Indian Terrain Fashions Ltd has informed BSE that the Board of Directors of the Company at its meeting held on October 23, 2015, considered and approved the following:
- Sub-division of 1 (one) Equity shares of face value of Rs. 10/- each into 5 (five) Equity shares of Rs. 2/- each and consequently, to alter the capital clause of the Memorandum of Association and Articles of Association of the Company. - (Good move to bring liquidity in market, currently hardly 500-600 shares are being traded daily)
- Alteration of Articles of Association in compliance with Companies Act, 2013.
- Approved the Related Party Transaction on purchase of property from M/s. Celebrity Fashions Limited, related party.(Not a good move, contrary decision to asset lite model, will reduce ROCE and ROE)
- All the above items 1, 2, 3 are subject to the approval of shareholders through a Postal Ballot & E-Voting, under applicable laws & regulatory frame work.
Feedback sought from senior boarders.
Disclosure - Invested from 600 level.
Company has given a detailed explanation of related party transaction. In essence, it says that property with warehousing is being purchased, which was earlier already substantially leased by the company (~80%). The Company now requires the entire space The annual cost of lease was 1.6 crore and for full property, would have been 1.8 crore. In view of this, they are purchasing the property for no more than 16 crore.
The property is situated close to the factories and thus provides good synergies and integration. Purchase of any other property for warehousing would have been far away and would have added to logistical issues and cost of transport. Increased warehousing is required, by the way, due to expanded product line up and e-retailing requirements.
Source: http://www.bseindia.com/xml-data/corpfiling/AttachLive/3D69D226_65CB_4654_BEB1_81C8C7062ACE_162004.pdf
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Just wondering if it is possible for somebody to confirm the rates in the same area to verify if the deal has been concluded at arms length. I did try digging online but didnât get much.
Regards.
Glad that someone is thinking independently and going into details
As a thumb rule always compare Sales Growth with receivables growth. Gives a lot of insights if sales are real or cooked up.
Im not saying that Indian Terrain has cooked up books, but this is definitely a red flag.
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@hrfacebuk - valuation has been done by two separate entities, including the companyâs banker, so I assume the price is fair. Also, if you think about it, paying 1.8 crore per annum vs one time price of 16 crore is a very fair deal - it is only 5 years of rent, not to mention the synergies that come with it.
@ashwindamani - thank you. I have high hopes for ITFL, and that makes it all the more relevant that one is careful. On another note, I have sent a physical copy of the letter, an email copy and a follow up to the company secretary but have received no response. Do you know any way I can pressure them to respond or at least acknowledge my mail? Does it count as an âinvestor grievanceâ which the quarterly results disclose?
It would almost be 9 yrs of rent I think on Rs 1.8 Crs. and 15 times present rent of Rs 1.2 Crs. None the less. Its just that I take any mgmtâs justification on related party transactions with a pinch of salt.
Regards.
You are correct, 9 years of rent. It will not be 15 because company needs more space and wants to take the entire facility.
Very good numbers from Indian Terrain
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/23A20535_5212_4705_934A_81D7915074D9_154029.pdf
One must note that last year festival season sales came in Q2. But this year festival season is in Q3. In that aspect result is very good.
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I thought numbers were average - EPS is up purely because of debt reduction and other income not so much because of operational efficiency.
Said all of this, I think indian terrain will do well - however, thereâs an extra risk that I am cognizant of - which is a linear growth in their receivables as unlike aditya birla nuvo, they control the last mile inventory which addds margins but adds significant costs and IMHO adds a lot of risk. This kind of operating leverage can cut both ways and can become a disaster if sales drops
I prefer a cash and carry, negative or a low WC model which is hugely cash accretive. Letâs see how Q3 pans out.
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My view â Open for discussion and feedback from veteran boarders.
- I feel results are pretty decent from all angles, sales for H1 is flat as compared to H1 last year despite delayed festive season this year. This means most probably we will see far better Q3 results.
- Operating margin for H1-2014 was 10.20% (15.81/155.35) which has increased to 11.29% (17.20/152.33) in H1-2015. Company had already indicated in their AGM that they are expecting margin to grow 1-1.25% annually and that it will peak out at 15-16%.
- PAT figures have increased by Rs. 8.1 crores from Rs. 9.04 crores in H1-2014 to Rs. 17.15 crores in H1-2015. This is due to increase of interest income by Rs. 2.5 crore, reduction in interest cost by Rs. 1.8 crores, diff in provision for tax by Rs. 2.4 crore and rest is 1.4 crores increase in operating income. In my view except Rs. 2.4 crore of provision for tax, rest 5.7 crore is genuine increase partly due to operating margin increase and partly due to financial structure change.
- ROCE part- ROCE for H1-2015 is very healthy at 27% approx. (Avg Capital employed is Rs. 125 crores and EBIT is 17.20 crore for half year.)(Capital employed = Cap + Res + Long term loans + short term borrowings â Current investments.) For me any that generates more than 24% ROCE, ie., > 2% per month is good model for investment, irrespective of whether is cash and carry or last mile investment model.
- Valuation â Due to delayed festive season, Q3 is expected to be very good, but even if it turns out to be decent growth, we can easily see 42-45 EPS for full year. (EPS of H1 is Rs. 24). So at cmp of 630, its still trading at just 14-15 PE multiple of FY16 earnings.
- We may see some positive revenue surprise from their Indian Terrain Boy brand, their new accessories launch or effect to TV commercials. Thatâs all additional benefit.
- The only point that I think is not their best decision is to buy that property of Celebrity fashions. That will unnecessarily reduce that ROCE and profitability. Anyways, considering the fact that there are benefited much coz of captive manufacturing by Celebrity and fact that celebrity is in needs of funds, it seems ok.
- Also one more point that I consider as positive point is recent entry of few visionary investors in this counter, BSE bulk buying shows Indian terrain has been bought by Kedia Securities, Malabar fund, and Om Kedar Investment (Prof. Shavanand Mankekar). (all at around 550 levels in month of January).
So to summarise, I feel there is much scope for business and valuation growth in near term in this counter.
Disclaimer â Invested at 600 level.
@dhawaldoshi
all of what you are saying is true - inspite of this being a big position for me, I shall say this again - this is the kind of business where cash has to be continuosly ploughed in for growth as they hold inventory. if they can work around that and palm this off to frnachisees/reduce WC days, it will generate FCFâs - FCFs are what count for a shareholder., The issue is that this businesss linearly needs capital in consonance with topline growth (may be even more). IMHO, a more enduring moat comes from BS related efficiencies like asset turns, WC days and reducing capital deployed than from margins. Increasing amounts of capital locked in WC increase probability of black swans - obsolescence, write-offs, bad debts etc. -
Look at madura garments ROCE - its 70% and their WC is much better. ITFL is somewhere inbeween an arvind and a madura garments (part of ab nuvo). Itâs a good business but we just have to be cognizant of the cash flow issue here.
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True.
Read in AB nuvo annual report that Madura is delivering 70% roce. Please let me know where can I get detailed balance sheet, profit and loss and cash flow of Madura garments. This would help to compare as to whats main difference and why is Indian terrain not able to get that ROCE or why is Madura garments getting that ROCE.
thanks for your valuable inputs.
Current investment of 59.07Cr is same in BS of March 2015 and Sep 2015.
What company is going to do with these amount. What is the purpose of rising more funds than required?
In my opinion, out of 75 crores QIP funds, they have prepaid long term loans of Rs. 16 crores. Of rest 59 crores, 16 crores would be indirectly used for purchase of land from celebrity, and remaining for working capital requirements, advt campaign spend and new product launch expense. Its very important that they use this funds productively to improve efficiency and volumes of their business. We need to keep close watch on where these funds are getting used.
Normally in QIP, company sees proper market conditions and raises funds for their requirements of next couple of years. So that funds will be gradually used. Proper use of funds is very crucial.
IMHO expecting it to give move like Page Industry is bit more to ask, but ya, good in depth analysis. Can be multi bagger from here.
Happy investing.
@dhawaldoshi
Management indicated that 16 crore would be funded through accruals & debt. Canât understand their rationale.
Not 100% sure but mostly when QIP was done, the purpose for QIP didnât had mention of buying land and thus they cannot use those funds for buying land. So they indicated that it would be funded through internal accruals and debt and not QIP funds. Thatâs the reason I wrote indirect usage of QIP funds for purchase of land. Again saying, I donât feel its best decision of management to buy land, but considering the fact that captive production facility by Celebrity is very much advantageous to Indian Terrain and that this deal would help Celebrity the most to come out of crisis, its ok and may be necessary to do.
More crucial is how effectively they use remaining Rs. 60 crores of QIP funds.
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True that, but sometimes synergies are not immediately apparent to outsiders. The biggest positive I see is in the long run, elimination of rent from expenditure. In the bigger scheme of things, 16 crores is not a huge number. If it is partly funded with debt, it should not take more than a year or two to pay it off with internal accruals, especially with the improved performance.
Q3 should be better than Q3 of last year purely due to diwali falling in Q3 as opposed to Q2 last year. So a few bumper quarters and the company should have sufficient funds to comfortably acquire the warehouse and not impact performance.
Can anyone highlight if the purchasing of warehousing would affect the working capital/inventory scenario? I do not think so, the operations will go on as before, only ownership will change. Still, asking if anyone has any insights in such a situation.
Diwali always comes in Q3 more often than not and so was the case last year as well 
