Hi Dhwanil,
Good to know your views. Do you have any views as to how BSE entry into commodity segment will impact market share of MCX. The only thing that scares me is that this is a winner take all business. I have read that BSE platform is much faster than MCX platform. Do you think the faster platform speed can allow users (traders) to overcome the impact of higher impact cost due to lower volumes?
Abhishek.

Ranvir,

What is the arrangement of Starbucks with Tata global? Does tata global hold any stake in the JV?

rgds
hitesh.

Hi guyz,

This is my first write up, so kindly forgive me if i have missed any information. Do ask for any further info if required.

Nandan Denim Limited
One world with Denim…

Industry Snapshot –
Denim industry is one of the fastest growing (niche) industry in India. The Indian denim apparel market was valued at 13,500 crore in 2013, as per a report by management consulting firm Technopak, accounting for 5% of the total apparel market. It has been growing at a CAGR of 14% to 15%, outpacing the global denim apparel market, which is clocking a CAGR of 3% to 5%. The domestic denim market is projected to register a CAGR of 15% to 27,200 crore by 2018. In volume terms, the domestic denim apparel market has witnessed faster growth vis- à-vis exports during the five-year period FY2009-FY2013. India is the 2nd largest denim manufacturer in the world with 1,000 MMPA capacity, next only to China. The country is the 4th largest exporter of denim fabric in the world after China, Pakistan and Turkey. Asia accounts for about 70% of the global denim fabric production.

Global Denim Capacities (MMPA)

China 3,497
India 1,000
Latin Americas 1,082
European Union 698
North Americas 406
Africa 164
Australia 15
Others 880

The Indian denim jeans market is largely unorganized, with branded market accounting for only 30% share. According to a white paper by RNCOS, the ratio of organized and unorganized market will change significantly due to changing consumption patterns. Tier II, III cities and towns have emerged as significant demand drivers for the denim industry. Large players are exploring the unchartered waters through low range products, considering the affordability of consumers.

Denim Apparel Market in India

2013 13,500 crore
2018 (P) 27,200 crore
2023 (P) ` 54,600 crore

City Type Population (%) % in Market Share

Mega Metro 4 37
Metro 3 12
Tire 1 3 8
Tier 2 4 8
Rest Of urban 18 20
Rural 68 15
Total 100 100

The China Threat –

Earlier Indian denim industry used to face tough competition from China, even though cotton (the major input) was scarce in China (compared to India). The things have changed and forced China denim manufacturers to divert/shutdown their denim business. Costly labour and environmental issues/charges played the role. This came to vanish the competitiveness of China in global markets as well in Indian markets. Further, cotton being in abundance in India, India gradually became competitive. This led Chinese manufacturers restrict their business to polyester yarns/non cotton fabrics only.

Potential of Denim Industry In india –

1). Large Population base.
2). Only 9% of Females consuming Denim!!
3). Organized segment contributing only 30%.
4). China diverting its attention to non cotton based textile sector.
5). Govt. support ( TUFS, VAT rebate, etc.).

Company Snapshot

Nandan Denim belongs to the famous Chiripal Group - having huge portfolio of products under its name. Nandan is the denim wing of the group – run by Mr. Deepak Chiripal(CEO) nephew of Mr. VedPrakash Chiripal (the Chairman of the company). Brij Mohan Chiripal is the brother of Ved Prakash Chiripal and is the MD of the company.
Nandan Denim Limited (NDL) is the second-largest textile company in India. Located in Gujarat, the textile hub of India, the Company is engaged in the manufacture of denims, cotton fabrics and khakis through fully integrated facilities. With a projected denim manufacturing capacity of 110 MMPA, NDL is currently the 2nd largest manufacturing facility in India. After achieving the said capacity, Nandan will gain the first position in India surpassing Arvind Limited. Company has increased its capacity by almost 57-58% in last two years (from 70MMPA to 110MMPA*). Company is currently running on 99MMPA capacity with 85% capacity utilization(70 to 99 MMPA already installed during 2014-15). Company has also made expansion through backward integration. It used to produce around 50% of yarn through backward integration and procure the rest of the 50% requirement from outside. This year it has increased its spinning capacity from 54MMPA to 124MMPA – bringing the need of outside procurement to just 20%. Both the expansions will be completed by first quarter of 2017.
Company is planning to get into Denim processing to provide value added products to explore the global markets like Arvind. It has recently started for this expansion, which would materialize in 2nd or 3rd quarter of 2017. Company is planning to increase the strength of the Product Development Centre by increasing the staff strength (hiring more and more fashion designers), increased R&D efforts, etc. The processing facility is under construction, which will be complete by end of 2nd quarter FY 17.
Company enjoys 10-11% of the market share in the denim industry in India (post expansion). Company’s target customer group was the Indian mass market and not the premium denim market that wants value added products. But, now with increased focus on processing and product development efforts, company is targeting the premium market. Company intends to increase its market share in exports in next 3-5 years. Currently 10-12% of the topline comes from exports which company wishes to increase to 35% in next 2-3 years (no compromise on Indian business - Indian business growing at the rate of more than 20%).

Corporate Governance -

Company since last year, was simply a promoter driven company with less number of independent directors on board. This year they have appointed two more independent directors –one with rich experience in financial markets and the other having a wonderful knowledge about branding. Deepak Chiripal is the CEO of the company (the nephew of Ved Prakash Chiripal). He has a wonderful experience in the denim market for years now. He was the man before the growth of the company over years. With his niche focus on Denim Industry, professional mgmt and rich insights from independent directors is a great mix salad on table.

Company Fundamentals

CMP – 130/- (last week).
PE – 10.34
Market Cap- 610 Cr.
Dividend Yield – 1.19%
Debt/Equity- 1.82 (Debt from TUFS has increased this ratio – Debt from TUFS recd at 2-3%).
ROE – 21.64%
Sales Growth (3 years CAGR) – 24%.
EV/EBITDA – 9.
PEG ratio - 0.30.
Tax % - 25-27%.
OCF last year – 133 Cr. (This year, FY16 – 200Cr(P) – from the horse mouth).
NPM las year – 4.40%.
This year NPM – 5.3% (Sept Quarter).
OPM – 15-17%.
Net Worth – 258 Cr.

Valuations –

Attached.

Insights from Management meet and Plant Visit

We met the president of the company – Mr. Govind Sharda. After a 2 hour discussion with Mr. Sharda at the corporate office; he accompanied us to the plant. He was a very polite person and answered to the point.

Question 1
What is the risk of input cost price hike (cotton) ?
Ans – Company has no risk. Whatever increase in price of cotton is passed through to the clients. Adding further he said; you can see this in the company’s OPM over years.

Question 2
What are the company’s expansion plans once the 110MMPA capacity is achieved?
Ans – Once all is done – spinning capacity, denim fabric capacity and processing plant facility; company would like to streamline the process, go for internal efficiency and re-engineering. On asking further – what after that? He replied, company wants to expand its shirting division and also enter into garmenting business. But this needs a big team and focus from top mgmt which will slowly come over next 5-7 years.

Question 3
What is the rationale of bringing Polus Global in the company at 200/-?
Ans – There are two angles to this issue !!
1). Polus Global view point – Polus global wanted to increase its stake from mere 0.35% to 5% in the company. Owing to the illiquidity in the market, the market price of the company shoot up from 140 to 168 when an investor tried taking 70000 shars. What will happen to the CMP if Polus is standing to take 25lac shares. He also added, that Polus is a very small fund compared to others and was not having entire 50 crores to deploy in company, to which they decided to get issued warrants (paying merely 25% rest 75% in 18 months time). Polus is also invested in many other Indian companies like Zee Learn, Sangam Textiles, etc.
2). Company view point – Company knows that its share is undervalued currently. This is due to illiquidity in the markets. 60%-64% of the shares are held by promoters and 20%-25% are held by long term investors who do not want to sell. This brings the effective float to just 10-15%. They have advised the promoters not to buy further shares in the company (to maintain liquidity) and brought in Polus by diluting the equity.
(It can be a marketing strategy, to bring the fund into picture at 200/- and shoot up the price to that level. But I feel the stock to be much undervalued, which provides a good margin of safety. In addition to that Devkinandan Cop LLP (promoter-Devkinandan is the father of Chiripal Bros) was last year continuously buying stake in the company (5%) and this year it is still buying (0.5% as of now). Polus issue should be taken as a green flag rather than a red flag.

Question 4
What will be the EBITDA margins over next 3 years?
Ans- Yarn manufacturers earn around 10-12% of EBITDA margins depending upon quality. Further, increase share of exports will fetch good returns per metre (due to value added products offered). He added, Arvind currently enjoys 180 per metre and we only 130 per metre. Improved focus on consolidation of business (integration), bringing cost efficiency, offering value added products, etc. will help the company to touch the EBITDA margins in the range of 20-24% from just 17% right now.

Threats

1). Raw material price - Please refer question 1 asked to mgmt.
2). China comeback - As per the reports, China has started concentrating on non - cotton products - since they do not have access to cheap cotton (they have to rely on imports) and costly labour and environmental issues have made this market unattractive for them. Correct me if I am wrong here.
3). Competitors - Arvind is a diversified company - is not only focused on denim like nandan. It focuses expansion in knitting business. They havent added any capacity since last 5 years atleast. Aarvee Denims has good capacity, but there is some family dispute going on with less focus on business. Industry is growing at 15-18% CAGR - so competition is less and every player has got some market share to play in.

Moat - Company is a niche player in Denim having fully integrated facilities from cotton to spinning to fabric. It enjoys low cost advantage due to backward integration and efficiency in operations. It enjoys 10% market share in domestic market (which is not a joke) - this shows company has real great distribution networks. Company is trying its hands in value added products - to help its product differentiation.

Disc : Invested at 70,100 and 130 and bought some at 140 last week.valuation - nandan denim.xlsx (11.3 KB)

Excerpt from the Rakesh Jhunjhunwala Economic Times interview posted today -

ET
Now: An interesting stock you have is MCX. The reason why I want to revisit MCX is because a commodity exchange may not do well when there is a bear market in commodities. The numbers are also showing that volumes are coming down. Is that investment giving you second thoughts?
Rakesh Jhunjhunwala: No, I do not think. In India gold consumption is not going to go down and
it is a primary centre for gold and silver and also oil. Maybe volumes will come down a bit, but I do not see any replacement for it. If they are able to introduce options and futures, then I think they
will take the cake and have the highest volumes

Read more at:

@am648

I personally feel that there is nothing substantially negative happening in MCX to warrant the sharp correction. At the same time, we must view the correction in the context of following
- Market has corrected significantly in last 2 months
- on FY 16 normalized earning of 120-150 odd crores, company is trading at 25-30 times earnings even after correction.
- FMC-SEBI merger has been consummated but the positive impact of same has yet to reflect in policy changes (Bank/FII participation, options in commodity etc)
- Commodity prices have been very volatile and is on sharp downward trajectory. As you must be knowing, MCX charges transaction fee on value of the contract and not on volume. Thus, higher volumes traded on the exchanges are countered by lower price of the commodity and hence the value traded on the exchange has remained largely constant (not reflecting higher volumes)

Thus, I feel that the long term investment hypothesis remains valid. At the same time when and how some of the catalysts/tailwinds will play out is hard to predict. However, business remains strong as ever in my opinion. As I had said earlier, I am looking at MCX from a 10 year story perspective and my conviction levels has increased in it post FMC-SEBI merger.In my view, it is an event which will have far reaching positive impact for MCX in the long run. In fact, around 750-800 odd levels, it looks very interesting to further add up.

Disclosure: 10% holding with average price of 450