Thanks Abhishek for having done a detailed analysis and posting it on the forum. Also to other boarders for bringing out the positives/negatives and having a good discussion on the same.
I am invested in the business and following were the reasons for me to invest. The ongoing expansion, the expected OPM marigin improvement to 20-22% from existing 15%-17% after the completed backward integration, improving ROCE(ROE might not be a good measure for this company as it uses a lot of leverage), large addressable Indian market, favourable industry tailwinds(cheap debt/subsidies, low cotton prices and china not very competitive at the moment in this segment). Also, the stock looked cheap from P/E point of view with decent fundamentals. Also, the past record of management showed that they have ramped up the business well.
The negatives are that it is capital intensive business and don’t have much pricing power(my understanding).
I am a novice investor. So probably I don’t understand the risk in its entirety. What will happen if government stops subsidies or if China becomes competitive again or if Denim goes out of fashion in Indian market. I don’t really know. But I feel the probability of these events happening in the next 2 years is extremely low and hence I am personally comfortable ignoring these risks.
@abhishek90 – I saw your valuation excel sheet. Your FY16 EPS projection is 18.11. In the past 2 quarters the cumulative EPS is 6.83( 3.4 and 3.43). Would the business be able to make EPS of 11.28 in the remaining 2 quarters? Also, will it be able to grow the revenues 25% each year for the next 2 years with the new capacity(which is expected to be completed by 1st quarter FY17)? My understanding is that they are already operating at 99MMPA and the full capacity would be 110MMPA. The backward integration should give them marigin improvements but not more denim capacity. So can they increase revenues by 25% for next 2 years with the existing capacity? I am asking this because you have spoken to management and probably you understand these things better. Thanks in advance.
Disclosure – Invested from 75 levels. 20% of portfolio. Views might be biased.
