FAZE THREE LTD. --A Textile co. Rising From ASHES to GLORY

Stock Opportunities
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#Textiles sector has been in the news for quite a while now, as this sector is seeing many tailwinds one after the another, be it –
-Trade wars
-Scouting for sourcing from more than one
-country due to pandemic
-Ban on imports from China’s Xinjiang region -Various reforms & push from the local Govt. to reach aspirational target of $100bn of textile exports within 5 years from current $44bn. -Several incentives such as RoSCTL,MITRA, PLI and signing of new FTAs hv added fuel to d fire

-Various player in this industry hv already seen a massive rerating in their valns. -From yarn mfgs to garments mfg co., every player has seen a tremendous improvement in their profitability due to increasing cotton yarn spreads,increasing realization for the end product & China+1 Strategy.

-Among all this one co. which came to my radar, after a Renowned Investor Sir Ashish Kacholia bought stake in it & further topped it up later at a higher price.
The interesting thing is that,he bought it,after it was already 8x from its Mar’20 lows Stake- 4.63% as of 31.12.21

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FAZE THREE LTD. Promoted by Mr. Ajay Anand in 1985, is a mfg & exporter of home furnishing textile products mainly floor coverings.
CMP: Rs.343
M.cap- 827crs
P.E.-18.9

-Along with Mr.Kacholia, Promoters of the co. hv been openly buying from the markets every qtr.

  • In last 2 years they hv increased their stake by almost 6% & they are buying since 2017.

So, What does the co. do?
-They mfg. bathmats, rugs and top of the bed i.e. blankets and throws along with cushions (apart from bed sheets & towels that currently other listed players specialize in)
-Bath mats & rugs contribute 80% of the revenue

History -Founded in 1985 with operations out of Panipat, Haryana, FTL came out with a public issue during the year 1995. -FTL has 6 manufacturing facilities at Panipat, Silvassa and Vapi.
-More than 90% of its turnover is from exports (US-60%, UK/EU – 30%,ROW-10%)

Client base -Comprises of very large retail chains in USA, UK, EUR etc. -Top 15 customers contribute around 80% of the revenue and no single customer contribute more than 15% of Rev. -Their relationship with top 15 customers is almost 2 decades old.

Me too co?
What’s unique about FTL is that d space in which it operates,is not crowded by Indian Textile Giants like Welspun ,Trident etc. Although Welspun is present in some of its product basket but the market itself is so large that every player can get its own share.

-FAZE 3 mfg those products which are clear beneficiary of CHINA+1 theme

-China is d major exporter of Rugs and bathmats to US and as per the mgt there is huge unfulfilled demand from existing customers due to shift in sourcing from China to India.

Management Quality -In every small cap co. major risk/concern is about the mgt quality or any corp. governance issue.
-After going through its past 10 Annual reports, nothing have come to light which highlights any corp. gov issue.

Management quality can also be accessed from the following points:
1.Salaries Drawn: -In 2010-11
Salary drawn by Mr.Ajay Anand=34.56lacs ,Mr.Sanjay Anand=17.64lacs

Salary Drawn in 2020-21 Ajay Anand =68.61lacs Sanjay Anand=38.40lacs -Total =1.07crs (4.28% of N.P)

-Although Mr.Ajay Anand hv already got the shareholder’s approval to inc his salary to 98lacs in 2018 but still he drawing salary lower than d approved limit

2.Dividends: After turning around the co. & paying of its major liabilities in 2017-18, the first thing that co. did was to declare a dividend of Rs.0.50/share after a gap of 10 years & another dividend in 2020.

-Dividends seems to be on the lower🔽 side but not to forget co. hv been on investment spree after 2017 turnaround and preparing itself for higher growth in coming years.

  1. Next gen promoter- Mr.Ajay Anand is nearing 68yrs old now & his son Mr.Vishnu Anand is preparing himself to take the control.
    -Here’s an interview of Mr.Vishnu Anand in which he talks a lot about the ethics & Culture in the co.
    Innovation and Trends in the textile industry with Mr. Vishnu Anand, President of Faze Three Ltd. - YouTube

Why Growth was slow till now?
Lets go back to 2010 to understand this.

-In 2010 world economies were still struggling with the after effects of GFC 2008,as a result of that d demand for home textile was subdued.
-They had a subsidiary in Germany which suffered heavy losses.

  • After analyzing the European market conditions and to mitigate the further losses, the Board of Directors decided to file an insolvency petition in the German court.

-As a result various write-off were done which effected the profitability.

-The corporate guarantee of Rs.29crs was invoked by the Canara Bank London. -Along with the Corporate guaranteeit there were FCCB bonds which were due to be redeemed but co. could not redeem them because of financial stress.

-Inspite of that co. was able to grow its topline but the bottomline was affected due to various write-off and provisions. -The turning point for the co. came in 2017 when promoters raised funds by issuing Preference shares & warrants to promoters & non- promoters entities.

-FTL made a Preferential Issue and Allotment of 81,00,000 Equity Shares and 30,11,203 Convertible Equity Warrants (Rs.20/share)on October 15 :dollar:Total funds raised 22.22crs (Promoters infused – 6crs) Details​:point_down:

-Then Again in March 2017 They did Preferential Issue of 319000 equity shares and 845500 Convertible Equity Warrants @ Rs.110/share
Mr.Ajay Anand Infused – 7.7crs Details👇

-These funds were used to settle all the prev. liab. like corp.Guarantee ,FCCB bonds & all the impending long term liab. were settled.

Another shot in the arm for them was d start of US-China Trade war due to which they started gaining more attention from their global clients.

-Mgt focused aggressively to capture the market share vacated by China.

-They started developing outdoor performance textile products for some of their large customers , which were earlier sourced out of China.

Even the guidance Trajectory changed dramatically after 2017

Along with warrants Promoters continued inc. their stake in the co. from d open market (Skin in the game)

-They realigned their product and customer mix which lead to improvement in margins & at one time they were struggling to pay off their liabilities

but now they were undergoing capex & that too funded by internal accruals. -Mgt guided for even better results for FY20 & despite the COVID they were able to achieve it. Fast forward to FY21 – Mgt reiterated their guidance to 2X their turnover of FY21 within 3 years

CAPEX PLANS

So until now it was all about past, now lets look what is going to happen in the future. -Their capex plans-Looking at the size of the opportunity co. has decided to invest 80crs from internal accruals in order to inc. their capacity by almost 3x by April 2023.

-With a targeted asset turnover of ~8-10x of new capex,the company has chalked out a plan to build FTL’s revenue to 1500 crore in the next five to six years (from current- 480crore)
3x Current Rev.

FINANCIALS💹 Now coming to the financials -Co. is long term debt free & the short term liabilities comprises of Packing credit facilities only.

-Ebitda margins are expected to sustain around current levels despite higher RM and other costs.

  • Return Ratios for 9MFY22 are healthy

Valuations

At CMP Rs.344 the co. is currently trading at 14.7x FY23 EPS est. :point_right:Topline is expected to grow exponentially over the next few years along with decent profitability.

RISK-
Foreign currency risk – since 90% of its turnover is from exports, there could be risk associated with currency fluctuations
-Slowdown in demand from US and European markets

  • Significant increase in RM prices

  • Execution risk – Inability to utilize expanded capacity successfully could impact the financials of the co.

This is not a Reco. So kindly consult with your advisor before investing.

Disclosure: Invested and Biased

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what is the future of textile industry, does it only depend on exports ?

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I’m from Panipat and did some scuttlebutt by asking a friend who is also into the export of bath mats, rugs; and he also knows the promoters in person.
He told me the promoters are very reputed in their industry and they have never heard anything bad about the company or promoter.
I also asked him about the export demand from the US and other countries, Since my friend only exports to the US so he told me earlier there was not much demand but in the last 2 years the demand has gone up at a faster pace and they are seeing the same trend but he also mentioned that competition is going high in this industry.

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Textile industry is expected to grow not only in domestic market but also in international markets due to change in Trade relations around the world.
For FAZE 3 they only focused on exports from the beginning itself, domestic market on the other hand faces alot of competition from unorganized players and there are no quality standards required in order to sell in domestic market.

But in the international markets, the quality standards required by Retail Giants are very high, so its difficult for smaller players to enter and get the share.

Now Rugs and bathmats were mainly dominated by the Chinese but after Trade wars,cotton ban, Covid etc. that gap needs to be filled by someone, that’s why the opportunity in exports is large.

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Thanks for the inputs.
Yes the demand scenario have changed dramatically in last two years & as a result of it competition might hv inc. to some extent but opportunity is quite large.
Having been in market for about 3 decades they should be having good relationship with their clients.
Otherwise why would they try to increase their capacities by almost 3x.

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Company has done Rs35crs profits in 9MFY22. Extrapolating 3Q profits as 4Q profits conservatively company should do Rs47crs in FY22. Company has a market cap of Rs830crs. Stock trades at 17.6x FY22 P/E with revenues expected to double in 3 years and triple in 5 years

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The promoter Ajay Anand and Ashish Kacholia have added at Rs288 levels. Stock currently at Rs340 levels

Disclosure: Invested

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Nice Podcast : Discussed in detail Journey of Faze Three by Vishnu Anand President Faze Three

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Have already shared this video but unfortunately it remains as a simple text link without proper thumbnail.

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While FY21 and FY 22 has been good for India textile industry, FY23 seem to be starting with trouble on Input cost pressure on cotton - both high prices and availability deficit. Per article India is losing market share to neighbors in dominant categories such as bed sheet etc.( look for welspun comments)

Per article, removing import duty can solve the issue to great extent, various representation are being made, Textile being sensitive sector hope to see some interventions.

Needs to be seen how Faze navigate these times, usually organized firms execute past orders on agreed prices in lieu of long standing relationships, taking hit on own books.

Tracking positions.

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Order Booking is already low with many Textile Giants like Trident,Welspun etc.
Reason - Low demand from the US.

But the products in which FAZE 3 operates could still fare better than the mass product segments like Terry towel & sheets in which India has the majority share.

What FTL is doing,is actually replacing the Chinese players, which have the majority share in their segments,so it might perform well even during the low demand scenario.

These are my opinions, concluded from whatever info i hv been able to gather till now and i could go terribly wrong too. Lets wait & watch.

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Thanks @Aditya942000 for thread. Your story telling way of post is quite good.

Last 2 yrs performance

Summary

  • Competetitive scenario - As of now they seem to be only scaled supplier from India in core categories, can’t current giant enter and eat into Faze product lines as bigger competitors? Money should be minor issue, relationships and technical capabilities may play some role but that is there something more?
  • Very healthy margins- Faze has demonstrated increase in margins in last many quarters where peers are hit by RM issues - some possibilities are - Utilizations/ Product mix/ some pricing power/ Strong tailwind in absence of global supplies as well as China+1 being in execution helping Faze
  • Faze gross margins has been 50 to 60%, and at upper band in q3 - indicates ability to sustain margins - RM front Sourcing or supplies efficiency is visible.
  • Employee cost as % has been coming down, AR also talks about process improvement and automation focus - outcomes are visible.
  • Goes without saying that Internal accruals based Capex, promoters increased stake as well as promoter salary points are well covered in first post. All pointing to a healthy future.
  • Valuations - per mgmt commentary FY24 at 650-700 cr revenue and 18-20% margins, 130- 150 Cr EBDITA, 80-100 Cr profits( normal tax rates ), even at 20 PE market cap could be 1600 to 2000 cr range -current market cap being sub 900 cr. Market being forward looking it can happen sooner as Q1 and Q2 23 numbers start to reflect throughput of new capacities.
  • Investor friendly steps- Presentation of Qtrly results is welcome step, more steps like quarterly con call and listing on NSE will further help on market perception, though Ashish Kaxholia stake buy has already got them into some limelight.
  • Healthy range based consolidation on charts in last few months

Risks

  • Competetitive intensity
  • RM cost - though they have demonstrated ability to deliver here
  • Scale up phase of new capacities - again with demand scenarios called in AR, doesn’t. Look like much impact on financial and likely fast scale up - to be seen
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Govt seem to have exempted import duty on cotton - this was very quick action on govt part. Source - ET news feed.

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Great Work @Dev_S, you managed to cover all the points that i missed out on.

As far as scaling up is concerned i feel they should be able to reach their target of doubling their turnover in 3years quite early than projected, provided the external environment stays healthy.

As far as margins are concerned, they might not be as strong as they seem to be till now. Even Vishnu Anand,in the interview, accepted the fact that they face difficulty in passing on the price increase & hv to fulfill orders even at reduced margins.

Very true. Eventually they will try to enter this space and it will become crowded at some point, but till the time it happens FAZE3 would have already scaled up their operations. Not to forget the Size of the opportunity.

I don’t hv any doubts regarding Mgt capability in scaling up operations,the way they hv transformed after 2017, gives enough confidence about their execution capability.

Further support from the govt. like this

will definitely add fuel to the textile sector.

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While looking at peers, the trend has been a hit on Gross and operating margins as well with commodity prices like cotton below,

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  • Last few qtrs have shown across the industries that unless you have pricing power, there is margin hit, no matter who you are( except Commodity players themselves or Solid brands or folks like CRAMS players )- - case in point barring exceptional cases in manufacturing setups, margins were hit across the board over last many Qtrs

  • What seems to be interesting in case of Faze is - steady gross margins operating margin expansion - with material and employee cost both trending down as % - unlike peers

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  • Someghing in q3 results Deck stands out - they pay advance/fast to suppliers!!!

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  • Let’s take a look at long term ratios - 2018 onwards there is a drastic reduction in payable days, reduced to 20s, earlier used to be 100-150 range, also notice cash conversion cycle and inventory days near 200.

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  • If we zoom in above trend in latest qtrs, similar change across all ratios, Payable days further down to teens in deck updates - ( however numbers reported for 2019, 2020, 2021 in deck doesn’t reconcile with screener data in above screenshot - need to figure this out if they have factored for half year only for each year - views invited)

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Summary

  • 40 cr spent on tech/upgradation/automation between 2017-2020 is helping with higher throughput and cost leadership, employee cost as % of sales coming down, operating leverage would be helping as well
  • Paying advance to suppliers is helping with RM stability and price predictability, hold gross margins, infact improve it with product mix lever as seen in recent qtr trends. Think it this way if I know my cotton supply is committed at X price for next Qtr, I know how to build my end customer prices for next Qtr( assumption here is that these are not long term contract and with supply chain issues globally, supply security matters more)
  • Sum of above two is also helping with higher asset turns, thus improved ratios across board
  • Given ongoing FY21 Capex is live between Mar 22 and June 22 - margins should hold and improve too if above thesis holds

While above doesn’t look like what others can’t do, infact Faze themselves used to squeeze vendors till 2015 with 150+ as payable days( now near 20), many peers like welspun etc still do, however sensing supply security importance Faze has reversed the course and coupled with operating leverage, demand momentum, well placed to make most out of it.

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Glad to see a thread on Faze Three on VP. I initially got attracted to this company as it was one of the few textile manufacturing companies which were in segments that were not already dominated by India: bath rugs (synthetic and cotton), area rugs, pillow covers, comforters, etc; leading to a strong China + 1 growth narrative. Being a yarn supplier to Faze Three, we were also impressed with their sourcing capabilities which, despite their smaller scale were arguably on par/better than their larger counterparts. Lastly, next-gen was in the management team and seemed quite hungry to grow the business while doing things the right way. These three factors along with the low valuations, were enough to initiate a position.

Since then, the story has gotten better and better:

  1. They announced a large capital expansion: increasing capacities by 2-3x for an outlay of just 70 cr. I was puzzled by this. If you see peers, normally they need to spend 100’s of crores to enhance capacity even a little bit. If you see, the further down you go in the textile value chain: the less asset intensive the processes become. Spinning being the most capital intensive. Faze Three doesnt invest there. It pretty much does only tufting, processing , cutting and sewing. It seems they had some spare processing capacity and also rugs doesnt require much dyeing and finishing. Hence, the asset turns are extremely healthy.
  2. Doing some basic numbers: If we assume the new capacity can enhance revenue by 400-500cr, at 20% EBITDA margin; EBITDA can increase by 80-100 cr for an increase in capital employed of 270-320 cr (including WC at 180 days). Incremental ROCE on this investment looks like 25-30% which would make it among the most capital efficient textile companies.
  3. While I am concerned about competition, the company clearly has a head start. It will take 2-3 years for larger peers to setup their own facilities, commission and do sampling during which Faze Three can take substantial share from China/Turkey.
  4. Q3 results were also very suprising. The larger textile companies struggled to pass on the increasing costs and we saw a margin hit. On the other hand, Faze Three was able to largely mantain margins. Why should this be the case? The reason is because while the larger companies mainly do replenishment program based orders where prices need to be passed on, Faze Three largely does one time/promotional orders where pricing is negotiated every time; making it much easier to pass on rising costs.
  5. This also means that there is a large growth opportunity ahead for Faze Three by tapping into some of these replenishment program orders for their categories. If they can get 2-3 of these programs while there is limited capacity for their products available in India; that is your doubling of revenue right there. Need to watch out for management commentary on the same.
  6. ALong with the above, the company is also investing in technology/ERP, etc as mentioned above which is required to scale up.

All in all, looks like one of the best textile stories in the market today. 25% incremental ROCE and 30-35% growth expected over the next 3 years. Paying 20x PE seems more than reasonable. A screener search for companies that have delivered the above throws up a lot more expensive names.

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This development on Interest subvention scheme seem to be quite helpful on bottomline for Faze, also explains why Faze hasn’t applied for PLI schemes( those opting for Interest subvention aren’t eligible for PLI and vice versa), in quantitative terms at current rate the bottomline gets a boost by 6cr( q3 annualized) which at current valuations comes to about 100 cr+ boost in mkt cap. Though RBI release is dated March but is applicable from 1 oct 2021., as long as Faze qualifies - Q4 nos will reflect same.

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Q4 SHAREHOLDING - Ashish Kacholia has further added some small qty in Q4.

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Great Inputs @Dev_S , but would like to have some clarity on your point of 100crs+ boost to valuations.
6cr (Annual Gain) turns out to be an Eps of Rs.2.47/ share (6/2.43)
Even on the TTM P.E basis it turns out to be 50crs gain in M.cap instead of 100crs.

So,Would like to understand the calculations behind 100crs+ gain in M.cap?

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@Aditya942000 See it like 44 cr TTM profits gives them market cap of 840 cr, thus 6 cr Additional on bottomline adds another 100 cr there about. It’s a different thing that Mr Market is yet to factor it :slight_smile:

While we are at it, they are also on elevated Tax slabs of 30-31% while most of corporates have moved to New tax regime of 25.6% type. This could be another, profit kicker as well, not sure when though, given they said they chose higher tax rate for FY22, one would assume FY23 it should normalize.

Above are goodies but as long as core biz delivers, we should get well rewarded. Given current China lockdowns extending, Faze do have a good window of opportunity to accelerate growth, would be keen to hear order book commentary. @yrm91 post has good insight on Faze order model being Campaign/promotional pattern, that being the case - gives opportunity to make most of supply disruptions.

Invested and adding in dips

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Textile segment update from a peer Century textile( not strictly comparable as have domestic focus and apparel biz), though gives a sense of demand and supply aspects, some challenges on demand and margins called out for FY23 on US biz front.

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Let’s see how Faze delivers, has demonstrated resilience in last few qtrs.

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