Hm. But do they manufacture Zara clothing in India? I think not.
Current investment of 59.07 Cr is converted into cash. Interesting to watch out how company use this cash. On the other side, company should have cleared some debt using the cash.
This report of Future Retailâs entry in âFast Fashionâ corroborates my perspective of Zaraâs success. Atleast in India this trend is catching up and people want fresh collections every time they visit the store.
I dont think Indian Terrain is in the fast fashion category. Which is perhaps better.
Zara runs on entirely different models than all the above mentioned companies or brands. (use Google to find more)
So it would be like comparing apples with oranges.
Now, regarding LP - itâs a Indian brand owned by Madura. They have bought branding rights for VH and AL (allen solly).
Though MBO route is difficult to scale up, it constitute a large portion of revenue for most of brands.
Itâs difficult to open EBO for smaller brands as franchise are hesitant (EBO requires far more planning / back end systems, assortment than traditional MBO channel). ITFL has just going for ERP, so this clearly indicate than they need more time to streamline their processes.
Disc - I own PE EBO and also run apparel MBO, selling VH, AL and PA (Park Avenue)
Hi Nikhil,
Since you mentioned that you run an EBO for VH, LP etc, what would your views be on ABFRL (sorry for raising this question on Indian Terrain forum 
regards
Ankit
I own PE (Peter England) EBO.
I retail VH (Van Heusen / LP) etc in my MBO.
Not tracking ABFRL, So canât comment.
You own and retail PE, LP and VH. But not tracking ABFRL. This is very interesting. Any special reasons or insights?
ITFL has pledged 22,22,046 shares to ECL Finance Limited against loans outstanding (new pledge notification). This constitutes 5.96% of the share capital.
It is interesting to note that 76,46,450 (68.97%) of the promoter shareholding is already pledged, out of a total promoter shareholding of 1,10,86,100. With this new pledge, the total pledge now increases to 98,68,496 shares or 89%. Of course, account for the issuance of 560,000 shares to the CEO earlier this month, the pledge ratio remains around 86%.
This is extremely concerning. At current market prices the pledge amounts to approximately INR 156 crore. Even assuming a worst case scenario that the loan against securities is only 25%, this would still be in the region of INR 38 crore. What is the purpose of taking a loan against securities? Is it for funding other activities of the promoter? Is it to fund the activities of the company? If yes, is it for the warehouse acquisition? If yes, why was a loan against the property itself not taken? The company had said the 14 crore acquisition would be funded partly by debt and party by internal accrual. If that is the case, I do not see why such a huge pledge has been given.
Something tells me that this pledge is not for the company but solely for the promoters other activities. Why would the promoters pledge the shares with an NBFC rather than a scheduled bank if the loan was of the company? As I understand it, NBFCs charge higher rates of interest than banks - so this pledge would also be on account of loans taken through the NBFC and not through a bank. As far as I am aware, ITFL would be borrowing from banks (see AR and not NBFCs). Further, if the credit rating of the company has been recently revised upward (intimation dated 01 June 2016) - then loan terms should be getting easier and not more stringent for the company.
Overall, I am getting pretty wary of the promoter actions in this company. I have a big holding in this company and while the 30% promoter holding did worry me a little earlier, that holding is almost entirely pledged now. And these further pledges make no sense in terms of the companyâs own growth path. Further, if these are loans for the promoterâs own activities, we as investors will have no warning if and when they default on the loans and a fire-sale takes place of ITFL shares.
In addition to this, it is necessary to delve into the possible reasons this pledge, if it is indeed for the companyâs benefit. If so, consider the fact that year on year receivables have increased to 95 crore to 117 crore = increase of 22 crore. The increase in net profit from FY 15 to FY 16 was 17 crore to 33 crore = 16 crore. The increase in top line was 290 to 325 crore = 35 crore.
What does this tell us about the company? The following:
- The entire increase in net profit is lesser than the increase in receivables. Can one say that the entire net profit improvement is stuck in receivables (and more)?
- As a corollary to the above, can one say that the top line improvement of 35 crore comprise of 22 crores in receivables?
If the above is the case, then the accounts clearly leave much to be desired. After the debacle in Tree House Education Limited, I am extremely apprehensive of wealth destruction through greedy promoters. In that case too, there was small promoter holding, almost complete pledging, good results till one day the stock price started declining, institutions sold shares in public markets, pledges were invoked, the promoter went scot free and investors were left holding ashes.
I am having serious doubts about what is happening in this company. If it werenât for the fact that I can see ITFL stores in physical form, I would have gotten out of this. Comments anyone?
P.S. apologies for the long post.
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Dear @Leading_Nowhere,
Thanks for raising pledge issue.
Pledging 85% of promoters holding is definitely a concern.
I have sold all my holding today.
Below are the reasons for my decision.
- Low promoter holding and more than 85% share pledge by promoters. Pledging is definitely for their personal use, because company have 60Cr cash in books.
- Poor capital allocation. Funds raised in QIP last year are still not used. Funds are still in cash.
- Increasing receivables more than increasing sales.
- Valuation. Though PE looks low at 17. Actual PE is 25.5 ( calculated by subtracting other income of 5.1 Cr from PBT of 37 cr and considering 30% tax)
- Shares issued to COO (5,60,000 shares or 1.5% or total equity) under ESOPs. At current price these shares worth 8.Cr. seems a very high figure
Disc: Exited today.
Dear @Leading_Nowhere,
Indeed a very informative post. Thanks for sharing.
Just a doubt in my mind about the corporate filing done by ECL finance. There is no mention in filing that shares pledged are promoters pledge. Isnât there a possibility that shares pledged are done by non-promoter? I see it as fair possibility, as had it been promoter pledge, corporate filing in exchange should have been done by promoters also and there is no such filing from company / promoterâs side.
Disclosure - Holding ITFL.
I did some more digging Dhawal. It seems if the promoters had indeed pledged, they would be required to make an intimation to the exchange under Regulation 31(3) of the SAST regulations. On the other hand, the acquirer is required to make an intimation under Regulation 29(1) of the same regulations. In this case, since the promoters have not made any disclosure, the same is likely to not be their pledge.
For coming to this conclusion, I went to Tree House Education disclosures on pledges (well, since their promoters create a pledge every month). Therein, the promoters created a pledge on 86,42,169 shares. This disclosure is available here. On the other hand, the acquirer, Hamlet Media Ltd made a disclosure of the pledge for the shares of the same amount, which can be accessed here.
In ITFLâs case, only the second disclosure has been made. So I think this would mean that the pledge was made by a third party. Unless a disclosure is coming soon from the promoters.
Earlier, I made a case for why it would not be the promoter. That post is quoted below, just to keep a record and not switch colors 
You are correct, that could be possible. However, I thought of the same yesterday and went and looked up the last shareholding pattern to see who would have that many shares (22 lakh to be exact) to pledge.
Among the public shareholders, there are 2 mutual funds with enough shares to pledge. I doubt mutual funds would pledge shares to raise capital or are even allowed to. Further, there are âbodies corporateâ with just a shade more than the amount that has been pledged. However, these were spread over 221 entities, so I find it unlikely it was these shareholders. In addition to this, there were 913 public shareholders holding 65 lakh shares or 17% of the outstanding shares. It could be one of these shareholders, but that one shareholder (or PAC) would have to account for the 5.96 lakh shares that were pledged. It is likely such a large holding would have been declared separately in the public shareholder list and not included in the 913 shareholders.
Among the promoters, Rama Rajagopal had 23.80 lakh shares that were un-pledged. Again, it could be these shares that were pledged.
The analysis may be interpreted as boarders see fit. I do think promoters are required to declare their share pledges, but I am unable to recollect whether the intimation to the stock exchange is supposed to provide who has pledged their shares. I am inclined to think that the promoters might not have pledged their shareholding, but my above analysis makes it difficult for me to reconcile anyone with a large enough shareholding to be pledging it.
We will know only when the new shareholding comes out sometime in July or August. Any thoughts Dhawal?
Dear @mmravindra,
My views on your points, (may be biased coz am holding itfl)
- Low promoter holding and additional pledge shares. Wait till its confirmed who has pledged the additional shares, if promoter, agree to your point that its negative.
- QIP funds. Many company raise funds in QIP for their capex requirement of next 3-4 years. Of 75cr raised, immediately 15 crores was used for repayment of long term loan. Of the rest 60 crores, mostly all is lying in cash or invested in liquid funds. As per QIP document, they are going to use it for store network expansion, new product launch and advt and marketing. I think they did all three things last year also but that got funded from internal accrual and thus that 60 cr is still cash/bank balance. To me, this is good sign.
- Debtors. Last year sales - 295 cr. Last yr debtors - 95 cr. This year sales - 325 cr. This yr debtors - 117 cr. This means 300 odd cr collection this year, right?? Also who all wud be their debtors?? Mostly their franchisee owners from whom they would have also collected deposits. Also note only 5 cr odd figure is debtor payment beyond 6 months. According to me, there are 2 different models, one cash and carry model, where u sell garments on cash only and earn lesser margin, second you sell on credit of 3-4 months and you get better margin. Both models are good till you are able to make profit from it.
- Valuation - If you subtract 5.1 crore interest from income, logically you should also subtract 60 crore cash lying in balance sheet from where this income is generated and then PE comes again at 17 odd levels only. I have considered actual tax rate as they are getting benefit MAT benefit.
- ESOPs - These would have been awarded some 3-4 years back and vested now by CEO. And I think there are some rules for ESOP. A company cannot issue as many ESOPs as want to their staff. Correct me if wrong.
Above views are personal and may be biased as I am invested in stock.
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Dear @dhawaldoshi,
Regarding valuation, yes we have to subtract cash from Mcap. PE could be 22.5, In my view may be the MAT benefits are for short term. After 2 or 3 years company have to pay tax at normal rate.
I was just checking Q4-2016 figures of ABFRL, segment EBIT of Madura division is 286 crore on capital employed of 1128 crores. That makes ROCE of just 25%. In their last AB nuvo report they claimed 70% ROCE, right?? Any reason for so much fall in ROCE?? Or am I missing something in calculation??
Disclosure - Invested in ITFL
June 2016 shp is out, pledge reported by ECL are not promoter shares. thank god.
Promoter pledge shares are same as it were in Mar 2016 shp.
And with todays upmove in share price, I smell good q1 coming.
Disclosure - Invested.
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Indeed, excellent news.
Also, there is a new shareholder - Ashish Kacholia through Suryavanshi Commotrade. See below:
We should see further appreciation in times to come because of the bandwagon effect. Todayâs move to all time high has unfortunately been completely swallowed by the market decline.
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Terrainâs bottomline maybe flat this FY despite topline growth.
In FY16 they have paid tax after accounting for MAT credit entilement. So MAT credit entitlement seems to have been exhausted and therefore they might be subjected to full taxation next FY, thereby keeping their bottomline relatively flat.
They do seem to have some Deferred Tax Assets (assuming to a maximum of Rs. 1.55 Crs. reflecting under Other Current Assets) but they donât recognise it and in any case that is relatively small.
So in short their bottomline would be impacted this FY.
Just posting on FYI basis.
Discl - Not holding Indian Terrain as of today.
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Other Current Assets is not deferred tax assets - take a look at the notes to accounts in the annual report for previous financial year and the year before that.
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They pay some tax every year in the last quarter, so this is not something new.
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They have not provided the accumulated losses in the annual reports, so one cannot say if it has been exhausted
Yes, correct. DTA doesnât seem to be part of Other Current Assets.
But they would still be subjected to full taxation and not MAT as their FY16 tax expenses include Current Tax net of MAT credit entitlement.
So if above is the case then bottomline does get impacted accordingly.
That is the way I read it.
Kind Regards.