Company Update Rating matrix Rating : Buy Target : 825 Target Period : 12-18 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 73.5 8.1 18.4 123.7 EBITDA 2.1 2.4 28.2 32.8 EBITDA Margins (%) 27.3 25.5 26. 26.5 Net Profit 12.6 12.3 16.5 19.8 EPS 38.1 37.3 5. 6. Valuation summary FY16 FY17E FY18E FY19E P/E 15.8 16.1 12. 1. Target P/E 21.7 22.1 16.5 13.8 EV / EBITDA 9. 9.1 6.3 4.9 P/BV 3.9 3.2 2.6 2.1 RoNW 24.8 19.9 21.6 21.1 RoCE 32.5 26.1 3.1 29. ROIC 56.4 38.3 42.2 48. Stock data Stock Data crore Market Capitalization 198 Total Debt (FY16) 4 Cash and Cash Equivalent (FY16) 21 Enterprise Value 182 52 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 7.3 -.8-9. -26.4 Arrow Textiles -1.8 16.4 13.1 45.4 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
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 2 15 1 5 81 81 11.1 11.1 9. 9. 7 14.6 18.1 1.3 71 12.9 81 18.1 14.7 FY15 FY16 FY17E FY18E FY19E 85 8 75 7 65 6 % Capacity Production Capacity Utilization Levels Exhibit 2: Blended sales and realisation Crore Metre 16 14 12 1 8 6 4 2 8.2 8.1 7.8 7.6 7.6 14.7 12.9 9. 9. 1.3 FY15 FY16 FY17E FY18E FY19E 8.4 8.2 8. 7.8 7.6 7.4 7.2 /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
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 14 12 12 15 We expect Premco to record net sales of 15 crore in FY18E & 12 crore in FY19E crore 1 8 6 69 7 78 4 2 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 35 27.3 26.5 28 25 6. 7 crore 3 25 2 15 1 5 2.1 25.5 2.4 26. 28.2 32.8 27 27 26 26 25 25 % crore 2 15 1 5 38.1 37.3 12.6 12.3 5. 16.5 19.8 6 5 4 3 2 1 /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 % 6 5 4 3 2 1 56.4 32.5 24.8 38.3 26.1 42.2 3.1 19.9 21.6 48. 29. 21.1 FY16 FY17E FY18E FY19E RoE RoCE RoIC ICICI Securities Ltd Retail Equity Research Page 3
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) (%) (%) FY16 7 2.2 38.1 4.7 15.8 9. 24.8 32.5 FY17E 78 11. 37.3-2. 16.1 9.1 19.9 26.1 FY18E 15 35.3 5. 34. 12. 6.3 21.6 3.1 FY19E 12 14.1 6. 2. 1. 4.9 21.1 29. Exhibit 8: Two year forward P/E (Premco Global currently trading at 1.7x) 1 9 8 7 6 5 4 3 2 1 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
es Recommendation history vs. consensus estimate ( ) 1, 9 8 7 6 5 4 3 2 1 Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Aug-16 1 8 6 4 2 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 FY1. 213 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 FY13 215 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-16 27.7.9. 2 Harjani (Lokesh Prem) 3-Sep-16 13.2.4. 3 Harjani (Suresh) 3-Sep-16 12.9.4. 4 Harjani (Prem) 3-Sep-16 8.3.3. 5 Alwani (Mulchand Gianchand) 3-Sep-16 2.9.1. 6 Alwani (Manju Mulchand) 3-Sep-16 2.5.1. 7 Harjani (Nisha Prem) 3-Sep-16 1.8.1. 8 Pattabiraman (R.) 3-Sep-16 1.6.1. 9 Chhabria (Neeta Dhirajlal) 3-Sep-16 1.5.. 1 Harjani (Sonia Ashok) 3-Sep-16.1.. Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Promoter 63.4 64.9 64.9 64.9 64.9 FII..2.2.2. DII 2.2 2.2 2.2 2.2 2.4 Others 34.5 32.7 32.7 32.7 32.7 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
Financial summary (Consolidated) Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Net Sales 7.1 77.8 15.2 12.1 Other Operating Income 3.4 2.3 3.2 3.6 Total Operating Income 73.5 8.1 18.4 123.7 Growth (%) 1.7 9. 35.3 14.1 Raw Material Expenses 31.3 34.1 46.1 52.6 Employee Expenses 7.6 8.8 11.4 13. Selling Expense.... Other Operating Expense 14.5 16.8 22.8 25.4 Total Operating Expenditure 53.4 59.7 8.2 9.9 EBITDA 2.1 2.4 28.2 32.8 Growth (%) -.8 1.7 37.9 16.3 Depreciation 2.2 3.1 4.1 4.7 Interest 1..9.8.7 Other Income 2.6 2.2 2.2 3.6 PBT 19.5 18.7 25.5 31.1 Total Tax 6.9 6.2 8.4 1.2 Minority Interest..2.6 1. PAT 12.6 12.3 16.5 19.8 Growth (%) 4.1-2. 34. 2. EPS ( ) 38.1 37.3 5. 6. Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax 12.6 12.3 16.5 19.8 Add: Depreciation 2.2 3.1 4.1 4.7 (Inc)/dec in Current Assets.8-5.2-9.4-4.4 Inc/(dec) in CL and Provisions -.8.4 1.7 1.1 Others 1..9.8.7 CF from operating activities 15.7 11.5 13.7 21.9 (Inc)/dec in Investments -8.3 6.1-8.5-15.5 (Inc)/dec in Fixed Assets -6.1-14.6-2. -2. Others.2 -.2.9 1. CF from investing activities -14.1-8.7-9.6-16.5 Issue/(Buy back) of Equity.... Inc/(dec) in loan funds 1..2-1. -.5 Interest & Dividend paid -2.2-1.9-2.8-3. Inc/(dec) in Share Cap.... Others.2... CF from financing activities -1.1-1.6-3.8-3.5 Net Cash flow.6 1.1.2 1.9 Opening Cash 1.8 2.4 3.5 3.7 Closing Cash 2.4 3.5 3.7 5.6 Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital 3.3 3.3 3.3 3.3 Reserve and Surplus 47.5 58.8 73.3 9.7 Total Shareholders funds 5.8 62.1 76.6 94. Total Debt 4.3 4.5 3.5 3. Deferred Tax Liability.9.9.9.9 Minority Interest / Others 1.3 1.5 2. 3. Total Liabilities 57.2 68.9 83. 1.9 Assets Gross Block 24.8 37.1 45.1 48.1 Less: Acc Depreciation 15.1 18.6 22.7 27.4 Net Block 9.7 18.5 22.4 2.7 Capital WIP 4.3 7. 1.. Total Fixed Assets 14. 25.5 23.4 2.7 Investments 18.6 12.5 21. 36.5 Inventory 15.6 17.1 21.6 23. Debtors 9.1 12.8 17.3 19.7 Loans and Advances 1.8 1.9 1.9 2.2 Other Current Assets 1.5 1.6 1.9 2.2 Cash 2.4 3.5 3.7 5.6 Total Current Assets 3.4 36.8 46.4 52.7 Current Liabilities 4.1 4.3 5.8 6.6 Provisions 1.9 2.1 2.3 2.6 Current Liabilities & Prov 6. 6.4 8.1 9.2 Net Current Assets 24.4 3.4 38.4 43.5 Others Assets.6.6.3.3 Application of Funds 57.2 68.9 83. 1.9 Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) EPS 38.1 37.3 5. 6. Cash EPS 44.8 46.7 62.4 74. BV 153.6 187.8 231.7 284.5 DPS 3. 2.5 5. 6. Cash Per Share (Incl Invst) 63.6 48.4 74.8 127.3 Operating Ratios (%) EBITDA Margin 27.3 25.5 26. 26.5 PAT Margin 17.1 15.4 15.2 16. Inventory days 81.2 8. 75. 7. Debtor days 47.6 6. 6. 6. Creditor days 21.3 2. 2. 2. Return Ratios (%) RoE 24.8 19.9 21.6 21.1 RoCE 32.5 26.1 3.1 29. RoIC 56.4 38.3 42.2 48. Valuation Ratios (x) P/E 15.8 16.1 12. 1. EV / EBITDA 9. 9.1 6.3 4.9 EV / Net Sales 2.6 2.4 1.7 1.3 Market Cap / Sales 2.8 2.5 1.9 1.7 Price to Book Value 3.9 3.2 2.6 2.1 Solvency Ratios Debt/EBITDA.2.2.1.1 Debt / Equity.1.1.. Current Ratio 4.7 5.2 5.3 5.1 Quick Ratio 2.1 2.5 2.6 2.6 ICICI Securities Ltd Retail Equity Research Page 6
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
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