Price on date (April 30th 2017): Rs. 416/-
Market Cap: Rs. 1050 Crores; Sales: Rs. 477 Crores in 9M 2017;
SP Apparels is a 30 year old Garment and textile manufacturing company based out of Tirupur area in Tamil Nadu. It has 21 manufacturing facility within a radius of 125 km and employs about 9200 workers (non-contractual).
The company has two major business segments i.e. Garments and Retailing. Garment segment has full range of operation from Design – Spinning – Dyeing – Cutting – Printing – Embroidery – Sewing. They are focussed on small batch sized (20000 – 50000 pieces) child and kids wear segment of business and derive 90% revenue from the segment. Till recently its main business was in UK with 5 main clients namely Tesco (31%) / Asda (22%) / Primark 13%) / Mothercare (7%) / Dunnes Stores (3%) and had almost no direct presence in US, the largest kids wear market. The business had 70% of Garment revenue from designed kids wear and 30% of basic kids wear. Though the previous one is high margin but management plans to shift focus to make revenue mix 50:50 going forward as growth rate of basic kids wear is much higher. The company has recently forayed into US market with two small orders of basic variety garments. They are hopeful of increasing the business in coming days.
Company also has a fast growing, presently loss making retail division to manufacture, distribute and sale (including ecommerce sales) of Crocodile brand of shirts, T-Shirts, Polo shirts, trousers, sweatshirts and innerwear under exclusive arrangement (valid till 2021) with Crocodile International, Hong Kong. Brand license is owned through 70% subsidiary Crocodile Products Private Limited where remaining 30% is owned by Crocodile International. Crocodile earns a royalty on sale of the branded products. This segment constitutes 10% of the revenue.
The company came with a public issue in 2016 and raised about Rs. 215 Cr. The private equity fund, Jacob Ballas, took partial exit in the offer for sale portion of the IPO (total issue size Rs. 240 Cr). Jacob Ballas invested in 2006 in SP Apparels for 10% stake at Rs. 36 Cr. DSP Blackrock, Goldman Sachs and Birla Sunlife were anchor investors in the IPO.
The IPO proceeds were used to repay loan (Rs. 63 Cr); backward integration and plant balancing (Rs. 70 Cr) and retail expansion (Rs. 28 Cr). The balance money was for IPO expense (Rs. 15 Cr) and General corporate expenditures.
Post debt repayment the Debt Equity ratio would come down to 0.4 in FY 17 as per management and give them enough headroom for expanding Garment business volume. They also expect to breakeven the Crocodile retail business in next few quarters.
The uniqueness of the business model as per management is their ability to involve with the client from design stage and economically handle small batch sizes of unique designs. The design to delivery time is about 3- 6 months at pre agreed prices and hence they claim to be immune to cotton price fluctuations (need to be watched out).
The biggest immediate risk of the company comes from its ability to manage the currency fluctuations for various reasons across globe and its unpredictable nature. INR appreciation with depreciating GBP and uncertain outlook of US$ may temporarily dent its profitability unless it can negotiate well across its value chain. Presently even though they mainly supply to UK and Europe their 51% revenue is booked in USD and rest in GBP and Euro. In spite of the uncertainty, I expect ROE to be about 17% in FY 17 and can improve to 19% in FY 18.
The company also has a pending litigation in Indian court with Lacoste as the later claimed that Crocodile infringed on their logo. Any negative outcome may affect the retail business.
Investment Case: With backward integration the margins to improve going forward and foray into new customers, increase in sewing capacity (till recently outsourced), better traction with newly added customers (Primark and Dunnes) and improvement in retail operations with Crocodile brand can give a steady revenue and profit visibility going forward.
Not investment case: Smaller size compared to much bigger players will limit the growth possibilities with existing two largest customers especially in designed Kid swear (Tesco and Asda) segment. Currency fluctuations may act as a spoilsport in margin in the short and medium term. Labour intensive nature of the business may limit growth.
Disclosures: It is not a buy, sell or hold recommendations. The entire writing is for discussion purpose. Author holds the stock (~ 3% of PF) from Rs. 300/- level and runs a SEBI Registered investment and portfolio advisory https://aveksatequity.com. No trading in the stock has been done in past 30 days.
