Mirza International - consistent performer but undervalues at present?

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Hi Ayush, I have some doubts from you, can you give your perspective on the same. It would be of great help. I think you may have met the management and discussed these issues already?

The business seems to be going good, but there are some things which need clarification.

  1. One is of genesis acquisition (equity dilution). Even after diluting the equity and increasing the promoters shareholding, some people from the promoter group have sold roughly 3-4%?

  2. Comission (As already discussed in latest concall) + promoters salary roughly 30% of profits, If you include dividends this number goes to 35-40% of Net profit…This clearly shows that the intention of may be old management is questionable? Even capital allocation seems poor?

  3. Even Mr. Shuja Mirza seems to be the game changer, but still other people have a lot of holding in the company, whose intentions are questionable?
    Even Mr Shuja and Mr Faraz Mirza are not directors…As it would be impossible to pay them salaries as directors as the company already breaches the 10% limit?

I agree each company has its own pros and cons…But sometimes one con can damage the entire system…I want to know your viewpoint to get a different perspective.

You can even message me for the same.

It would be a great learning experience.

Thanks

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125

This model is taken from abroad where you keep diff shoe size at the display model only so that guy doesn’t have to run back every time to store to bring diff shoe size. Not only it saves time, it increases the customer experience.

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126

Ayush how do you overlook significant related party transaction and promoters taking lot of money out by means of high salary and commissions . What is view on promoters if you have done scuttle-but. Right now they are in mode of opening stores and this like channel stuffing , we need check same store sales growth.

Brands have no moats unless you have made luxury brand (Aspirational ) , only good part is they are manufacturer of leather shoes but going apparels is big stretching other brands are launching their own shoes.

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127

Shift from leather export to domestic, Branded, and Multi-Category (Leather+Casual+Sports+Clothing) sales seems to be an attempt to pull through a forward Integration, which is a good idea as retailers earn, I feel, the maximum margins. As compared to the super reputed brands such as Adidas, Nike, and Reebok, the business offers a known, foreign sounding named brand at economical prices. I see that as a Low Cost Advantage, if not moat.Going forward I would monitor Revenue Growth, Profitability, and ballooning Working capital (Inventory & Debtor Days) as well as Debt. As evident from the financials of last 5 years, business seems to be pretty comfortable to service debt amount of around 400Cr.
Pros are:
1- Exp. Promoters, who are educated in Leather/Shoe industry.
2- Established Brand - Red Tape.
3- Integrated Operations, with an in-house tannery.
4- Healthy Financial Profile.
5- Promoter Stake at 70%.
Cons are:
1- Working Capital Intensity
2- Geographical Concentration: - UK, 70% of export Rev.-Forex risk, Pound.
3- Customer Concentration: -45% of total exports are to Mirza UK.
4- Board consists of too many family members who are Paid a lot and charging hefty commissions for bank guarantees.
As long as I get a chance to pay reasonable price, which I can control, I am okay to live with the fact that the Board consists of too many family members, who are Paid more than the norm via salary or Commission for bank guarantees, as that is out of my control.
Could anyone help to understand what is Bills Discounted (Note 28 on Page 88 of FY17 AR )under contingent liabilities as I understand that it’s considered as debt from the banks?
Disc: Invested recently.

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128

Hi Amit and @hm0293,

Yes, the points mentioned have been the concerns and one shouldn’t ignore them. I’m not advocating the stock, I just shared some of the interesting changes that I noticed going on in the company.
It interested me as there have been several changes in the way of working of the company and product launches and given the huge tailwind due to consumption boom in India, the potential is big. Its tough to get a domestic spending play at reasonable valuations.
People have asked about channel stuffing - I don’t think that would be happening as almost all the new stores are company owned. As per accounting, they can’t recognize sale till it actually happens. Yes, the inventory has increased sharply and its a concern.
It could well be that going forward the profitability gets hit (due to bad economics in large stores) or inventory write-offs happen or promoters take people for ride etc etc. Retail expansion is tough and competitive. Everyone should be cautious and do his homework.

Regards,
Ayush

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129

Thanks ayush got your viewpoint.

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Thanks Ayush , Off course the forum is not for recommending stocks and any one who invest is responsible for his own investments. i wanted to understand your thinking how do you view these risk especially on promoters. Business and execution risk is some how easy to take but how does one evaluate promoters and corporate governance (Commission, high related party transaction ) and seeing what they are doing ignore these .

Do you do these by 1 % allocation or something ( Money you are ok to loose) or you are of view that promoters will eventually get the logic when business becomes big . or these guys have family reputation to protect so they may be taking huge money out but will not cheat

131

While I don’t know the intricacies of retail store layouts, I work with one of the brands in this industry. The store layouts are similar not only across India but even in the US. I have visited competitions outside India and similar layouts are being adopted across the industry. I still don’t believe that layout is that critical of a point that impacts strategy.

As rightly called out by Ayush, what warrants more discussion, is their strategy to open big stores. That strategy for now, has been limited to big brands and Red Tape following the same is actually gutsy and a gamble for sure. If executed well, might be a game changer from brand point of view. The brand that I work with has significant improvement in recent years owing to us closing the small stores and opening the big doors, but red tape has mid segment products where margins aren’t likely to be so high to support these big doors. One of the reasons for us to open big doors was that our premium products needed premium experience for consumers which we were not able to provide in small doors. Digital Channel lacks the touch and feel thats important to satisfy the consumer of premium products (10k+ price point) and hence it made sense for us.

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132

Thanks @ayushmit for providing the store count. It’s interesting to note that between 2015 and 2016, they added 10 exclusive RedTape stores and 10 shop in shop for a total of 20 additional shops. However their cities covered went up from 30 to 69 so they added 20 shops in 39 cities? Numbers don’t add up unless they also closed some shop in some cities.

Correct way to analyze a retail operation is to calculate same store sales growth (repeat purchase) and sales per square foot (utilization) but relevant information is not available at least in the annual report. Another important metric is whether the growth is funded by internal accrual or external capital. Company can grow sales because capital cost is funded by franchiser and working capital is funded by borrowing for inventory. So this is appears to be a borrowed growth and organic growth may be less than headline growth.

Upcoming IPO of TCNS looks better in comparison.

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133

Hi @Yogesh_s

Online sales of footwear could be a possible reason where you can cover more cities without opening physical stores.

Bata in the 2016 & 2017 AR has started reporting online sales numbers , both volume and value. The 2018 numbers should provide further insight. Online retailing of footwear is another tailwind to the industry. In 2016, Bata sold 3.8 lac pairs for 36 cr online and in 2017 it sold 6.3 lac pairs for 69 crores giving its topline a lifeline. I think it will play an important role going forward in the footwear sector though realizations are much less compared to offline brick and mortar.

Some other data points to consider on employee, revenue & margins

Unlike Bata which has a declining employee count indicating a shift to franchise & digitally enabled from own stores, Mirza has increased employee strength in the same period indicating that it still owns a majority of its stores during its recent expansion where it can have some control on the price realizations.

If you look at the revenue per employee of Bata its almost twice that of Mirza but operating margins are significantly less , indicating the loss in realizations due to spreading of stores all over the country. So how Mirza grows is going to a good plot to follow.

I think large format stores are good in retail as the operating expense ratios are low and there is better control on realizations- an extreme case being sree leathers with a 2.07 cr revenue per employee and a solid operating margins despite being a low cost player.

Relaxo seems to have found a balance although its products are different. I think there are a lot of sub plots that are worth following here.

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134

They have been closing stores down as well, confirmed on conf calls. The way it was explained in one of the conf calls was this -

  1. Geo spread of stores is not uniform across India. In some pockets like Mumbai their presence is actually quite limited. Bulk of the stores are in North India

  2. Some EBO’s were located in large cities which weren’t meeting numbers, they are being closed down since 12-18 months (effectively 6-12 months after a store is opened) is a reasonable time frame to be able to judge whether the store location is optimum or not in terms of tapping into catchment areas. Stores in Tier 2 and Tier 3 have typically done better as compared to those in metros and Tier 1 cities

While the exact count was not mentioned on the conf calls, it has been confirmed that they have been closing down stores as well. Even the adverts they do are very targeted and not broad based, they are very catchment area and customer segment specific

Do listen to the Q3 FY2018 conf call where Shuja spent a couple of mins elaborating on this - their approach to how they evaluate and keep stores running/close down

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135

@Yogesh_s on TCNS, the brand that gets them more revenue is ‘W’. They don’t have trademark for it and Wrangler has already opposed them using the W logo. So it is in trademark dispute and if they lose the case, it will have a huge negative impact on TCNS.

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137

They also sell through Third Party stores.

I recently bought a RedTape pair in Rajasthan through a Metro Shoes outlet

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138

Does brexit will make an impact in export market for this company I think Europe is a big market for them and even Tata motors has written a letter to British president that they loss billions due to brexit…?

139

Hi ashish,

Yes the Brexit exit had affected the Export business by 50%.
But slowly the export business has started showing some progress, as mentioned by company in the q4 con call

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140

additinal import duties lived on import of textiles. fibre by govt
need to see , if they are importing shoes / textiles from outside…then this would hurt their margins

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141

In the last conference it was clear that all sports shoes and casual shoes (other than leather) are being imported from China.

Affected textile products include: woven fabrics, knitted garments, dresses, trousers, suits, carpets, and baby clothes.

I think this will impact their nascent business in garments.

@ayushmit given the big fall it does become more attractive.

142

Gst on shoes upto 1000 is 5% now it will also benefit the company in gaining market share…

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143

But as far as i can see they don’t have too many shoes in that price range. Almost all shoes are upwards of 1000(even BondStreet). Doubt if this will help the business.

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REDTAPE is already famous for premium formal leather shoes. First global brand from India. Now they have diversified into different segments such as sports shoes and footwear for women’s etc…they are selling their products through almost all major online portals such as Amazon, Paytm mall, Flipkart, Myntra, Jabong, Snapdeal, AJIO, Tatacliq, and they are selling through both online and offline formats in the stores such as Shoppers stop, Lifestyle, Metroshoes. So far, they were concentrating only on exports which declined due to BREXIT and all. so slowly they are expanding their domestic presence with new range of products. these new products may do well globally who knows, in the upcoming years exports may also grow.
Mr. Shuja Mirza who is responsible for domestic market who has completed his degree from California. so obviously he could have visited many stores/outlets in USA. whatever he learnt over there with respect to retail business, store outlook etc… is applied here. As they started sports shoes with brand name "REDTAPE now+ (Athleisure range) it needs time for people to get to know about it. that’s the reason why they are selling with hefty discounts to compete with global brands such as Nike, Adidas, Reebok, Puma, Asics. so when you have to compete with the global brands, you have to sell it at affordable cost with quality, so that one can try and if the quality is at par with the global brands mentioned above, then obviously they will win the race slowly by capturing market share and when the demand increases they will reduce the discounts and no discount on new arrivals etc… This is the mantra being followed in any retail segments (Footwear & appeals).

one of my friend bought Athleisure sports shoes(black) and he is using it for the past 3+ months and he is happy with that, very soft and light weight at par with the global brands that what the feedback i got from him. Younger generation people those who are major customers for the sports shoes. if the quality is good, no doubt people will go for it. i think from March 2018 they started serving Women’s as well which is a huge market globally. men used to have few pair of sandals or shoes where as women used to have more pair of sandals/shoes comparatively. nowadays people become so conscious about their health/fitness. so to be fit by going to GYM, Walk, Yoga, Aerobics etc… 5 to 10 years back that was not the case, right? nowadays i see age old people (mothers/grandmothers) also started wearing sports shoes and walking in the morning which is a good sign. even i am thinking of getting a pair of buying a pair of sports shoes for my mom. I didn’t mean that everybody will buy REDTAPE, as they are expanding in domestic, people will give a second thought of buying their shoes as the feedback/reviews are good and available at affordable cost.

Why do they need retail stores? as they are coming up in new segments/products for Men’s & Women, they want the people to visit their stores and get a feel of the product. i would say this as a marketing strategy. unless your brand become popular, your brand gets recognized, you need retail store to exhibit your products and make the consumers understand and feel it. This can happen only in their own retail stores. Even in metro shoes they have Redtape brand as well. but they may not advertise the same way you do for your product. because as they have so many brands, where ever they get margin, they will advertise those brands only. so, my point is to create awareness among people they need retail stores. Even now many people including me before buying a sandals/shoes we go to that exclusive show rooms and check the model/size whether it fits perfectly. then i will order the same through online as online portals offer hefty discounts.

Initially they may not be making huge profit as they are spending on opening new stores. over a period, say after 2 years or so the brand REDTAPE will be one among the global brands in sports shoes section. with the assumption that the quality is good and at par with other global brands. That time they will reduce the discounts and they may close loss making stores as the brand become popular. Eventually the major sales will be through exports/online.
I do read that from many other posts, reports that the this is family run business and they do have some private companies, and they draw huge money as salaries and charge hefty commissions for bank guarantees etc. Again, retail expansion is not so easy, and they may lose some money. but once you build a brand which will pay for you later years (after 2 to 3 years)
I am still in my learning curve, if anything wrong with my views please feel free to point it out. Please provide your feedback which will motivate us to study and share our views on businesses

Retail store details:
No State No of stores(july18)
1 Assam 1
2 Bihar 2
3 Chattisgarh 2
4 Delhi 30
5 Haryana 17
6 Jammu & Kashmir 2
7 Jharkhand 3
8 Karnataka 6
9 Kerala 1
10 Madhya Pradesh 6
11 Maharashtra 12
12 Manipur 1
13 Punjab 24
14 Rajasthan 9
15 telangana 3
16 Utterpradesh 12
17 Uttarakhand 6
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Total as on July2018 137
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Note: Even though all the story looks good, still i am keeping it in my watch list. may add position slowly on dips. This is not an investment advice, please consult with your financial advisor or research analyst before you buy.

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