Published on 17/03/2017 2:43:28 PM | Source: Sharekhan
Positive On SP Apparels Ltd - Sharekhan
*Leading manufacturer/exporter of infant and children garments in India:
SP Apparels (SPAL) is one of the leading manufacturers and exporters of knitted garments for infants and children, providing end-to-end solutions from greige fabrics to finished products. Some of the company’s key strengths are stringent quality compliance, superior in-house product development (operating 21 facilities with close proximity to raw material supply and skilled labour) and strong relationship with international retailers (Tesco, ASDA, Primary, Mothercare etc). SPAL also has a license to manufacture, distribute and market adult menswear products in India under the ‘Crocodile’ brand. The scale-up in operations and de-leveraging of the balance sheet helped SPAL to achieve a CAGR of 8% in revenue, 16% in operating profit and 145% in the PAT (largely on account of de-leveraging of the balance sheet) during FY2013- FY2016.
* Capacity enhancement & backward integration to improve margins; will bring in efficiency in working capital management:
SPAL is proposing to utilise ~Rs75.1 crore out of the funds raised through its Initial Public Offering for capacity enhancement (in spinning and dyeing units) and to set up a new knitting facility. These investments will not only lead to de-bottlenecking and backward integration, but will also lead to better operating efficiencies, resulting in a gradual improvement in the margins in the coming years (due to expected savings in transportation, packaging and other manufacturing costs). Further, backward integration is expected to improve it’s working capital management from the current level of about 40 days. The improvement in the profitability and savings in working capital will be utilised for driving future growth. Also, the company has no plan to take incremental debt.
* Strengthening retail presence; business grows more than 2x:
SPAL intends to capitalise on the growing opportunity (fast conversion of small towns into tier II/tier III towns and rising brand awareness) in the menswear products under the ‘Crocodile’ brand. The expansion of this business will be done through company owned and company operated (COCO) stores, along with the sale of the ‘Crocodile’ products through Exclusive Brand Outlets (EBO) and Multi Brand Outlets (in the area where the ‘Crocodile’ brand already has presence through COCO stores). The company is planning to set up 70 new COCO stores and expand its presence to 18 states from the current level of nine states (which is largely through EBO/LFS model). Further, the company is considering an option to launch products in the women’s essential wear category under the brand ‘Natelia’ (subject to compliance with the applicable law). All these initiatives would improve the growth prospects of SPAL’s retail business, which has more than doubled in the last two years.
* Debt reduction strengthens balance sheet; operating efficiency to improve return ratios:
SPAL repaid Rs63.0 crore of debt out of its IPO proceeds. Its debt:equity ratio reduced to 0.7x in 9MFY2017 from 1.7x in FY2016. With internal accruals expected to improve on account of operating efficiencies and better working capital management, we don’t expect the debt to rise from the current level. The funding of the upcoming capex will be done through IPO proceeds and future capex is expected to be funded through internal accruals. The return ratios have seen a substantial improvement in the recent past and are expected to improve further (RoE improved to 22.6% in FY2016 from just 7% in FY2014 and RoCE improved to 19.3% in FY2016 from 13.4% in FY2014).
*Expansion and backward integration to drive earnings growth; see upside of 20-25% from current level:
The planned expansion and operating efficiencies (resulting due to backward integration) would lead to 20%/45% CAGR in SPAL’s revenue/PAT over FY2016-FY2019. The company is focusing on expanding its global presence by entering into more tie ups with the international clients. The stock is currently trading at 15.9x/11.6x its FY2018E/FY2019E earnings. We have a positive view SPAL and foresee potential upside of 20-25% from the current level based on better earnings prospects.
* Key risk:
About 90% of SPAL’s revenue comes from exports (predominantly done in the UK). Any downturn in the macro environment or change in the trading policy in its key overseas markets would act as a key risk to SPAL’s earnings.
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