Management Meet Note Rating Matrix Rating : Unrated Target : NA Target Period : NA Potential Upside : NA Key Financials (Consolidated) ( Crore) FY14 FY15 FY16 FY17 Net Sales 45.9 472.6 532.8 635.7 EBITDA 63.9 68.9 85.3 17.3 Net Profit 6.3 9.5 18.5 59.4 EPS ( ) 2.5 3.8 7.9 26.8 Valuation Summary (x) FY14 FY15 FY16 FY17 P/E NA NA 5.2 14.8 EV / EBITDA 16.7 15.5 12.5 9.9 P/BV 1.5 9.6 7.5 2.5 RoNW (%) 7.1 9.8 14.2 15.9 RoCE (%) 12.9 14.7 18. 15.9 Stock Data Particular Market Capitalization Total Debt (FY17) Cash & Current Investments(FY17) Amount 994 crore 166 crore 93 crore EV 167 crore 52 week L/H ( ) 325 / 482 Equity capital 25.2 crore Face value 1 FII Holding (%) 9.4 DII Holding (%) 7.8 Price Movement 12, 1, 8, 6, 4, 2, Sep-16 Research Analysts Price (R.H.S) Bharat Chhoda bharat.chhoda@icicisecurities.com Apr-17 Ankit Panchmatia ankit.panchmatia@icicisecurities.com Cheragh Sidhwa cheragh.sidhwa@icicisecurities.com Nifty (L.H.S) 5 4 3 2 1 Dec-17 Value play in garmenting business December 14, 217 We recently met the management of SP Apparels (SPAL) to understand the opportunities in the Indian garmenting sector and how SPAL is poised to capture the same. Established in 1989, SPAL is a leading manufacturer and exporter of knitted garments for infants and children in India. It mainly operates in two business verticals, including manufacturing, export of knitted garments for infants, children wear, which contributes ~9% and retailing, which contributes 1% of its overall revenues (as on H1FY18). SPAL has established expertise in -8 year kidswear segment and is a preferred vendor to UK s marquee retailers Tesco, Primark, ASDA, Mothercare and Dunnes. The integrated manufacturing set-up (23 manufacturing units within 125 km from corporate office) spread across production of yarn, knitting, dyeing of fabric, sewing, cutting, printing, embroidery and garmenting enables SPAL to adhere to stringent quality norms of global retailers. It also manufactures and retails menswear garments in India under the brand Crocodile. Revenues, EBITDA grew at a CAGR of 1%, 18%, respectively, in FY13-17. In FY17, SPAL has added three major customers based out of the US, France and are also cautiously expanding its retail presence. Outsourced manufacturing - India remains key partner The global apparel market in CY16 was at $1.25 trillion is expected to grow at 4.8% CAGR to $2.6 trillion by CY25. SPAL serves the US, UK, which are one of the leading apparel markets with a market size of $277 billion and $66 billion, respectively. Developed countries like the US, UK and other countries in Europe are focusing on brand building, marketing and designing of product (textile apparels) and outsourcing manufacturing to developing countries like India, Bangladesh, Sri Lanka, Turkey, Vietnam and others. Cotton, which remains a critical factor for infant and toddler apparel remains abundant in India, thereby increasing its competitiveness. With nearly two decades, SPAL has experience of working with a majority of global retailers and brands in children wear. With this experience, SPAL intends to de-risk its revenue concentration (from current five customers) and has successfully added new clients. Newer capacities at forefront; government incentives for garmenting The Indian textile industry, employing about 4 million workers, is one of the largest job creation sectors. Garmenting, generating ~2.5 labour per machine remains a key focus for subsidy allocation. The amended technology up-gradation fund scheme (ATUFS) has provided one-time capital subsidy for eligible benchmarked machinery at the rate of 15% for garmenting (to the extent of 3 crore). SPAL recognised the fact that demand continues to remain robust. However, lack of skilled labour resulted in supply side constraints. SPAL added 3 sewing machines in FY17 and further plans to deploy unutilised IPO proceeds ( 75 crore) in the near term, which could significantly accelerate its future earnings. Exhibit 1: Financial Performance FY12 FY13 FY14 FY15 FY16 FY17 Net Sales 4.6 428.5 45.9 472.6 532.8 635.7 EBITDA 6.2 55. 63.9 68.9 85.3 17.3 EBITDA Margins (%) 15. 12.8 14.2 14.6 16. 16.9 Depreciation 16.3 16.9 17.6 2. 2.1 2.8 Interest 4.3 34.3 35.6 31.2 25.3 13.5 PAT 9.7 2.4 6.7 1.2 18.8 61.9 PAT Margins (%) 2.4.6 1.5 2.1 3.5 9.7 Diluted EPS ( ) 3.9.9 2.7 4. 7.5 24.6 SP Apparels Ltd (SPAPP) 39 ICICI Securities Ltd Retail Equity Research
Company Snapshot SP Apparels (SPAL), with a production capacity of ~5 crore pieces per year, is a leading manufacturer and exporter of knitted garments for infants and children in India. SPAL provides end-to-end garment manufacturing services from grey fabric to finished products. With a wide range of manufacturing activities like production of yarn, dyeing of fabric, sewing, cutting, printing, embroidery and finishing of garments, the company executes bulk orders as per the requirements of its foreign counterpart. The product range for infants and children includes body suits, sleep suits, tops and bottoms. SPAL s clientele includes international players like George, Tesco, Crystal Martin, Mother Care, Dunnes Stores, Primark, etc. The company follows a centralised manufacturing process with operations at 23 manufacturing facilities, all located within 125 kms radius of Avinashi, Tamil Nadu and a registered office in Kavindapadi. SPAL undertakes in-house manufacturing activities, which include designing, embroidery, printing, sewing and cutting of garments. The manufacturing operations are supported by a wide range of infrastructure facilities, which includes sewing machines, cutting machines, embroidery machines, printing machines, 22272 spindles and 22 dyeing machines. For FY17, with 17 full time employees, the manufacturing capacity operated at 9% utilisation level. Subsequently, SPAL exported ~5 crore pieces in FY17. Exhibit 2: Integrated manufacturing process SPAL proposes to utilise 75.1 crore from the net IPO proceeds towards: A) Enhancing spinning capacity Capex of 47.2 crore Spinning capacity from 16896 to 22272 spindles Blow room capacity from 32 kg/day to 1515 kg/day B) Setting-up a new knitting facility in the spinning facility - capex of 16.9 crore C) Addition of balancing machineries at existing dyeing unit at the SIPCOT facility capex of 5 crore D) Common infrastructure for spinning & knitting facility capex of 6 crore ICICI Securities Ltd Retail Equity Research Page 2
SPAL also manufactures and retail menswear garments under the brand Crocodile consisting of shirts, polo shirts, t-shirts, trousers, jeans, sweaters, jackets and men s innerwear consisting of vests, briefs, boxer shorts and socks. SPAL sells Crocodile branded products through a sales and distribution network that includes 47 exclusive brand outlets (EBOs), of which 35 are company owned operated stores and 12 are franchise stores. It also sells these products on majority of the third party e- commerce platforms like Central, Brand factory, Central, Unlimited, etc. SPAL owned subsidiary Crocodile Products Pvt Ltd (CPPL) has formed a JV with Crocodile International Pte Ltd (CIPL) renewed every seven months. The JV proportion is distributed as a 7:3 of total sales. Furthermore, CPPL is liable to pay royalty to CIPL, which is 5% in FY17 compared to the earlier 3.8% in earlier years. Exhibit 3: Proposed expansion in Crocodile Source: Company presentation, ICICIdirect.com Research SPAL proposes to utilise 28 crore from the net IPO proceeds towards: A) Establishing 7 new retail COCO stores, expanding its presence from nine states to 18 states in India over next three years B) Majority of the expansion is in Tier II, III and IV cities in India. SPAL intends to capitalise on brand awareness and higher disposable income to grow its menswear products under the Crocodile brand Exhibit 4: Utilisation of net proceeds as on Q2FY18 () Particulars Utilization Planned Amount Utilized Un-utilized amount Expansion and modernization of manufacturing facility 7.2 14.8 55.4 Repayment or prepayment of debt 63. 63.. Opening of new stores under Crocodile 27.9 8.7 19.2 Addition of balancing machineries for existing dyeing unit 4.9 4.9. General Corporate Purposes and Issue Expenses 49.1 49.1. Total 215. 14.5 74.6 ICICI Securities Ltd Retail Equity Research Page 3
Financials Exhibit 5: Revenue grows at CAGR of 12% over FY14-17 Exhibit 6: Volumes grow at CAGR of 19% in FY14-17 7. 6. 5. 4. 3. 2. 451 473 533 636 326 No. of pieces 6 5 4 3 2 2.82 2.92 3.6 4.8 2.3 1. 1. Exhibit 7: EBITDA grows at CAGR of 19% over FY14-17 12. 1. 8. 6. 4. 2.. 16.9 16. 14.2 14.6 63.9 68.9 85.3 17.3 6.1 EBITDA EBITDA Margins (%) 18.4 2 18 16 14 12 1 8 6 4 2 % Exhibit 8: Robust PAT growth due to IPO proceeds and debt reduction 7. 6. 9.7 5. 4. 6.4 3. 3.5 2. 1. 2.1 1.5 1.2 18.8 61.9 2.8. 6.7 PAT PAT Margins (%) 12 1 8 6 4 2 % Exhibit 9: Leverage trend 45 4 3.2 35 3 2.4 25 2. 2 15 1 5 298 253 259 39 94 13 133 166 FY14 FY15 FY16 FY17 Debt Equity Debt:Equity.4 3.5 3. 2.5 2. x 1.5 1..5. Exhibit 1: Return ratio trend 2 18. % 14.7 15 12.9 14.2 1 9.8 5 7.1 15.9 15.9 FY14 FY15 FY16 FY17 ROCE ROE ICICI Securities Ltd Retail Equity Research Page 4
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