SHREE KARNI FABCOM LIMITED - leader in Technical Textiles

[ca.ankitarathi]

Incorporated in March 2018, Shree Karni Fancom Limited specializes in Woven Fabrics, Knitted Fabrics, Coated Fabrics, and 100% polyester, and sources yarn, resin, acrylic, and coating chemicals to produce specialized technical textiles.

Product Portfolio - Application
A) Interlining Fabric - Jackets, wallet and hard luggage
B) Tafeta Fabric - Back-packs, rain cover, umbrella, vehicle cover, soft and hard
luggage
C) Matty Fabric - Soft and hard luggage, back-packs
D) Air Mesh - Backpacks, shoes, chairs, masks, helmets, medical arch support.
E)PU Coated Matty - Back Packs
F) WR Coated Lining - Back-packs, rain cover, umbrella, vehicle cover, soft and hard
luggage
G) AF Coated Lining - Back-packs, soft and hard luggage
H) PVC and EVA Lamination - Soft Luggage

Expansion
Company is setting up a new dyeing facility (backward integration) and manufacturing of bags (forward integration ). It has purchased land in close vicinity to its existing facility

Management

1. Rajiv Lakhotia
2. Manoj Kumar Karnani
3. Raj Kumar Agarwal
4. Radhe Shyam Daga

Manufacturing Set up

1. Knitting Unit - 90 tonnes/month
2. Weaving Unit - 70000 mtrs/day
3. Dyeing/coating Unit - 100000 mtrs/day

To ensure to supply quality products which meet the applicable standards, they have set up a Research and Development facility (“R&D facility”), which consists of quality assurance and quality control teams who check and conduct various tests in their ‘in-house laboratory’ on the fabrics at various stages starting from grey cloth to the finished fabrics manufactured.

Acquisition
Company has acquired a 66.67% stake in IGK Technical Textile LLP w.e.f. October 31, 2023, which is engaged in weaving, coating, sizing, and embossing of specialized technical textiles.

IPO Details
Co. raised 42.5 Crs through the IPO and got listed on March 14, 2024.
The Net proceeds will be utilized for:

1. Funding the capital expenditure setting up a dyeing unit in Navsari District, Surat, Gujarat;
2. Funding the purchase of new machinery
3. Working capital requirements of the company;
4. General Corporate Purposes.

Clientele
Khadim, VIP, Samsonite, Bata, Hidesign, Tommy Hilfiger, Safari, Benetton, Swiss Military etc

Financials-

Key Ratios

Red Flags -

1. The company availed Interest Free loan from the promoters - 2378.76 Lakhs
   (couldn’t understand what the company is planning on - It means their PAT would have been much lower if they would charge interest on this loan amount)

2.The capacity utilisation is very low.

3. Top ten Clients cater to 74.23 % of the revenue (as of latest data in Nov’23) - Needs to diversify its clientele.

Disclosure:
Invested

[Shubham96]

IPO Meet - Shree Karni Fabcom Limited

About loan from promoters and debt from 22:10 - i don’t think it’s a red flag Ankita mam, usually promoters charge interest on loans… also most of it went into growth, they have plans to convert this debt into equity in the next 3 years… in my view it shows the aggression of promoters to grow the business

[ca.ankitarathi]

Well, definitely it shows aggression. But in financial terms, technically if we don’t consider interest on loans that means our profit is inflated.
If they are planning to convert to equity later why didn’t they do it before IPO?
Its not a BIG red Flag but still there are many questions unanswered.

[Shubham96]

Management takes a pay cut to fund growth. They could’ve diluted as well - and a lot more during their IPO time. Brought the IPO at a great valuation. Interesting visits - recently from the Niveshaay and concept investwell team and other HNIs. Shows management quality.

The pay cut may also look like the company maybe in trouble - but based on the potential future export orders, capacity expansions from their clients (safari increasing by 50% and vip now being potentially acquired by a PE firm) and their recent capacity addition - leading to forward integration into being a contract manf and backward integration into dyeing ops to increase margins - everything seems fine imv.

I may be wrong in my views. I am biased and invested.

[Shubham96]

https://nsearchives.nseindia.com/corporate/SHREEKARNI_18012025182027_Intimation_SKFL_AS.pdf

Raises 40 cr to cover for financing wc & pre ops for upcoming capacities. There are some decent names in the preferential.

[AnantAgar]

@Shubham96
Do you have any idea how do these preferentials even come about? All I know is everything post-facto, i.e. after a preferential allotment is finalized and disclosures are made to the stock-exchange. I am specifcally looking to understand what happens behind the scenes?
Who approaches first-the investor or the company?

As an example, we can see Debashish Neogi, as a preferential allottee. Let’s assume he was not an investor till then. Was it that the company approached these investors? How did it even shortlist whom to approach, etc?
If I myself wanna participate or get calls in these allotments, what would it take?

[TradingWithMind]

The preferential opportunities goes to a lot of high net worth individuals via word of mouth. Usually they have a minimum ticket size of different amounts.

[sammy11]

hi, just to clarify, the company mentioned in one of the meets that this unsecured loan is actually their share of the capital (and retained profits) when the company was an LLP. at that time the promoters had infused capital as and when required to fund growth/capex, as well as retained profits in the business. at the time of ipo, conversion of this loan to equity would have entailed additional permissions, documentation etc, and it would have delayed the ipo. hence the funds continued to remain in the company in the form of unsecured loans. as per recent funds raise plan. the promoters proposed to subscribe to warrants. this is actually conversion of the unsecured loan to equity through the warrants route.

this loan did not carry interest all along. and promoters are converting this to equity as per the recent pref allotment at the sebi derived price. both these actions indicate favourable corporate governance.

PS: now that the stock price has fallen below the pref price, the future action by the company remains to be seen.

[Shubham96]

Hi Vinay Sir thanks for giving your valuable inputs on the skfl thread. I am tracking this company as well and had some doubts - sir are they the only player doing this or at least at their size and clientele ? Are they taking away market share from unorganised or any other countries like Bangladesh/china ? Would be helpful sir…

Thanks
Regards

[sammy11]

hi…i am not yet fully clear about the competitive positioning of skfl…there are many manufacturers of “technical textiles” in india…some of them may be supplying to the end products where skfl’s fabric also gets used.

specific to luggage, from concalls of vip, it can be understood that there are no players at scale in india who can supply luggage fabric.

i would request @Samarth1 to contribute because he has done some fantastic work regarding this.

one of the demand drivers could be substitution of suppliers from china and bangladesh. due to their size, chinese suppliers demand larger minimum order quantities, are not very flexible in providing multiple design options, and not very accommodative of customer timelines. indian luggage cos are just one their many customers.

on the other hand, skfl brings such flexibility to the table - they provide more design options, are willing to accept smaller orders, and supply kind-of just in time (till then they make and hold on to the inventory)…and in return customers like vip may be willing to pay a little more to them compared to chinese suppliers. essentially, as a fee for taking over vip’s working capital onto their (skfl’s) books. i am just using vip as an example. as per skfl presentation, they have many customers.

caveat - these are just narratives for now. the company is expanding and backward and forward integrating. all these “stories” eventually should translate into numbers, which remains to be monitored.

PS: those tracking vip/safari/samsonite may please contribute also. if we can check with any of them to validate the above hypotheses, it would be great.

[Shubham96]

Thank you sir for the inputs… will work on this more

[Samarth1]

Shree Karni Fabcom Limited.

It is a play on the growing Indian Luggage Industry and the tourism sector where the end players like Safari, VIP, Samsonite etc… are facing competition from growing indigenous startups and homegrown brands the player like SKFL will have a opportunity to capture as it will be able to cater more of them:
So, the question that arises here is why SKFL exist in first place?
The answer for that lies in three things:

1. The facility of SKFL is an integrated one which very few players in this segment of the market has which enables them to have better control over the quality and allows them better utilization of the capacity.
2. There is an increase in shift of luggage manufacturing from China and Bangladesh as many players prefer to have Indian sourcing partner which wasn’t so possible before Covid but post covid the whole supply chain shifted to India
   Historically when we see the trend in this industry we can notice that up until 2003 the whole manufacturing of luggage was primarily residing in India but, post that the luggage players in India like VIP industries which was a dominant brand back then started to procure it from China as it was providing the goods at better rates & better designs but, since 2010 onwards the factor cost in China started to rise due to which supply chain started to shift to Bangladesh where those Chinese players only started to do tie up with Bangla Cos or started setting up there own units but this was majorly for soft luggage as up until 2016-17 soft luggage was dominant part of revenue in Indian luggage industry and hard luggage had just picked up but, when hard luggage picked up players like VIP, Safari, Samsonite started setting up hard luggage manufacturing in India and today as well hard luggage manufacturing happens in India where as Soft luggage gets procured. So, this gave rise to players like SKFL who were supplying lining material to them.
3. The Players like VIP, Safari etc. requires scale and the terms of trade which they offer are acceptable to players like SKFL only because they aren’t relying just on one customer so it acts in favor of them.

according to me this gave rise to player like SKFL and answers the Question as why it shall exist in first place.

The demand in the industry is going to come in a big way and according to my ground research the players in size and scale of SKFL are not many which gives it a benefit and advantage as we see more and more indigenization of Supply Chain is happening.

Now, one strange thing that I notice on twitter for this company is that many people label it as negative net worth company but they essentially miss to notice that the Loan from promoters which we see on it’s book is of 25 crores out of total 45 crores of debt and that 25 crores should essentially be part of equity as it was the balance in partner’s current account when SKFL was an LLP firm so when it got converted in Limited Company that balance of partner’s current account which is the made via profits is shown as Loan from promoters.

This happened because at the time of conversion of LLP to Limited company due to clauses of Companies Act, 2013 it wasn’t possible for them to convert it into equity.

PS: The Company is placed right in it’s position but what we need to see is execution by the management as a good position + good theme without execution is nothing so, we have to track it diligently.

Disclaimer: Invested and my view can be biased.

[Shubham96]

Thanks a lot Samarth for the insights

[Samarth1]

Dyeing unit capex and why it is needed,
The company has entered into setting up dyeing unit from the IPO money and it was listed as one of the objective in it’s RHP:

They setting up of dyeing unit is very essential to them given the industry in which they operate & the clientele they serve:

• Currently they outsource there dyeing operations to various dyeing mills in Surat & around it but the lead time to get the cloth dyeing is around 1 to 1.5 months in Surat so, by setting up there dyeing facility they can reduce it in to 10 to 12 days which will aid there working capital cycle & inventory turnover.
• In the period of demand in Surat all dyeing facility gets fully occupied which is in the months of Oct to March so, during those time when they also have heavy quarters there lead time to get material dyed increased significantly.
• No new dyeing units are getting permission to setup and most of the dyeing unit that are operated in Surat are either taken over or bought via stress sale so the capacity is not increasing & it is getting tougher to get a license from environmental & pollution control board to setup dyeing facility. The dyeing facility of the company which is coming in Rajhans Zesto is a complete facility for only dyeing mills.
• In dyeing only the material hardness, color and finishing etc. work is done so by having in inhouse they can have better control over the quality of their end product.
• Currently, for dyeing when they send material to dyeing mills there fabric gets dyed into batches so there is a risk that between two batches the shades of their fabric differs and due to which rejection rate also increases if it get outside the permissible range.
• With getting process of dyeing in-house they can expand the product offering by providing greater variety of shades and colors.
• The dyeing unit is of relevance to them when they want to serve to defense industry as they need to have greater control over quality and the end product finish which they won’t be able to match if it is outsourced.
• This step will also allow them to enter into new segments like sportstech and serve players like decathlon etc. which expands the segments of technical textile industry to which they can supply.
• So, the benefit of having this operations inhouse will have greater impact in terms of quality rather than on quantitative front as production capacity of knitting, weaving, coating etc. can be expanded easily as machines can be imported from China but, if the material after weaving & knitting doesn’t get dyed it cannot be sold and setting up dyeing facility requires high setup cost & increased working capital control.
• By having this part of the process in-house the margins of the company can inch up by 2% to 3%.
  
  
• So, now they can expand the production capacity as well as take dyeing unit towards maximum utilization.

[Shubham96]

Samarth bro thanks for these wonderful insights.. you mentioned about sports tech textiles and decathlon, will the current facility support the manf of this sports techtex or are they working on their r&d for this segment ? Isn’t the nature of techtex that goes into say luggages different from sports ? Thanks

[Samarth1]

The dyeing material which is nylon based which is similar in use even in sportstex and techtex so dyeing unit can support both also they have warp knitting machines through which the production of that fabric is possible but R&D they will have to do.

Also in dyeing the quality of dyeing master and its skillset is very relevant as that is the person which decides the colour and dyeing quality of the material.

In textiles through the machines youbxan produce fabric of the choice but R&D and its quality is something on which the whole game is so machines can produce it but R&D and quality control has to be done by the producer.

[Shubham96]

#S5E7 : Le Merite | Inside India’s ₹25,000 Cr Military Fabric Boom

To understand the defence technical textile oppurtunity (not skfl, it’s a company called le merit )- although at the last of the video he mentions about 50-60% ebitda margin for the defence techtex which sounds unbelievable (have to verify with arvinds techtex division for def). They are entering ECC (extremely cold temp tolerant techtex), anti-microbial, flame retardant - and it’s a TOT (tech transfer) from DRDO for 10 years. They can leverage this tech to supply to hospitals and other institutions too.

Lets see the divisions shree karni is trying to cater to in defence and if they can partner up with defence orgs for TOT partnerships like above.