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

[hitesh2710]

I dont track the co closely but prima facie it seems topline is near flat on quarterly and annual results basis. q5 fy 15 vs q4 fy 14 is largely flat whereas fy 15 vs fy 14 shows less than 10% growth.

In absence of topline growth how long the company can keep pressing margin improvement levers and how long the other income boosts the results needs to be seen.

If it can generate decent revenue growth it could be real interesting.

[aveekmitra]

Prima facie the result of Q4 '15 is a bit peculiar to me...

1) Sales growth is barely 8% by value YoY---- not even sure if there is a decline in volume.
2) EBITDA margin suddenly jumped to 42% from previous 3 quarter margin of 28%, 25% and 28% respectively. What may be the reason? It is too sudden .... Can they sustain it? To me it is unsustainable and a spike of unknown nature.
3) Sudden jump in inventory ... From around 10 cr in Q2 '15 to 15.Cr ++ in Q4 '15.
4) Around Rs. 6 cr of incremental cash generation over previous year (roughly)
5) Very low dividend payout --- Is it due to Vietnam Expansion?

Either there is complete value migration in last 1 quarter (is it likely?) which resulted in EBITDA Margin spurt or inventory is a point of concern.

[aveekmitra]

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

Can it be a reason for sudden spike in inventory for NF makers? Are these treated as waste or can these be used with subsequent shipments of Fabric manufacturers? Or else, one wrong but large shipment of fabric manufacturer can create havoc to a NF player..... How they mitigate this risk?

Your probing was great and insightful.... Can you check it with your source .... I am also trying....

[ricky76]

Aveek, do you know their current utilisation of Indian plants? Is that a constraint on volume growth?
Bobby

[ricky76]

One reason for rise in inventory could be to lower COGS thus increasing profits in other words accounting jugglery.

[Ishank]

Premco is mainly in exports and export shipments are accumulated before shipment, as clients require entire shipment together. Hence, production was higher for the quarter but sales was lower leading to increase in stock. This will reflect as sales in the current quarter.

[aveekmitra]

Grapevine says 20% to 25% increase in Capacity last year (2013 - 2014) at Vapi plant.

Last year annual report of Premco says ...

Quote

The management continues to pursue its efforts to further improve its capacity utilization, operating efficiencies and
cost competitiveness to improve its performance in the coming year through increase in Turnover, improved
domestic market and strong inroads on export front along with appropriate restructuring of products and procedures.

Unquote

In another place it says...

Quote

Due to increase in capacity utilization and expansion of new factory unit at Vapi the energy consumption in absolute
units and value have increased vis-à-vis earlier years

Unquote

So, capacity has been increased as seen from energy consumption of 2014. But it was completed last year (NFA reduced over last year in 2015).

And it seems same capacity can increase sales realization by improvement in product mix / operating efficiency. How much? I don't know.... Need to find out...

Another thing "Non Current Investment" was Rs. 4.44 Cr. in Q4 2014; jumped to Rs. 12 Cr in Q2 2015 and then again reduced to Rs. 10.3 Cr. in Q4 2015 .... Is it for Vietnam expansion?

[vnktshb]

It is time a management Q&A is done with the company. Besides the annual reports from BSE and company website there is nothing much available in the public domain

Disclosure: Invested

[ashwinidamani]

I am in touch with the management and will soon be sending out a list of questions.
You all can let me know your specific questions which can be made a part of the communication I send

[vnktshb]

A few from me:
1. After growing +57% and +25% in FY13 and FY14 respectively sales has decelerated to 9% in FY15. Why? Is there a capacity constraint?
2. What capacity utilization levels is the company operating at? What is the capex expected in FY16E and FY17E?
3. Margin in 4QFY15 was 39.8%. Are those margins sustainable going forward?
4. Why are inventories end FY15 so high compared to that of FY14?
5. What is the reason for high margins?

[dd1474]

1. Who are the other domestic player and what is there capacity?
2. What is reason to open a plant in Vietnam? Expected project implementation time, like topline, expected PBIT and Capex for same.
3. How does company quote price for bulk supply? In case of increase/decline in cost of raw material, does is pass on same to customer?
4. Top 5 client share in total sales, over last 5 years
5. Company's view on price of rubber, nylon and polyester over next three years
6. Company's dividend distribution policy,if any. DEspite major spurt in EPS, why there is no corresponding increase in dividend announcement.
7. The company website also mention about subsidiary in label business. Is there any synergy between the group companies? Why there a separate company as clients appears to be common for both the companies.

[aveekmitra]

Dhiraj,

The reason for putting up a plant in Vietnam is already given in one of my posts above. In addition, please find the slide which depicts how Vietnam is positioned vis a vis different Trade Block.... Possibly, over the years many players in Textile and Garments from China would shift base to Vietnam.

[aveekmitra]

Dhiraj,

Subsidiary Pixel Packaging is an almost dormant company. I have the financials downloaded from MCA site.

The plant cost in Vietnam is US$ 425,000 for 300 Lakh meter narrow fabric is phase 1 and another US$ 425,000 for 300 Lakh meter in phase 2.

Vietnam plant, Premco Global will be holding 85% and rest by another individual named Sushil Rajwani.

[dd1474]

Aveek,

Great response. Thanks.

Just one more point. Plant cost of USD 425,000 (@ 65 rate), translate in Rupee cost of Rs 2.76 Crore. At 80% capacity utilisation and Rs 6 per meter rate, it would translate into sales of Rs 18 Cr. Even assuming 15% EBITDA margin, it would give EBITDA of 2.7 Cr. From these, even if we deduct 10% of Depreciation, we shall get PBIT of Rs 2.5 Cr on Capital investment of Rs 2.76 Cr. So almost 90% ROCE ! These apprears too good to to believe.

Appreciate your view on same.

[rohitbalakrish_]

There is working capital also there which needs to be added to their CE calculations which will reduce the ROCE. Premco's average WC days are 120 days which will translate to about 6 Crores of Working capital on the sale of 18 Crore. Adding the WC, Capital employed works out to be ~9 Crores. And the ROCE works out to be 28%. Still not bad .

[aveekmitra]

Dhiraj / Rohit,

I disregarded these capital investment figures as we don't know final capital structure. And secondly, if we assume presently Premco runs at 75% Capacity utilization then its total Capacity at India is 12 Cr meter. Their Gross Block is Rs. 23 Cr. (with meagre few lakhs of Land Cost) ... So, on historical figures, for per 3 cr meter capacity, Premco has deployed about Rs. 6 Cr of Gross block. So, how on current market value, by investing just 3 Cr. they can generate 3 cr. meter of NF is something which time and events can tell or management can tell.

And yes, WC needs to be added to get the correct ROCE figure .... In Vietnam it may reduce from existing level and may be significantly.

But I don't want to speculate and want to see what happens on the ground in coming days....

[varadharajanr]

what about the vietnam land cost ? May be it's on lease and you have to add that in - also the cost of construction/training/recruitment/workers/stabiliation of line all should be added.

I think those by itself will add at least another Rs. 4-5 Cr. to this - assuming WC reduces (as there is no cross sea shipment) to say 6 days, it's about Rs. 3 Cr. + Rs. 4 Cr + Rs. 4 Cr. of WC - so about Rs. 11-12 Cr. - some of which I am sure will be funded through debt.

assuming a 2. 0 asset turnover on Rs. 3 + Rs. 4 Cr. = Rs. 7 Cr. , it;s about Rs. 15 Cr. of sales and at a 25 % EBITDA margin, it's about Rs. 4 Cr. - so an ROCE pre-tax of 35 % or so - in line with their historicals.

Of course asset turnover is the key here - the indian numbes look higher because of historical costs.

[vnktshb]

When is the AGM. Any views about FY16E??

[Vivek_6954]

Request Mumbaikar n western indian stakeholdres to attend the Premco AGM as its one of the few cos where promoters open the mouth only during AGM. This I take as a positive sign.

[rohitbalakrish_]

@Vivek_6954 When is the AGM? Is the new AR out?