Indian Terrain Fashions Ltd (pick by The Ace Investor)

Report as published on https://theaceinvestor.in
I have just copy pasted, i do not claim credit for this.

Indian Terrain Fashions Ltd - Diwali Special


HAPPY DIWALI TO ALL READERS..HAVE A HAPPY, FUN & SAFE DIWALI!
Muhurat Trading Time: 11 Nov 2015, 5:45 PM to 6:45 PM.



The Ace Investor
Indian Terrain Fashions Ltd
Listed on both NSE: INDTERRAIN & BSE: 533329
Currently trading around 660 with a market cap of around 470 crores.
Promoters hold 30.85% stake.
It is a Debt Free company with Zero Long Term Debt.
Total Reserves are around 119 crores.

Indian Terrain Fashions Ltd is an Indian branded apparel company, It mainly operates in a niche space of men's casual wear segment with its own brand "Indian Terrain" which enjoys really good brand recall among consumers.

Indian Terrain is a part of Celebrity Group, their other listed company Celebrity Fashions has ceased to exist and it is the resources of Celebrity Fashions that has given birth to Indian Terrain which ultimately was demerged.

Indian Terrain is a premium brand targeted at the mid-income group with the price points for core products (casual shirts/trousers) being between 1400 to 2800.

Around 80% of the total turnover of Indian Terrain comes from Casual Shirts and Trousers.
The term "Casual shirts" covers a wide variety including the business casuals, smart casuals, resort casuals and partywear casuals.

The fashion trends for men have been increasingly getting casual centric, in the past perfect office attire used to be all about formals but now the perfect office attire is becoming more ambiguous by the day, now wearing a casual chequered shirts to the office is the trend and the trend on rise.

At end of 2014, Indian Terrain had 3.7 lakh registered loyalty program members while majority of customers do not go for such loyalty memberships it does give a idea about the kind of brand-recall the company enjoys.

Indian Terrain has a pan-India presence, The company retails its products via 700+ multi-brand outlets,130+ doors of large format stores, 100+ exclusive brand outlets, and presence on all leading e-commerce websites.

Indian Terrain has its own e-commerce platform on its website and offers great festive deals and discounts too.

India has world's largest youth population according to a U.N. report with about 356 million 10-24 year olds despite having a smaller population compared to China.

By 2020 India is set to become the world's youngest country: In 2020 the median individual in India will be 29 years.

This is very positive factor for Indian Terrain as the Youth is their target customer.
Wearing a Shirt is not a luxury but a necessity so that adds a lot of margin of safety in this sector.

Coming to the financials, Indian Terrain has witnessed great growth :-


From FY11 to FY15 the growth has been great.

FY12 was eclipsed by Global Recession, the impact can be seen on the profitability of the company in the said year but the important factor is that despite recessions the sales had grown.

The company reported wonderful topline growth of 48% at end of FY14 and now it has grown to 290crores in FY15 reporting a topline growth of 25%.

Before looking at further positives in Indian Terrain let us take note of the two key issues or flags that can be seen in Indian Terrain :-
Pledged Promoter Holding
Trade Receivables

Regarding the pledged promoter holding, I have heard from credible sources that after clearing the long-term debt the company will now get rid of the pledged promoter holding too and it can be soon or we have to wait a bit more for that.

Indian Terrain has about 95 crores of Trade Receivables at end of FY15, However this is not abnormalfor the company as it has historically had the trade receivables and it has steadily increased now maybe with the e-commerce push because of the fund cycle of the e-commerce companies which are in heavy losses.

Trade Receivables become an issue when they come all of a sudden, hinting at fudged sales and also one should look at the Receivables Turnover Ratio which should not dip under 1 in the best case.

If we look at the Receivables Turnover Ratio for Indian Terrain it is at 3.36 at end of FY15 improvingslightly from 3.17 in FY14.

Even Kewal Kiran Clothing which owns brands like Killer and Lawman PG3 has had the trade receivables but their RTR is better at 5.79.

The company has announced purchasing the manufacturing facility it has currently availed on lease from its related party Celebrity Fashions at amount not exceeding 16 crores which is at fair market price and the company is not going to use the QIP proceeds of 75 crores that it has recently raised from marquee investors like SBI, Malabar but from internal accruals and partly from term loan from bank.

Indian Terrain Fashions this week reported its September 2015 quarter numbers and they were really good, thanks to the debt repayment the interest costs have reduced and that has expanded the net margins.

H1 2016 EPS for Indian Terrain stands at 23.86 as against 16.06 in H1 2015.

If we consider no growth against 2015 numbers, Indian Terrain should report EPS of 14.43 for H2 2016 taking the full year EPS to 38.29.

However late festive season this year means the company is expected to do better than FY15 in terms of final two quarters for the year.

Indian Terrain today mimics the Page Industries of FY 2009-2010 when it was growing at around 30% and was trading at similar valuations of around 17 times to its earnings when stock price was around 450.

Indian Terrain has raised 75 crores in January 2015 where it allotted 14.12 lakh shares at the price of 531 each to Malabar India Fund, SBI, DSP Blackrock and Amundi Funds.

Malabar India Fund is the same fund which had invested in Page Industries at the price of around 450-500 and it also boasts of investments in major multibaggers like Symphony, Hawkins, Eclerx among many apart from Page Industries.

Bulk Deal data shows, Malabar purchased another small chunk of 45,505 shares at 599 recently in August 2015. Vijay Kedia has purchased 30,000 shares from BSE at around 550 in Jan 2015 and Om Kedar Investments of Prof. Mankekar has purchased 38,500 sharesin various transactions early this year around 550.

At current market price of around 660, Indian Terrain is trading at only 17 times FY16E which is highly undervalued for such a good brand play in the fashion apparel segment even as KKCL (Kewal Kiran) trades around 50 times.

Here is a comparison table of all the companies operating in this sector :-

Just look at the way Indian Terrain has been wrongly undervalued for long, Zodiac with inferior margins is trading at 70 times its earnings, Kewal Kiran at 40 times, Future Lifestyles at 80 times and Indian Terrain at only 17 times.

Major reason for under-valuation is the lack of equity capital, 30% with promoters and almost 50% with institutions and big players makes it only 20% available to the retail investors, To change this the company has approved a stock split which should also trigger a re-rating as volumes will pick up.

Fair value for Indian Terrain should be atleast 35 times which takes it to 1340 and 45 times rating takes it to 1720 with present set of earnings.

It may sound like an over-statement but Indian Terrain is my bet as the Next Page Industries if not it should be atleast the next Zodiac, KKCL with major re-rating.

Disclosure: It is safe to assume that i might have Indian Terrain Fashions Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.


:Links:
Indian Terrain website
Indian Terrain Screener
Indian Terrain Annual Report 2015
QIP News
Indian Terrain Bulk Deals
Malabar Fund Investments
Latest Quarterly Results - SEP15




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Good report.

 

Clear arguments to make one look at it more seriously. I think stocks which people like should be introduced in this manner, with a cogent argument backing it. Then the argument can be taken apart in an objective manner. The presentation should have two parts : The business case and the financial strength. This covers both. So thank you again for increasing the standard of the fourm contributions.

This kind of an introduction is so much better than : I like stock xyz. what do you think of it ? In such cases my mental response is : I think you want others to do the hard work for you. If you like a stock please do us the favour of introducing it like how bazzariyaan has.

 

A very preliminary check throws up the following :
- Zodiac ROE and ROCE are in single digit, so straightaway inefficiency stares you in the face.
- The ROCE and ROE of Kewal are 30% and 19% respectively
- The ROCE and ROE of India Terrain are 20% and 14% respectively
- Kewal throws out operating cash of INR 75 Crores a year vs INR 10 crores for India Terrain
- The above factors may explain the difference in the earnings multiples. But it is also true that the Indian Terrain brand is getting stronger and is positioned in a sweet spot vis a vis the growing young population of the country

 

thanks but i am only copy pasting.
credit goes to the ace investor for penning this on his blog.

 

why i post his messages here is because most of his stocks have doubled and multiplied, some have failed and are down 30-35% but the majority has given mindblowing returns so i think to post it here, another blogger i love is value-picks but he is silent nowadays.

 

Many of the textle stocks being referred by analysts are not going to perform including favourite of all such recommendations,ie Page or some time Kitex.I will not be surprised if page industry takes a further hit even from this level as now business growth is tapering off as I had predicated rightly.But I belive its reported performance .I had referred to Page and Kitex as sure down side play in other threads and elsewhere some time back,when they were high flyers,page is down to 12k from 17k and Kitex down to 720 from 1070.Simialry this stock also seems to me on the same path down to 600 from high of 800 ..Good explanation by The ace invester but alarmed by hidden or missing fact from report more than great explanation.I am amused how people can propel a stock price to 800 but company is not healthy to even pay dividends .A high price stock with zero dividend yield but great buy? This is not new generation high growth technology business but a textile business?I am realy surprised at ignorance of some of analysts about their knowledge of textile industry .I am some time confused by strong numbers ? being posted by some textile compnies and stocks being reported as great buy but their suppliers,employees and bankers as worried lot.My this view has nothing to do with future price performance of this stock and I don't know much about this company either although it is an Indian brand.. So this is just for discussion.I am always worried about companies which are said to be great business but busy with raising money via QIP etc and reporting good numbers. . Those company can not be great business which can not fund its expansion from its profit and has no Surpuls for dividend distribution.

 

That's one bucket full of generalization and judgement.
Dividend was paid because till date company was in debt, doesn't make sense to pay dividend with debt on books anyway.

This is not exactly a textile business.

 

I don't agree that company should not pay dividend due to debt on books.Rather due to Indian tax laws,a company should take debt if it can service,as on self funds you pay taxes on income but service of debt is tax free.In my view a good company should never dilute equity except for purpose of bonus,should take debt upto a level which can be serviced easily and distribute profits .If a company can not fund its expansion from its profit and can not service debt from expanded capacity should not expand through juggalry of QIPetc .More over what other business this company do other than selling clothing's under its Deshi Brand,please let me know with % of non textile business.As a disclosure I don't know much about working of discussed company as I don't track and not sure about price movement of stock on any side.

 

Not surprised at blood bath at Page industry .Nothing wrong with company but a textile stock at price to book of 35..So beware of high price,high PE ,high price to book value ratio stocks.There are many and being recommened when high qualty proven leaders large cap are being sold like potatoes .Profit and growth of next 10 years or beyond priced in price of many of the hyped stocks.Be grounded with good quality fundamentaly strong reasonably priced stocks,certainly not time to fly like unguided missiles.

 

Very good advice for one and all

 

"I have heard from credible sources that after clearing the long-term debt the company will now get rid of the pledged promoter holding too"

How can the company clear promoter pledge? Has the promoter pledged shares and lent the money to the company i.e. Indian Terrain? And the company now after reducing debt would repay the promoter thereby resulting in release of pledge?

 

I suppose the message is that the pledge would stand cancelled.... Given that the company has paid back its borrowings ( that which was taken backed by security in the form of shares held by promoters)

 

Points to ponder on : If a company's return on networth beats what a shareholder would earn on monies received as dividend : is the shareholder better off receiving dividend or with the company deciding to plough back its profits
: Why do companies pay dividends? Because profits belong to the owners of the company—the shareholders—and the company doesn't see any better opportunities to invest the money. So the world's biggest and valued brands currently arent paying dividends or didnt until recently ( google, amazon, Apple, gilead etc) for they are retaining monies and investing in better growthopportunities
: An established business with a dominance in the market and few opportunities to grow - the value of the stock depends on being able to pay a good and steady dividend
: A company might choose to hoard its profit. This is especially true for businesses with cyclical sales and profits
: The best dividend paying companies increase their payout regularly
: a company with a solid business that grows and generates more cash every year is a great company to own. Instead of financing its growth (or even continued operations) through debt ( dividends reduce available cash) it's free to build up its own equity.
: Berkshire does pay any dividend ( from mr buffet's belief about point 1 above)

 

Most of Indian fund managers has beaten Buffet in dollers term in last 10,5,3,2,1 years.Even Buffet underperform Dow index in last one year.So even if any body will buy NIFTY index may beat Buffet in dollers term in next 10 years.No doubt he is a past Hero and has done CAGR of 18% over a long period,but now it is going down every year and many of Indian fund managers and investers are beating him regularly even in dollers term in India,still we have lot of respect for him and need to follow many points of his style..Any body by just buying one stock HDFC bank can still safely beat Buffet by wide margin in next 1,2,3 ,5,10 years in dollers terms.So doing Buffet may not work in this case as the concerned company is not the status of young Coca cola.

 

Wonder why there is consensus amongst all these super brilliant 'indian fund managers' and worldwide that Mr Buffets is amongst the greatest investors of all times..... And why these ' super brilliant' indian fund manager just 'ape' his investment philosophies and treat him as their 'guru'

So if YOU only have some ' past' respect for him... Better use the word 'I' and not 'we' for you would be like the congress party ( in absolute minority) as regards the respect Mr Buffets COMMANDS even today.

Apart from this (1) my points were 'general in nature and not company specific and (2) will leave you to bask in your loony investment principles..... Thank you!!!!




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Dear Sachin I have great respect for Guru Buffet,but even NIFTY and Sensex had given 18% CAGR since start of NIFTY and sensex . Berkshire has not even beaten our index forget those many ,even I would go to extent of saying almost every fund manager in India has beaten Berkshire. I have lot of respect ,and ready to do more to please you, but can not change statistics.I have Reliance Growth ,HDFC equity fund since almost 20 years,I don't remember exactly and Berkshire is no where in sight in comaprision,athough these are not best of Indian funds.If investers will compare Indian mutual fund industry return of last two decades,they may end up having reduced respect for our Guru.Better You refer Nilesh Shah Chief of Kotak Fund on google if available ,who has done comparison of Indian fund managers with Buffet on many TV interviews and revealed facts about Berkshire and Buffet under performance vs Indian fund managers.You know US ows maximum to World and highly debt to GDP economy but still triple A rated,why ?.Why many of ailing econmoy of west have better rateing than India ,although they are being bailed out in every quarter.?Similarly Buffet is great Guru and our fund managers inspite of giving higher returns are under rated.Respect ,status, fame and facts may be different

 

FYI - Nifty is a mere 11% CAGR since inception (20 yrs) and BSE ~ 16.5% (31 years). berkshire is ~22% over 50 years!!!! This without considering the emerging markets vs developed market and currency depreciation considerations

 

And to give you a perspective what this means

Rs 100 invested in BSE in 1979 has grows to about 25,000 in 2015 and
Usd 12.2 ( usd vs inr exchange rate in 79 was about 8.2) invested in berkshire grows to usd 15,678 and rs 10,34,800 . CAGR ~ 29.5% in rupee term and in a developed market where long term index linked returns in single digits is pretty much a norm

i dont think i need to refer to any nilesh shah's of the world and listen to what he has to say about india returns vs berkshire. He grabs my attention ONLY if he generates 22% CAGR over 50 years in ANY developed market ( and remaining averse to tech companies) and not in emerging markets which are inherently risky and so earning a % return higher than their counter parts in developed markets is a very common phenomenon. One doesnt need to be a fund manager for this.

 

Dear Sachin Compare Reliance Growth Fund which has grown 79 times in last 20 years and compare with Berkshire