Virat Industries Ltd – Sock Stock

Stock Opportunities
1

I am not sure micro caps are allowed in this forum, I am just bringing this company to light.

If against rules this post can be deleted.

About:

Virat Industries is a Gujarat based Textile Company specialized in Sock Manufacturing.

Products: Manufacture cotton dress/casual socks, for Men, Ladies and Children on the latest computerized electronic knitting machines of Lonati and Matec from Italy and KTM from Korea. Socks are manufactured in Cotton, Cotton/Viscose, Wool, Acrylic, Wool/Cashmere, Wool/Silk, Cotton/Silk. Special yarn requests can also be developed.

Markets:

VIL manufactures excellent quality socks for export mainly to the European markets. The Company started its operations in 1995 and has successfully completed more than a decade in Socks business. The socks are manufactured on the latest computerized electronic knitting machines by Lonati and Matec, Italy and KTM, Korea supported with balancing equipment from Spain and other European markets.

Virat plays the role of a Contract Manufacturer who supplies socks against specific orders. Also provide design facilities as per customer requests.

Customers: include John Lewis and Ted Baker in the UK, Migros in Switzerld, Shoe Mart in the Middle East, Puma in the UK.

Production Facilties: capacity is normally based on size, design and style of socks. As per the prevalent pattern of production, the production capacity of VIL is estimated at 6 million pairs per annum.

The factory was designed and engineered by Gherzi Textil Organisation, Switzerland and their Associates Gherzi Eastern Ltd, Mumbai, India. VIL commenced production in November 1995. The project cost was around Rs. 85 million.

Awards: Virat has been awarded ISO 9001: 2008 Certificate by SGS

Winner of the BID Century International Quality ERA Award in Geneva 2013.

Positives:

Low valuations

High Dividend Yield

35% dividend payout and increasing YOY

No debt being Textile Company

Good growth shown recently

Experienced Management

46% promoter share and increasing.

Negatives:

Microcap â Not much information to judge correctly.

Textile Company â valuations may remain low

Financials:

2013

2012

2011

2010

2009

Sales

20.7

16.44

14.18

13.53

13.8

Op Profit

3.72

2.41

0.82

3.13

3.08

NP

2.22

1.39

0.87

1.46

1.83

Sep '13

Jun '13

Mar '13

Dec '12

Sep '12

Sales

6.92

5.25

5.39

5.09

5.5

PBIT

2.07

1.41

0.81

0.96

0.99

NP

1.37

0.93

0.52

0.64

0.66

Last Full year EPS is achieved in first half of FY14.

Compounded Sales Growth

10 YEARS:

24%

5 YEARS:

17%

3 YEARS:

15%

Return on Equity

10 YEARS:

20%

5 YEARS:

20%

3 YEARS:

18%

LAST YEAR:

24%

Investing Theme:

Company is specialized in Sock mfg and it is evergreen market like âinnerwearâ

Company is in Growth phase

Opportunity ahead with EU markets showing revival

Good Exchange rate driving profits.

Ref: Company Website: http://www.viratindustries.com

Disclaimer: Not invested yet

1 Like
2

Anybody tracking this company? The company is diversifying its clients and introduced his Own brand"Lord Walker" socks in Indian market. Also, the sales are improving marginally, although 14-15 reported low sales. I found a detailed report on the website
www.viratindustries.com/virat_website_development_final.pdf

Disc: Not invested, tracking

3

Looks interesting. Comparison with Spenta International will help.

Disc: No position in both

4

@nityanandparab

I too find the story worth tracking at least as there are number of positives that exist in story. Few interesting points for me

  • Virat has per pair realization upward of Rs.40/pair for few years while the largest players in the category (i.e. export of socks) Renfro India (an Indian subsidiary of Renfro which is the largest sock manufacturing company in world) has average realization in the range of Rs. 33-35/pair. Thus, company must be doing something right to command higher premium.
  • Company with sales of 20 odd Crores in engaging Deloitte as their auditor. To me this is a big positive as it may indicate the management is very cognizant about its accounting/disclosure quality.
  • Unlike many other players in the industry, company has maintained very decent margins (in the range of 15-20%) and very decent ROE. It’s cash generation has been in line with net profit consistently over few years indicating tight working capital management.
  • It has recently launched Lord Walker brand mostly on online portals and in selective regions in Mahrashtra. Average price for pair of socks is around 150-180 per pair. I have ordered couple of pairs and the quality seems very good.

Few negatives

  • Company’s topline has hardly grown in 3 years and volume have showed degrowth
  • Company’s own brand’s pricing seems to be much higher than the other market players. Thus, it remains to be seen how this strategy works. Other dominant players in the domestic market are Bonjour & Mustang
  • It is also to be noted that the industry dynamics in domestic socks market is very challenging due to existence of multiple small players giving the same offerings. Thus, the “brand pull” may just not work
  • In Sep 15, the receivables has gone up sharply. though, the reason for same is not yet known, it may be because of the “increased working capital cycle” in domestic market. If that hypothesis is correct, the working capital requirement may increase and it may bring down the return ratios and put pressure on it’s balance sheet

Disclosure: Holding tracking position @ average price of 55

1 Like
5

Hi @desaidhwanil Agree with your points. In fact I had looked at this company for the same reasons. And it looked interesting given they were launching the domestic brand. However, I do agree that creating a brand is a very uphill task in sock category. The company has a very small number of clients and they are very choosy before working with anyone, largely because of the terms of trade. They claim to have the best quality amongst all Indian mfg’s.

The dampner here was on growth. A friend of mine had attended the AGM and he mentioned that the promoters are extremely conservative and that is also one of the reasons why they aren’t working with many clients (This is largely positive in my view, though this has an implication on growth as well)
The key element of growth could be there domestic brand launch - ‘Lord Walker’.
I did try to do some on ground research on their brand it was just launched and not much info was available then. Maybe we can do more work on this and do some on-ground research about the pickup of their brand.

I think more than the brand - it will provide growth to the company. The base is small thus they can perhaps grow from here.

The space is seeing some action here -
http://www.business-standard.com/article/companies/renfro-india-to-expand-domestic-footprint-114102100903_1.html. Renfro which is one of the largest is a 400 Crore company and is now eyeing domestic market with their brand ‘Copper Sole’. They claim to be growing @ 15-20% as per the article above, They have an agressive target of 400 Crores over the next 5 years from domestic market!

Virat’s size is extremely small at the moment and getting a re-rating here is a function of growth in my view. Thus answering that part of the puzzle is extremely important.

1 Like
6

It’s important to understand what the company wants to do on the domestic market front. How are they going about creating distribution. Where are they planning to sell, and their budgeted spends on marketing etc.
If we are able to talk to someone in Bonjour/Mustang/Renfro then we can have a lot of insights about the nature/economics of the industry and if there is any trend that is undergoing in this niche market.

7

Hi Guys,

Even I worked on the company a bit and was pretty impressed by their balance sheet (especially working capital), cash flows & management practices like appointing Delloite as an auditor (given their size its a big thing; they charge hefty fees compared to other auditors) & good dividend payout. However, my major concern has been on volume growth despite realisations increasing considerably over the past six years. This is highlighted in the table below:

Even on realisation front, I feel major kicker would have been currency depreciation.

I feel the domestic venture (Lord Walker) seems to be just an optionality now and lets see how they progress in that given its a highly fragmented and competitive market. However, their pricing seems to be pretty high compared to some other players like Bonjour (I buy a simple black/blue sock for around 120 - 130) with majority of the socks being priced upward of 149 (source - flipkart/amazon). But they seem to offer better variety and designs. Also, one interesting thing to notice in the FY15 AR was that despite being conservative, they spent Rs.70 lakh for the launch of Lord Walker brand on advertising and promotions and even deployed outside consultants for that.

8

Hits the upper circuit… any reason?

discl: invested few days back around 72

9

@rohitbalakrish_

I very much agree with you that the real trigger for Virat is growth and as you rightly pointed out it is difficult to figure out. Though, one factor that will work in favor of Virat is the small size as the growth from a smaller base will be much easier and impact can be larger. However, I do agree that domestic socks industry is very competitive and it will not be an easy task at all to scale up. However, what is interesting is the analysis of Virat on economics and operating ratios with some of it’s competitors (And much larger)

Pasted image1058×221 10.4 KB

Few things that stand out

  • Very good operating margins and much higher than Renfro (which has major focus in exports)
  • Very good Return ratio that too generated from good margins and asset turns with very low leverage. This is non existent in any of it’s competitors
  • Relatively asset light business model for all players ( though apparently, export oriented companies have more asset light business model i.e. Renfro & Virat than domestic focused ones (Bonjour) - key factor to consider here is the impact of entry in domestic business on asset turns
3 Likes
10

Hi Dhwanil,

As always great analysis. I was trying to do a similar analysis., thanks for sharing it here.

On your asset turns point I think it is related to the WC cycle. Indicative of the competitive nautre of the industry.

11

Posting the link of other discussion related to this company in Q&A segment

12

Couple of observations

The company released an ad in Pune for their branded socks, Lord Walker. It said the socks are available in Mochi and other retail stores, as well as leading e-comm sites.

I checked online and indeed their product was available on the following sites

Amazon

Snapdeal
http://www.snapdeal.com/search?keyword=lord+walker+socks&santizedKeyword=&catId=&categoryId=&suggested=false&vertical=&noOfResults=20&clickSrc=go_header&lastKeyword=&prodCatId=&changeBackToAll=false&foundInAll=false&categoryIdSearched=&cityPageUrl=&url=&utmContent=&dealDetail=

Flipkart

i have ordered some socks online…will update you how they are once i use them

disclosure : built position once i saw the ad on friday

1 Like
13

I ordered a pair on flipkart and received it in time. Few observations - packaging was poor (sent in A4 size office envelope!), price was high, even if you buy 2 pairs of different types of socks from same buyer for same customer address shipping cost was charged 2 times. No reviews on Amazon. Socks are of good quality but I am not sure I would have ordered them if I would have no interest in the company.

Hence IMHO, there is long way to go for brand"Lord Walker" to become household name in India.

Disc - Not invested but watching.

14

While my wife was shopping at lifestyle store i decided to do some quick channel check. Then i bumped into premium “Happy socks” brand. Here is something for investors delight.

IMG_20151218_134418_HDR.jpg2368×4208 2.62 MB

IMG_20151218_134435_HDR.jpg2368×4208 2.11 MB

Discl: tracking position.less than 3% of portfolio

2 Likes
15

Further to my earlier post, the socks look better online than what they are in reality.

I also saw the socks available in the local market.

I feel the stock has run up more than warranted, hence have exited my position

mcap when posted ; 71 cr.

1 Like
16

Q3 results are out. Sales and PAT are up by 16%, even though employee benefit expenses went up by 47% due to lower material cost (I guess lower cotton prices are helping company). Not sure why employee benefit went up by Rs. 42 Lac for the quarter.

Another interesting aspect - Company is yet to file shareholding pattern for the quarter ending Dec but for Sept quarter, it has declared its MD Mr. Adi Madan is holding 2.4% of the company shares who is shown under “Public”. Now MCap of the company is Rs. 43 Crores. I think at this price, it is starting to look interesting.

17

great discussion. they seems low cost producer with pair socks cost around 38/pair approx in my view seems low cost producer.

this will allow them to higher margin and can compete with competitor. i have also order pair of socks and quality seems good after a month of use too.

their employee cost increase may attribute to domestic sales team addition based on earlier quarterly result explanation.
looking forward this annual report for domestic sales growth this year.

disclosure holding shares for long term investment

18

Any update on why the spike in quarterly sales. How much of it is volume. And from where has this growth come? Any updates on the brand launched domestically

19

Pardon my ignorance. I have not been tracking the stock. Any reason for the correction in last six months?

20

BEST IS TO WAIT FOR THEIR AR. THEY HAVE EXPOSURE TO UK AND DEPRECIATION OF POUND MAY AFFECT THEIR PROFITABILITY.
THIS STOCK SHOULD BE WATCH FOR DOMESTIC SALES AS MARGIN EXPANSION WILL COME FROM DOMESTIC SALES. COST AROUND rS 40 AND SALES PRICE IN INDIA IS AROUND 120-150.
SOCKS INDUSTRIES AS PER THEIR AR IS AROUND 3000CR IF THEY ARE ABLE TO GET 10% OF ITS SHARES IN TEN YEARS CAN BECOME 300CR MKT CAP COMPANY.