the market that the FTA between European Union and Vietnam and the TPP agreement will also be signed in
2015. These trade preferences (whether existing or potential) together with the abundant supply of skilled and
hardworking labour make Vietnam as a strategic choice for the Group to invest in the next few years.
In order to cope with the Company’s strategy, Luen Thai International Group Limited (“LTIG”), a wholly owned
subsidiary of the Company, entered into a subscription agreement with Duc Hanh Garment Joint Stock Company
(“DHG”) on 10 February 2015 pursuant to which LTIG shall subscribe for subscription shares for a consideration of
VND54,229,000,000 which is equivalent to approximately US$2,540,000. DHG is principally engaged in the production,
importation and exportation of garments in Vietnam. The subscription in DHG was expected to be completed in June
2015. The Board believes that the Group can enhance its competitiveness and gain market share through its investment
in TNS and DHG.
In addition, the Group has been considering a plan to form a joint venture to invest into a garment and textile
industrial park in Vietnam. Such investment is an important strategic step for the Company to strengthen its position
in Vietnam through (1) inviting upstream players to set up fabric mills in the industrial park; (2) investing in these
upstream players to facilitate the transformation of certain portion of the Group’s business into a vertical model; (3)
increasing the profitability of the Group by selling water, steam, electricity to the other industry players within the
industrial park. As this potential investment has not entered into any legally binding agreement, there are no other
details to be disclosed at this stage. The Company will comply with the Listing Rules and issue announcement related
to this industrial park investment when an agreement is concluded and signed.”

Unquote

This coupled with post by “dubyrex” on this thread makes the case for investment in Vietnam.


(Rohit Balakrishnan) #45

Thanks Aveek. That helps. It would be interesting to understand competition in Vietnam as well. Strangely, Spica Elastic’s numbers took a reverse turn since it went to Vietnam. Obviously, these two may not be causal. But I feel its still good to check.

Another thought I have and we should also check this (Maybe from someone @ Hanes?) -given Hanes has prompted/pushed them to open the plant, it could also be construed as Hanes really wants Premco’s elastic as I would assume that Hanes could have got elastic from other players in Vietnam… maybe Premco is a preferred supplier. If they are it again points in the direction that there is something more to Premco’s elastic :slight_smile:


(Vivek Gautam) #46

SPICA promoters sons I think are more interested in playing Golf .
Golf is an addictive time consuming sports. In Premco 2nd Gen Luke Harjani became ED in 2011 and ever since then increasing focus on exports turned the fortune of the co around for this 30 year old co.

If this Florida born well educated US Citizen speaksto fellow American cos I their own accent ,carries the same value,honours commitments trust appears and more business automatically follows.

In small cos bet is on Jockey running the show.Luke is in 40s the ideal age for any CEO has growth mindset,good execution track record,is professionalizing management ,anew CEO has joined from Raymonds,Opp size is multiplying both in exports n domestic.

Post Page indian mkt is also moving towards premium products.

Mkt cap still 110 odd cr ,PE still sub 10.ROCE v decent at 44%,Excellent promoter with good execution track record, an ideal combo for a multibagger imho


(Vivek Gautam) #47

Yes Rohit your correct in your reading of Hanes prompting them to open factories in Vietnam.Hanes is their big customer and has shifted its entire operations from Central America to Asia.


(Dhiraj Dave) #48

I still have concern by a fellow VP member pointing out closing stock overvaluation of around Rs 2 Cr (Aveek, if memory is correct). I have wrote to the company specifically asking for this detail and despite follow up not being able to get any concrete answer. On positive side, the company is at least entertaining the communication. In case get any update from that side, shall keep the forum appraised.

Also, Vietnam plant being informally discussed almost for last 3 months in public but official announcement coming much mater is also a concern for me.

Dislaimer: Hold small position in my portfolio.


(Varadharajan Ragunathan) #49

We need to get a contact in hanes or jockey or a premium underwear manufacturer to understand what’s special about elasetic and why would they leave 30 % EBITDA margin for the vendor.

any one with contacts pls ?


(Dhiraj Dave) #50

I got following response to my email inquiring about higher valuation of closing stock as on March 31 2014:
“The average realization of sales takes all the sales during the year. Which varies from Rs.3 per Metre to Rs23 per metre. While we were holding higher value stocks for customer supply at the year end i.e. 31.03.2014. Hence the average value for sales during the year and closing stock are different.”

My email as under:
"Finished goods are valued at cost or market value whichever is lower. (Page 19)

However, on Page 34, We find average realisation for the finished product are Rs 6.76 per Mts (Rs 62.85 CR/9.29 Cr Mts). The closing stock value is however give average valuation of Rs 10.87 per mt (Rs 7.03 Cr being closing finished stock/64.74 Lakhs mts).

Since the company is profit making, the cost is expected to be lower than sales realisation which is average around Rs 6.76 per mt, while closing stock is valued at Rs 10.87 per mt, almost 60% higher average sales realisation."


(Varadharajan Ragunathan) #51

Find attached the answer from a narrow fabrics expert who has helped companies offshore from US to low cost latin american countries. It seems like there is a little more than what meets the eye -

I think hanes may be a volume driver - but the company should be doing high end narrow fabrics - for eg. used in medical (bandages), defence to realize these kinds of margins.

If any one has any specific questions, i can ask this guy - of course, he can’t answer on premco specifically.


Thanks - I am a grounds-up fundamental investor who tries to
identify trends ahead of the curve. One of the micro trends I have
identified is that of exports from India of narrow fabrics.

  1. Is narrow fabrics a labour intensive business - like textiles ?

  2. what’s the differentiation in narrow fabrics and how does one move
    up the value added curve ? Why does for eg., a metre of a narrow fabric
    sell at $ 0.10 cents and some at $ 0.40 cents.

  3. Is it difficult to get approved as a narrow fabric vendor ? what
    governs it - price/quality/experience in business/ability to offer
    different product types ?

  4. does manufacturing in places like india/vietnam pose a cost
    advantage ? I see that players like AEC still have factories in the USA -
    does that mean its a technology dependent manufacturing that is not
    disadvantaged too much by labour costs ?

Thanks and your answers would be most useful.

Regards
varadha

Yes
it is labor intensive. Not as a sewing facility but pretty intensive.
As an example, when we moved our operation form NC to El Salvador, our
labor cost as a percentage of total cost went down from 30% to less than
5%.
2. It is all about the type of material and the weight and width of
the fabric. Very much the same as wide fabric. In addition, if there are
designs, functionality, patterns, jacquard, etc, will have an effect on
the cost.
3. Yes, it can be difficult. You have several well established
manufacturers that have a long history both in the US and
Internationally. You have to be able to bring some value and that will
be difficult as a start up. There are also different types such as woven
and knitted fabrics. Woven is more expensive due to material content
and speed of manufacturing, but also better quality.
4. Cost advantage due to labor. The companies that still manufacture
in the USA produce specialty fabrics for the medical, defense and other
industries. It is very hard to compete with high volume items. Most all
of them are manufactured in low labor countries.

Hope this helps,


(Varadharajan Ragunathan) #52

Just thinking long and hard, if the high RoE’s and RoCE’s are because of the historically low costs at which the assets are being held - remember premco is a company from the 60s and I am sure plant machinery, land is being held at prices that have no correlation to market value. Perhaps, their labour costs are low as well and that’s why EBITDA/ROCE’s are high

What would matter is incremental ROCE as someone had suggested in the ambika thread - it mattters here more than ever because of the huge difference that is likely to arise (ambika is only a 20-22 year old story).

how do we find that out - say the incremental ROCE of a spica’s vietnam or anything similar ?


(Rohit Balakrishnan) #53

Look at the numbers in FY13 and FY14 and compare it with earlier numbers. The difference is light & day. Don’t think depreciation effect will kick in suddenly.


(Varadharajan Ragunathan) #54

another mail exchange -

  1. from this, it looks like this is closer to spinning than garments in terms of requirement of work force - it is a lot more capex heavy which is why a company like AEC narrow fabrics has still been able to make this in the US and earn above cost of capital

  2. if RM is 60 % and labour can be kept below 5 % - in premco’s case it is 10 % and capital intensity if 4-5 (sales/FA) and I am not sure how much more it can be stretched. I think the key, as in ambika’s case is to improve yields by focussing on higher realizations (given the natural limitations of max. production capacity, the only way to move up margins is by moving up realizations on sales - moving towards a bettter quality fabric).

Premco’s overheads are unusually low - Rs. 35 lakhs total for all directors. If this was normalized, ebitda margins would reduce significantly given the small size - say if we made this Rs. 2 Cr. (reasonable assumption), EBITDA would reduce by 20-30 % on FY 13 numbers.

So, it seems like these margins are a result of a ultra frugal compensation for directors. There is no sales head/no senior guys who are paid Rs. 10 lakhs +. Is this a sustainable way to build a compay ? I would think not - beyond Rs. 100-150 Cr.

I am invested but at 11-12x, I think it is fairly valued. I want to see more investments into people especially on SG & A before concluding that this is sustainable. It seems ot be a tightly run proprietorship with a motivated promoter - what happens if lokesh harjani, god forbid, becomes inactive ?

If you intend to go for narrow fabric manufacturing this
involves short cut operational process and is not high labour intensive
but do involve skilled work force. The training and development of work
force skill is possible during plant erection and commissioning.

Basic cost component of a textile product is on usage of material per square-meter( 55 to 60 %).
Manufacturing costs generally are directly related to material
costs, Product quality, wastage, energy costs, wages / salary expanses
and operational and overall plant efficiency and administrative costs.
There are many variables involved in textile costing.
It is possible to manufacture narrow and normal width fabrics using
different set of operational processes within the same plant and if
volume of products increase it will have a significant impact on costing
and on the bottom line of the profit and loss statement
All technical fabric manufactured which includes medical, defense etc
has good profit margins in comparison to conventional fabric and are
the products of future.
AEC uses modern technology with fully automatic high speed machines
in all operations which has capability to produce high volumes and
almost defect free products with employment of minim required skilled
personal. This has a big impact on production costs. Of course the
initial cost of machinery is high and running costs are low.
Well it is little difficult to penetrate in this market but not
impossible. This needs excellent product quality as agreed with buyer,
back up services, on time deliveries and initially below market product
prices with good market strategies.

Is narrow fabrics a labour intensive business - like textiles ?
what's the differentiation in narrow fabrics and how does one move
up the value added curve ? Why does for eg., a metre of a narrow fabric
sell at $ 0.10 cents and some at $ 0.40 cents.

Is it difficult to get approved as a narrow fabric vendor ? what
governs it - price/quality/experience in business/ability to offer
different product types ?

does manufacturing in places like india/vietnam pose a cost
advantage ? I see that players like AEC still have factories in the USA -
does that mean its a technology dependent manufacturing that is not
disadvantaged too much by labour costs ?
  1. is it possible for a player to do both narrow fabrics and normal fabrics or the
  2. what are the typical gross margins in this business for a normal fabric and for value added fabrics (eg., medical, defence) ?

Thanks
Varadha


(Varadharajan Ragunathan) #55

another response from someone who ran a narrow fabrics plant in the USA. This is very insightful.

1 if you mix nylon and cotton rather than polyester, realisations are higher
2. dyeing and providing a finished look product helps improve realizations - eg., the nice looking bands on calvin klein, hanes etc. Dyeing issues may be the reason why they may have moved to vietnam since india has strong environmental control norms on this.
3. the price is also a function of pick (similar to count in cotton spinning) the higher the pick, the more robust the fabric and lasting the feel.

Clearly premco is gettiing all of this right.

Below are my initial responses to your questions. Please let me know if you need more details.

Is Narrow Fabrics a Labor Intensive Industry?

I would say yes. In the US, direct labor costs (excluding benefit
expenses) would run about 20%. Operations in LDCs would likely cut your
labor costs in half, but my experience is that a good portion of that
savings will be eaten up by increases in energy costs and, if you are
operating a dye house, water costs.

what’s the differentiation in narrow fabrics and how does one move up
the value added curve ? Why does for eg., a metre of a narrow fabric
sell at $ 0.10 cents and some at $ 0.40 cents.

There are a lot of factors that go into the cost of a narrow fabric,
but the two big factors are the yarn content of the material and the
picks per inch of the fabric. The yarn content is generally measured in
the form of grams/meter. The pick is one crossing of the crosswise
yarn in a that goes over and under the

The yarn content of the fabric is directly related to the cost of the
raw materials. Obviously a fabric with a heavier yarn content is more
expensive to make because it takes more yarn to make the fabric.
However, the choice of the yarn also can have a large influence. Nylons
and cottons are generally more expensive to purchase but much easier to
dye than a polyester or polypropylene. Generally polypropylenes and
polyesters are less expensive to purchase.

The pick per inch measure gives an indication of how efficiently you
will be able to produce the fabric. Each loom will run at a set speed.
While this set speed will depend on the actual design of the fabric, I
would plan on production levels of about 1600 picks per minute for
products up to 2.5 cm, 1200 picks per minute for products up to 5 cm and
about 800 picks per minute for wider products. Since picks per inch
are almost always specified by the customer, this will limit the overall
production you can expect to get off a given loom.

Is it difficult to get approved as a narrow fabric vendor ? what
governs it - price/quality/experience in business/ability to offer
different product types ?

It is very difficult to break into Hanes, Fruit or the other major
manufacturers. In my experience, these vendors are very price sensitive
but are also quite demanding in their quality and delivery
requirements. They will not simply turn the business over to you but
will vet you with small orders and if they like you they will keep you
at the edges for years until they are ready to drop a vendor and move
you into the position. The standard practice is to force the existing
vendors to take the prices you offer instead of giving you the business.
Proximity to their manufacturing is also important to them. If you
have existing operations near their facilities, they may be more
inclined to give you a shot.

To be treated seriously, you will also have to have the ability to
dye your fabrics and to match the shade of the dyed fabric very closely.

does manufacturing in places like india/vietnam pose a cost advantage
? I see that players like AEC still have factories in the USA –

As a general rule, shipping costs tend to level the playing field.
When I ran a mill, generally, I could match the price and beat the
delivery of imported narrow fabrics. That was not the sourcing
direction Hanes and Fruit took. They would source the entire garment
from a region and would source their fabrics, including narrow fabrics,
locally within the region.

is it possible for a player to do both narrow fabrics and normal fabrics

I would not suggest it. The narrow fabrics industry is a different
market and mindset from the broad fabrics market. While there would
seem to be advantages in merging the two, the difficulties caused from
the differences will almost certainly overwhelm any advantages you may
get.

I have seen broad fabric manufacturers get into narrows and lose a lot of money in the process.

This will probably be clearer with a specific example.

The narrow fabric contend of an undergarment sold by Hanes or Fruit
is probably 5-10% of the value of the garment. To sell into Hanes or
Fruit a narrow fabric vendor will have to dye their product to match the
shade required by Hanes or Fruit and each dyed shade lot will have to
be approved by Hanes or Fruit.

Now suppose that a broad fabric manufacturer dyes a lot that is 7%
too blue relative to the standard Hanes or Fruit provided. In a
rational world, the broad fabric manufacturer would be expected to redye
their lot to bring their material into the shade standard. However, in
practice, a narrow fabric manufacture will be expected to adjust their
lot shade to adapt to manufacturer’s lot that is too blue. While this
isn’t right, it makes economic sense: it is less expensive to adjust 5%
of the content rather than the 50% of the content that the broad fabric
would represent.

The key point here is that this is a not billable service. Even
though the narrow fabric vendor hit the shade, they will be expected to
adjust the shade at their own expense. A narrow fabric vendor that
tried to bill for this would be thrown out of Hanes pretty quickly.
There are a lot of these sorts of unbillable expectations that are
placed on NF vendors that broad fabric manufacturers generally have a
lot of problems dealing with.

what are the typical gross margins in this business for a normal fabric and for value added fabrics (eg., medical, defence) ?

I would expect gross margins in the 15% range and profit margins in
the 2% range. If gross margins get to 20% or profit margins get to 5 or
6%, you can expect a lot of competition getting into the market.

I don’t see any margin advantage to the defense markets – unless the
item is a small volume niche item, they are pretty competitive.

Any margin advantage from the medical market really would be derived
from an FDA approval which is a pretty expensive undertaking.

I hope this helps.

If I may answer any questions, or be of any assistance, please do not hesitate to let me know.

Regards,

Jim


(Rohit Balakrishnan) #56

Thanks Varadha for sharing this, Pretty insightful. On the positive side- it validates that getting through to a Hanes, Fruit of the loom of the world is tough and that shows some mettle in terms of the product.

On the flip side the above quote is a bit worrying. These were the margins that Premco earned prior to FY13… would they revert to those levels again? If no, why? The story is not clear in my head, atleast yet. What do others think?


(Varadharajan Ragunathan) #57

And I forgot to mention, none of these guys knew premco or spica - not
very surprising. AEC is the big daddy of this space and they actually run
plants in the USA still - so I am reasoning that there must be fat enough
margins for them to survive still and flourish in this business


(Ayush Mittal) #58

Thanks a lot @varadharajanr for doing such work and sharing insights. These kind of feedback from industry people are in-valuable and help us go to the next level of thinking and research. Kudos.

Regards,
Ayush


(Varadharajan Ragunathan) #59

Thanks @ayushmit

Either premco is doing something really special which we cannot as yet figure out (their margins are easily a 5-10% higher than for anyone else I have seen) or there is an issue with numbers.

At this point of time, we need inputs from the management - what does lokesh harjani have to say about this ? has anyone met him ? how sustainable are these numbers ? is one guy enough to scale this up - lokesh ?

what beyond hanes ?


(Venkatesh) #60

Where are the Premco results? Were they not supposed to report numbers yesterday?


(Ashwini Damani) #62

We tried to speak to Lokesh harijani, but he refused discussion. Said speak to CFO.

Lets compile a list of questions which we can ask the CFO and then take it on from there


(Durai) #63

Results posted in BSE website. Revenue almost flat compared to same previous year quarter 16.29 Cr vs 16.05 Cr. Profit more than doubled 1.86 Cr vs 4.04. There is a big change in changes in inventories & finished goods ( -5.16 vs .31) which contributed for good profit margin this quarter.

http://www.bseindia.com/xml-data/corpfiling/AttachLive/A62DEBBA_900F_4D52_AB95_D01402FD9D7C_104154.pdf

They announced dividend 2.70/share.


(Chitresh Lunawat) #64

Awesome Results by premco. But Experts do you think there is still scope of revenue expansion and increase in profits when vietnam plant also starts to contribute…There was a a very high inventory adjustment… Could anyone please throw light on it?.Any views on garware who are into technical textile where margins are higher?