Indian terrain---play on consumption

have been following indian terrain since 80-90 levels…

now at 85 cr mkt cap and with 175 cr revenue and decent margins…looks like a steady performer for future…

if these margins can be sustained…increased then such stocks sell at twice the revenues…

expert opinion please

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Vicky,

At vp we are trying to encourage ppl to do more work on stock ideas, specially when they are initiating an idea and a thread for it.

Sorry to say, but this post doesn’t look like a “decent job done” to me. Request you to do more work on this and update the thread with more information.

this quarter posted good numbers too
topline came in good numbers too

Hi all, this is my first post here. I hope I am compliant with all the rules for posting.

Has anyone been following Indian Terrain lately? The company has done very well in recent quarters. However, while going through their Annual Report for 2014-15, I noticed that accounts receivables have been piling up humongously in the last three financial years. In fact, the Accounts Receivable for FY 2014-15, at 95 crore, is now almost 30% of the total annual revenue of the company, which stands at 290 crore!

That means a full 1/3 of the revenue is not even coming in as cash but is ‘expected’ to come in. That naturally means that the profit figure of ~18 crore for the last year does not even fully exist, as it presupposes that these accounts receivables would translate into cash sometime down the line. Normally, I am not too worried about this, but the issue is that while FY 13-14 to FY 14-15 saw an increase in sales by 58 crore, the accounts receivables went up by 18 crore. Again, a full 30% of the increased sales have not been received in cash.

I thought this was extremely strange as people going to Indian Terrain stores would obviously be paying upfront for the product. If at all, the only explanation I can think of is that franchisee stores are not paying the company. I don’t see why this would happen, as the company would surely have some arrangement to not give their franchisees inventory without any payment or why they would continue having these franchisees when they’re not giving their due to the company. Now the question remains, a lot of franchisees would have to be screwing up in order for 90 crores of receivables to pile up.

So, keeping this in mind, I wrote to the CFO / Company Secretary J Manikandan. I received no response to my email, therefore I sent a physical hard copy of the email to his office address. It was delivered and received but I received no response again. The portion of my email dealing with this aspect is detailed below (for hard numbers):

Under the “Assets” head of the Company’s latest Balance Sheet, Item No. 2 pertains to “Current Assets”. Thereunder, it is stated that “Trade Receivables” have increased from INR 77.11 crore on 31 March 2014 to 95.62 crore on 31 March 2015. A further look a Note 16 which specifies details of Current Assets shows that “Others” has increased from INR 71.23 crore on 31 March 2014 to INR 91.04 crore on 31 March 2015.

A perusal of previous Annual Reports evidences that this is a trend that has been accelerating over the last three years. The AR 2013-14 shows that trade receivables of the “Other” category have increased from INR 61.80 crore on 31 March 2013 to INR 71.23 crore on 31 March 2014. The AR 2012-13 shows that the same has increased from INR 56.26 crore on 31 March 2013 to INR 61.03 crore on 31 March 2013.

Therefore, the increase in trade receivables of the “Other” category increased by 8.4% in FY 2012-13, 15.20% in FY 2013-14 and 27.80% in FY 2014-15. Further, this increase of INR 19.81 crore in FY 2014-15 is more than the entire net profit after tax of the Company, which stands at INR 17.98 crore.

In this regard, please clarify what this “Others” category represents? Whether the Company is having issues with recovering dues from its customers? If it is assumed that the Company only operates self-owned stores and sales are made on cash basis to customers, why has Accounts Receivables been increasing at such an accelerated rate?

Anyone as any thoughts on this? Is this normal for garment retailing companies?

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I will not talk about numbers. i am not convinced about the business. to me it looks like a me too. it will be very difficult take on brands like Allen solley, lp, van heusen etc. moreover, i haven’t seen a single exclusive store of indian terrain. they just occupy some small space in big malls. i have personally used their products. they are ok. but nothing great.

Indian Terrain has quite a few single stores…there are many in Delhi, including one in Connaught Place.

I hold the stock from 500 levels and track it actively. I went for the AGM here are notes

  1. IT boys has been launched - targeting the teens and the sub 20s
  2. e commerce is now 10% of the business from 10 % a couple of years back
  3. they plan to work closely with myntra, jabong to launch SKU’s
  4. they have an analytics team to work with e com
  5. they will grow 10-15 % this year with a 200 bps increase in margins and hope to continue the same.

discl: I invested thinking the company has a moat but now realize the company does not have one, as yet looking at their WC cycle. Unlike other brands, they want to integrate forward to claw back margins of 150-200 bps by investing into WC, which with the benefit of hindsight I have realized is quite capital inefficient. Adding 30-40 lakhs of inventory to add about 200 bps on about Rs. 1 cr. of sales is only about an incremental ROCE of less than 10%. I raised this in the AGM but the management talked around it.

Discl: invested but avoiding confirmation bias by poking holes in the thesis myself.

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Hi Varadharajan,

Thank you for the update. While the management seems to be quite intent on growing the business, you are correct that there is no moat. In fact, I never got into ITF thinking there was any moat. However, a home grown fashion retail brand with decent quality is something I feel will do well. At the same time, I was a little ticked off by the management not responding to my queries, both through email and through physical post. They also haven’t sent me a physical copy of the AR as I had requested. However, I do realize some managements are just not responsive, though this does not mean they are not working to maximize shareholder wealth.

Can you please explain to me what you mean by adding inventory to increase margins? I do not understand how the margins are increased by adding to inventory (and hence WC). Can you also explain to me how this is tied to the Accounts Receivable? It seems to be they are using the QIP money to do exactly what you’re saying, apart from setting up new stores. Does not seem a very efficient use of the capital, according to me. However, from recent disclosures and news I have come to know that some PE funds are still picking up shares around the 600 mark (Malabar Fund being one that picked up a big chunk around 600 a few weeks ago), so maybe the management does have plans to rectify this aspect in the near future.

I apologize if I sound quite uninformed about these concepts, but I try as much as I can and learn from individuals like yourself.

Regards,

Tushaar

Hi Tushaar,
I think he meant to say that working along with Jabong and myntra to sell garments online, Indian Terrain will hold inventory for them(jabong, myntra) and in return will command 200 bps higher margin by selling online. So holding inventory will cost some 30-40 lacs, and in return with 30 crs sales online (10% of total sales) incremental sales will be around 1 cr (that’s a guess I think). Not a wise decision, coz it will block more money in working capital and require additional money as sales increase, which is kinda anti-moat(coining a new term here).
Hope it explains.

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Definitely, it does. Thank you so much.

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As far as i know, QIP money is utilized only to extent of Rs. 16 crores and that too for repayment of debt. Rest all QIP money is parked in liquid funds. I had been to AGM and had personal discussion with CEO, QIP funds would be used for

  1. launch of new products like “Indian Terrain Boy”, they are planning to also start selling of other men’s accessories like “Shoes”. So funds will be used for design, product development etc.
  2. Advertisement campaigns, they soon are coming up with TV ads.
  3. Repayment of long term debt which they have already done and now long term debt is NIL.

On business front, they are confident of increasing their top line by 12-15% and EBIDTA margin by 150-200 bps. That should give decent growth of 25-30% in EBIDTA and added with reduction in long term interest cost of nearly 1.5-2 crores should help achieve PAT increase of 35-40%.

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Good to see Indian Terrain ads in yesterdays T20 cricket match with slogan “Where I Belong”.
I have only one doubt at this moment. Can anybody tell why Tax payout % is very less???

Combination of Increasing Accounts receivables and very less tax payout % rising the doubts of cooking the books

Disc: Not Invested

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Low taxes is because of accumulated losses before 2011.

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Also the pledging seems to be very high.

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Again it was because of Celebrity Fashions got into a lot of trouble. So that’s the reason for pledging. With a stronger balance sheet the pledging should come down now. They have already paid the LT debt

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Taken a small position. Need to study more to increase conviction. Thank you @rohibalakrish_ for ur answer to my question.

:+1:

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AR 2015: Surplus cash has been deployed in liquid funds and one Birla Sun Life Savings Fund - Growth, which is an equity fund. One one side, the company is looking to expand operations, made QIP issue, lowered down their debts and on other side, they invest (or may be trade) in equity MFs. Does not look good IMO.
Has anyone questioned the management on this?

Birla fund stated above is an ultra short term debt fund and not an equity fund.
On another note stock split from FV 10 to FV 2 has been approved. This news has been given to exchanges but results have not been notified.
A related party transaction has also been approved where ITFL has bought some property from Celebrity Fashions. Somehow I have never been fond if these 3 words ‘Related Party Transactuons’ ; awaiting details on this front.

Regards.

Oh yes. Sorry, my mistake