Premco Global (PREGLO) 600

Transcription

1 Company Update Rating matrix Rating : Buy Target : 825 Target Period : months Potential Upside : 38% What s changed? Target Unchanged at 825 EPS FY17E Unchanged at 37.3 EPS FY18E Unchanged at 5. EPS FY19E Unchanged at 6. Rating Unchanged Key financials crore FY16 FY17E FY18E FY19E Net Sales EBITDA EBITDA Margins (%) Net Profit EPS Valuation summary FY16 FY17E FY18E FY19E P/E Target P/E EV / EBITDA P/BV RoNW RoCE ROIC Stock data Stock Data crore Market Capitalization 198 Total Debt (FY16) 4 Cash and Cash Equivalent (FY16) 21 Enterprise Value week H/L 974 / 53 Equity Capital 3.3 Face Value 1 MF Holding (%) 2.4 FII Holding (%). Stock data 1M 3M 6M 12M Premco Global Arrow Textiles Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia, CFA shashank.kanodia@icicisecurities.com Srinath Sridhar srinath.sridhar@icicisecurities.com November 16, 216 Premco Global (PREGLO) 6 Vietnam plant operational, growth to follow... Premco Global reported a fairly decent Q2FY17 performance; largely tracking our investment rationale. Net consolidated sales for the quarter were at 21.7 crore, down 3% YoY. The company reported external sales of 1.5 crore from the Vietnam facility for this quarter On a consolidated basis, EBITDA in Q2FY17 came in at 5.6 crore (EBITDA margin at 25.9%) while PAT in Q2FY17 was at 3. crore Premco commenced operations at its Phase I unit in Vietnam in Q2FY17 with Phase II on schedule to be commissioned by FY17E end Niche segment- narrow elastic fabric/tapes! Premco Global is a technical textile unit manufacturing woven & knitted narrow elastic fabric, which finds application in innerwear. The company has a niche business model with an installed capacity of 11 crore metre domestically. In FY16, sales volume were at ~9 crore metre with blended realisation at ~ 8/metre. Premco is largely an export oriented unit with exports contributing ~66% of the sales mix. The company s moat is the technical knowhow of its product profile, long gestation period of customer approval (entry barrier) & innovative product solution. Premiumisation story in innerwear segment staying intact to benefit Globally, innerwear is a highly brand conscious market (US$16 billion) with relatively stable consumption patterns. Branded innerwear commands an impressive 85% share of the US$21 billion (215) innerwear market (one of the largest). It is expected to grow at 2-5% with premiumisation share largely intact. Domestically, the Indian innerwear market size is pegged at 2, crore (214) with the organised sector comprising ~52% share. It constitutes ~8% of the overall Indian apparel industry and is the fastest growing segment of the market. It is expected to grow at 13% CAGR to 68 crore by 224. Domestically, with rising per capita income, higher discretionary spending, rising urbanisation and growing fashion consciousness, the innerwear industry is on a strong footing with increasing premiumisation, going forward. Impressive capacity expansion, first phase commissioned in Vietnam Premco is currently setting up a narrow elastic fibre plant in Vietnam (capex of ~ 2 crore). The plant in Vietnam is a result of natural preference of its customers to expand its manufacturing base in Vietnam amid low employee costs and benefits associated with Trans Pacific Pact (TPP). On the back of commissioning of Vietnam facility, we expect volumes to grow at 17.6% CAGR in FY16-19E to 14.7 crore metre in FY19E (9 crore metre in FY16). The capex is being implemented in two phases with each phase having a capacity of 3.5 crore metre with revenue potential of ~ 25 crore each. The first phase has already been commissioned in Q2FY17 with full ramp up expected by Q4FY17E end. At peak capacity, the Vietnam facility can generate RoCE in excess of 5%. Un-levered balance sheet; robust return ratios, moat to sustain! By virtue of healthy cash flow from operations in FY14-16 (~ 12 crore/year), a relatively stable working capital cycle (~1 days) and minimal capex spend, Premco has a debt free balance sheet with surplus cash on books at 17 crore (FY16). Sustained EBITDA margins have resulted in healthy return ratios with FY16, RoE, RoCE & RoIC at 25%, 33% & 56% respectively. Going forward, we expect Sales & PAT to grow at a CAGR of 19.% & 16.3% over FY16-19E. We value Premco at 825, i.e. 15.x P/E on FY18E & FY19E average EPS of 55.. We assign a BUY rating to the stock. ICICI Securities Ltd Retail Equity Research

2 Company Analysis Premco Group was established in 1966 and was primarily involved in manufacturing and export of high-fashion ready-made garments to department, chain stores and boutiques in international markets across the US, Europe and the Latin Americas. In 1977, Premco Global ventured into manufacturing of high-quality woven and knitted elastic fabric, which finds application in the apparel, lingerie, sports-related, medical, footwear, luggage and automotive fields. Premco s product usage is gender agnostic. Currently it has four manufacturing facilities across Maharashtra viz. Dadra, Vapi, Palghar and Mumbai. Premco Global production rising on the back of capacity expansion! During FY13-16, the capacity utilisation steadily rose from 73% to 81%. Sensing the robust demand, Premco has set up an additional 7 crore metre facility in Vietnam, which is being implemented in two phases. The first phase of 3.5 crore metre has already been commissioned in Q2FY17. We expect the entire capacity to be absorbed by the end of FY17E. Capacity utilisation is expected to get augmented to ~81% in FY19E with corresponding elastic tapes sales at 14.7 crore metre in FY19E, implying sales volume CAGR of 17.6% in FY16-19E. Exhibit 1: Capacity, production & capacity utilisation levels Premco is also expected to enjoy slightly better realisations of 8.5/metre at its Vietnam facility as it will supply value added products to its export clients Crore Metres FY15 FY16 FY17E FY18E FY19E % Capacity Production Capacity Utilization Levels Exhibit 2: Blended sales and realisation Crore Metre FY15 FY16 FY17E FY18E FY19E /metre Export realisations to benefit from larger width name tape business in which Premco enjoys a competitive advantage Sales Volume Realization Moreover, this sales volume growth will be led by sales in the export market, which are indeed accretive in realisations and margins. The Vietnam facility has primarily been set up to cater to export clients such as Hanes and Jockey (US). Realisations are expected to be steadily in the range of ~ 8-8.5/metre. Indian facilities will be used to cater to its domestic clients while realisations may remain largely flat at 8/metre. ICICI Securities Ltd Retail Equity Research Page 2

3 Net sales to witness strong growth due to capacity expansion Going forward, on the back of commissioning of the Vietnam plant, we expect sales to grow at a CAGR of 19.% in FY16-19E led by volume growth of 17.6% in the aforesaid period. Exhibit 3: Net sales trend We expect Premco to record net sales of 15 crore in FY18E & 12 crore in FY19E crore FY15 FY16 FY17E FY18E FY19E Exhibit 4: EBITDA & EBITDA margins trend Sales expansion to drive EBITDA & PAT, going forward Volume expansion, sales tilted in favour of exports markets and increasing share of VAPs will enable Premco to maintain impressive EBITDA margins of ~26% in FY16-19E. In FY16-19E, on account of sales volume growth (17.6% CAGR) and steady EBITDA margins, we expect PAT to witness robust growth of 16.3% CAGR in FY16-19E. Exhibit 5: PAT & EPS trend crore % crore /share 24 FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E EBITDA EBITDA Margin PAT EPS ( ) Corresponding EPS is expected at 37.3 in FY17E, 5 in FY18E & 6 in FY19E Return ratio profile expected to be healthy despite low dividend payout Exhibit 6: Return ratios profile The strong profitability and low dividend payout is expected to increase the equity base from 5.8 crore in FY16 to 94 crore in FY19E. Despite the swelled equity base, Premco is expected to report enviable RoE, RoCE & RoIC ratios of 21%, 29% & 48%, respectively in FY19E % FY16 FY17E FY18E FY19E RoE RoCE RoIC ICICI Securities Ltd Retail Equity Research Page 3

4 Outlook and valuation By virtue of healthy cash flow from operations in FY14-16 (~ 12 crore/year), relatively stable working capital cycle (~1 days) and minimal capex spend, Premco has a debt free balance sheet with surplus cash on books at 17 crore (FY16). This along with further CFO over FY17E will take care of capex being executed at Vietnam. Sustained EBITDA margins have resulted in healthy return ratios with FY16, RoE, RoCE and RoIC at 25%, 33% & 56% respectively. Going forward, on the back of commissioning of the plant in Vietnam, we expect sales to grow at a CAGR of 19.% in FY16-19E led by volume growth of 17.6% in the aforesaid period. EBITDA & PAT, however, are expected to grow at a CAGR of 17.7% & 16.3%, respectively, in FY16-19E largely taking into account initial ramp up costs at Vietnam (limited margin expansion) and increasing depreciation and lower other income incidence (due to utilisation of cash towards capex). We value Premco at 825, i.e. 15.x P/E (~.9x PEG) on FY18E & FY19E average EPS of 55.. We have a BUY recommendation on the stock. The key risks to our call are client concentration risk and an elongated working capital cycle. Exhibit 7: Valuation Summary Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY17E FY18E FY19E Exhibit 8: Two year forward P/E (Premco Global currently trading at 1.7x) Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 ( ) Nov-16 Price 16x 13x 11x 8x 6x 3x 1x Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 4

5 es Recommendation history vs. consensus estimate ( ) 1, Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Aug Nov-16 (%) Price Idirect target Consensus Target Mean % Consensus with Buy Source: Bloomberg, Company, ICICIdirect.com Research; *I-direct coverage on Premco Global was initiated on October 216 Key events Date/Year Event 21 Premco is considering expansion of its current installed capacity and corresponding production on the back of growing demand. It has identified a suitable location at Vapi for the same. 211 The company has expanded its installed capacity at Vapi by 1.5 crore metre to reach a total capacity of 11 crore metre. Premco net sales at 42cr witnessed a 51% jump as exports doubled to 14.5 cr in FY11 vs. 7.1 cr in FY Premco marks the beginning of a turnaround with capacity utilisation rates at 73%. Net sales at 52.1 crore were driven by both the domestic and export sales which grew in excess of 55% over previous year. The EBITDA stood at 8.8 crore with corresponding margins at 16.6%. 214 The company delivers quality products to its export clients as exports grew by 31% during the year and constitute ~ 7% of total sales. This resulted infurther strengthening of EBITDA margins to 2.8% in FY14 vs. 16.6% in FY Premco delivered a strong performance as net sales, EBITDA and PAT came in at 73.5 crore, 2.1 crore and 12.6 crore respectively. Premco also entered the High End name Tape business that offers better margins going forward. 216 The company plans to set up an additional 7 crore metre capacity in Vietnam at an approximate cost of 2 cr. The facility is expected to be commissioned in two phases (3.5 cr metre each) by Q2FY17E and Q4FY17E respectively. Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Harjani (Ashok B) 3-Sep Harjani (Lokesh Prem) 3-Sep Harjani (Suresh) 3-Sep Harjani (Prem) 3-Sep Alwani (Mulchand Gianchand) 3-Sep Alwani (Manju Mulchand) 3-Sep Harjani (Nisha Prem) 3-Sep Pattabiraman (R.) 3-Sep Chhabria (Neeta Dhirajlal) 3-Sep Harjani (Sonia Ashok) 3-Sep Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Promoter FII DII Others Buys Sells Investor name Value Shares Investor name Value Shares NA Alwani (Mulchand Gianchand) -.1M -.M Pattabiraman (R.) -.M -.M Alwani (Manju Mulchand) -.M -.M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5

6 Financial summary (Consolidated) Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Net Sales Other Operating Income Total Operating Income Growth (%) Raw Material Expenses Employee Expenses Selling Expense.... Other Operating Expense Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Total Tax Minority Interest PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Interest & Dividend paid Inc/(dec) in Share Cap.... Others.2... CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Current Liabilities Provisions Current Liabilities & Prov Net Current Assets Others Assets Application of Funds Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share (Incl Invst) Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 6

7 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 7

8 ANALYST CERTIFICATION We /I, Chirag Shah PGDBM; Shashank Kanodia CFA MBA (Capital Markets) and Srinath Sridhar BBA (Finance), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a Sebi registered Research Analyst having registration no. INH99. ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Chirag Shah PGDBM; Shashank Kanodia CFA MBA (Capital Markets) and Srinath Sridhar BBA (Finance), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Chirag Shah PGDBM; Shashank Kanodia CFA MBA (Capital Markets) and Srinath Sridhar BBA (Finance), Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. ICICI Securities Ltd Retail Equity Research Page 8