S.P. Apparels Ltd Research Report By HDFC Sec

Promoted originally as a partnership firm by Mr P Sundararajan in 1989, S.P. Apparels Ltd (SPAL) is an integrated ready made garment manufacturer of 100% cotton garments, primarily for the children’s wear export market. Its manufacturing facilities located in Tamil Nadu, the Company has 23 manufacturing units in and around Avinashi, District Tirrupur (knitting, processing, garmenting, and printing and embroidery facilities) and Salem (spinning facility). The exports are made to renowned brands/marketers in the EU & US, lending stability to operations. It entered domestic retail market in FY07 by acquiring a 70% equity stake in Crocodile Products Pvt. Ltd., the Indian arm of the Singapore-based Crocodile International Pte. Ltd. (which markets the menswear brand, Crocodile). SPAL came out with an IPO of 89.2 lakh equity shares @ Rs 268 in August-2016.

Investment Rationale:

 Global childrenswear market to reach US$ 322bn by 2024

 Shifting base of apparel industry from China to benefit India

 High entry barriers marked by stringent compliance requirements

 Expanding retail presence of Crocodile brand

 Enhancing capacity and backward integration to become fully integrated company Concerns:

 Labour intensive operations

 Geographical and customer concentration

 Delay in retail outlet expansion & sales pickup

 Competition from other emerging market companies

View and Valuation

SPAL has been adding new customers outside of UK which has reduced its client concentration as well as geographic concentration risks. Its retail venture in India and UK subsidiary SPUK have turned around and could become profitable at PAT levels in FY18. It has been adding capacity to meet the increasing order flows from customers. Backward integration is expected to be complete by FY19 post which the company is likely to witness strong margin expansion. Shifting of apparel exports from China to other emerging markets due to cost competitiveness has opened up a big opportunity for companies like SPAL and it is fully geared to grab it.

SPAL seems to be a quality midcap stock engaged in a recession proof business and growing at a decent pace (though having its own share of risks) and the current valuations leave scope for a rerating.

At CMP of Rs 367 the stock quotes at 11.4x FY20E EPS. We feel investors could buy the stock at CMP and add on dips to Rs 327-333 band (10.25x FY20E EPS) for sequential targets of Rs 419 (13x FY20E EPS) and Rs 467 (14.5x FY20E EPS) in 3-4 quarters.