Span Capital Services Zodiac Clothing Company Ltd.

Transcription

1 Span Capital Services Zodiac Clothing Company Ltd. Current Price : Rs65 SCS BUY Target Price : Rs250 Zodiac Multibagger Stock Market Data BSE Code BSE Index 3302 AvgDailyVol W. H/L 81/42 Shareholding Pattern Promoters 74% Corporate Bodies 4% NRIs/ OCBs 5% Indian Public 18% Promoters 74% Corporate Bodies 4% Concentrated 12% Indian Public 10% Key Data Market Cap., Rsm 221 Issued Shares, mn 3.4 PBR- FY04F 0.4 Next Result FY03E Brief Financial Consolidated Year EPS PE FY FY03E FY04F Rsm FY02 FY03E Revenue Zodiac Mayfair Total PAT Zodiac Mayfair -4 6 Total February 20 th, The Company - Existence of 5 decades Zodiac Clothing Company Ltd. (Zodiac), is the part of the 'House of Zodiac' promoted by Noorani family. The company is engaged into Apparel manufacture & export for last 5 decades, which shows management commitment towards the business. In 'Indian Shirts' market Zodiac brand has strong leadership and in 'Ties' has secured an enviable position. Merger with 'Mayfair Ltd.' - Fair Valuation Zodiac is merging its 51% subsidiary 'Mayfair Ltd.' (w.e.f. Apr 1 st, 2002) with itself by issuing only 38,000 shares of Zodiac for the additional 49% stake in the company. The fair valuation in favour of listed company clearly shows prudent corporate governance and management commitment towards 'Zodiac Clothing'. The merger with Mayfair is expected to improve Zodiac's FY03E revenue by 77% to Rs1.34bn. Exclusive European Tie-up - to sell Branded Zodiac Zodiac recently tied up with Ciro Citterio, UK, to sell 'Zodiac brand' as an exclusive Indian brand in 130 stores across the UK. Prior to this tie-up, Zodiac had entered into a similar arrangement very successfully in Holland and in Germany. Robust Growth - Export post 2005/Domestic Organized Retailing - Zodiac's major export market, EU, will be removing all import restrictions (Quota System) by 2005 as per WTO agreement. We believe removal of import restrictions and company's tie up with European retailers to market under own brand name are likely to fuel future growth. Also the domestic organized retailing market is expected to grow at a CAGR of 15% going forward. Attractive Dividend Yield - Over 7.7% Zodiac is a consistent dividend paying company. At CMP, dividend (Rs5/share) yield stands at 7.7%, better than bank deposit return (6.25%, SBI 3yrs+). Brand Acquisition - Valuation Trigger - We believe that over a period of time 'Zodiac' brand will be brought in 'Zodiac Clothing'. If 'Mayfair' valuation offers any indication, Brand valuation will be done in favour of 'Zodiac Clothing' shareholders. We believe Brand valuation would offer big valuation trigger to the scrip. Valuation - Very Attractive We expect consolidated revenue & earnings to grow at a CAGR of 16% & 30% respectively two years going forward to Rs1.6bn and Rs74mn respectively. Attractive dividend yield of 7.7%, liquid Cash & equivalent of Rs31/share and an attractive valuation, quoting at 0.4x PBR & 3.0(x), FY04F earnings makes Zodiac a strong investment case. We initiate coverage with a BUY on the scrip. Analyst : Setu Divekar Ph: setu@spancap.com

2 Zodiac- The Company Company Background Promoter Board of Directors Production Capacity Existence of 5 decades Zodiac clothing makes readymade garments mainly famous for its premium quality shirts and ties. The company has been in this business for over 48 years and opened its first exclusive retail store in 1973 in Taj Hotel- Mumbai. At present Zodiac brand is available with over 80 exclusive and 1000 multi-brand retailers. The company's product covers the range from Rs545 to R2200. In ties, the company has become a generic name but the market is highly fragmented. Mr. M.Y. Noorani, Zodiac's founder chairman is the founding father of the clothing industry in India. He was the founder of the Clothing Manufacturers' Association of India. Mr. A.Y. Noorani, Vice-Chairman is with the company for about 35 years. Mr. S.Y. Noorani, who joined group in 1982, is credited for company's recent launch 'Zod!' in casual wear. Zodiac has some equally dynamic personalities on its board. Dr. S. Abid Hussain- Former Secretary- Ministry of Commerce. Mr. Bernhard Steinrucke- Managing Partner of the Board of ABC Bank GmbH, Berlin. Mr. Deepak Parekh- Chairman- H.D.F.C, Glaxo Smithkline Mr. Gurucharan Das- Former Chairman & MD of P & G India, Mr. M.L. Apte- Former Sheriff- Mumbai Mr. S.M. Datta- Former Chairman of Hindustan Lever. Mr. S.R. Iyer- Chairman of Credit Information Bureau India Ltd. Mr. Y.P. Trivedi- Former President of Indian Merchant Chamber At present, Zodiac has manufacturing facilities in Karnataka, Gujarat, Daman & Dubai. The manufacturing capacity of all the facilities put together is close to 3m garment units per annum. Besides India, Zodiac has offices in Dubai, Germany, U.K., and USA. Of these, 3 design offices are located at the fashion capitals namely, London, New York & Dusseldorf. It is these very design offices, which have helped the Zodiac to bring out some of the hottest trends in male couture first to the country before any of its competitors. Indian Textile Industry Textile Export India has garnered about 2.5% market share in global textile business over a years and exported textiles worth about USD11bn in FY02 and USD7bn in first 6months of FY03, a growth of 12% in same period (USD6bn- 6m FY02). Ready-made Garment (RMG) is the major contributor with about 47% (FY02) of total textile export revenue is from RMG. RMG export has grown at a CAGR of 12% to USD5bn in FY02 from USD2.8bn in FY97 as against 8% CAGR growth of Indian textile export from USD7.1bn to USD10.6bn in FY02. RMG export share has stabilized at around 46% of total textile export for last 5 years. We expect RMG export share in an overall textile export along with total Textile export to improve as a result of free trade by 2005 (WTO regime) and an abolition of trade barriers, quota import system in major markets like Europe and USA. Source : Textile Ministry

3 Zodiac - Business Export to Private Labels Graduating as A Brand Although, India has 2.5 % share of world trade in clothing, almost the entire export comprises of what is known in the trade, as "Private Label" i.e. the brand name on the product is that of the foreign company who sells the goods, whether it is the likes of Polo Ralph Lauren, Hugo Boss, Harrods to name a few. In majority of cases Indian companies acts mere as contract manufacturers. Zodiac is trying to be an exception to the rule. Zodiac is in the process to transform itself from a mere contract manufacturer to a 'Brand' in an Overseas markets like E.U. One such unique foray was when Zodiac recently tied up with 'Ciro Citterio' a UK based company. This tie-up has helped Zodiac sell its 'Zodiac' brand, as an exclusive Indian Brand i.e. the formal-office wear shirt, in 130 stores across the United Kingdom. The tie-up would offer much needed shelf visibility for 'Zodiac' brand in a major market like UK. We consider this is truly a major breakthrough for an Indian brand. We expect the tie-up would improve margins going forward. Prior to this tie-up, Zodiac had entered into a similar arrangement very successfully with 'De Bijenkorf' in Holland and Germany (Company commands 2% market share in Shirt segments in Germany) E.U. & USA Removal of Quota System Retail Reach - India Competition & Product Range European Union and United States, the two major trade partner of India and major market for Zodiac will be phasing out 'Quantitative Restrictions' from year 2005 as per WTO agreement. We believe the removal of quota system would help Zodiac as a 'Brand'. Established brands like 'Zodiac' would be in better position to take an advantage of the situation than a mere contract manufacturers by leveraging its brand name. The company has quite a strong presence in the domestic market with over 80 exclusive outlets (30 Outlets- Company Owned) and sells through approximately 1,000 multi-brand retailers. The company ranks as one of the top five brands in the country. There has been competition locally from Colour Plus, Indigo Nation, Provogue stealing the limelight in the causal segment while brands like Van Heusen, Arrow and others in formal. The company has launched 'ZOD!' brand in the causal segment. Though the late entrant, the brand has picked up significantly. The Zod! recent range comprises of Changeant Satin tretch s, Shiny Shimmers, Furry Denims, Toned down Shimmers and the Retro s which offer the Ivy Collection to discerning Indian males. This range is available at all Zodiac showrooms, Shopper s Stop, Lifestyle, Piramyd and other premium Multibrand stores across India. Shoppers Stop Locally the company has taken stake in a leading multi-brand retailer 'Stopper s stop' by investing Rs100m. The stake in Ivy retailer would not only help company in ensuring shelf space allocation on priority basis but would also offer better valuation in future. The association with Shoppers Stop has helped company as 'Zodiac' has emerged as the largest selling 'Shirt & Tie' brand in Shoppers Stop (Brand Equity- Economic Times). We haven't considered any valuation upside from an investment in 'Shoppers Stop'. But any value unlocking through IPO or any other route would offer another valuation trigger to Zodiac.

4 Going forward Business Restructuring - Proactive Process Mayfair Limited. - Business Consolidation Zodiac is engaged into proactive business restructuring for quite some time. The major moves are the merger with subsidiary 'Mayfair Ltd.', Brand establishment in an Overseas market and an entry into casual wear with new brand 'Zod!'. Zodiac Clothing is taking over its subsidiary 'Mayfair Limited (51%)' in all stock deal by offering 1 share of Zodiac Clothing (total 38,000 shares) against 2 shares of Mayfair. Post acquisition Zodiac's equity capital would increase by Rs0.38m. In India, there is a marked shift from tailored garment to Ready-to-Wear Garments in last decade. Ready-to-Wear Garment market, which is estimated at Rs60bn is estimated to be growing at 30%. As 'Zodiac' is one of the major mens' wear brands, Indian operation of Zodiac (Formerly 'Mayfair Ltd.') is expected to fuel future revenue growth. Brand - 'Zodiac' Future Valuation Trigger from Brand Acquisition The 'House of Zodiac' owns the ZODIAC brand in a private company called 'Metropolitan Trading Company'. We believe in near future the 'Brand Zodiac' will be brought in listed company, Zodiac Clothing' at a price beneficial to Zodiac Shareholders. Brand Valuation Though the Brand Valuation is not available, few transactions in past can offer some idea. Indian Rayon's acquired Brand rights (and not the brands) for a whopping Rs2500m from Coats Vyella Inc. of UK. Arvind Clothing Company Ltd.'s (ACCL) major labels 'Arrow' and 'Lee' are only licensed to it and not sold to Arvind. ICICI had paid Rs1000m for 25 % stake in ACCL. Indus League, a relatively new entrant with 3 brand names and an unrecognized brand name, has got venture capital funding from Draper International and Dalmias. 20% stake in the same company has been taken by ICICI for Rs100m. We believe Brand ownership would offer big Valuation Trigger for the stock. We value Zodiac Brand to 1x revenue, Indian and International operations (50% of Revenue), i.e. Rs308/share. 1x, Revenue Total Company, Rsm Per Share, Rs Indian Operations Overseas Operation Total Brand Valuation Business Turnaround Improved Realization Favourable Currency Garment realization for 'Mayfair Ltd.' has improved by 4% in FY02 to Rs241 per piece from Rs233 in FY01 and by 9% for 'Zodiac Clothing' to Rs319 per piece from Rs294 in FY01. We expect realization to improve further for 'Mayfair' and 'Zodiac' as a result of improved acceptance for the premium ready-made garment and favourable currency movement respectively. Also the cost rationalization is expected to help Indian operation to improve margins and turn profitable again.

5 Attractive Valuation Growth We expect consolidated revenue and earnings of Zodiac Clothing is expected to grow at a CAGR of 16% and 30% respectively to Rs1.6bn and Rs74m respectively two years going forward. Opening up world market, free trade regime and graduation of Indian retailing market from a mom & pop stores to multi-store retailers are expected to fuel future revenue growth. Prudent Working Capital management PER Valuation Upside Zodiac's inventory management, 62 days to sales is far superior to its peers, Pantaloon- 114 days to sales, Trent- 71 days to sales and Raymond Apparel- 147 days to sales FY02. Also the receivable position, 50 days to sales is better than comparable player Raymond Apparel- 88 days to sales FY02. At CMP, the scrip is attractively trading at 3.0x, FY04F consolidated earnings and 0.14x, Mcap/sales. 3x - 8x from CMP We value stock at Rs254 (upside of 290% from CMP) without Brand in the company and at Rs562 (Upside of 765% from CMP) with Brand in the company. Excluding Brand Total Company, Rsm Per Share, Rs Cash and Cash Equivalent (1x) Cash Liquid Investment (excluding Shoppers Stop) 22 6 Total Dividend (1x) 50% Dividend 17 5 Total 17 5 Business Valuation (Expected PE- 10x) We believe current valuation has not reflected Brand Valuation PAT, Consolidated FY04F 74 PE 10x Total Valuation, Ex-Brand Including Brand Brand Valuation 1x, Revenue Total Company, Rsm Per Share, Rs Indian Operations Overseas Operation Total Brand Valuation Total Valuation Company Valuation Excluding Brand Total Valuation, Including Brand

6 Income Statement Standalone- Zodiac Clothing Consolidated Rsm FY01 FY02 FY03E FY04F FY02 FY03E FY04F Revenue Sales Duty Drawback Quota Premium Labour Chrg. Received Other Receipts Shares Sales Total Expenses Inc in Stock Raw Material Finished Goods Staff Cost Other Costs Total Exp Operating Profit Other Income Gross Profit Interest Depreciation ExtrOrd Income PBT Tax Inv. Revaluation 5 PAT Balance Sheet Standalone- Zodiac Clothing Consolidated Rsm FY01 FY02 FY03E FY04F FY02 FY03E FY04F Share Capital Res & Surplus Networth Secured Loan Unsecured Loan Total Loan Minority Interest Def Tax Liab Total Liability Application of Funds Gross Block Depreciation Net Block Investment Current Assets Inventory Debtors Cash Loans & Adv Curr. Liability Provision Net C. Assets Def. Tax Asset Misc Expenses Total Assets

7 Key Ratios Standalone- Zodiac Clothing Consolidated FY01 FY02 FY03E FY04F FY02 FY03E FY04F Growth Income 5% 8% 5% 10% 22% 10% Earnings -5% -38% 7% 20% 39% 21% Margin OPM 12% 10% 9% 10% 5% 5% 5% NPM 9% 5% 5% 6% 4% 4% 5% Return ROE 19% 11% 11% 12% 9% 11% 12% ROA 18% 15% 9% 10% 7% 9% 10% FY01 FY02 FY03E FY04F FY02 FY03E FY04F Mcap To Sales(x) Sales To Gross(x) Inventory Days Receivable Days Sensitivity Price Sensitivity FY01 FY02 FY03E FY04F FY02 FY03E FY04F Price/ EPS PE Sensitivity FY01 FY02 FY03E FY04F FY02 FY03E FY04F PE/ EPS Peers Comparison Sales, Rsm PAT, Rsm PE, (x) DE (x) Cash/ Sh, Rs FY02 FY03E FY02 FY03E FY02 FY03E FY02 FY03E FY02 Pantaloon Raymond * Trent Zodiac Mkt Cap/ Sales Inventory Days Debtors Days FY02 FY03E FY02 FY03E FY02 FY03E Pantaloon Raymond * Trent Zodiac * Raymond Apparel Figures for FY01 & FY02. We believe, Raymond Apparel is better comparison than Pantaloon & Trent to Zodiac.

8 Detailed Shareholding Pattern Shareholder No of Shares % of Holding Promoters Indian Promoters % M Y Noorani % A Y Noorani % S Y Noorani % Zodiac Pvt Ltd % Algilani Holdings Pvt Ltd % Foreign Promoters % K K Seth % Asia Tangible Investments Pte Ltd % Sub Total % Institutional Investors Mutual Funds and UTI 200 0% Banks,Financial Institutions,Insurance 800 0% Companies Sub Total % Private Corporate Bodies % Indian Public % Arshad Yusuf Wahedna % NRIs/OCBs % Hussain Sultan Ali Nensey % Sub Total % Grand Total % Stock Performance Zodiac- Stock Volume Vs Stock Return (NSE) 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 0 Jan 02 Feb 02 Mar 02 Apr 02 May 02 Jun 02 Jul 02 Aug 02 Sept 02 Oct 02 Nov 02 Dec 02 Jan 03-20% Stock Volume Stock Return, %