Indo Count Industries ~ Global Home Textiles Bedding Segment Leader

Have you checked its earning sensitivity with cotton prices? additionally, I think I mentioned somewhere the effect of Yuan depreciation. It is at 5 yr low and seems to be determined to get export competitiveness back. I may be wrong but textile exporters’ outperformance seems to coincide with cotton price deflation over the last few yrs. Now it has started rising once again.

Disc.: No holding

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Thanks for your input Sumit. :slight_smile:

To quote @ramakanthThis comprehensive report by Motilal Oswal (http://www.researchbytes.com/Indo-Count-Industries-Limited-I0159.htm) clearly mentions that the revenue split is:
81% - bedding
16% - spinning and
3% - consumer goods and that going ahead they are focusing more on the bedding business and its various verticals.

With 84% (81+3) of revenue coming from non-spinning, cotton prices should not have a significant effect on their margins. Would you agree?

Moreover, for the bedding and consumer goods, the company should be able to pass on that increase in cotton prices to the consumer just like diesel/petrol prices go up and down with increase and decrease in crude prices. Is this assumption correct on my part?

I agree, Yuan depreciation is something that needs to be monitored. To counter that the recent incentives announced by Govt. of India should be able to cushion that for a couple of years. And with Chinese government manipulating Yuan, it is anybody’s guess, which way it will move. But I agree, that Yuan depreciation should be monitored in order to get an early hint of an exit.

Hi @lavpatel,

My thinking was in similar lines as yours. But with prices of cotton rising as much as 30-35% needs to be seen how much can it pass on to its costumers. My understanding is it is still a B2B business rather than B2C as it mainly sells to retailers, esp if suppliers from other countries can supply at much cheaper prices, how much can it preserve its share? This is a good testing time for the business model of indo count to see the effect of cotton prices on its business and if it can keep the margins and profitability intact? But as it is continuously shifting its product mix towards premium segments and fasion, institutional and utility bedding, some of the increase in realizations/margins may offset the cotton price rise effect for some time till the cotton prices soften in a year or so.

Disc: Invested with 10% of pf at around current levels.

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Hi Anjaneyulu,

My thinking is that since cotton prices are universally the same (its a commodity), it should in no way result in loss of revenue for ICIL. i.e. if cotton prices are higher for ICIL, they would also be higher for other supplier from other countries since cotton prices are universal. So other countries would not have any advantage because of the increase in cotton prices. Worst case if ICIL is not able to pass the increase in cost, then it would affect its profit margins, but it should not have an impact on its revenue or market share. Would you agree?

And since they are focusing more on the higher end of the market, eventually in the long term the fluctuations in cotton prices should not matter.

@lavpatel, i felt in short term depending on local conditions, inventory levels and supply constraints the prices will vary a bit, since india has domestic cotton crop issues right now, the price rise may be higher in short term but yes over medium term the global prices should probably move in same direction depending on global supply and demand. In 2009-11 cotton price rise period it does seem to effect indo count margins but product mix i guess has changed now significantly towards more value added home textiles. Cost of materials consumed in FY16 is still about 50%, so i guess it may have a significant impact in short to medium term but how much the effect can be masked by incremental revenues from high margin products need to be seen.

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Extract from FY16 AR

Raw material Price Risk:
Cotton being the base raw material for the Company’s
bedding products, any increase in cotton prices will impact
its margins directly. Another factor related to cotton prices
is the movement in cotton to polyester price ratio, which
when higher may lead to a dip in demand for Company’s
cotton based products.

Risk Mitigation
Current situation in the industry, with high cotton
production and excess yarn capacity in India, is highly
amenable to a stable price scenario for the Company’s
raw material base. Irrespective, the Company follows a
procurement strategy of partnering with its raw material
suppliers by extending better credit facility and buying
the latter’s production capacity. With its made-to-order
approach to manufacturing, the Company is able to
incorporate variations in raw material prices in its pricing
decisions so as to protect its manufacturing margins. This
approach helps facilitate lower inventories, shorter working
capital cycle and capability - based competitiveness.
Company’s presence across the bed linen product basket
in the mid to high segment insulates it to an extent from
changes in highly price sensitive customer demand that is
linked to the movement of cotton to polyester price ratio.

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Hi Anjaneyulu,

Thanks for pointing this out. :slight_smile: Cotton to polyester price ratio makes sense when thinking in terms of market share to an extent.

Sometimes I get blinded by the positive things that I read. Appreciate your views.

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Welspun india results are released and I am attaching its investor presentation and a report from Edelweiss which has concall highlights. Both have some industry related points which may be relevant for indo count as well. Some of the points I noticed from the attached two docs

  1. Recent spike in cotton prices do not have an immediate impact on welspun margins but edelweiss believes if higher cotton prices sustains till September and beyond it will impact margins but management in concall are confident of maintaining margins despite rise (so it is able to pass on the price rise to constumers?).
  2. Slide 10 in investor presentation shows how well Indian players took US market share in cotton towels and sheets over last 6-7 yrs and indo count hopes to do the same in other segments such as fashion and utility bedding, but as mentioned in concall notes, welspun does not see india grabbing major share in top of the bed category (need to listen full concall may be to know why they believe so).
  3. China 1. While the recent spike in Indian cotton prices is worrisome, Chinese cotton is still 17% more expensive (so cotton prices vary among countries may be coz of different varieties? @lavpatel 2. This cotton advantage along with existing labour advantage should help Indian companies maintain their advantage. 3. The cost differential will not change too much.
  4. WLSI wants to outsource yarn manufacturing for towel and sheets whereas fabric will be outsourced only for sheeting – Now welspun also seems following indo count way in outsourcing yarn manufacturing
    Welspun ind Edelweiss Q1FY17 result report.pdf (304.2 KB)
    link for welspun Q1FY17 investor presentation
    http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/08081961_DC34_42EC_A9B6_13667362D26D_142923.pdf
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Board to consider Sub-division of Equity Shares
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=1ad09e7b-9249-4a7a-9cc9-21f7e58e2a51

A good move to increase liquidity considering high promoters holding at almost 59% and that the stock has appreciated a lot in last few years.

Disc: Invested.

Q1FY17 Result
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=a4d649c6-5287-4fe1-8b52-70797baf3263

Board approves Sub-Division of Equity Shares from FV 10 to FV 2 (5:1)
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=4449954e-ab33-4fc0-8664-2013f11e97b7

Investor Presentation
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=6ad72203-5153-474d-8ee5-bdf5231a7507

Welspun issue spillover not a concern for Indo Count, says ED
(None of Indo Count’s clients have asked for clarification on quality, says Kailash Lalpuria, Executive Director the company adding that a robust system is already in place for quality control.)

Disc: Invested and Accumulating

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Super. Thanks for posting this Aksh

One question I have on management quality . The company had undergone CDR during 2008.link is here


Reason being huge currency hedging losses. Is it sheer bad luck or was it greed to make money through hedging instead of playing safe ? If it is greed , then, it can play again until once beaten twice shy.
Disc : hold more than 2 percent but still exploring

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This stock has been a hundred bagger in last two years.
The sector may still double in next 3-4 years but the hay days are behind us.
I don’t expect any more PE expansiton, makes sense holding only if there is a massive bull run ahead when all stocks grow.

Disc: Not holding, Reduced textile exposure to 5% of my portfolio

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While checking the consolidated balance sheet of Indo Count I found that between 2016 & 2015 the Share capital (under ShareHolder’s Fund) was reduced from 41.9 crores (in 2015) to 39.47 crores (in 2016).

Does that means they bought back some of their shares ?

There were Non - Convertible Pref. Shares of 2.5 cr which were repaid. This can be confirmed from cash flow statement under financing activites - Redemption of Preference Shares Capital.

Company is addicted to debt (even though CFO says they are not) and has a history of getting into debt trap. Many textile companies suffer from debt addiction because govt offers some or the other kind of debt / equity scheme as this sector generates lot of jobs for low skilled workers.
I think the textile sector took off when BT cotton seeds were approved in 2002. Since then cotton yields and production has quadrupled. However, the story has largely played out and from now on this is a cyclical story and not a secular growth story.
IMO only the downsteam companies (garmenting) are worth looking at. Upsteam companies (spinning, weaving, processing) companies are capital intensive and debt heavy. Companies take pride in saying that they are vertically integrated manufacturer but that’s a bad strategy. Upsteam companies have to be large with access to low cost capital and should be a low cost producer. I think KPR mills is better than Indocount.

Disc Invested in KPR.

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Hi Everyone,

This stock used to trade at a PE of 20 times. Can anyone point out the skepticism in this counter. Can anyone list down the factors that has led to the de-rating of stock.

What I think is -

1). Increase in cotton price.
2). Donald Trump winning the elections.

Any other reasons?

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  1. Welspun issue
  2. More than 4x PE expansion from bear to bull run is unlikely.
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Hi Ishan,

Agreed to the welspun issue. But, 4x PE expansion cant be seen like that. Company shut down its other business segments and started focussing only on one segment. That was the main reason for re-rating. GHCL is in the same position today. It has a soda ash division and home textile division. The day it demerges its two divisions, the stock will re-rate. This is my view and I might be wrong.

These are cyclicals, you can’t predict where the top will be, I continue to remain bullish on textile sector atleast for next 2-3 years but not so much on textile stocks anymore.

Disc: Exited Indo count recently.