Bloomberg Code: MXWI IN

Transcription

1 Textiles & Apparel Maxwell Industries Nov 29, 214 Ltd India Research Stock Broking Bloomberg Code: MXWI IN Divestment & Revised Strategy to Cater Growth Maxwell s Sales, EBITDA & PAT grew 3%, 41% & 87% in FY14 due to better premium product portfolio and realizations. Going forward, we expect the sales and EBITDA to grow by 15% & 31% CAGR during FY14-17E yielding to better economic conditions, lower raw material prices and new product launches, going forward. Capex planned is around Rs.4mn-Rs.6mn which would be used for technology upgradation, setting up dormitory for the labor and also plans to revamp its warehouse in Mumbai. Affluent Brand Mix to Augment Market Share: Maxwell has well-known brands like VIP, Leader, Frenchie, FrenchieX, Eminence (licensed), BRAT and Feelings. While Feelings is a women brand, rest of the brands are men focused. The company s strategy to introduce premium products across these brands is expected to improve the overall realizations leading to higher profitability. It also plans to spend ~3%-5% of the revenues for promotional and advertising expenses, which would lead to margin expansion. Divestment in Non-Core Assets: Maxwell plans to sell off its non-core assets to focus on its garmenting business. It has recently sold its processing unit in Navi Mumbai for Rs.9mn, which would be used to reduce the working capital loan. It also plans to sell two other units for a sum of Rs.12mn-Rs.15mn by FY16E, which could be used for capacity expansion. Direct Retail presence for Enhanced Brand Visibility & Traction: Maxwell has a vast portfolio of innerwear brands. The company is expected to open 5 retail stores by FY16E in Tier-II & Tier-III cities. It has launched its exclusive innerwear store- Inners & also separate EBOs for the premium brand Eminence, which we believe is likely to enable the company to focus more on premium brands through its wide distribution network of over 11, outlets and 55 dealers. Valuation and Outlook Maxwell Industries revenues and PAT grew 4% and 48% CAGR, respectively over FY11-14 and expected to be moderate with revenue CAGR of 15% over FY14- FY17E. At CMP, the stock is valued at 6.9x and 5.7x FY16E and FY17E EV/EBITDA respectively. We reiterate BUY recommendation with a target price of Rs. 47 per share, with an upside potential of 31%. Key Risks 1) Volatility in the raw material prices. 2) New Entrant in Retail Format. Exhibit 1: Valuation Summary (Rs. Mn) YE Mar FY13 FY14 FY15E FY16E FY17E Net Sales EBIDTA EBIDTA Margin (%) Adj. Net Profit EPS (Rs.) RoE (%) PE (x) Recommendation (Rs.) BUY CMP 36 Target Price 47 Upside/Downside (%) 31 Stock Information Mkt Cap (Rs.mn/US$ mn) 2198/35 52-wk High/Low (Rs.) 4.3/13.2 3M Avg. daily volume (mn).45 Beta (x) 1.2 Sensex/Nifty 28694/8588 O/S Shares(mn) 63.8 Shareholding Pattern (%) Promoters Public FIIs.26 Stock Performance (%) 1M 3M 6M 12M Absolute Relative to Sensex Performance For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Nov-13 Feb-14 May-14 Aug-14 Nov-14 Maxwell Sensex Source: Bloomberg Technical View Maxwell had made stellar move in the last 15 months, the stock has multiplied from Rs.1 to make fresh life time high mark of Rs. 4 during the last month. The rally in the stock is supported by strong volumes with last month clocking life time volumes. The momentum oscillators are still looking strong indicating the upside momentum to continue in the stock. We expect the rally to continue in and the stock likely to head to 48-5 levels in the coming months. Analyst Contact Varun Chakri varun.chakri@karvy.com 1

2 Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs.mn) FY15E FY16E FY17E Net sales Op. Exp (Adj for OI) EBIDTA Depreciation Interest PBT Tax PAT Profit & Loss Ratios Ebidta margin (%) Net margin (%) P/E (x) EV/EBIDTA (x) Dividend yield (%) Company Background Maxwell is engaged in manufacturing and marketing of innerwear for men, women and kids. It owns some well known brands such as VIP innerwear, Frenchie, VIP Feelings, Brat and Eminence (under license). Maxwell has six regional offices, with network of over 11, outlets and 55 dealers. The Company has six manufacturing units catering to innerwear & socks and a spinning unit, located across Tamil Nadu, Gujarat, Maharashtra and Daman. However, recently Maxwell sold spinning unit on slump sale basis to focus on its innerwear business. It has rolled out retail stores Green Room and exclusive innerwear store - Inners to sell all the owned brands. Balance sheet (Rs.mn) FY15E FY16E FY17E Total Assets Net Fixed assets Current assets Other assets Total Liabilities Networth Debt Current Liabilities Deferred Tax Balance Sheet Ratios RoE (%) ROCE (%) Net Debt/Equity Equity/Total Assets P/BV (x) Cash Flow (Rs.mn) FY15E FY16E FY17E EBIDTA Other Income Interest (117) (126) (135) Tax (72) (99) (121) Changes in WC (12) (88) (158) CF from Operations Capex (61) (45) (45) Investment CF from Investing (61) (45) (45) Change in Equity Debt Dividends (29) (29) (29) CF from Financing Change in Cash Exhibit 2: Shareholding Pattern (%) Public 36.17% Exhibit 3: Revenue-FY14 Others 3% FII.26% Promoter 63.57% Hosiery 97% 2

3 Business Restructuring Focus on Innerwear Manufacturing Maxwell Industries is one of the first companies in India to have a complete vertically-integrated manufacturing set-up for innerwears. Over the years, its management felt that this backward integration is not going to help much to grow as an innerwear manufacturer due to a lot of volatility and regulations in spinning and weaving business, while it requires huge working capital for cotton procurement, spinning and weaving therefore blocking inventory at each stage. Henceforth, Maxwell has decided to procure fabric from vendors directly and concentrate on manufacturing innerwears. In the entire process of exiting from spinning and weaving, we expect the company to further cut inventory levels significantly, which would help in redirecting the resources towards retail channels. The company has recently sold its processing unit in Thane, Navi Mumbai for Rs.9mn and plans to sell its other processing house in Tamil Nadu & knitting unit in Daman, Gujarat for ~Rs.12mn-Rs.15mn.It had earlier sold its spinning unit in Erode, Tamil Nadu for an estimated Rs.39mn. The company plans to sell off its non core businesses in order to focus on its garments division. The low-margin spinning division stunted the margin expansion of Maxwell, resulting in EBITDA margin of 8% over the last three years. We expect Maxwell to report 15% CAGR revenue growth over FY14-17E and EBITDA margin to grow by 13% by FY17E on back of higher realizations, capex, product launches and increasing demand. Exhibit 4: Revenue growth 3 2.% 2 1.% 1.% -1.% FY8 FY9 FY1 FY11 FY12 FY13 FY14 Revenue (Rs. Mn) Revenue Growth (%) Exhibit 5: EBITDA & PAT Margins FY8 FY9 FY1 FY11 FY12 FY13 FY14 14% 9% 4% -1% Revenue (Rs. Mn) EBITDA Margin (%) PAT Margin (%) Growing Innerwear Market The Indian innerwear industry is valued at Rs. 178bn, accounting for 8% of the domestic apparel industry. Men s innerwear accounts for 4% at Rs. 71 bn, while women s innerwear accounts for 6% at Rs. 17 bn. The innerwear market is growing at a faster rate than overall apparel market, and is estimated to grow at a 13% CAGR. The innerwear market can be further divided into low, economy, middle, premium and super-premium segments. Exhibit 6: Indian Innerwear Market Indian Apparel Market (Rs.23bn) Indian Innerwear (Rs.178bn) Men s Innerwear (4% share, Rs. 71bn) Women s Innerwear (6% share, Rs. 17bn) Organized (64% share, Unorganized Organized (66% share, Unorganized (34% Rs.45bn) (36% share) Rs. 71bn) share) 3

4 Exhibit 7: Brand Positioning Segment Key Brands Share in overall(%) Future growth rate(%) Premium Calvin Klein, FCUK, UCB, Jack & Jones Mid Onn, Jockey, Big Boss, Frontline, Macroman, Chromozome, Levis 3 12 Low/Economy VIP, Rupa, Frenchie, Cozy, Dixcy, Jon 21 1 Maxwell s key brands-vip, Frenchie operate in the Low/Economy segment in the Indian Innerwear market. With growing domestic demand and value for money, we believe this segment to grow at 1% in the near future, which would be beneficial for the company. Diversified Brand Portfolio to Augment Market Share Maxwell has well-known brands like VIP, VIP Frenchie, Frenchie X, VIP Feelings, Leader with a recent tie-up to bring French brand Eminence under its umbrella. The company plans to launch VIP Signature Collection with a mark up price of ~2% and plans to capture a signigficant market share in the premium market segment, which we believe, would aid to margin growth. It has launched Brat, aimed to target kid s innerwear market between the age of 7 and 14 years. Exhibit 8: Brand Portfolio Eminence is a men s innerwear French brand, the marketing license of which was acquired by Maxwell in 21. Maxwell has the license for distribution in India, Sri Lanka, Bangladesh and Nepal. It is planning to launch women range shortly. Other products in pipeline are thermals, Frenchie X Active and Frenchie Sports/Lounge - high margin segments which could fuel growth in the near term. Feelings is a women s brand where the management aims to increase the revenue contribution from the current 15% in FY14 to 35% in the next four years on back of strong demand. The further expansion into women innerwear with premium brand Feelings is expected to portray Maxwell into serious lingerie player, going forward. Leader is a men s brand in the thermal wear segment. The company plans to clock in Rs.5mn-Rs.6mn from the brand in the next 2 years. Presently, the demographic mix of Maxwell revenues is 9% male and 1% of the female population. By FY17E, the company is looking to change this mix to 75% male and 25% female, which would be a significant move in the women segment. The company has strategically introduced brands which cater to a diversified demographic population. The management has also hinted upon possible JVs to rope in more international brands for premium segment going forward. Pan-India Market Presence with Balanced Topline Exhibit 9: Demographic Revenue distribution Exports 7% East 6% West 33% North 28% South 26% Maxwell caters to a diverse demographic population in India. Wholesale markets situated between the Upper Ganges and Orissa region diagonally comprise the biggest chunk of wholesale revenues. With new retail stores the company s major sales are generated from the Northern part of India (28%), while the South accounts for 26%, with the East & West accounting for 6% and 33% sales and exports (7%) respectively. 4

5 Extensive Direct Retail Presence Expect Enhanced Brand Visibility & Traction with New Retail Initiative Maxwell has extensive wholesale distribution network of 55 dealers and 11, retail outlets. However, the Company is looking at opening retail format stores largely on franchisee model to do the much-required brand attention and consumer perception for different brands. The Company has introduced new concept stores called Green Room which house the complete product range offered by them. It proposes to open 5 of such stores across the country by FY16E on a franchise model, out of which, the Company will own 4-5 stores in metropolitan cities. Apart from this, separate EBO format stores are to be opened for Eminence, so as not to dilute the premium brand factor. Exhibit 1: Business Assumptions Y/E Mar (Rs. Mn) FY14 FY15E FY16E FY17E Comments India Business (Consolidated) Revenue Growth expected on account for new brands & products Revenue Growth (%) EBITDA EBIDTA Margin (%) PAT (normalized) Normalized PAT Margins Margin expansion due to enhanced product mix, stable raw material prices Improved PAT on lower finance costs; sale of non-core assets Fully Diluted EPS Fully Diluted EPS Growth (%) Capex (ex. Acquisitions) (49) (61) (45) (45) Technology upgradation and maintenance costs Net CFO Net Debt Free Cash Flow 128 (35) Exhibit 11: Karvy vs Consensus Karvy Consensus Divergence(%) Comments Revenues (Rs.mn) FY15E % FY16E % Higher realizations and new product launches FY17E % EBIDTA (Rs.mn) FY15E % FY16E % Lower input costs to increase margins FY17E % EPS (Rs.) FY15E % FY16E % Improved product mix FY17E % 5

6 New Products & Capex to drive revenues Exhibit 12: Revenue & Growth (%) 4 24% 16% 2 8% % -8% Net Sales Growth(%) Maxwell Industries revenue grew at a CAGR of 5% over FY1-14. The company appears to be struggling with the yarn and fabric business which has been discontinued off late. It has recently sold its processing unit and plans to focus mainly on its core business. Going forward, with new product launches, increasing contribution of women s brand and premium brands in the pipeline, Maxwell is set to grow at a higher pace. We expect revenues to grow at a CAGR of 15% during FY14-17E over better product mix, strong domestic demand & capacity expansion. Asset Turnover to improve further Exhibit 13: Revenue & Asset turnover Maxwell has improved its asset turnover from 3.5 in FY12 to 4.4 in FY14 and we believe this to further improve to 6.3 by FY17E due to the strategy for purchasing fabric directly and manufacture innerwear, where the realizations are high. Net Sales Asset Turnover EBITDA to grow at 31% CAGR on margin expansion Exhibit 14: EBITDA & EBITDA Margin (%) % 6.5% 11.8% 13.% 13.3% 8.9% 14% 7% % FY12 FY13 FY14 FY15E FY16E FY17E EBITDA EBITDA Margin (%) EBITDA margins have declined from 9.4% in FY12 to 6.5% in FY13, largely due to higher cotton prices with historic highs during FY11, followed by corrections in FY12. However, with stable cotton prices & new product launches, we expect the operating margins of 13% by FY17E on account of expected higher realizations of the premium brands and stable raw material prices. EBITDA is expected to grow at a CAGR of 31% over FY14-17E based on the above parameters. Net Income & margins to increase on restructuring measures The net income de-grew in FY12 due to lower EBITDA margins and mounting interest burden to a large extent. As debt is expected to be capped and cash release from lower working capital due to sold spinning & processing units, the interest cover is expected to improve and so are the net margins. We expect the net margins to recover to 6.3% by FY17E on account of improved operational efficiency and lower finance cost. Exhibit 15: NI & NI margins (%) % 5.9% 6.3% 7.2% 4.8% % 2.4% 2.1% -.6%.% -2 FY12 FY13 FY14 FY15E FY16E FY17E -2.4% Net Income Net Income Margin (%) Exhibit 16: Interest cover FY12 FY13 FY14 FY15E FY16E FY17E EBIT Interest Interest cover 6

7 RoE & RoCE on path of recovery Exhibit 17: RoE (%) & RoCE (%) 4% 2% % 2% 1% % -1% Maxwell s RoE & RoCE were in a bad shape, as the company had high debt and working capital issues. With the restructuring strategy leading to reduced working capital requirements and repayment of debt from sale proceeds, we expect both RoE & RoCE to improve to 16% & 19% by FY17E. ROCE (%) ROE (%) D/E ratio to reduce further on improved efficiency Exhibit 18: D/E ratio FY12 FY13 FY14 FY15E FY16E FY17E Debt/Equity ratio Maxwell s D/E ratio currently stands at.8x in FY14. Due to the restructuring and sale of proceeds-spinning and processing units, we expect the company to reduce its debt in the near term. It also plans to sell off its remaining noncore assets for a sum of Rs.12mn-Rs.15Mn, which we believe could be used to pay off the working capital loan from the current Rs.83mn in FY14 to Rs.6mn by FY16E. We expect the D/E ratio to be around ~.5x by FY17E based on the above parameters. Valuations Absolute Valuation At CMP of Rs. 36 per share, the stock is valued at 6.9x and 5.7x FY16E and FY17E EV/EBITDA respectively. We reiterate a BUY recommendation with a target price of Rs.47 per share valuing at 7.2x FY17E EV/EBITDA, representing an upside potential of 31%. Exhibit 19: Comparative valuation summary CMP Mcap EV/EBIDTA (x) P/E (x) CAGR (FY14-16) RoE (%) Price Perf (%) Rs. Mn FY14 FY15E FY16E FY14 FY15E FY16E Sales EBIDTA EPS FY14 FY15E FY16E 3m 6m 12m Page Lovable (4.7) (5.4) 1.2 Rupa & Co (11) (15) (28.5) Maxwell Source: Bloomberg 7

8 Relative Valuation Exhibit 2: EV/EBITDA vs RoCE Peers Comparison Maxwell currently operates in the low/economy segment. Going forward, with a strong product pipeline, it plans to enter the premium segment with the launch of VIP signature collection. Peer competitors include Page Industries, Lovable Lingerie and Rupa & Co. Exhibit 21: RoCE (%) 5% Exhibit 22: EBITDA Margin (%) 21% 25% 14% % 1.% 6.5% 9.3% 8.7% 6.2% FY1 FY11 FY12 FY13 FY14 Page Industries Lovable Rupa & Co. Maxwell 7% % 11.% 9.4% 7.4% 6.5% 8.9% FY1 FY11 FY12 FY13 FY14 Page Industries Lovable Rupa & Co. Maxwell Exhibit 23: RoE (%) 72.% 52.% Exhibit 24: EPS % 12.% -8.% 5.9% 1.6% -1.2% 2.9% 5.2% FY1 FY11 FY12 FY13 FY14 Page Industries Lovable Rupa & Co. Maxwell FY1 FY11 FY12 FY13 FY14 Page Industries Lovable Rupa & Co. Maxwell 8

9 Exhibit 25: Yr Forward EV/EBITDA Band Aug-7 6-Aug-8 6-Aug-9 6-Aug-1 6-Aug-11 6-Aug-12 6-Aug-13 6-Aug-14 EV/EBITDA Mean ~1SD ~2SD ~-1SD ~-2SD Over the past five years, the EV/EBITDA traded in the range of 7x-11x with a historical mean of 8.6x. With new product launches, divestment of non-core assets, capacity expansion and aggressive advertising, we expect the margins to expand to 13.3% by FY17E. The management also intends to tie up with some international brands in the near term, which we believe would cater to the top line growth. Based on the above parameters, RoE is expected to increase to 16% by FY17E due to better operational efficiency and higher realizations. We recommend a BUY on the stock with a target price of Rs.47, based on 7.2x FY17E EV/EBITDA, representing an upside of 31%. Risks & Concerns 1. New Entrant in Retail Format: Being new entrant in retail format, the company has to lay down the retail supply chain structure for efficient inventory management. 2. Inherent Risks associated with Shifting of Working Business Model: The Company s working model shift from a fullyintegrated manufacturing unit to core innerwear business requires effective fabric vendor arrangements on one hand while proper brand distinction to reduce cannibalization on the other. 3. Volatile Raw material Prices: Cotton is the largest consumables for Maxwell. If the prices move northwards going forward, it could impact the margins of the company. 9

10 Financials Exhibit 26: Income Statement YE Mar (Rs. Million) FY13 FY14 FY15E FY16E FY17E Revenues Growth (%) Operating Expenses EBIDTA Growth (%) (21.2) Depreciation & Amortization Other Income EBIT Interest Expenses PBT Tax Adjusted PAT Growth (%) (331.) Exhibit 27: Balance Sheet YE Mar (Rs. Million) FY13 FY14 FY15E FY16E FY17E Cash & Inventories Sundry Debtors Inventory Loans & Advances Investments Gross Block Net Block CWIP Other Assets Total Assets Current Liabilities & Provisions Debt Other Liabilities Total Liabilities Shareholders' Equity Reserves & Surplus Total Networth Minority Interest Total Networth & Liabilities , NA: Not Applicable 1

11 Exhibit 28: Cash Flow Statement YE Mar (Rs. Million) FY13 FY14 FY15E FY16E FY17E EBIT (Inc.)/Dec in working capital (11) 16 (12) (88) (158) Other income Depreciation Interest paid (139) (127) (117) (126) (135) Tax paid (15) (27) (72) (99) (121) Others 5 4 Dividends paid (25) (22) (29) (29) (29) Cash flow from operations (68) Inc/dec in capital expenditure (18) (49) (61) (45) (45) (Inc.)/Dec. in investments Cash flow from investing activities (18) (49) (61) (45) (45) Issuance of equity (In)/dec in borrowings 163 (157) Others (64) 19 (5) 2 2 Cash flow from financing activities 163 (157) Net change in cash 13 (1) Exhibit 29: Key Ratios YE Mar (%) FY13 FY14 FY15E FY16E FY17E EBIDTA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout ratio.4 (1.5) Net Debt/Equity RoE (%) RoCE (%) Exhibit 3: Valuation Parameters YE Mar FY13 FY14 FY15E FY16E FY17E EPS (Rs.) DPS (Rs.) BV (Rs.) PE (x) P/BV (x) EV/EBIDTA (x) EV/Sales (x)

12 Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : <5% Connect & Discuss More at For further enquiries please contact: research@karvy.com Toll Free: Analyst certification Disclosures Appendix The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities. Karvy Stock Broking Limited Karvy Centre, Avenue-4, 2nd Floor, Road No: 1, Banjara Hills, Hyderabad India. Tel: ; Fax: For More updates & Stock Research, visit 12