Repeated orders, rapid inorganic expansion, and attractive valuations augur well for the Bangalore-based garment designer and manufacturer Indus Fila. From the macro perspective, penetration of organised retailing in the country and increased brand awareness for the garments are also a significant driver for higher growth and could result in better margins in the long-term.

Business

To stay ahead in the competitive Indian textile market, Indus Fila has an integrated setup starting from yarn dyeing, yarn weaving, cloth processing, and lastly cloth garmenting. This helped the company to control 80% of the value chain as compared to 50% that a pure textile player might have. This advantage enables the company to earn a comparatively higher margin if as they do not outsource.

Its domestic clients list includes Gokaldas, Page Apparels, Madura Garments and Celebrity Fashions, Indus Fila has an agreement to supply garments with all these companies. Majority of the sales comes from the domestic market, where it fulfills the requirement of the outsourcing companies like Gokaldas, who in turn supplies to international brands. It also supplies directly to the international brands mentioned above. Till date, Indus Fila does not manufacture garments in its own brand name. However, due to its manufacturing capability and penetration of organised retail in the country, the company could launch its own brands in the domestic market, which could further drive margins.

It manufactures colour dyed, solid dyed fabrics for domestic purposes and men’s shirts and women’s tops for exports. It intends to enter the high-end garments sector like lower wear, sports wear, etc. Indus Fila wants to position itself in the mid to high-end garment segment.

Investment rationale

Indus Fila has raised Rs 166.24 crore in March 2007 in its public issue. Till March 2008, out of the total funds it has utilised around Rs 43 crore.

The company has expanded rapidly through acquisition. Before going public, the company was outsourcing around 31% of the total cloth weaving capacity. After the first phase of expansion it would increase the capacity by 17% and 39% in the second phase. Overall this would result in 64% capacity enhancement. Complete in-house manufacturing would improve operating margins and result in higher profit.

While expanding organically the company had also taken the inorganic route. The inorganic route is a better strategy in the textile market. It reduces significant time if there is buoyancy in demand.

The company has been using the inorganic route to complete the expansion as stated in the red herring prospectus (RHP) filed for the public issue. This may reduce the cost of acquisition.

The expansion started with the acquisition of a 51% stake in Indus Garments (India) for Rs 9.35 crore in July 2007. Indus Garments has an installed capacity of 36 lakh garments per annum and products are exported to American and European countries. Recently the company has announced one more acquisition of Tulip Apparels and the board approved the amalgamation with the company itself subject to court approvals. Tulip Apparels is the apparel contract manufacturer based in Bangalore.

Financials

According to estimates, the Indian textile industry is expected to grow at a rate of 16% in value terms and touch $115 billion in the next five years. And the exports are expected to grow at a rate of 22% for the same period. The negative part is textile companies run on wafer thin margins in the range of 2% to 8% depending on which part of the value chain the company is.

To survive in this kind of market, coupled with high debtor days and inventory that makes business more difficult to run, Indus Fila and many other companies have gone one step ahead by integrating the value chain. This advantage reduces dependence on the outside supplier. The complete control on the value chain enables them to deliver consistent and similar quality and gradation, which is the most important factor in the textile market.

As far as financials are concerned, Indus Fila had seen a sudden jump in revenues and profit in the FY2006-07, which was due to the acquisition of Sai Lakshmi Industries. It delivered a healthy sales and net profit growth of 55% and 38% respectively in the FY2007-08. Net sales, operating profit, and net profit were Rs 417.43 crore, Rs 77.10 crore, and Rs 36.01 crore respectively. Higher interest cost resulted in lower growth in net profit.

Valuation & concerns

The current valuation of the company looks attractive from the long-term view considering the steep decline in the price. The fully diluted earning per share for FY2007-08 is Rs 18.59. Considering the current market price, the price to earning multiple is at 7.10 times.

Currently, the market price is below the public issue price of Rs 160 and it is one of the positives.

Getting regular and large orders is the major concern for Indus Fila. Not able to meet the required quantity of sales vis-?-vis capacity could lead to higher operating cost. Unable to deliver consistent quality and gradation as per the client requirement could cancel the supply and affect the profitability significantly.