I have attended AGM of Premco Global. Please note that there is possiblity of communication gap from the actual proceedings and my notes. Investors are advise to do their own due diligence and read the note with the stated limitation.
Key points discussed shared in AGM held in Mumbai on September 9 2016:
1) Chairman speech
Ashok Harjiani confirmed that the Vietnam plant phase I being operational during last year. He also said the company expect growth of around10-15% going forward.
2) Vietnam Facility:
Due to TPP Agreement, Garment imports from Vietnam to US are expected to be exempted from duty of around 8%. The same would be effective in US from Jan 2018 subject to approval from Senate. Over last few years, in anticipation of this PACT, many US based garment players have heavily invested in Vietnam. Beside the duty benefit, the balancing their sourcing of product from China to other country were also driver for investment in Vietnam. The company has good relationship with Hannes who already have operational garment factories in Vietnam and hence decided to set up capacity in Vietnam.
Over last years, Vietnam has emerged as third largest Garment exporter in the world. During last year, top 4 global garment exporting countries were
1) China USD 34 billion
2) Bangladesh USD 18 billion
3) Vietnam USD 17 billion
4) India USD 14 billion.
It may be noted that Vietnam has lower population then other ASEAN countries like Indonesia/Thailand/Philippines but still it has emerge as preferred country for most of US garment companies. Also, beside Hannes, even Jockey International and other large global players have set-up/ on way to set up their capacity in Vietnam. Hence, the company decided to set up new elastic capacity in Vietnam.
There is a risk that US Senate may not ratify the TPP in February 2018. However, since significant capacity are already operational, even not having TPP would not affect Vietnam exports as labour cost are still competitive vis a vis other nations and most of the capacity are already operational.
There is another other about Yarn Forward rule which may limit Vietnam benefit from TPP. (Refer to enclosed link for more information)
The management was confident given the scale of operation and investment in textile, availability of yarn would not be major challenge. Cotton yarn is already available and also exported from Vietnam to other countries like Malaysia. Hence, the management feel similarly other yarn like Nylon and Polyester shall also be available easily shortly.
As per Management, the total capacity installed in Vietnam is around 50% of current Indian Capacity. (Indian installed capacity is around 120 Million). The management also did a small presentation showing picture of Vietnam plant infrastructure and manufacturing set up. In that presentation, they indicated that Phase I investment would be around Rs 12 Cr, with total investment of around Rs 20 Cr in two phases. That would give installed capacity of around 3.5 Cr mts in Phase I and another 3.5 Cr mts in Phase. Labour productivity in Vietnam is better than India and quality of elastic is also fetch better realisation. Hence, the company is confident to get EBITDA margin comparable to India at least when it reach 70-80% of capacity.
Currently, Vietnam plant has total 50 employees of which around 15 employees are Indian and 35 are local labour. At full completion of two phases, the company would have total manpower of around 115-120 employee in Vietnam.
The first phase is currently operating at around 50%, which is expected to reach full capacity by Jan-Feb 2017. The plant is expected to break even from current month and would look at meaningful contribution in financials from second half of FY17.
The company expect Phase II at Vietnam shall be over by January 2018 which would coincide with US senate Ratification of TPP. Based on how Vietnam plant perform, the company may decide to undertake further expansion, as currently it would be small supplier to requirement of Hannes. Currently, Hannes is importing elastic from other countries to meet Vietnam manufacturing. Even at full capacity of current Vietnam plant, the company may not be able to meet the requirement of Hannes. They are also in discussion with other global players to supply elastic.
3) My Calculation on Vietnam Plant (based on discussion and information provided in AGM)
Expected sales from Phase I shall be around Rs 20 Cr (3.5 Cr Mt at 80% @ Rs 7 per meter realisation).
Expected EBITDA margin @ 25%. Rs 5 Cr.
Interest of 10% of 5 Cr Working Capital : Rs 0.5 Cr
Dep at 5% of 12 Cr Investment: Rs 0.6 Cr
PBT : ~ Rs 4 Cr.
PAT (post 30% Tax) ~ Rs 2.8 Cr.
ROE of around Rs 23% (Assuming Full 12 Cr of capex financed by Equity capital. To extent 15% are owned by local partner, same would also reduce funding requirement. For Premco Global consolidate, we may assume around 1.7 Cr PAT from Vietnam during FY17 after providing for Capacity Scale up and stabilisation.
The company already have plan to double the capacity in Phase II which would also have similar economies. Total investment in both phases are expected to around Rs 20 Cr. (Phase II capex would not have land and common Infra cost and would prominently Machinery cost and hence lower capex of around Rs 8 Cr).
So, based on my working, over next 24-30 months, we may see Topline growth of around 40-45 Cr and PAT growth of around Rs 6 Cr. There is further scope for increase in margin in case TPP is ratified and US exporter gets Duty Benefit of around 8%. The company then may get portion of that which would result in higher margins. Please note that above calculation are my working based on discussion in AGM and company has not shared anything expect Total Capex of Rs 20 CR (both phases) in Vietnam and Expected Sales of around Rs 40 Cr.
4) Domestic market
The export market performance was lower due to limited demand from large exporter. Hence, company started to focus on domestic market. Currently it supplies to Lux, Rupa, and Dollar. The company operates mainly on speciality products which are woven and have name/logo in elastic which get better realisation. The company has flexibility to manufacture mass market unbranded/named elastic where margins and realisation are lower. At certain period, when demand is slack from export/branded manufacturer; the company operate plant for mass market volume products. Overall, the company is well placed to meet market fluctuation and focus on value added/specialised product mix in domestic market has assisted the company to manage the market. Generally, margin in exports are better than domestic market. However, with increase share of specialised product the company is able to manage the margin in range of 25-30% which is sustainable. Going forward, demand for value added elastic growth is expected to show higher growth rate and there is very limited competition in that segment. That shall assist the company to maintain the margin.
FY16 results have three negative points vis FY15:
Increased share of Domestic market (generally lower margin)
Lower share of exports (generally higher margin)
Fixed cost of New Vietnam plant
Despite all headwind, by successfully changing product mix in domestic market, the company manage to maintain margin and expect same to be sustainable.
The company is exploring all 4 local plants and may evaluate to increase capacity depending on market. However, currently no plan to increase capacity as it is operating around 75-80% and looking higher share of value added product in the sales mix. The medical elastic and other new products are still under development and that would be new growth drivers.
While on production scale, globally may not feature among top 10 players (since still large portion of market is for unbranded elastic and mass market elastic which has lower margin), in ability to develop new products as per Customer requirement and ability to manufacture specialised product range, the company would be among Top 3 players globally.
5) Promoter related party transaction and investment in MF.
The promoter were inform about concern of related party transaction and also scope for increasing dividend pay-out given the comfortable liquidity position. The promoter promised to look into these matter positively.
6) My conclusion
In summary, we can expect continued growth in sales and maintained margin in FY17, specially from Second half of FY17, for Premco Global. Vietnam plant financial performance would be key variables in FY17 and FY1va8.
Other valuepickr member may also submit their view.
Disclosure: I hold shares of the company and my views may be biased.