Assumption: The Vietnam facility operates at 100% utilization. At 75% utilization, revenues = 38cr, EBITDA = 7.5cr, EBIT = 7cr, PBT = 5.5cr, PAT = 4cr. ROCE reduces to 38% and ROE to 55%.
Disclosure: Invested last year
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
- China USD 34 billion
- Bangladesh USD 18 billion
- Vietnam USD 17 billion
- 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.
Thanks
Disclosure: I hold shares of the company and my views may be biased.
28 Likes
I attended the AGM y’day along with Dhiraj Bhai, I’ll post my note inspite of an extensive one from Dhiraj Bhai. Please pardon any (or all 
) overlapping.
The co. witnessed no growth in sales on account of Hanes facing a slowdown also putting pressure on the export business. On the domestic market front, efforts were made to introduce high-end elastic for premium variants sold by local brands and for some exporters (job-workers) based out of Tirupur, the same contributed around 30% of domestic sales fetching a rate of Rs 16-18/meter. Sale of high-end elastic helped maintain operating margins inspite of slowdown on export front. For instance, the co. is a supplying smoother quality, highly stretchable elastic with brand name inscribed on it to Zoiro. The co. is optimistic of getting more business for high-end elastic in domestic market. Rest 70% of domestic sales were from plain-vanilla elastic that fetches a rate of Rs 8-9/meter, 60 days of credit is provided for the same. Plain-vanilla elastic sometimes helps fill up the capacities.
Vietnam facility is finally on stream, first shipment was done almost 2 weeks back. Pictures of the plant were shown to investors, the plant comprises of two buildings representing Phase 1 and Phase 2, both having capacity to produce 35 mn meters each. Total investment for both the phases is Rs 20 cr, Rs 12 cr has already been done for the same. Phase 1 is completely set up and operational while building for Phase 2 is ready and machinery will be gradually added keeping in mind demand scenario after Phase 1 achieves peak utilisation. 70 mn meters of full capacity is expected to be on stream by Jan 2018. The Vietnamese capacity at peak will generate sales of Rs 50-60 cr. The cost structure and margin profile in Vietnam is more or less similar to India. Vietnamese plant currently occupies 50 employees, 15 Indian and 35 Vietnamese, the plant will have an employee strength of 115-120 at peak. The manpower in Vietnam is highly efficient and receptive as per management. TPP to open up big opportunity for the co. going forward.
Management is taking care of not cannibalising Indian operations. Indian plant will always complement the Vietnamese pant in supplying to Hanes, in the mean while plan is to develop the high-end elastic market in India gradually so as to fulfil any capacities left idle due to shift of Hanes business to the plant in Vietnam. Currently, Hanes in Vietnam is procuring elastic from China and some supply will be cut down to accommodate Premco.
As per management, the co. is small in size but amongst leaders in industry to carry out innovation in elastic. The innovation done on raw-material front and end product front is difficult for a competitor to imitate as that would require aligning to the entire supply chain of the co., although possible but Premco has a strong lead and justifiable volumes. The co. is primarily focused on elastic application in apparel and not yet exploring other areas of application.
As far as y17 is concerned, 8-10% sales growth can be expected from Indian operations aided by value and volume both, plus Rs 10-15 cr sales from Vietnam on a conservative basis.
RPT concerns were openly discussed and management has assured to look into the matter.
Disclosure - Invested
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In my notes, I have conservatively put sales from Vietnam plant at Rs 40 cr although vaguely remember that management indicating around rs 50 cr or more. However missed to write that fire in my note which was very important and material which has been correctly out by you. Your note also increased expected profitability by 25% without any operating leverage in profitablity if the management walk its talk, which shall be good for all investor. That was a precise reason why I requested other participating member also to give their note. Due to your efforts, the commission error of Rs 40 cr sales from Vietnam gets corrected. Thanks for putting efforts.
My apology to Members for the error.
Regards
Dhiraj
5 Likes
Surprised to see a note by broker on Premco.
Discosure - Invested
Premco Global-IDirect.pdf (202.7 KB)
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technically not a ‘coverage’. simply a management meeting note.
Pardon me. Coverage involves rating, indeed. Made changes.
Premco Global Annual Report 2016 : http://www.premcoglobal.com/reports/PGL-ANNUAL-REPORT-2015-2016.pdf
All Latest Annual Reports could be accessed here
goo.gl/1yWivT
If management walks the talk on sales and margins this would be very interesting. Thanks @nikhilmoryani and @dd1474 on your AGM notes. Do you have any qualitative inputs on the promoters?
The stock has been under performing for quite sometime given the delay in commissioning of Vietnam plant. Stock trades at 14.9x FY16 P/E (@ Rs570 current price) with zero debt and 28% RoE with possibility of sales going up by Rs50-60 crs over next 2-3 year on a base of 74crs in FY16 which is 70-80% growth over next 2-3 years.
Disclosure: Invested
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When you ask “Do you have any qualitative inputs on the promoters?” I do not know what exactly you want to know as “qualitative” is very generic word. We hardly got time to interact with managment which was around 15 minutes post AGM. Within that time, you would appreciate that it would be too much premature and also unfair on our part to pass value judgement on the promoters.
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Volumes are very thin. Just 55 shares traded in 3.5 hrs today since morning. Daily delivery average these days is just abt 1500 shares (~0.04%-0.05% of total equity).
Disclosure: invested yesterday.
Any reasons for the sharp correction from 600 to 540 levels? I thought 2Q onwards Vietnam should start contributing
@vicky_7900…
Volumes are increasing now…i think consolidation seems over…
ready for a break out …
Anyone tracking this up lately?
Today’s volumes are 4 times ATV per day of last three months
i am having shares since 10 years and not a single instance i have found any doubtfull and significant objectionable transaction in books
i am tracking the counter of premco regularly and it has very low liquidity . very low floating stock. so when even if some one wants to buy or sell 5000 shares it gets upper or lower circuit.
also some one is intrested in cornering floating stock so whenever some selling comes and they come to know usually next day they come to buy
I am new on this thread, so first question which came to my mind is it seems narrow fabric industry boom started late whereas companies like Page Industries, Kitex’s growth story started 6-8 years back(to me it sounds to be similar industry). I checked balance-sheet of premco, they struggled to make profit till 2013, not sure why. Some other names which I came across but none seems to be listed are,
- Jain Narrow Fabric
- Gurukrupa Narrow Fab
- Priya Nerrow Fab
- Forbros Narow Fabrics
- BH Narrow Fabrics
Any idea of their profitablity?
Please refer to Sipca and other players details discussed over thread
Looks like TPP might not happen after Trumps victory. However this wont affect Vietnam as it has already signed several two-way free trade agreements . No impact on Premco i guess
“Even when polls tipped Trump to lose the U.S. election, Vietnam was hedging bets about the TPP in case the U.S. Congress missed its February 2018 deadline to ratify the deal under whatever president.
The Southeast Asian country has meanwhile signed and implemented a raft of two-way free trade agreements that could offset losses to exports from lack of a TPP. Among the confirmed trading partners are Australia, Chile, China, India, Japan, New Zealand, South Korea and the European Union. Vietnam’s trade negotiators are likely to keep channeling their efforts into bilateral deals rather than the Pacific Rim bloc. And those ties “are enough for an economy with nominal GDP of roughly $200 billion to capture growth opportunities in the years to come,” Hanoi-based equity market research firm SSI Research said in a note Thursday.”
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@kk82
Premco put a plant in Vietnam to benefit from TPP … correct?
Now TPP is gonna get scrapped…
Doesn’t it mean the capex and investments are going to take more time to pay returns to Premco from Vietnam plant atleast…
There will surely be an effect due to TPP if scrapped…
how much only …time can tell though