Shiva Texyarn: Opportunity in technical textile

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Shiva Texyarn Limited:

History: Incorporated in 1980 as Annamalai Finance Private Ltd, Shiva Texyarn Limited (STL) was converted into a public limited company in 1985 and later renamed Shiva Texyarn Limited (STL). It was promoted by Mr S V Balasubramaniam and his brothers. The company’s main business is manufacturing and marketing of cotton yarn and other textile products. It has a capacity of 91,488 spindles. The company also 76 windmills having combined capacity to generate 22.54 MW of power. STL is part of the Bannari Amman group. It is one of the largest industrial conglomerates in South India with diversified interests in manufacturing, trading, distribution and financing activities. The Bannari Amman group operates in sugar, alcohol, liquor, granite, cotton yarn, wind power, education, healthcare, real estate, etc.

Current operations: At present, STL is primarily engaged in the manufacture and marketing of yarn to both the domestic and export markets with an aggregate spinning capacity of 91,488 spindles. Until FY08, STL was purely into spinning; however, in the last five years, STL has established a knitting unit with 41 knitting machines and garments unit with 120 sewing machines. The company also focuses on technical textiles which are based on lamination & coating technology. During FY15, income from technical textiles was Rs.40 crore (PY 35 crore), accounting for 9% (PY 7%) of the total income. Dr. Sundarraman (MBBS) is the Executive Director and manages day to day operations of the company. He is also the Vice President of Indian Technical Textile Association (ITTA).

Financials: Obtained from https://www.screener.in/company/SHIVTEX/

Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 TTM
Sales 84.7 81.07 99.23 96 98.87 194.53 397.27 331.95 419.16 504.47 465.29 443.6
Expenses 66.82 62.39 72.99 78.11 81.87 163.71 326.22 315.52 347.64 432.07 411.07 388.67
Operating Profit 17.88 18.68 26.24 17.89 17 30.82 71.05 16.43 71.52 72.4 54.22 54.93
OPM 21.11 23.04 26.44 18.64 17.19 15.84 17.88 4.95 17.06 14.35 11.65 12.39
Other Income 3.32 2.78 2.71 5.42 1.75 3.66 7.75 1.62 5.98 1.12 0.83 0.66
Interest 7.39 7.08 6.21 4.69 4.66 12.71 23.13 27.99 26.77 23.49 25.47 22.73
Depreciation 7.72 -0.82 7.21 7.43 8.32 13.5 17.66 18.7 19.17 20.09 16.87 18.42
Profit before tax 6.09 15.2 15.53 11.19 5.77 8.27 38.01 -28.64 31.55 29.95 12.72 14.46
Tax 1 -0.09 0.1 4.99 1.27 3.09 11.41 -9.21 9.26 9.09 3.83 3.68
Net Profit 5.09 15.29 15.43 6.2 4.5 5.18 26.6 -19.43 22.29 20.86 8.89 10.78
EPS (unadj) 2.21 6.87 6.89 2.62 1.93 2.24 12.07 0 10.11 9.45 3.91
Dividend Payout 42.44 21.19 21 52.26 43.33 41.7 12.18 0 11.62 12.42 24.3

Historical return rates have not been anything fancy. The company has delivered low ROE, a reason could be accelerated wind mill depreciation but even without considering depreciation the return have been nothing great. The last three quarterly results have also not been significantly better.
What is changing: The company has build up a variety of technical clothing and ranging from consumer to defence related garments. The following categories are emerging from company’s technical textiles portfolio:

a) QuickDry and allied products to target the infant/child care segment: QuickDry is a consumer focused product and it is available through all major online shops (flipkart, amazon, firstcry). The company has also launched a set of allied products like reusable diapers, bibs, carrier etc. A major part of technical textile sales last year came from this segment. My expectation is that this segment can grow at 20% annually.

b) Defence: The company has been working with DRDO since last few years to come up with CBRN (Chemical, Biological, Radioactive and Nuclear) textiles. This is an import substitute product. Along with this the company has actively participating in defence tenders for the Ordnance factory board. Some of the other material that the company is working on are Aero Stat fabrics, High Altitude fabrics etc. The annual requirement for CBRN textile is between 50,000 to 75,00o suits by the Indian army. The current version is MK-V. High altitude textiles are of three types and the most complex are ones used in most high altitudes like glaciers.

c) Wulf bags: The company is in the process of launching backpacks and travekl bags with wulf brand.

d) B2B supply of technical textiles: The company manufactures multiple other technical textiles including canvas products, coated, polar fleece, terry fabrics, velour fabrics, activated carbon fabrics. The company is working with MNCs to figure out a B2B market.
Investment rationale: The company is focused on technical and value added textiles across segments and is moving away from the traditional business. As part of it the company is also demerging one of its units with 40000 spindles in a separate company. The operating margins in technical textiles are in the range of 20% to 25%. Further presence in defence and the kind of products that the company is working on shows company’s technical prowess. The promoters are highly respected and have conducted themselves in a very fair manner.

Risks:
a) The company is entering into unchartered territories. Some of the other companies which havbe tried similar experiments have failed (reasons could be somewhat different though). Some example that come to my mind are Precot Meridian and Lakshmi Cotsyn.
b) QuickDry has been in the market for more than 5 years and has not been able to go up in sales significantly.
c) Defence orders are generally lumpy and have huge bureaucratic issues. The time for defence orders to materialize can sometimes stretch to years.
d) The company’s historical track record in wealth creation is nothing to write about.

Disclosure: Forms more than 5% of my portfolio. No trading in last one month.

Links: http://www.shivatex.co.in/sites/default/files/TheTextileMagazine(10).pdf
http://www.drdo.gov.in/drdo/pub/npc/2016/january/19Jan2016.pdf
http://www.cbrneportal.com/sharaba-the-new-indian-cbrn-permeable-suit/
http://www.wulf.co.in/
http://quickdry.in/
STYL-Products.pdf (984.9 KB)

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Thanks for this fantastic find. I am so happy to know this.
They have a school of higher education, a branded bags as you mentioned segment too.
I wonder why the market has to pay a premium to this, when its just another stock and nothing is so special about it apart from the fact that its trying to do new things.

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The school for higher education is in personal capacity of the promoters and has nothing to do with Shiva Texyarn.

Regarding newer products:

It is not just trying but has already been successful in products like QuickDry and has created a new segment of sorts. If you speak to anyone the complexity involved in developing something like QuickDry is very high. The defence products that it is working on are again highly complex import substitute and have been under development in partnership with DRDO. The development process itself took 3 to 4 years. Most of the company’s products in defence and consumer segment should have high margin and give company a definite technical advantage. I personally foresee technical textiles being a major component of sales in 2 to 3 years from now changing the structure of the company from a commodity yarn/textile manufacturer to a highly specialized technical textile company.

Regarding what premium to pay is a call that one has to assess. Also a thing to assess is how much premium has market already factored in.

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ORGANIZATION, CAPABILITIES AND ASPIRATIONS OF ITTA AND INDUSTRY Dr. K. S. Sundraraman, Vice Chairman, ITTA & ED, Shiva Texyarn Ltd He emphasized about the ITTA which have more than 300 members and the members span entire spectrum from Raw materials to finished goods, centers of excellence, consultants, research organizations. ITTA works with textile Ministry on Industry surveys and Policy reports on Technical Textile Industry in India, Works on areas like Streamlining of HSN codes and Participates/Co-ordinates with most Premier exhibition organizers around the world and also took an early lead in working with the Indian Defence forces by conducting a Major interactive event with the Indian Army in Feb 2015. He highlighted the importance of 12 segments of technical textiles, fibers used in technical textiles and some areas of expertise of ITTA members such as Geotextiles, Filter fabrics, including respiratory filters/masks, Carbon fiber fabrics, Activated Carbon Fabrics, FR and work wear fabrics and Garments, Tyre cord, industrial belts, PU , Acrylic and PVC coated fabrics, Insulation tapes and sealants, etc. He also talked about the Potential Applications for the Navy FR protective wear, Low weight, durable Tarpaulins and covers, Filteration systems for Ships and Submarines, Ropes, Hoists and other Load bearing textiles, Wound dressings, personal Sensor based monitoring of vitals, Fire Proofing, NBC protection, Inflatables, Footwear, Gloves and other PPE, Surveillance Balloons, etc

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Garware Wall Ropes also deals in textiles for the defence segment and are also involved with the DRDO. It is a much better company to invest in which is debt free, generates free cash flow and has a very strong balance sheet. If technical textiles is your only play in this, look at Garware Wall Ropes. The performance is very stable and with a great upward trajectory, unlike this company which is rather inconsistent to say the least. Should be a thread floating around here somewhere on Garware.

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Agreed that Garware-Wall ropes is a decent company and in a much better shape. Comparing Garware-Wall ropes with Shiva Texyarn is probably not the right thing to do. Technical textiles in themselves is a very large bag. The investment thesis is not just based on technical textiles but on the kind of innovation that the company (Shiva texyarn) is doing and how that may reward the company going ahead.

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Q1 2017 Results:

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Finance costs are killing the bottomline.

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I think the price excitement is bcos of proposal for demerger. Its written in footnotes.

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Link to an article published on 01-Sep in The Textile Magazine:

http://www.indiantextilemagazine.in/corporate-news/shiva-texyarn-well-positioned-to-seize-opportunities-in-technical-textiles/

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Great job. Thanks for the update.

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Thanks Anant and MpBhat

Discl: No idea about this sector/this business
My observation is that the investment premise is built on the future of technical textiles in India/Export and the company’s proven expertise demonstrated of late to make the value-added transition to higher profitability.

Some quotes from the Textile Magazine are highly interesting.

  1. Quick Dry, for example, has been clocking a growth rate of 30% annually in recent times. There are indications that it should do better in 2016-17.”

2.The company is considered one of the leading exporters of canvas clothing meant for painting and digital printing in European countries and China. “We are probably the largest exporter of coated canvas fabric in the country today. We hope to retain our pre-eminent position in the future too”, added Mr. Sundararaman.

3.The company has also developed a highly specialized CBRN (Chemical, Biological, Radioactive, and Nuclear) product. “We have orders worth Rs. 55 crores for the product. So, all in all, it has been a good year for us on the technical textiles front too.”

Do we have ANY granular segment data sales & profitability?
Is yarn is still 80% of Sales?

While CBRN at 55 Cr is roughly 12% of current Sales - that as you have said before can be lumpy?
how sustainable is continued defence sector demand for this product, company competitive positioning and managing to bag more of such defence orders?

Will be good t understand more with your help - just how long will the transition to 50-50% (yarn-technical textiles) take? Any guesses?

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Got to find out what moat this co enjoys like patents. Otherwise a lot of
the tech is developed by defense agencies and licensed.

Been hearing about technical textiles for last 25 years. I know itochu of
Taiwan used to make these drip dry fabrics way back in the 1990s.

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The above data is from company’s last 3 years ARs. Quick Dry sales fall under laminated textiles and the canvas sales are under coated textile. Coated textile sales have been falling. The company does not provide profitability for segments since each of these are smaller segments.

CBRN orders for next 5 years are going to be in the order of around 1200 to 1300 crores. Currently there are only two companies and Shiva texyarn is the larger one. DRDO has come up with the tender for MK-VI version of CBRN textiles and that should come into picture 5 years from now. STYL seems like an interested party in the development of MK-VI. The transition to 50 - 50 should happen in 4 years.

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Thanks Anant for the details.
Much of the fortunes of the company (the 50:50 tranisition being banked upon) seem hinged on the CBRN MK-V for next 5 years, and MK-VI subsequently. Rest segments are small to make a dent that quickly?


As quoted in this article, In view of this DRDE has developed indigenous technology at its pilot plant facility for
the production of ACS required for the NBC suit coating. The ACS process technology has been
transferred to industry for bulk production for NBC Suit Mark-V.
Do we know when was this made available - 2013?? How many players have since worked with DRDO and got the Technology Transfer Certificate?

The first CBRN tender was floated in 2013?
http://drdo.gov.in/drdo/tenders/viewTender.jsp?paramMicro=4847

The Tender for 50000 CBRN pieces in Dec 2015 (Is this the right one??)
Manufacture and supply of K-10/NK NBC Permeable Suit MK-V for qty 50,000 Nos
https://eprocure.gov.in/eprocure/app?page=FrontEndTenderDetailsExternal&service=page&tnid=70826

Logical questions to ask:

  1. Despite the technology being available, it appears there are only few players that have taken it up seriously - invested in the technology development with DRDO; do we know why? how many years did Shiva Tex Yarn take to develop the ACS Bulk process? How many such players finally got the ToT (Technology Transfer) Certificate from DRDO? Limited Tenders pre-qualification criteria would restrict to only these, right?

  2. How many players submitted bids? who are the other players? How is their financial standing?

  3. Assume Shiva Tex Yarn has been one of the lowest-cost bid submitters to have earned 55Cr business; Why wouldn’t someone else be able to quote significantly lower?

Assuming there are limited players. Margins therefore are artificially high?
Anyone here knows how to track the tender bid submission/winning process - L1/L2 and the total qualifying bids?? That will easily throw more light on this puzzle

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I think Garware also makes fire resistant tent materials.Does Shivatex also makes it? Todays Uri casualties of Indian army were more because of fire in tents.Cud this also be a big opp for Tech textiles makers on lines of CBRM,High altitude,backpacks,Specialized clothings for indian army below high altitude?

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If by CBRN Mk-V you are talking of defence I agree both from a topline and bottomline perspective this should be the most significant part. My guess is since it is a limited competition business the conservative margins at EBITDA levels should be north of 30%. Other than MK-V there was another media article on glacier clothing.

http://indianexpress.com/article/india/india-news-india/coming-soon-make-in-india-special-clothing-for-soldiers-at-the-worlds-highest-battlefield/

Other important segment will be Ikea supplies and the company has ramped up manpower for this. Although the margin profile here would be lower but the asset turns and IKEAs payment schedule are a win win for the ecosystem. Further IKEA has this tenency to focus on very few suppliers but pull them up significantly fast.

QuickDry and allied products should be a 100 Cr category in 3 years assuming mgmt. does a promised 30% CAGR growth here.

Overall I think the technical textile textiles turnover in a 4 to 5 year period should be around 400 crores (200 Cr defence, 100 Cr. IKEA and 100 Cr QuickDry). I expect an EBITDA margin profile of 25%+ as a whole.

The first tender came out in 2013 for 30000 suits and it was awarded to Lakshmi Cotsyn but they floundered the opportunity and were not able to deliver. The entire project began in 2009 with three companies selected Lakshmi Cotsyn, Shiva Texyarn and Vijay Sabre. Currently there are only two players remaining Shiva Texyarn and Vijay Sabre.

Yes that is correct.

I do not have an answer to this. I will try to ask this in AGM.

The process started in 2009. The first bids for MK-IV had 3 players. Only those players who have worked with DRDO can bid.

Currently only Vijay Sabre and Shiva Texyarn are the players. Vijay Sabre is relatively small and do not have a textile division (AFAIK), but they have a lot of experience in defence bidding and tender processes.

I guess with limited competition the players would be more interested in splitting the pie amicably rather than going cut throat. At the same time with only two players I am sure the buyer would want to hedge his bets. In the actual tender Shiva was L1 with approximate tender value of 95 cr.

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Thanks Anant for the pointed replies.

1.Does look interesting.
Yes, thanks for correcting I meant the overall defence pie - CBRN being the most tangible one so far.
One aspect that hasn’t been paid enough attention to is the “Big” assumptions being made about the Market for CBRN MK-V of 1200-1300 Cr in 5 years. (and by extension, other tendered defense procurement business)

Other than the Management version - do we have any other means of verifying the same??
Defense Tenders being what they are and subject to changes et al - the “defense” would perhaps be - this is not weapons/armoury technology, competing technology/products aren’t available, this being a import substitute, make-in-india, DRDO/Defense Ministry should have every reason to ensure the fledgling suppliers sustain and prosper - continue to deliver increasing supplies every year to be able to achieve some scale, build on current capabilities, and broaden offerings.

Anyone has any previous thoughts/discussions on this aspect from industry-folks?

2.The other “unquestioned” aspect I notice so far is the big debt and the (relative to operations) huge interest burden. (I like the fact a lot though, is that this Management has been continuously reducing Debt).
I haven’t done any calculations, but looks like the business is not availing TUF Loans??
Spinning company and no TUF or not fully exploiting TUF?? Technical Textiles would also qualify for TUF, one would think??

Any thoughts/views here would be helpful. Especially Management’s take on this aspect is good to understand.

That’s for now. Hope to come back with more questions :slight_smile:

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Tender Status seems to be available at the GoI eProcurement System site itself

Using the Tender ID for CBRN MK-V suits here, does show only 2 successful bidders

  1. Vijay Sabre http://www.vijaysabresafety.com/product_nbc.htm
  2. Shiva Tex Yarn

Need to understand the legacy of CBRN suits, why there have been so few takers, why Laxmi Cotsyn failed to deliver (financial or technology absorption, and the like)

Vijay Sabre website mentions manufacturing, assembling & testing facility, at plants in Silvassa & Umbergaon (not for CBRN related products though)

1.VSSL’s Plant No. 1 is located at Silvassa, in the Union Territories of Dadra & Nagar Haveli, which us fully equipped for the manufacture of Safety Equipment and Medical Equipments.
2.Our Plant No. 2 at Umbergaon in the State of Gujarat, is fully equipped for the manufacture, testing and packaging of Latex Examination and Surgical Disposal Gloves. These Gloves are CE marked.

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So this is cross verified by this MOD document where it says the total requirement is 6.5 lac suits of MK-V version. You can access this document here
http://www.mod.nic.in/writereaddata/AnnualReport2013-14-ENG.pdf

Why was it so difficult to make an NBC suit of course technology. The previous version of suit weighed 5 Kgs and was practically useless. It was then imported from Germany and it weighed 2.3 kgs. The Mk-V version weighs around 2.26 Kgs. As for the woes of Lakshmi Cotsyn I think it is both financial and technical, have a look at document below which talks about the failed attempt by Lakshmi Cotsyn:

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