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


(Sachin Panpaliya) #153

Its old news… November 2014


(Dhiraj Dave) #154

The objective was to estimate prospective market size for Premco’s Vietnam plant. So while I appreciate that Hanes news is old, with expected commencement of Premco’s Vietnam plant, in my opinion, it become very relevant.


(Dhiraj Dave) #155

Thanks for your feedback. In fact I am also concerned about silent from Management about Vietnam Plant except usual note to account about capex which appear in quarterly result.

Only positive in December 2015 update is investment of Rs 3.95 Cr (USD 600 thousand of expected USD 850 thousand (being 85% of 1 mn capital)), which indicate that nearly 70% of capex being incurred (6/8.5).

This was in September 2015 update Rs 0.63 Cr (USD 100 thousand of expected 850 thousand) which was only 11.7% of planned capex.

So in a December quarter, we see ~ 60% incremental capex. The company in AGM of 2015 did indicated that plant would be operational from April 2016. Given the run rate and in absence of other information, we may see may 2-3 months delay in commencement.

Also, it would be material if we can figure out how Hanes source Elastic for current production and what is expected share of Premco in requirement of Hanes for Vietnam production. I assume that given the reasonable simple production process, Premco shall be able to use capacity at around 60-70% within 9-12 months of operation, if order from Hanes are there.

As always, looking forward to your view on same.

Discl: Holding for last 12 months


(Ayush Mittal) #156

Hi Dhiraj,

I didn’t notice that Hannes article was an old one. So if we are not sure about the timeline of Hannes new plant then we shouldn’t be too concerned. Yes, its good to see that the amount being invested in subsidiary is increasing now and indicates the capex happening.

Regards,
Ayush


(Dhiraj Dave) #157

No in change in Capex for Vietnam project. The company was expected to contribute $ 0.85 million in capital of which $ 0.6 million being already remitted (same as in December 2015 notes).

The results are mediocare. The future of company is now majorly dependent on Vietnam expansion.


(Venkatesh) #158

@dd1474 and @ayushmit.

How much topline can this Vietnam plant add once it is commissioned. Just trying to understand the size relative to FY16 topline of 74crs

My calculation are as following. According to notes to account the total chartered capital is US$ 1mn which is 6.6crs. If I assume this is entirely equity funded then going by historical asset turnover ratio of 3x this can maximum give additional 20crs topline which is not much. Do you know if any debt is also being used for the capex?

BTW looks like they have not spent anything on this plant in quarter ending March 2016. Which is a cause of worry. Does anyone know current status of the Vietnam plant.

Disclosure: Exited in Feb 2016.


(Dhiraj Dave) #159

Some indication about probable sales as per my understanding of Vietnam plant is given on the forum. Please look into same. I also do not have any further information/insight about likely sales beyond what I have shared on the forum


(Varadharajan Ragunathan) #160

I met one underwear maker from tirupur. he gave me names of a few private players worth checking

  1. JV tapes - apparently thy supply to page ( a part of jockey’s requirements)
  2. vijay tapes
  3. br. elastics/tapes

if someone can check the financials of these companies from MCA and post here it would be helpful. He makes premium underwear for which he buys Rs. 20 /m tape and in his opinion JV is the best. He had heard of premco but never bought from them.

He did say that it is difficut to make beyond 20 % ebitda in this business in domestic biz - if we can check the financials, we can get some insights.


(edwardlobo) #161

Any new venture or factory has its own hurdles until production starts running smoothly

Over the next one year I think due to the hurdles in bringing the Vietnam factory upto mark most of the top managements focus will be diverted there.

Only once the factory is fully operational management would focus on acquiring additional customers for the excess capacity. I think in a year’s time the script will give a better entry point.

Disclosure: not invested yet but tracking


(Dhiraj Dave) #162

Indicative Project report for Elastic tap from Textile commissioner office
http://www.txcindia.gov.in/html/projecthandgloveselastic2.pdf


(Sumit 2.5 C) #163

Do we have any communication, or any news about the progress of Vietnam plant?
For a long time, we didn’t get any update about that.


(Varadharajan Ragunathan) #164

Dhiraj

the one doubt I have is this looks like a cottage industry with very little pricing power prima facie - globally there are not too many who have scaled up beyond even $ 100 mn.

Given that the margin profiles of every one else in India and abroad is much much lower, just wondering are these numbers true ? These kind of margins and asset turnover is best in class by a wide margin.

Discl: Invested and it’s been a multi bagger for me - but I keep inverting the thesis and contradict myself to avoid surprises.


(Ayush Mittal) #165

@varadharajanr how and when can we say that a cos nos are true??

Here it’s a pretty simple balance sheet - the debt has reduced, they have paid taxes, money has been invested in mutual funds (details of which are provided) and yet we don’t have confidence?


(Bhavik) #166

Hi,

I did not find a separate post for Arrow Textiles so thought of asking it here if anybody has been tracking the company which is in the manufacturing of textile labels.


(amit anam) #167

Today there was article in guj. samachar guj. daily (page 15 mumbai edition) regarding dumping of cheap narrow fabric from china at rate per kg, while indian mfg charge per metre.


(edwardlobo) #168

Ayush
Why not return funds to shareholders or buy back shares, why keep in mutual funds


(Abhishek shah) #169

Hi Dhiraj,

Till what I understand is the Vietnam project is going to be executed in 3 Phases. As per the discussion with mgmt (in your comment), in phase 1 - company will/has invested 6.5cr (1 million) and generate 25-30cr of revenue at peak levels. Total capacity at vietnam plant will be 6 cr metres p.a. If we calculate the phase 1 capacity - 25cr/8 (8 being realizations per metre), 3 cr metre . Phase 1 accounts for 50% of the total capacity to be built. So, if we can generate 25 cr at half capacity we should expect 50 cr from vietnam plant. Now as per your market size analysis, we come to have some idea about the total opportunity. So, looking at this if we expect 50cr from Vietnam, our share in Hanes total requirement should be around 50cr/175cr = 28.50% (assuming our sole client is Hanes (which is not a correct assumption as such). According to me total revenue of the company should be around 70 cr (domestic) + 50 cr (Vietnam) which is 120cr. Considering 1 re more realization on Vietnam project, the PAT can be around 26 cr (at max).

Subjective Calc - 12 cr PAT on 70 cr revenue. so 50 cr should give 8 cr PAT. Adding high realizations of 6cr (6 cr metres @ 1 re extra realization) to PAT it makes to 14 cr from Vietnam plant.

So its a good story as such.

Concerns -

1). When will it be operational?

2). Currently, Indian facilities are working at 80%. 60-70% sales is to Vietnam. What will be the impact of shifting sales to Vietnam plant? Can company utilize its Indian capacities and sell in India or to other geographies?

3). Impact of China slowdown on Hanes? Hanes has a big market in China. Is this a reason for delay in the Vietnam plant? Orders from Hanes might have been lack luster.

4). Impact of low cost dumping (elastic tapes) by China?

5). High ROE might be because of holding old assets. We need to see incremental ROE.This has been indicated by Varadharajan. Is this understanding true. Company would have had scrapped old machines and bought new machines over a period of time. The machines can be old as 10 years - not older than that i guess.

I might be wrong here. Please do correct me if I am wrong with my understanding.


(Dhiraj Dave) #170

@abhishek90

First, very good compilation from many loose dots. (Even I could not have been able do same although in pieces I have commented on threads).

I find no logical poblem in your arguments. The company would exclusively service Hanes for Vietnam plant. In AGM, the company did said that it would not have major impact on Indian operations as it has diverted supply from domestic to exports market. Hence, once Vietnam plant commences, it would resume supply in domestic market.

Only one issue to consider would be Vietnam stake of Premco are 85 %(not sure and based on my memory) and there is one local NRI based out of Vietnam holding balance stake as required under Vietnam regulation.

So the consolidated profit would be lower the extent of stake of outsider.

Find enclosed my view on your concerns:

  1. I am also waiting for company announcement about completion of project. We shall get more information at least in AGM, if no update in June results.
  2. Shift for Vietnam to India shall marginally negative due to lower profit margin in domestic operations. (This is purely my assumption and not based on any facts to support)
  3. Hanes presentation to investor does give regionwise sales breakup. Of total sales of USD 5.1 billion, nearly USD 1.1 billion sales is international sales. The top 5 market after US are France, Germany, Japan, Italy and Canada. In view of same, I assume that China may be major supplier but not major consumer of Hanes brand.

You can get full presentation in following link
http://ir.hanesbrands.com/phoenix.zhtml?c=200600&p=irol-irhome

  1. Possible, I believe Premco quality is superior and among trusted supplier for Hanes in Asia Pacific reason. May impact India sales in commodity segment, in which I believe Premco shall have marginal sales. (Again my assumption and no factual data to support this)

  2. I think the business is more working capital intensive then capital intensive. We did have in past some discussion about very high ROE on Vietnam project on same thread. You can go though same. Even if we work with you number of Rs 25 Cr sales and 6-8 Cr PAT, (with expected working capital at very 180 days, total capital employed would be Rs 18-20 Cr (Rs 12 for working capital being 50% of sales and Rs 6 Cr Capital infusion). The ROCE would be around 25-30%. These too much premature and very rough estimate, rather guesstimate. However, do see good ROCE/RONW from Vietnam business as well.

Do let me know your view on same as well.


(Abhishek shah) #171

Hi Dhiraj,

Thanks a lot for quick response.

Ok so one thing is sure that company is going to solely cater to Hanes through its Vietnam plant.

This means that we are going to cater to almost around 28% of the total Hanes demand.

I am still worrying about the Indian operations because it would be very tough for the company to sell its high quality products domestically. Of course there would be a loss in realization per metre due to selling in domestic market. We need to consider this loss in our forecasting model.

Yes you are right, I forgot the effect of 85-15% ownership issue. Profits will be proportionately less.

So, this is a big comfort that China is not a big market for Hanes.

Still, a sales growth of mere 2% for FY16 !! This has to be due to low prices of raw materials which would have impacted topline. Can you share the volume data for last year?

One thing that I have noticed is about another company called Sarla Performance Fibres. Its into some what same industry, same customers. they manufacture high quality yarns and fabrics used in airbags, leather, textiles, automotive seat belts, etc. Majorly it caters to textile yarns. Hanes is its big client. Even this company expanded globally in US (to take advantage of NAFTA/CAFTA regimes- avoiding the customs duty levied by US). This company has not been able to ramp up its production capacity since last 2 years. It started in Jan 2014 and till today it is operating its 9000 TPA plant at 30% capacity only. When it had started off with global expansion, it had planned to double its capacity to 18000 TPA. But, today it seems as if its first 9000 TPA capacity accomplishment target is also tough. I have not been able to understand the exact reason for slow pace of growth in this company yet.

One more company to have gone global and now it seems it is failing to ramp up. One has to watch and closely track the developments.

Disclosure - Tracking position.


(hash611) #172

The Hanes’ requirement is being fulfilled out of the India facilities - likely at the Dadra facility. As per comments in the Outcome of Board Meeting held on 20-Apr-2015 (see filing on 19 May 2015 on BSE), PGL exports to Vietnam were 38cr for FY15, out of total exports of 52cr for the Company. Hence, assuming INR 7.50-8.00/meter realizations, this represents ~50mn meters of narrow fabric exported to Vietnam (and another ~12mn meters to other regions)
Vietnam facility is 60mn meters of capacity. It is not inconceivable that this facility would be almost fully dedicated towards all the Hanes’ requirements. In this worst case, there will be 50mn capacity in India which would be lying idle, unless PGL has already secured orders from others. According to the Annual Report, incremental output is expected to be 9 mn meters only (20% domestic growth and 5% export growth as per AR16).

Also, to another question earlier of the funding mix for Vietnam:
As per the same Board resolution, USD 1,000,000 (INR 7cr) is the investment in Plant and Machinery. In addition there is USD 1,600,000 (INR 11cr) working capital loan routed through PGL books.
Total capital employed should be USD 2.6mn or 18cr. Revenue = 50cr (6 cr meters times 8/- realization). At 20% EBITDA (long term assumed margin), this is 10cr EBITDA. EBIT is 9.5cr. Pre-tax ROCE would be 9.5/18 = above 50% (assuming no further WC is necessitated). PBT of 8cr, PAT would be 6cr (25% tax rate in Vietnam). PGL’s attributable PAT (85% equity) is 5cr. ROE could be 80% (6/7) - absolutely through the roof ! Viet operations seem very profitable, prima facie.

My queries:

  1. With Vietnam operations commencing this FY, a large portion of capacities in India would remain underutilized. Do we know of how these capacities are expected to be fulfilled ? Domestic revenue is expected to grow 5cr only (20% growth on 24cr in FY16) and exports likely to not contribute to any growth.
  2. There are 20cr of MF+Cash, which do not seem to have much use. The only use I see is to fund the unsecured loans required for Vietnam (10cr or so, as detailed earlier). Can someone confirm?
  3. PGL has paid 1cr interest on borrowings of 3.2cr (average of FY15 and FY16) - the rate of interest turns out to be 30%+ which is astonishing.
  4. Loans have been taken by various management personnel from the company, amounting to 13cr, on which a paltry interest of 67.5L has been paid. This was 8cr last year. I see this as a red flag - Seniors, how should one think of this ?