S.P. Apparels (SPAL) is a leading manufacturer & exporter of knitted garments for infants & children in India with an extensive product range of body suits, sleep suits, tops & bottoms. It generates more than 80 % of its top-line through export of knitted garments to big brand retailers of repute such as TESCO, Primark, ASDA & Mothercare. The company also manufactures & retails menswear garments in India under the brand Crocodile. Both childrenswear & menswear are manufactured at its 21 integrated facilities, allowing it to undertake end-to-end garment manufacturing from greige fabric to finished products. These facilities are all located within a 125 km radius of its registered office near Tirupur, an Indian hub for knitted garments for children & exports. SPAL is looking to foray in women’s essential wear as well with its Natalia brand.
SPAL is one of India’s largest exporters in the global infant & childrenswear industry which was estimated to be a US$ 228 bn market as on 2014 and is expected to grow at a 5.6 % CAGR to $ 300 bn by 2019. The U.S. is the largest market for childrenswear with a market size of US$ 58 bn followed by China (US$ 44 bn) while European countries like Germany, U.K., France, & Italy lead in per child spending on apparel. The growth of childrenswear market in developing countries like China, India, Russia, Brazil etc. has been higher with CAGR in the range of 8 % to 12 %, between 2009 & 2014 owing to their low base. This is also competitive market as evident by the presence of a large number of international & local brands, private labels etc.
The global infant & childrenswear market is marked by its resilience to pressures on economic conditions & disposable incomes. Generally, parents across the globe tend to cut down their own discretionary spending rather than cutting down spending on children’s clothing. While adults can delay purchase of new apparel, children quickly outgrow clothes making purchase of new apparel an absolute necessity. There is also a high level of safety standards required to be adhered to on account of laws enacted by the governments in these developed countries and are more stringent compared to that of general apparel. Most of the brands & retailers have a zero tolerance policy for non-compliance of standards for both chemical & physical safety of children’s apparel, especially those which are intended for children of 0 - 3 years of age.
The textiles value chain globally extends across boundaries of countries. While developed economies like the U.S., E.U. & Japan are among the major consumption markets, most of the production in this labor intensive industry takes place in developing & least developed countries due to low labor costs. Although China has a lion’s share in apparel exports, it has started to lose manufacturing competitiveness owing to rising labor & energy costs. Additionally, growing domestic demand has forced many local manufacturers to shift focus away from exports. This has opened up opportunities for other key exporting countries, especially India, which has the distinct advantage of abundant cotton supply, government support for apparel manufacturing and a strong reputation of meeting stringent quality, environmental & social norms of international buyers. India also possesses expertise with embroideries, trims & patchworks and can meet design & product development requirements of the western market, making it a sourcing destination of choice for buyers & buying offices that prefer to outsource designs from suppliers.
Valuation & Outlook
We believe SPAL is truly at an inflection point as it looks to leverage its healthier financial position, strong customer relationships & end-to-end manufacturing capabilities to foray into U.S. markets as well as grow its business with existing clientele. The close proximity of its manufacturing facilities to an international port along with convenient access to skilled labor, raw materials, machinery supplies & replacement parts offer potential for significant savings in production, labor & transportation costs. This puts SPAL in a unique position to take advantage of the structural tailwinds in the form of policy push by the Centre to promote apparel manufacturing & exports and the gradual shift of sourcing preferences from Chinese manufacturers to other major apparel exporters, especially India. Its reputation as a quality conscious & responsible manufacturer would help SPAL to continue to make inroads with newer customers & geographies in the specialized & demand inelastic industry of childrenswear. Capacity additions & backward integration would enable it to fulfill orders from customers that it would previously refuse on account of capacity constraints while supplying to new customers as well.
We expect SPAL to continue on its growth trajectory seen over the last 2 quarters both on the volume & margin front on the back of its strong balance sheet as well as economies of scales kicking in from its added capacities & backward integration. Considering the inelasticity of demand for childrenswear, strong customer relationships, end-to-end manufacturing capabilities, comfortable debt position, healthy margins and strong free cash flows & return ratios, we recommend a BUY on SPAL with a 12 month price objective of Rs. 530 ( 25.9 % upside) where the scrip would trade at a 20 X FY17E earnings.
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