Initiating Coverage. Monte Carlo Fashions Ltd. 1 P a g e

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1 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Recommendation BUY Extended winter will support near term RESULT!!! CMP 381 Upside 15-20% Sector Stock Details Textile BSE Code NSE Code Bloomberg Code Montecarlo MOCF IN Market Cap (Rs cr) 828 Free Float (%) wk HI/Lo (Rs) 664/328 Avg. volume (BSE+NSE) (Quarterly) Face Value (Rs) 10 Dividend (FY 18) 12 Shares o/s (Crs) 2.17 Relative Performance 1Mth 3Mth 1Yr Monte -1.3% 2.6% -37.8% Sensex -1.2% 1.5% 5.1% Shareholding Pattern Sep 18 Promoters Holding Institutional (Incl. FII) 7.27 Corporate Bodies 5.64 Public & others Akansha Jain ( ) Research Analyst Monte Carlo Fashions Ltd, established in 1984, has a comprehensive product portfolio of garment & winter wears across woolen, cotton & cotton blended, home furnishing and kids segments. Company sells its product under umbrella brand of Monte Carlo. As on Sep 18, the company has MBO, 242 EBO &334 NCS. Q3 is the seasonally strong quarter as this season sales comprises of Winter wear & cotton wear Investment Rational Buy back with no promoter participation - As on Sep 2018, promoter holding in the company stands at 64.77%, and since the promoters are not participating in the buyback their holding post buy back would increase to 67.9%, Other than this, buy back will lead to effective cost of buying to come down which will create room of safety for investors. At CMP of Rs 381, with 15% acceptance ratio at a price of Rs 550, the effective cost of buying share will come down to Rs 351. With buyback return ratio will also improve Lower interest in midcap stock with Weak H1 led to attractive valuation- On half yearly basis; H1FY19 vs. H1FY18, company sales grew by 9.8%, However, Ebitda margins depressed by 546 bps. Inspite of this, for the year, the management has maintained its guidance for 15% growth and stable margin at last year i.e.17.5%, indicating improved performance in Q3 which is seasonally strong quarter contributing around 55-60% of revenue. From Dec , till date share price has corrected by ~38%. This correction we feel is mainly due to lower interest in mid cap stock and Weak H1 result. With Q3 to be strong we expect MCFL to give reasonable return in near term. Strong brand - Monte Carlo enjoys a good brand name and customer loyalty. and is recognized as Super Brand for woolen knitted apparel since Sep 2004 Diversification of business portfolio Over FY12-18, the cotton segment has grown at a CAGR of 10.8%, Home furnishing by 126.6%, & kids wear grew by 43.4% whereas woolen segment has grown at a CAGR of 1.4%. Higher growth in cotton, home furnishing and kids wear segment is helping the company in diversifying and expanding its reach to different geographies. Valuation & Recommendation Over F12-18, company sales has grown at a CAGR of 9.6%, operating profit has grown by 3.5%. Going ahead, Q3 being the best quarter and with extended winter this season we expect management will be able to meet its guidance and company s sales to grow by 15% in FY19E. We expect operating margins to remain stable at 17.5%. Management has guided average sustaining capex to be in the range of Rs 8-10 cr on yearly basis in the next two years and near term growth would be achieved by higher capacity utilization. Higher profit with low capex will generate higher FCFF. Higher operating margins will lead ROE & ROCE to improve to 12.9% & 16.6% in FY19E.We expect company to report EBITDA of Rs cr in FY19E and is likely to do PAT of Rs 66.5cr and EPS of Rs 30.5 in FY19E At CMP, the share is trading at EV/Ebitda of 6.6x and PE of 12.5x FY19E EPS. We recommend a BUY on Monte Carlo for 15 20% return in near term. Year Net Sales Growth % EBITDA Margin % PAT Margin% EPS PE EV/EBITDA ROE % FY % % % % FY % % % % FY % % % % FY18* % % % % *FY18 numbers are restated as per INDAS. Previous nos are not comparable 1

2 Business Monte Carlo Fashions Ltd, established in 1984, is recognized as Superbrand for woolen knitted apparels by Consumer Superbrands India since Under the umbrella brand of Monte Carlo, Company has a comprehensive product portfolio across woolen, cotton & cotton blended, home furnishing and kids segments. The Company has various sub-brands under the Umbrella Brand Monte Carlo Product portfolio and Ranges of Brand Monte Carlo Woolens & Woolenblended Cottons & Cottonblended Home Furnishing Kids Monte Carlo Premium and mid-premium segments for men Luxuria Premium range for Men Denim Mid-premium Range Alpha Exclusive range for Women Tweens Exclusive Kids wear Collection for 7-13 years age group Cloak & Decker Economy range for men Sportswear fitness & fashion wear range Rock.it Sweaters, Pullovers thermals, woolen accessories (caps, mufflers, shawls, stoles) Cash-wool sweaters, blazers, coats Sweaters, cardigans Shirts, trousers, t- shirts, track-suits and jackets Cotton shirts, trousers and t-shirts Denim trousers (jeans) and shirts Shirts, t-shirts, tops, trousers, jackets and sweat-shirts Cotton and cottonblended t-shirts Tank, Polo T-Shirts, Shorts, Track Pants Mink blankets, bed sheets and quilts Sweat-shirts Sweaters, Cardigans, Shirts, t-shirts &Bottoms The company has 3 manufacturing facilities in Ludhiana, Punjab - 1 for woolen apparels & 2 for cotton apparels. The manufacturing facilities include facilities for product development, design studio and sampling infrastructure. The company has recently started in-house manufacturing of cotton t-shirts and thermals. The home furnishing products are outsourced from a network of job work entities. The company has wide-spread retail presence across India through a judicious mix of EBOs, MBOs and national chain stores located in 22 states & 1 union territory As on Sep 2018 Multi Brand Outlet National Chain Stores Exclusive Brand Outlet Co Owned Co Operated Exclusive Brand Outlet Franchise Owned Franchise Operated Total Number of Outlets % of Revenue Contribution 63% (MBO+NCS) 4% 29% Distribution Sale Model Pre-Booking of orders Outright Sales SOR Sale or Return / Outright Sales Inventory owned by Company Pre-Booking of orders Outright sale Inventory Risk No Yes Yes Minimal (5% - 15 % of Products Return Allowed) Discount Sharing No Yes Yes Yes (Range of 5% %) Payment Collection Credit Exclusive commissioned Reputed retail chains - Bank guarantee's and Risk agents are liable to pay PDC taken from franchise 2

3 CMP Geography wise Of these EBOs, 2 EBO are in Nepal and 1 in Bangladesh. Other than this, the company has E- commerce presence through its own portal and as well as tie-ups with Digital platforms such as Flipkart, Amazon, Jabong, Myntra & Kapsons etc. Online sales currently contributes 4% to the revenue Quarter Sales(%) Q % Company has very high seasonality in sales with Q3 (Oct Dec) quarter contributing Q % over 55% of annual sales. This is mainly because of sales of winter wear are Q % concentrated in this quarter Q % Revenue Contribution (FY18) Segment wis 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4% 4% 3% 4% 5% 4% 3% 4% 6% 5% 13% 9% 4% 3% 14% 13% 13% 16% 22% 25% 57% 59% 27% 26% 24% 25% 51% 53% 53% 51% FY13 FY14 FY15 FY16 FY17 FY18 North East central South West 100% 80% 60% 40% 20% 0% 0% 57% 3% 5% 5% 5% 5% 5% 7% 8% 8% 10% 9% 8% 48% 51% 53% 51% 58% 61% 42% 43% 37% 35% 34% 28% 26% FY12 FY13 FY14 FY15 FY16 FY17 FY18 Wollen Segment Cotton segment Home Furnishings Kids Being largely dependent on woolen segment the company was more focused towards north and east. However, the company plans to expand in western and southern markets in India with diversification of its product portfolio. Investment Rationale Buy back with no promoter participation Monte Carlo is doing Buy-Back of 1,000,000 Equity Shares at a price of Rs 550 per share for an aggregate maximum amount of Rs 55 crore. Promoter will not be participating in offer. As on Sep 2018, promoter holding in the company stands at 64.77%, and since the promoters are not participating in the buyback their holding in the company post buy back would increase to 67.9%. Other than this, the buyback will lead to effective cost of buying coming down. This creates room of safety for investors. At CMP of Rs 381, with 15% acceptance ratio at a price of Rs 550, the effective cost of buying share will come down to Rs 351 ( ~-7.9% from the buy price). The following table shows what will be the effective cost of buying on different acceptance ratio. Apart from this buyback ratio will improve the ROE & ROCE of the company Adjusted Price to Buy back Acceptance ratio 10% 15% 20% 25% 30% 35%

4 Lower interest in midcap stock with Weak H1 led to attractive valuation On half yearly basis, H1FY19 vs. H1FY18, company sales grew by 9.8%.increase in sales led to higher gross margins which improved by 85.6 bps. However, Ebitda margins of the company depressed by bps coming in at 15.2% in H1FY19 vs. 20.6% in H1FY18. Dip in Ebitda margins was mainly due to higher advertisement and other expenses. Advertisement cost came at Rs.14.3 Cr in H1FY19 vs. Rs 8.4 cr in H1FY18.Other expenses for the company came in at Rs 52.5 cr in H1FY19 vs. Rs 41.9 cr in H1FY18. For the year, the management has maintained its guidance for 15% growth and stable margin at last year level i.e.17.5%. With Dip in margins in H1FY19 and Q4 being seasonally loss making, this translates Q3 margins to be strong. Q3 being the best quarter for the company (records ~55% of yearly sales); with extended winter season we feel the company will be able to achieve its yearly guidance. Higher sales will in turn improve the margins of the company. From Dec , till date price has corrected by ~38%. This correction we feel is mainly due to lower interest in mid cap stock and Weak H1 result. With Q3 to be strong we expect prices will bottom out and would move from here. At CMP, Share is trading at EV/Ebitda of 6.6x and PE of 12.5x FY19E EPS Strong brand Monte Carlo enjoys a good brand name and customer loyalty. The company s marketing plans which includes advertising, endorsements through well-known personalities etc. helps the company to create awareness amongst the people especially youngsters. Monte Carlo is recognized as Super Brand for woolen knitted apparel since Sep Diversification of business portfolio Over FY12-18, the cotton segment has grown at a CAGR of 10.8%, Home furnishing by 126.6%, & kids wear grew by 43.4% whereas woolen segment has grown at a CAGR of 1.4%. Higher growth in cotton, home furnishing and kids wear segment is helping the company in diversifying and expanding its reach to different geographies. Monte Carlo was majorly depended on woolen segment. As such earlier its sales was majorly from northern and the eastern region. With the focus on different segment like cotton, home furnishing, kids, Monte Carlo contribution of central, western, southern region are increasing FY13 FY14 FY15 FY16 FY17 FY18 Woollen Segment 43% 37% 35% 34% 28% 26% Cotton segment 48% 51% 53% 51% 58% 61% Home Furnishings 7% 8% 8% 10% 9% 8% Kids 3% 5% 5% 5% 5% 5% Total 100% 100% 100% 100% 100% 100% 4

5 Key Risks and concerns The company has high dependency on woolen yarn which it purchases from its group company who in turn imports it from Australia The company s business being seasonal in nature generates largest revenue in the winter season (~55%). Any delay in the winter season would lead to low generation of the revenue and will in turn impact the total revenues for the fiscal year. Winter is highly seen in the northern and the eastern region. As such company is more dependent on northern and eastern region. Any change in demand from this region would affect the financial performance of the company Valuation and Recommendation We have compared MCFL with Kewal Kiran Clothing, Page Industries and Indian terrain. Although the business is not completely comparable the comparison is primarily on the basis of competition, brand image, style, performance and quality. Valuations for MCFL at PE of 13.9x and 7.7x its EV/EBIDTA for FY 18 earnings are lower than the peer group. FY18 Sales EBITDA Margin PAT Margin EPS PE EV/EBITDA ROE Monte Carlo % % % Kewal Kiran % % % Page Industries % % % Indian Terrain % % % Source: Company Data, NBRR Over F12-18, company sales has grown at a CAGR of 9.6%, operating profit has grown by 3.5%. Going ahead, Q3 being the best quarter and with extended winter this season we expect management will be able to meet its guidance and company s sales to grow by 15% in FY19E. We expect operating margins to remain stable at 17.5%. Management has guided average sustaining capex to be in the range of Rs 8-10 cr on yearly basis in the next two years and near term growth would be achieved by higher capacity utilization. Higher profit with low capex will generate higher FCFF. Higher operating margins will lead ROE & ROCE to improve to 12.9% & 16.6% in FY19E.We expect company to report EBITDA of Rs cr in FY19E and is likely to do PAT of Rs 66.5cr and EPS of Rs in FY19E At CMP, the share is trading at EV/Ebitda of 6.6x and PE of 12.5x FY19E EPS. We recommend a BUY on Monte Carlo for 15 20% return in near term. 5

6 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec PE Band - Price 12x 15x 18x 23x Half Yearly Financials H1FY19 H1FY18 Var Net Sales % Gross Profit % Gross Margin (% of net sales) 67.0% 66.2% Total Expenditure % EBITDA % % of net sales 15.2% 20.6% Net Profit % Equity EPS (Unit Curr.) Source: Company data, Nirmal Bang Securities Q3 is the best quarter for the company due to winter sale + cotton sales. Although gross margins improved by 85.6 bps but Ebitda margins declined by bps due to higher other expense and advertisement cost. Advertisement cost came at Rs.14.3 Cr in H1FY19 vs. Rs 8.4 cr in H1FY18. Other expenses for the company came in at Rs 52.5 cr in H1FY19 vs. Rs 41.9 cr in H1FY18. 6

7 Financials Income Statement (Rs. In Cr) FY16 FY17 FY18 Balance Sheet (Rs. In Cr) FY16 FY17 FY18 Revenues - Net Issued Share Capital % change 6.7% -6.9% -0.4% Reserves & Surplus EBITDA Net Worth EBITDA margin 19.8% 13.4% 17.5% Minority Interest Depreciation Net Deferred Tax liabilities Operating income Total Loans Interest Trade Payables Other Income Provisions PBT Other CL Exceptional (Gain)/ Loss Total Liabilities PBT Net Fixed Assets Tax Tax Asset PAT Investments Minority intererst / share of associate Inventories PAT Cash and cash equivalent APAT Sundry Debtors Shares o/s ( No. in Cr.)* Loans & Advances Adj EPS Other CA Quarterly (Rs. In Cr)(stand) Dec.17 Mar.18 Jun.18 Sep.18 Total Assets Revenue including OI Cash Flow (Rs. In Cr) FY16 FY17 FY18 EBITDA EBITDA Dep Exceptional & forex PBIT Change in WC Interest Tax Other Inc CF from Operations Forex & exceptional Capex and change in WIP PBT Investment Tax Other Income PAT Cash from Investment Comprehensive income Dividend paid Total Comprehensive income Share Capital and Premium EPS (Rs.) Interest Paid Operational Ratio FY16 FY17 FY18 Change in Borrwing EBIT margin (%) 15.1% 9.1% 13.9% Others Adj.PAT margin (%) 9.5% 7.7% 10.4% Cash from Financing Adj. ROE (%) 12.2% 8.9% 11.3% Net change in Cash ROCE (%) 16.3% 9.4% 13.7% Opening cash balance Debt Equity Ratio Closing cash balance Valuation Ratio FY16 FY17 FY18 Per Share Data FY16 FY17 FY18 Price Earnings (x) Cash EPS Price / Book Value (x) BV per share EV / Sales Cash per share EV / EBIDTA Dividend per share Source: Company data, Nirmal Bang Securities *FY18 numbers are restated as per INDAS. Previous nos are not comparable 7

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