Premco Global --- Narrow Fabric (A critical component for inner wear)

Stock Opportunities Untested - but worth a good look
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I attended Premco FY24 AGM. Find enclosed my notes. Please note that there may be communication error from my side while taking down notes.

New Plant: Umbergaon plant Phase I commenced during the years. By end of CY2025, the plant would be fully operational. It would service Indian and export market. Peak sales can be achieved from the plant would be around Rs 50 Cr. New plant is expected to contribute around Rs 10 Cr sales during FY25.

Capacity utilisation: The peak utilisation company can operate is around 85-90%. In FY24, various plant (excluding Umbergaon) are around 70-75%. So for next 2-3 years, can service the market Existing and Umbergaon Capacity.

New Market/ Client: The company is at advance stage of discussion with European Client. Current inspection and approval process is at advance stage. At appropriate stage they would inform shareholders. They are present in North America/South America/Africa market beside India and Vietnam, Have limited presence in European market which intend to penetrate shortly. The large professional fees spent in forex is in order to get right skillset to support and get new clients. Also, company supplies almost all major players in Indian market, like Lux, Dollar, Rupa and Amul.
FY25

Forecast: The company intends FY25 sales to grow by 10%.Also, expect to manage margin at around 17% EBITDA. They are trying cost rationalisation efforts in all the plant which would result in saving of around 2%. That shall assist company to manage EBITDA margin in case cost escalate. With Umbergaon plant, the company can reach peak sales of Rs 120-140 Cr.

New product line: The company has new product like Leap tag, Recycled yarn-based elastic, Micro elastic. These products would continue to drive growth in revenue.

Competitors: Spica, Elastica, Bena Regal Tape and Kohinoor (not sure of name/spelling) are main competitor to the company

Share buyback: Limited time is available to complete formalities and hence would not be possible. However, may look at rewarding shareholder with dividend.

No plan to list on NSE.

My view
The management appear to be very conservative and performance is likely to see moderate growth despite great business and relationship. It has still not reached is peak valuation of Rs 900+, Sales and Profit achieved in FY22. So investor shall be patient to hold this investment in my view. While no clarity on growth in medium term, downside is also limited in my view due to dividend yield of 3% and free cashflow generating business model. Despite large capex (almost 40% of gross block), the company is very comfortable in in liquidity position with HDFC Bank (among the conservative banks) as lender. There are my current view and can change any time.

Disclosure: The company is my core equity holding with around 3.25% allocation. My view may be positively biased due to my investment. I may increase/decrease/exit from the company without informing the forum. I am not SEBI registered advisor. I am not suggesting any investment action.

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427

If capacity utilisation was only 75% what was the need for new plant at Umbergaon - additional 10cr sales could be easily done from existing plants.
This business is very competitive and has low margins. Margins will surely go down to 10% (pre Covid levels). COVID they must have got additional orders due to restricted supply from competitors.

Performance of the company is more likely to go down… not up.

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As per managment, they can use practically capacity at level of 85% given the number of batches would reduce the operating time for change in new production order. Hence, at 75% they can increase sales by 10/75, i.e. 13% from the current capacity. However, there might be some new products as well which may need new machinery. Hence, in my view, new capacity expansion is much needed for the company for future growth. One shall not wait for 13% growth, which can happen in 3-6 months time and end up with siuation that there is demand but no capacity to fulfil that demand. While optimum utilisation and just in time improve productivity and margin, at time, particularly given the current geopolitical situation, some buffer for supply shocks are good in my opinion.

Secondly, on margin, your observation that margin at 10%, is not true business margin.
Find enclsoed sales, operating profit and operating margin of Premco Standalone and Consolidated financial over past 10 years sourced from screener.

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image975×299 38.5 KB

Your obersvation is correct that during FY18-FY20 period, Consolidated operating margin was 9-11%. However, that was period when Vietnam operation was about to stabilise. If one look at FY16-FY24 period, than consolidated maring are around ~17% which is very good in my understanding.

Further, in my understanding, while the company has not grown signficantly during last few years, they have also not compromised on margin to enhance sales. I find that trait being long term value accretive. Again, this is my subjective evaluation which may biased and wrong.

Disclosure: Same as last post.

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429

I will add few points. Biggest thing is management is very much honest. I am holding since 2005 and not a single day I had doubt for their honesty. Second is very low equity and float . Few points improvement in sales and margin can bring wondered in eps . Rest all has already posted by @dd1474

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@HIMSHAH
That’s the perfect way …
It’s very meaningful if u can disclose ur portfolio…

Thanks🙏

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I am invested since 2005 , and have disclosed it many times in my previous posts

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Can you talk about your learning, experience w.r.t holding a company for so many years, even returns, if you want to? Considering you must have bought it after getting employment, or in early 20s, what made you not sell, assuming the allocation is not big, so it does not matter if you sell or hold, as it does not make any meaningful impact?

I have not come across too many instances in the forum where members have held companies for so long.

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My cost is around 13 rs. I had good no of shares out of which I have sold some whenever I wanted to book profit. My holding reasons where 1) small equity and floating 2) it was paying dividend since long so yield is always good. 3) honest management. 4) biggest is luck favoring.

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Analysis is very good.
My only point is this is very competitive industry and margins will come down to pre COVID levels - especially when you want to increase volumes. Volume is not increasing as they dont want to reduce margins. So effectively company will stagnate at this level of sales and at same time be open to increasing competition with expanded capacity (which was not required at all !!).

Given all of this is the PE of 15x plus justified… to my mind it should be around 10x.

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