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Wednesday, January 27, 2016

DON'T BUY BCOZ SOMEONE IS BUYING !!

Hii Friends,
Once again I am back with very funny but meaningful story I recently heard at my work place. It's always fortunate to be surrounded with so much of wisdom. This story was narrated by one of our elderly client who read this story in his early days and narrated this story to us on hearing someone saying that so and so stock is being bought by some influential big investor, so we should buy that..... contradicting to that he narrated this story, thus giving us the unforgettable lesson on how we should learn to apply our own mind and not to be fettered by the saying of others, develop your own thought process -  




It was Autumn!
And the Red Indians asked their newly elected chief if the winter was going to be cold or mild. Since the new Red Indian chief was from the modern school of thoughts, he was never been taught the old secrets and so he couldn't tell what the weather was going to be. Nevertheless, to be on the safer side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared. But also being a practical leader, he went to the phone booth, called the National Weather Service and asked ''Is the coming winter going to be cold? ''

'It looks like this winter is going to be quite cold indeed,' the meteorologist at weather service responded. So the Chief went back to his people and told his tribe mens to collect even more wood. 

A week later, he called the National Weather Service again. 'Is it going to be a very cold winter?'

'Yes,' the man at National Weather Service again replied, 'It's definitely going to be a very cold winter.' The Chief again went back to his people and ordered them to collect every scrap of wood they could find.

Two weeks later, he called the National Weather Service again. 'Are you absolutely sure that the winter is going to be very cold?'

'Absolutely,' The man replied. 'It's going to be one of the coldest winters ever.
'How can you be so sure?' the Chief asked. The weatherman replied, 'The Red Indians are collecting woods like crazy.'

This is how stock markets works. Those who trust on rumours or stock call tips and see evidence of their correctness in the stock prices moving up or down may be caught in the same game. Many a times while the choice of stocks may be right, but the timing of purchase goes wrong. Thus, investors end up buying stocks after the prices have moved up sharply and they get tired or depressed as the stock refuses to climb in the short term or declines. And they end up exiting the counter just as the valuation starts moving up again. And left regeretted, so friends just don't buy because someone is buying - Hear them out why they bought that particular stock - understand their rational behind it - Apply your mind - can u understand the business - Do your set of homework - ask questions if u dont understand any aspects - then go for it - DON'T JUST INTIMATE PEOPLE, Develope your own thought process !!! -  READ SUCH STORIES HERE

                                                      !! HAPPY INVESTING !!

Reader Friends, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!

*Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.  
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Saturday, January 23, 2016

S H KELKER & COMPANY LTD: ADD FRAGRANCE TO YOUR PORTFOLIO !!!

Scrip Code: 539450 SHK
CMP:  Rs. 246.60; Market Cap: Rs. 3,566.34 Cr; 52 Week High/Low: Rs. 275.80 / Rs. 180.00
Total Shares: 14,46,20,801 shares; Promoters : 8,20,14,414 shares – 56.71 %; Total Public holding : 6,26,06,387 shares – 43.29 %; Book Value: Rs. 37.88; Face Value: Rs. 10.00; EPS: Rs. 4.87; Dividend: 11.30 %; P/E: 50.63 times; Ind. P/E: 47.70; EV/EBITDA: 26.17x ; Total Debt: Rs. 242.64 Cr; Enterprise Value: Rs. 3,732.98 Cr.

S H KELKAR AND COMPANY LIMITED: The Company was founded on July 1, 1955 and is headquartered in Mumbai, India. S H Kelkar & Company Ltd (Keva) is one of the largest fragrance and flavour companies in India. The journey of the company begins in 1922 as a manufacturer of industrial perfumes in British India regime. Company has a large and diverse mix of over 3,500 customers, including leading national and multi-national FMCG companies, blenders of fragrances and flavours and fragrance and flavour producers. The flavour products produced by the company are used as a raw material by producers of baked goods, dairy products, beverages and pharmaceutical products. S H Kelkar has dedicated research team of 21 scientists operating out of their facilities located in Mumbai and Barneveld. It also has a team of 12 perfumers, 2 flavorists, evaluators and application executives at their 5 creation and development centers in Mumbai, Bengaluru, Netherlands and Indonesia. The company provides Fragrances for Personal care, Hair Care, Skincare & Cosmetics, Fabric Care, Household Products, Fine Fragrances. It provides Flavours for Dairy Products, Beverages, Confectionery, Bakery Products, Pharmaceuticals. Provides services like Bio Technology Research services, cosmetic Research service, Cosmetic Testing Laboratory, Custom Synthesis Services. It also provides Ingredients. The company has expertise in manufacturing plant, quality control and R&D centre. The company sells its products under brands like SHK, Keva and Cobra brands which enjoys substantial brand equity in India. Company's research team has developed 12 molecules over the last three years of which company has filed patent applications for three. The Company has four manufacturing facilities, three of which are located in India and one in Netherlands, with a total installed manufacturing capacity of over 19,819 tons annually. Last year company manufactured and supplied over 6,300 fragrances, including fragrance ingredients and flavours for the personal and home care products, food and beverage industries, either in the form of compounds or individual ingredients. The company came out with an IPO on Oct 28, 2015 offering 1,65,65,161 equity shares of Rs. 10 each for Rs. 180 per share raising Rs. 298 Cr. The shares of the company got listed on November 16, 2015 at Rs. 223.70 making a high of Rs. 225.05 on listing day. The object of offer for sale was to achieve the benefits of listing and for repayment and pre-payment in full or in part of certain loans availed by the company and Investment in its subsidiary K.V. Arochem Pvt Ltd and for repayment and pre-payment in full or part of certain loans availed by KVA and for general corporate puroses. Company's subsidiaries includes: Keva Fragrances Pvt Ltd, Keva Flavours Pvt Ltd, Saiba Industries Pvt ltd, Keva Chemicals Pvt Ltd, Keva UK Ltd, Keva Fragrance Industries Pte. Ltd, PT SHKKeva Indonesia, PFW Aroma Ingredients B.V. S H KELKAR Ltd is locally compared to Panama Petrochem Ltd, Manali Petrochemicals Ltd, Vinati Organics Ltd, Adi Finechem ltd, Camphor and Allied Products Ltd, Resonance Specialties Ltd, Camlin Fine Sciences Ltd, Diamines And Chemicals Ltd, and globally with Elizabeth Arden of USA, Atlas Pearls and perfumes Ltd of Australia, ID Perfumes Inc of Athens, Chanel from France, L’Oreal & LVMH ,Givaudan, IFF, Firmenich, Symrise, Goldfield.  

Investment Rationale:
Incorporated in 1955, the company has over the years built strong relationships with its FMCG clients and they now understand the requirement of the end customer. SHK has 3,700 customers in the FMCG industry, which includes biggies like Godrej Consumer Products, Marico, Wipro Consumer Care, Hindustan Unilever and around 400 customers for their flavors products. SHK is the largest domestic fragrance producer commanding 20.5 % market share in the Indian fragrance industry with over 9,700 fragrances, fragrance ingredients and flavors created, manufactured and supplied as on FY15. It has a long standing reputation developed over the year’s history as a supplier of quality fragrances for use by FMCG companies in personal and home care products, food and beverage industries with exports to over 52 countries. It is also an emerging flavor producer in India with exports of its flavor products reaching 15 countries. SHK has a large and diverse mix of over 4,100 customers which include leading national and MNC FMCG companies, blenders as well as producers of fragrances and flavors. The fragrance and flavour business is a consolidated industry globally with 12 players controlling 83 % of the market and the top four players accounting for 53 % of the market share. The sector has been growing at around 4.2 % over the last five years and has a global market size of around $26.3 billion. Since the demand for fragrance and flavours is influenced by factors like urbanisation, rise of modern retail and high consumption of FMCG products, the biggest growth is expected to happen in emerging markets. India’s FMCG sector itself may touch $37 billion by 2020, which is a growth rate of 14 % (2012-20), annually. It is this growth rate and the size of the FMCG business that SHKCL plans to cash in on. In general, the Indian market has grown at twice the rate of the global market in the last five years and this growth is expected to continue for a long time. The top five companies in the Indian fragrance industry account for 70 % of the entire market, despite the presence of 1,000 odd players. Overall, SHKCL has a market share of 35 % in the Indian market. The company has 3,700 customers but it never allows one customer to account for more than 4 % of the total turnover, to maintain diversification. The management feels that this is like a mutual fund approach to risk management where they do not have to depend on one particular customer for solid returns. The global fragrance and flavour industry is estimated to be worth US$ 23.90 billion with an almost equal split between the fragrance and flavour markets. The global fragrance and flavour industry is expected to grow at a CAGR of 4.7 % by 2017 to reach an estimated value of US$ 27.5 billion. There are top 12 companies in this market and can be further broken down into the top four companies, consisting of Givaudan SA, Firmenich, International Flavors and Fragrances, Inc. and Symrise AG, that individually hold a market share of above 10.0 %, and collectively hold 57.0 % of the overall global fragrance and flavour industry among them. The remaining eight companies individually have a market share of between 1.0 % to 10.0 %, and collectively hold 26.0 % of the global Fragrance and flavour industry. Regional companies make up the balance of companies in the global fragrance and Flavour industry. The global flavour market accounts for approximately 49.0 % of the total global fragrance and flavour industry in terms of value at US$ 11.7 billion. Over the last six years, from calendar year 2007 to Calendar year 2013, the global flavour market has increased its share of revenues from 44.0 % to 49.0 %. The main product categories in the global flavour market for the calendar year 2013 were beverages contributing 34 %, savory 16 % and convenience foods and dairy accounting for 34 % of the global flavour market. Many top fragrance and flavour companies are placing greater focus on the emerging markets of Asia Pacific like India due to urbanization and changing lifestyles that are expected to benefit FMCG companies and their Fragrance and flavour suppliers. In particular, higher consumer credit coupled with rising incomes will lead to a sustained period of above average consumer spending, including the consumption of FMCG products. Fragrance and flavour companies with exposure to emerging markets also have a significant competitive advantage with respect to their customer base. SHK has always pushed its boundaries with new unique offerings to help enhance user experience of FMCG products containing these fragrances. In FY15 itself, SHK developed over 502 new fragrance and flavour compounds which have been sold commercially. Its research team developed 12 molecules over the last 3 years, out of which it has filed patent applications for 3. It combines its innovation efforts with a strong quality control system which enables traceability and repeatability for each batch of its products. This has led to a contribution of 14.3 % of revenues in FY15 from product launches of the last 3 financial years. SHK has built a Very strong reputation through delivery of quality products and customer satisfaction in the 90 years of its existence. With a solid business model, an 8,000 wide fragrance product range and strong sales & marketing Capabilities as demonstrated by its robust sales team of 95 people from 9 centres in India and overseas, SHK would be able to sustain its market share in this Rs. 20 billion Indian fragrance industry which in itself has witnessed a CAGR of 10.1 % over the last 4 years. The fragrance industry is primarily a niche market. Customers majorly include FMCG players who mainly use these fragrances in the manufacture of demand inelastic daily utilities like home and personal care products. With demand inelasticity is expected to drive demand in the Indian fragrance industry, S H Kelkar and company Ltd is expected to do better.

 Outlook and Valuation: 
 S H Kelkar & Company Ltd famously known as Keva is one of the largest fragrance and flavour companies in India. Company has a large and diverse mix of over 3,500 customers, including leading national and multi-national FMCG companies, blenders of fragrances and flavours and fragrance and flavour producers. The flavour products produced by the company are used as a raw material by producers of baked goods, dairy products, beverages and pharmaceutical products. Company has over 300 customers for its flavour products. S H Kelkar has a small 2 % share in the Indian flavor industry which is dominated by global leaders. With the capacity of 19,819 tons available with SHK will help company to take advantage of an industry which is growing at a stable CAGR of 10.4 % over the last 4 years. SHK has established brand equity with its fragrance and flavor products and a growing clientele of over 400, SHK is all set to increase its market share in an expanding industry thereby further augmenting its growth. Fragrance manufacturers are highly involved from an early stage of product development and there is a requirement for consistency in its smell and quality. Most FMCG companies depend on the reliability & quality of service of fragrance producers and their knowledge & understanding of their products and needs. In addition to this, fragrance procurement has a relatively small share in overall production costs for FMCG goods. Thus, there is an element of customer stickiness on account of these factors which helps fragrance producers in long term client retention. SHK enjoys a competitive edge, and has its own Economic Moat (A competitive advantage is, that one company has over the other companies in the same industry – by Warren Buffett) and is expanding its moats which is a very strong sign of SHK commanding better market share in future also. The global fragrance and flavour industry is characterized worldwide by high barriers to market entry. Some of these barriers to entry’s are like an establishing long term relationships between fragrance and flavour companies and their customers, especially FMCG manufacturers, which are an entry barrier for new players to the global fragrance and Flavour industry. Most FMCG companies greatly depend on the reliability, quality of service and fragrance and flavour company’s knowledge and understanding of their products and needs. Fragrance and flavour companies typically have to enter at an early stage of product development and such timely opportunities may not always be available to new entrants. Most FMCG manufacturers usually avoid replacing their fragrance and flavour supplier as the overall cost of fragrance or flavour products in the context of the final FMCG product is relatively small. This sector faces compliance with strict quality and regulatory standards, particularly in relation to FMCG products, such makes it difficult and costly for new entrants to enter the global fragrance and flavour industry. The global fragrance and flavour industry is characterized by an abundance of new and innovative products due to the dynamic nature of consumer preferences. Large fragrance and flavour companies spend approximately 6.5 % to 10.0 % of their sales proceeds on research and development, while global FMCG companies spend less than 4.0 % of their sales proceeds on research and development. In order to stay competitive, fragrance and flavour companies have to invest significantly on research and development to continue offering a wide range of innovative products. However, smaller fragrance and flavour companies or new entrants may not be in a position to spend such significant amounts on research and development. SHK plans to deepen its distribution network and plans to introduce new products and new application methods for its Fragrance such as small packs business. SHK also has a small pack fragrance business which it operates through its Cobra brand. This business includes sales of its fragrance products in package sizes ranging from 25 gm to 25 kg to several hundred traders and resellers spread country-wide. Thus the Cobra brand will grow and support SHK’s top-line growth. SHK also advantages from its low customer concentration. Out of the net revenue from operations of Rs. 840 Cr and Rs. 220 Cr in FY15 and Q1FY16E, revenue from SHKs largest customer was just Rs. 24 Cr and Rs. 8.80 Cr respectively. This amounts to only just 2.9 % and 3.9 % of revenues from SHKs biggest customer in FY15 and Q1FY16E. Thus, with a low concentration risk, SHK has managed to effectively mitigate the adverse effect of client loss on its top-line and bottom-line. Revenues from exports form a significant part of SHKs top-line. With negligible debt and consequent low interest burden, SHK would enjoy the benefits of reduced financial risks and low leverage. This would help the company sustain its high growth phase where its bottom-line has grown at a CAGR of 15.4% from FY11 to FY15. Revenues of SHK have grown at a healthy CAGR of 13.0 % from Rs. 470 Cr in FY11 to Rs. 860 Cr in FY15 driven by consistent demand for its fragrances from FMCG companies in India and overseas where it has a significant exposure in A & MENA. The fortunes of SHK depend of the level of FMCG consumption in India and overseas. With average household incomes of SHKs target market expected to significantly expand with an increasing share of disposable income, a favorable population composition and expansion of modern retail formats, consumption of FMCG products is all set to follow a healthy growth trajectory. Also, in order to keep up with changing preferences of the ultimate consumer, SHK consistently invests in research and development. It spent Rs. 26.4 Cr and Rs. 6.2 Cr in FY15 and Q1FY16E which comes to 3.1 % and 2.8 % of revenues respectively. With capacity available in its flavour manufacturing facility, established brand equity and a growing clientele, SHK can increase its market share in the flavour industry which has grown at a CAGR of 10.4 % over the last 4 years. SHK has raise money through IPO and will use part of its proceeds to repay some of its debts. SHK has already completed its capex cycle for the next 3-5 years with its Indian plants working at 35 % to 45 % capacity. Thus the repayment of significant debt post issue combined with an absence of material capex plans would ensure that financial risk is contained over the medium term. With a growing FMCG sector in Asia, North Africa and Middle East which constitutes 83.7 % of SHKs revenues, favourable demographics in place & customer diversity both in terms of low client concentration and 43.5 % of revenues coming from exports, SHK is surely to be an effective FMCG proxy. At the current market price of Rs. 246.60, the stock is trading at a PE of 44.83 x FY16E and 34.25 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 5.50 in FY16E and Rs. 7.20 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALSFY14FY15FY16EFY17E
SALES ( Crs)761.40837.00937.501,064.00
NET PROFIT (₹ Cr)79.1064.4079.60104.50
EPS ()5.504.505.507.20
PE (x)36.7045.2036.5027.80
P/BV (x)6.005.703.703.40
EV/EBITDA (x)22.3025.5019.9017.60
ROE (%)16.4012.6010.1012.20
ROCE (%)22.9020.6016.3017.40

As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase(Why Strict stop loss of 8 % ?) -  Click Here

*As the author of this blog I disclose that I do not hold S H KELKAR & COMPANY Ltd in my any of the portfolios.


*Reader Friends, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!

*Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

VIEW THE POWER POINT PRESENTATION ON

Wednesday, January 13, 2016

NANDAN DENIM LTD: STYLE YOUR PORTFOLIO !!!

Scrip Code: 532641 NDL
CMP:  Rs. 150.25; Market Cap: Rs. 687.79 Cr; 52 Week High/Low: Rs. 174.00 / Rs. 56.10
Total Shares: 4,55,49,056 shares; Promoters : 2,77,58,720 shares – 60.94 %; Total Public holding : 1,77,90,336 shares – 39.06 %; Book Value: Rs. 56.84; Face Value: Rs. 10.00; EPS: Rs. 12.96; Dividend: 16.00 %; P/E: 11.59 times; Ind. P/E: 20.16; EV/EBITDA: 6.30x
Total Debt: Rs. 470.86 Cr; Enterprise Value: Rs. 1,136.08 Cr.

NANDAN DENIM LIMITED: The Company was founded on August 09, 1994 and is headquartered in Ahmedabad, India. It was earlier known as Nandan Exim ltd and changed its name to Nandan Denim in 2013. It is part of the Chiripal Group, which has multiple businesses including textiles, real estate, education and construction. The company commenced commercial operation in 1999. It was initially involved in the trading of textile fabrics. The company came with an IPO in May 12, 2005 with issue size of 60 lakh shares of face value of Rs. 10 each at the price of Rs. 20 per share raising Rs. 12 Cr for foraying into denim and cotton fabric production. The Company had declared split in face value of its shares from Rs. 10 to Rs. 1 on 01 September 2005 and on 05 August 2011 it consolidated its face value from Rs. 1 to Rs. 10. The company declared last bonus on 31 October 2006 in ratio of 1:1. Nandan Denim Limited (Nandan Denim) is an India-based denim manufacturer. The Company's products include shirting fabrics, engineered khakis and denim home. Nandan Denim manufactures shirting fabrics for fashion garments and accessories applications. The Company manufactures khakis fabrics for fashion garments and accessories applications. It also manufactures handcrafted masterpieces made from denim fabric and natural indigo. The Company's installed capacity is around 110 million meters per annum (MMPA) for denim fabric, approximately 10 MMPA for yarn-dyed shirting, and around 124 tons per day (TPD) for yarn manufacturing. The Company exports its denim fabric to around 30 countries across the globe. Over the years, the company has expanded its denim fabric manufacturing Capacity and has established itself as one of the leading players in the Indian denim fabric industry. Currently, the company has a denim fabric processing capacity of 110 mmpa and shirting fabric processing capacity 10 mmpa. NDL’s denim fabric manufacturing plant is located in Ahmadabad, Gujarat. Since its inception, Nandan has been looking to the growing demand in Denims bottom-wear and shirting fabrics. Nandan has stood by its commitment to provide quality at the best price. To add to its glory it is now Nandan Denim Limited has an ISO certification and Oeko-Tex certification on its credit. Nandan Denim annually makes 100 million metres of fashion fabrics enough to go around Earth 2.5 times. NANDAN DENIM Ltd is locally compared to Arvind Mills, Aarvee Denims & Exports Ltd, Sudarshan Jeans Pvt Lts, Etco Denim Ltd, Ashima, Bombay Dyeing The Ruby Mills Ltd, Tuni Textiles Mills, Subh Tex (India) Ltd, Rainbow Denim Ltd, Dhanlaxmi Fabrics India Ltd, Santogen Exports Ltd, Alka India Ltd, Shri Lakshmi Cotsyn, Morarjee Textiles and globally with Michael Kors Holdings Ltd of USA, Guess? Inc of USA, PRADA SPA COM of Europe, Joe’s Jeans Inc of USA, Fossil Group Inc of USA, Ralph Lauren Corp of USA, VF Corp of USA, St. John Knits International Inc of USA, Ever-Glory International Group Inc of USA, Billabong of Australia, Speacialty Fashion group ltd of Australia, United Clothing FZE of UAE, Denim Area Industrie SPA of Italy, Berto E.G. Industria Tessile of Italy, Aqua Fabrics of Italy, Textile Canatiba from Brazil, Vicunha Textiles from Brazil.  

Investment Rationale:

NANDAN DENIM LTD is a part of Chiripal group and currently the second largest integrated denim fabric company in India based in Ahmedabad. Chiripal group is widely recognized as the Textile House with manufacturing facilities for POY, Texturising, Cotton Spinning, Denim Weaving, Knitting and Processing, Home Furnishing. NDL manufactures and supplies quality grey cotton fabrics, khakis and denims. Denim contributes 90 % of the total revenue to the company. It has invested heavily in capacity expansion to become the largest denim company in India and fourth largest in the world by March 2016. Nandan Denim was in the business of trading of fabrics in domestic and international markets. During FY04, it commenced implementation of Weaving (Grey) project. Currently, the exports account for nearly 10 % of sales. NDL is second largest denim player in the India with 99 mn meters per annum, and also has 10 mmpa manufacturing capacity of shirting fabrics. NDL is the largest denim suppliers to global brands such as Carrefour, Ralph Lauren Corp, Polo, A/X, Tomy Hilfiger, Gini & Jony, CP Colorplus, Mufti, Killer, Spykar etc. India’s textiles sector is one of the mainstreams of the national economy. It is also one of the largest contributing sectors in India’s exports, contributing around 11 % to the country’s total exports basket. The textiles industry is labour intensive and is one of the largest employers. The industry realized export earnings worth US$ 41.57 billion in 2013-14. The textile industry has two broad segments, namely handloom, handicrafts, sericulture, power looms in the un-organised sector and spinning, apparel, garmenting, made ups in the organised sector. The Indian textiles industry is extremely varied, with a hand-spun and hand-woven sector at one end of the spectrum, and the capital intensive sophisticated mill sector at the other. The de-centralised power looms and knitting sector forms the largest in textile and within that knitting sector forms the largest section. The close linkage of the industry to agriculture and the ancient culture, the traditions of the country make the Indian textiles sector unique in comparison to the textiles industry of other countries. This also provides the industry with the capacity to produce a variety of products suitable to the different market segments, both within and outside the country. The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With Consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade. The organised apparel segment is expected to grow at a Compound Annual Growth Rate of more than 13 % over a 10-year period. Also Indian denim capacity is poised to reach 2 billion meters per annum (bmpa) by 2018 from 1.2 bmpa currently, signifying 18.5 % CAGR. In contrast, international market capacity is likely to grow at 3 % to 5 % CAGR. Of the current 1.2 bmpa Indian denim capacity, usable installed capacity is about half of 1 bmpa. Domestic market demand for denim is of 800 mmpa while the balance 200-300 mmpa is exported. India houses 10 % of global denim capacity and NDL manufactures 10 % of Indian denim capacity. Nandan Denim is poised to become the largest manufacturer of denim fabrics in India after its expansion of its capacity to 110 mn meters per annum (mmpa). In India, Arvind Ltd has capacity of 130 mmpa and Aarvee has capacity of 84 mmpa, Sudarshan Jeans has capacity of 70 mmpa, ETCO Denim has capacity of 50 mmpa. However NANDAN is still behind its global competitors like Vicunha Textiles which has capacity of 230 mmpa, iSKO which has the capcity of 200 mmpa and Tavex corporation which has the capacity of 160 mmpa. NDL, Arvind and Aarvee, (together) would constitute one-third of the Indian denim industry. Consumption in India is skewed with 7 % of population consuming 49 % of denim. Male segment contributes 85 % to the total consumption while balance 15 % is consumed by female and kids segment. The overall denim market is expected to witness higher growth rates due to their lower base and increasing focus of brands and retailers on those segments. Denim is of the most promising category in India’s apparel market. In 2013, the denim market of India was worth Rs. 13,500 Cr (NDL having 10 % share with Mcap of Rs. 689 Cr) which accounts for 5 % of the total apparel market of the country. As per a report, the world trade in denim fabric averaged 670,000 tonnes over the past one decade, while in value terms; it fluctuated between $3 billion and $3.5 billion. India accounts for 5 % of this trade. Going forward, a large part of the growth of denim apparel shall be driven by deeper penetration in the smaller cities with increasing acceptance of denim within India. The Indian denim market is projected to grow at 15 % CAGR to become Rs. 27,200 Cr market in 2018 owing primarily to youngster’s obsession for cult fabric. This boom will be fuelled by not only due to an increasing demand from small cities and rural areas, but also because of acceptance of the fabric at workplaces etc. In terms of volumes, the denim market is estimated at 300 mn pairs of jeans, which is projected to grow to 550 mn-600 mn by 2016. India is the second largest denim manufacturer in the world with 1200 MMPA capacity, second to China, which has a capacity of 3497 MMPA. Asia accounts for about 70 % of the global denim fabric production, while the global denim fabric market is $17bn, growing at a modest rate of 3 % to 5 %. The western lifestyle and western fashion has boosted the consumption of casual fashion apparel like denims, dress, shirts, tees, casual shirts among both men and women consumers in all developing countries including India. The average number of denim items owned by Indian consumer is much lower in comparison to consuming market of the United States, Europe etc. The number is even lower than countries like Brazil and China. This difference in the number demonstrates the huge potential that exists for denim in the domestic market. Per capita denim jeans consumption in India is only 0.3 compared to USA’s 9, UK’s 8, Brazil 7, Thailand 7, Japan 6 and China’s 2. The 78 % of Indian population is less than 45 years of age. While denim story started elsewhere in the world as work-wear, it started as a fashion statement of youth in India. It reflected the fashion statement, style quotient and comfort wear anywhere for the youth. With more than 70% of Indian population aging around 26 years and the median age remaining under 30 years even after 10 years, huge potential exist for denim, a fabric with the target Indian age bracket of 14-40 years. Current share of male segment within denim wear is almost 75-80 % with the female gender catching up faster than the growth registered in the male segment. The young generation, either gender, has accepted denim as “normal” wear rather than a “functional” wear. Current domestic market is dominated by metro cities that account for almost two-third of consumption while having got less than 10% of national population. With rising disposable incomes and fashion consciousness, increasing demand from women’s wear segment and the growing acceptance of denim jeans as an office wear coupled with the expanding demand from Tier II & III cities driven by expanding organised retail industry will lead the growth of denim in India. Also NDL has strategic tie-ups with 10 firms for exclusively selling Nandan products around the country and 2/3rd of the orders are confirmed through long term agreements involving minimum yearly quantity commitment. NDL has strong global network of around 15 distributors spread across 8 countries – Peru, Mauritius, Hong Kong, Dubai, Thailand, Bangladesh, New York, Columbia. NDL exports its denim fabric to over 22 countries across the globe through its strong global dealer-distribution network. Merchant exports through various star export houses give an additional boost to exports. Currently, exports constitute over 10 % of total turnover in next three to four years taking benefit from decreasing competitiveness from its Chinese players. As the penetration of denim category and the awareness of denim quality increases in those cities and rural India, their share in market value will start increasing with more number of consumers willing to pay premium for the quality, design and fit. The latest trend in the denim fashion augurs well for the denim companies in India and the Nandan Denim (NDL), which is the second largest manufacturer of denim in India and the 5th largest in the global arena will definitely be the winner in this sector.

Outlook and Valuation:

NANDAN DENIM LTD is India's one of the largest and Asia's 5th leading denium manufacturer. NDL plant is located in Gujarat, which is a textile hub of India, and is known as largest exporter of denim fabric, largest producer of cotton etc. NDL’s plants are with state of art manufacturing facility with latest machinery & technology sourced from across the globe. The machinery is capable of producing wide range of denim fabrics – 100 % cotton, cotton spandex, cotton poly, cotton poly spandex, cotton modal, cotton tencel etc. NDL’s plant in Gujarat gives a close proximity to machinery vendors, fabric dealers and leading garment manufacturer’s which results in faster delivery and services, translating into lower overheads costs. NDL has easy access to the raw material like cotton as Gujarat meets 70 % requirement and provides skilled & unskilled labour. Cotton is the key raw material used for manufacturing denim fabric. It is a seasonal commodity and production is heavily dependent on monsoon. India, under a normal monsoon condition remains a major source of cotton to the national consumers as well as International market. With production of cotton having stabilized around 37 to 38 million bales and domestic consumption to the tune of 30 million bales, the country is prepared to take advantage of any volatility in the commodity market. Any volatility in cotton market impacts the yarn manufacturers the most, whereas the value added manufacturers are reasonably hedged due to the market conditions, i.e. non-commoditised product leveraging the strong agent-based domestic. Cotton prices remained below minimum support price (MSP) in last year. However, it has now stabilised due to intervention of Cotton Corporation of India. China import of cotton is declining and the NDL management does not expect any correction in cotton MSP. It expects cotton prices to remain range bound with decreased volatility. The decline in cotton prices would be beneficial for the company. The company keeps an inventory of 4 months depending on the outlook and trend of cotton prices. NDL is implementing capacity expansion in denim fabric, spinning and shirting segments. The total Capex requirement is of Rs. 612 crore which is funded with a D/E ratio of 2.4:1. Of the total expansion Rs. 250 Cr would be used for spinning, Rs. 250 Cr for denim and balance Rs. 112 Cr for yarn dyeing to be used in shirting manufacturing. The expansion of denim fabric capacity will help the company to increase its domestic market share as well as diversify its operations on a global scale through a rising share of exports, the addition of new shirting capacity will further diversify its operations, and the expansion of spinning capacity will support the increased denim fabric capacity of 110 MMPA. NDL will backward integrate by expanding its spinning capacity from 64 tpd (tonne per day) to 124 tpd over FY15E-FY16E. This backward integration will help NDL to improve operating flexibility by helping the company to absorb the increasing market demand with faster delivery and timely execution due to limited dependency on external factors along the value chain. This will help NDL to achieve optimum capacity utilization and maintain consistency and high quality standards. With the backward integration in place, the average cost of raw materials will stand at Rs. 150/kg as compared to Rs. 170/kg when outsourced from the open which were 10 % to 15 % higher compared to purchase of yarn from market. Integrated facility will help in better management of the working capital and improve the operational efficiencies. Better market response, efficient capacity utilisation and cost savings on captive yarn would result in improvement in EBITDA margin from current 14 % to 15 % to around 19 % to 20 % in the next two years. This backward integration will also result in improved return ratios. Furthermore, with improved operating flexibility, the company would be better placed to increase its share of exports, which have strict quality and timeline requirements. The company envisages increasing its share of exports from 10 % in FY14 to around 30 % by FY18. Overall, this should further help the company to increase its EBITDA margins to more than 20% beyond FY17. The company would get set off of Value Added Tax (VAT) for 8 years post completion of project in March 2016. With the establishment of higher spinning capacity, the cost of fabric is likely to reduce which would lead to better margins and ROCE. The management mentioned that margin improvement is likely to be in the range of 4 % to 5 % due to an advantage of Rs. 12.5 per meter in the cost of fabric by in-house manufacturing of yarn. Debt of the company stood at Rs. 470 Cr at the end of FY15. The management expects its peak debt to be Rs. 650 Cr by FY16E. The company is planning to raise Rs 50 Cr to 100 Cr to part finance the equity portion. It has already passed a Board resolution to raise Rs. 100 Cr through convertible warrants on preferential basis to promoter & non-promoter investors. Post-expansion, the management mentioned that it would consolidate its capacities for one year. Post FY17E, the Textile Upgradation Funds Scheme would expire and the Company would plan its next growth phase post clarity on investment avenues. Free Cash generated through the current expansion plan is likely to be distributed in the form of dividends, in the event of non-finalisation of further investments. Currently, exports contribute 10 % to the topline of the company. NDL exports to 22 Countries in the world; however, more than 80 % of the exports are to Latin America, Africa and Bangladesh. Polo, Target, Calvin Klein are the indirect client of the company, supplied through the wholesalers-distributors export channel. The company plans to increase the share of exports to 25 % in its revenue mix with an aim of diversifying its clientele and de-risk its revenue model. The realisations and margins are almost same in domestic and export market for the current product mix of the company. On financial side revenue of the company has increased at a CAGR of 21.2 % over FY11-15. This was driven by higher volume due to increasing capacities. Shift to higher value added products, backward integration and lower share of traded products in revenue mix enabled the company to improve its EBITDA margin to 15.1 % in FY15 from 13.4 % in FY11. However, debt remains a key negative for the company with leverage of 1.8 x in FY15. This is likely to reach 2.1 times by FY16E. ROE of the company increased to 21.6 % in FY15 from 12.7 % in FY11 while ROCE increased to 15.8 % in FY15 from 10.6 % in FY11. At CMP of Rs. 150.25 the company is trading at 12.52x the FY16E and 10.65x the FY17E. Company can post EPS of Rs. 12.00 in FY16E and Rs. 14.10 for FY17E. The company is on an expansion mode till FY16E which will start showing results from FY17E. It would be the largest manufacturer of denim in the country. It is likely to manufacture shirting with premium quality. Profitability of the company is likely to increase. It is expected the company to grow around 10-15 % in following 2-3 years. It is expected that the company will keep its growth story intact in the coming quarters also and can be a good pick from this sector. 

KEY FINANCIALSFY14FY15FY16EFY17E
SALES ( Crs)904.101,096.501,241.401,426.30
NET PROFIT (₹ Cr)39.1051.4054.5064.40
EPS ()8.6011.3012.0014.10
PE (x)19.8015.107.005.90
P/BV (x)3.601.501.301.10
EV/EBITDA (x)9.204.505.004.10
ROE (%)19.5021.6019.3019.40
ROCE (%)13.2015.7016.0016.10

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