The company sees the following four as drivers of growth:
- Moving up the value chain with new products and own brand
- Entering new geographies to expand beyond the US
- Enhanced focus on existing institutional business
- Operating leverage created by the expanded capacity
In my view, lumpy growth can come in only when operating leverage kicks-in, which is unlikely before H2 FY19 or FY20 (demand growth for Indian textile/garment exporters has been slow over the past 12 months or so). All other drivers can offer incremental growth at best in the short to medium term since:
- moving from B2B to B2C, and establishing brand presence in the US is not very easy - it takes a lot of time (5 years or more) and investment
- expansion outside the US will also be slow since Indian exporters are challenged by the lack of FTA in the EU (as opposed to Pak, Bangladesh companies which have the FTA in place, and have a 4-5% cost advantage as a result). Other geographies (Middle East, Australia, etc) are small. On the Q1 call, the Welspun management indicated that while discussions are on-going for the EU FTA, but nothing concrete is on the horizon as yet.
- growth in institutional business is being challenged by the strengthening of the rupee, and Indian textile companies have lost business to Chinese competitors in past two quarters. This might reverse as and when the Dollar strengthens, but I have no views on if/when that might happen. The other challenge to institutional growth is that ICIL’s end-customers (large retailers) are being challenged by Amazon, so price hikes can be ruled-out in the near future (except those linked to RM movement). Online sales in this segment is very small right now.
On the positive side, cotton prices have started stabilizing so bottom-line of downstream guys like ICIL can be expected to remain steady, if not move higher, from Q3 onwards.
To your question on drivers of cheap cost – it is the low cost of manufacturing and abundant availability of cotton in India (a bigger driver). However, bare in mind that these two factors are applicable to all Indian exporters, so i wouldn’t really consider it a moat.
ICIL has one supply side moat – which is its asset light model wherein it outsources spinning and weaving work (vs. someone like Welspun which is vertically integrated). This is the core driver of the higher return ratios and profitability. This model will be put to test in the current weak demand environment, and I am going to closely monitor if it produces the desired hedge.
None of the Indian textile guys in this segment have any demand side moat (brand, purchasing power, etc). It might get built over time but not right now.
Once again, the hockey-stick growth in top-line that you are looking for can only be a by-product of institutional demand picking up (in absolute terms as well as migration of demand from other countries). Else, the ongoing capacity expansion by ICIL as well as other players will look like an asset bubble. Based on management commentary, such pick-up is a couple of years away, but should happen as it did post 2010. Either ways, trying to time that is futile, so you should invest only if you believe in the fundamentals of the business and the management quality.
I hope this helps.
Disclosure: Invested, but continuously looking for disconcerting evidence to re-evaluate my investment thesis.