IGI Logo

Challenging times ahead; revival expected in H2FY23

About the stock: Indo Count is one of India’s largest home textile manufacturers & exporters with an extensive product range that spans across bed sheets, quilts, bed linen. It has a presence in top nine out of 10 top big box retailers in US

* ICL is an integrated bedding solution provider, boasting capacity of 90 million meters per annum of dyeing/processing and cutting /sewing

* It exports to nearly 54 countries with US being the prime market (~75% of revenues and commanding ~20%+ market share in bed sheets)

Q4FY22: Demand slowdown impacted volumes; 15% EBITDA margins maintained.

* Marred by demand slowdown in key export markets (US) and logistical issues, volumes for ICL declined 19% YoY to 17.6 million (mn) in Q4FY22. Higher ASPs (up 16% YoY to | 356/meter) owing to better product mix resulted in revenues declining 5% YoY to | 653.8 crore

* Despite significant pressure on RM prices (cotton) and supply chain related challenges, the company maintained its gross margins levels of 50%+ (up 130 bps YoY) and also its EBITDA margins at ~15% in Q4FY22

* Better hedging of raw materials and higher contribution from value added products supported margins

What should investors do? The stock price witnessed a steep correction in the last six months (~38%). India’s market share loss in US bedsheets (from 55% to 50%), all-time high cotton prices, softening of US demand (lower housing sales) are some of the main factors weighing on the stock performance. Inventory days have spiked significantly while higher capex has also led debt to bloat to | 1300 crore (D/E: 0.8x). While H1FY23 is expected to remain challenging, ICL expects a gradual recovery from Q3 onwards. In our view, the recent price correction largely factors in the near-term concerns.

* Hence, we recommend BUY rating on the stock

Target Price and Valuation: We value ICL at | 190 i.e. 8x FY24E EPS

Key triggers for future price performance:

* FTAs with UK/Europe to improve Indian textiles global competiveness

* With the latest acquisition of GHCL, it would be able to add a whole new avenue of customer base, which is untapped, thereby leading to gain in global market share. ICL plans to cross sell its value added categories (fashion, institutional and utility categories) to the existing clientele of GHCL.

* Focus on increasing share of B2C and D2C segment through its branded portfolio (owned and licenced). This would aid margins, going forward

Alternate Stock Idea: Apart from ICL, in our textile coverage we also like KPR Mills.

* KPR Mills is among select vertically integrated textile players in India that has displayed consistent operating margins with strong return ratios

* BUY with a target price of | 815

To Read Complete Report & Disclaimer Click Here

https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

Above views are of the author and not of the website kindly read disclaimer