cravatex ltd - hbj capital's (mps unit) - business insight penny stock reco for dec'10

8/3/2019 CRAVATEX LTD - HBJ Capital's (MPS Unit) - Business Insight Penny Stock Reco for Dec'10.

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CRAVATEX LTD. (BSE CODE 509472)

HBJ Capital, India

Web: www.hbjcapital.com

E-Mail: [email protected]

Call: +91 98867 36791

HBJ Capitals Business Insight stock for the month of December 2010

Cravatex Ltd owns FILA brand rights for India, and is the preferred vendor for healthequipment sales including Johnson, Matrix. The stock deserves a re-rating as FILA

focuses aggressively on Indian market and growing fitness awareness creates market forits equipments growing at 20%. In addition to this a low equity base ensures that thegrowth is shared with few market participants.

New Decade, Fresh Take
http://www.hbjcapital.com/mailto:[email protected]:[email protected]://www.hbjcapital.com/


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Best Buying Price

2 Phase Buying Strategies Suggested [Always buy in SIP ways]

1st Phase : Buy at the current price range Rs 575-600 [20% of investment]

2nd Phase : Add if the price falls down to Rs 475-500 [80% of investment]

>>>Expect at least 10-12 times returns in next 3 years time frame!!!


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What Next?HBJ Capital Specialists in discovering multibagger stocks is

launching more & more innovative products & services with

single focus on long term wealth creation!!!

HBJ Cap is growingfaster than ever.

HBJ Capital can be your

50x in 3yearsinvestment.Ask how?

Aim to become #1 -Equity ResearchCompany in Indiaby 2012, the same

year we haveplanned to get itlisted at BSE/NSE.


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Table of Contents

From the Desk of CEO, HBJ Capital (Page 5 )

Overview : Cravatex Ltd. (Page 7 )

The Indian Sportswear & Equipment Industry (Page 10 )

Key drivers for growth of the industry (Page 15 )

Cravatex Ltd. (Page 17 )

Management & Shareholding Pattern (Page 20 )

Peer Comparison (Page 23 )

Financial Analysis (Page 25 )

Investment Rationale (Page 29 )

Risks & Concerns (Page 31)

Disclaimer (Page 32 )


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While making investment lookfor companies being ignored byeveryone else because you may

end up finding a hidden gemand once you find one, invest init and relax. You have done your

job and just follow theperformance of the company.Wealth creation will happen

automatically.

From the desk of CEO, HBJ CapitalDear Investors,

You must be aware of uncertainty in global economy, andexpectation of a muted growth in 2011. But still there is good

growth expectation for India, pegged at more than 8%.

We at HBJ are bullish on India growth, particularly thechanging pattern of consumption and rise in disposableincomes.

The Middle Class is undergoing a dramatic change with focus

shifting from fulfilling basic needs to desires and aspirations. Ibelieve that as the reference point of average consumer keepsmoving up the income ladder, so does the demand for brandedhigher performance items, even though at higher values.

The Indian sport industry has also received a fillip fromperformance of India at international sports events, andacceptance of sports as a profession.

I am glad to present an investment idea which exploitssynergies between Revival of sports in India, its consumptiongrowth and consumers growing affinity for branded products.Successful investors have also favored investment inestablished franchise at deep under-valuation.


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Contd..

The sportswear industry is pegged at INR 35,500 cr, dominated by unorganized sector in non-metros and isexpected to grow at 40% for next two years. Low penetration of branded apparels and increasing disposableincomes project a good demand growth for established brands. In addition the fitness equipment market ispoised for high growth (30% or more) due to demand from youth for better fitness facilities. The growth isalso demonstrated by revenue growth and profit margins of the recently listed Talwalkars.

Our selection for BusinessInsight pick of the month is CRAVATEX Ltd, also knowto few as FILA India, is a 59 year old company with management credited for creating brands from

scratch. It caters to sportswear and fitness equipment industry. And is the only company in business listed onthe exchange. The company owns popular brands like Proline and FILA (License for India) and is the onlyimporter and seller for a wide range of fitness equipment manufacturers including Johnson, Matrix,Panasonic, Horizon, and Magnum.

Happy Investing!

Regards,Kumar Harendra, CEO, HBJ Capital, www.hbjcapital.com & www.multibaggerpennystocks.com

#912, 1st "F" Main Road, Girinagar 2nd Phase, BSK 3rd Stage, Bangalore 85

Call : 098867 36791, 080 6568 1134 or Mail : [email protected]
http://www.hbjcapital.com/http://www.multibaggerpennystocks.com/mailto:[email protected]:[email protected]://www.multibaggerpennystocks.com/http://www.hbjcapital.com/


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Overview


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Cravatex Ltd.- Overview


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Some key stats.. PE = 12.04 On the basis of annualized forward earningsthe stock is available at significant discount compared tothe industry standards.

Book Value = Rs 163.4 - The company has low bookvalue and low incremental capital requirements in linewith the business model.

Shareholdings : No Of shares [% Share Holding ] Total FII: 0 lakhs[0%] Total Non-Institution: 3.23 lakhs[25%] Total Bodies Corporate Holding: 9,760[0.76%] Total Promoters: 9.69 lakhs[75.00%] Total Outstanding Shares : 12.92 lakhs[100 %]

Debt/Equity = 0.83[Sept10] ROCE = 27.5% [Mar10] RONW = 22.4%[Mar10] Current Ratio = 2.025[Sept10]

Delivered Volume per day = 100% BSE Code 509472

CMP = Rs 594 (December 24th 2010) The stockis ten rupees paid up. A split into 10 shares of

FV 1 will improve the liquidity.

52 weeks high/low = Rs 690/164.25 The stockrecently made a new 52 week high while it hasretraced by more than 14% during the ongoingcorrection.

Peak share price = Rs 690 (25th November 10) The stock scaled a new high just a few days

back. The stock deserves a re-rating and we maysee Cravatex continue making new highs.

Trading volume = 1278 shares (approx) per day The stock witnesses period of high volumeduring insider buying while usually the volumeis low in this counter owing to low equity

(12,92, 080 shares only).

EPS = Rs 37.16 (TTM) Company has recordedan EPS of Rs 29.6 (11.71 excluding tax charge ofearlier years) for FY 10 while it has alreadyrecorded an EPS of Rs 24.57 for H1 Sep10


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The IndianSportswear & Fitness Industry !!!


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Sportswear industry, unlike the general category apparel industry, has the advantage of offering all the

products (apparel, footwear, accessories) under a single brand name. This indirectly, reduces a lot of pressureon marketing, which otherwise would have to create a brand name for each of the product categories, and mostimportantly offers its customers the entire range thereby reducing cost of customer acquisition.

With rapid economic growth, huge population base, rising income levels, changing lifestyle and consumerpreferences, India has witnessed tremendous growth in its sportswear industry over the past few years. Thecountry has been exploiting its favorable demographics, which make it one of the most attractive destinations

for both domestic and international sportswear players to cash on the highly lucrative market. As a result, allthe international players, including FILA, Nike, Adidas, Puma, and Reebok, are striving hard to grab a shareof the money-spinning market.

The current size of the Indian sportswear industry is worth over INR 35,500 cr (comprising both organized andunorganized sector), which is expected to grow at a CAGR of around 45% between 2010 and 2012.

Sportswear Industry


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Sportswear Industry

Opportunities:

The premium sportswear industry is expected to grow at high rate due to the following factors

Increased urbanization Higher Disposable Income Change in Consumer behavior particularly in our target 20-44 age group Larger marketing spend by Companies creating general awareness for the category Increased brand awareness by consumers Shift from unorganized to organized sector Rapid expansion of modern retail format


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Fitness Equipment & Services Industry

Presently, the fitness industry is in its nascent stages. There is complete lack of product differentiation. Themarket also appears to have a shortage of talent, since qualified personal trainers, and consultants are scarce,which also contributes to the lack of differentiation. This high degree of fragmentation, lack of productdifferentiation, and customer price sensitivity result in prevalent price competition and low margins. Yet, onthe other hand, awareness about fitness and a healthy lifestyle is growing; along with higher disposableincomes and a growing young population. India presents a huge opportunity for the health and fitnessindustry with over 65 towns having a population greater than 500,000 as per Census 2001 statistics.

Significant changes in lifestyle related to lack of physical activity and increased consumption of fast foods

among both affluent and working class population has led to the greater need for healthy lifestyles throughsports, fitness centers and counseling on dietary habits.

The Indian sports equipment market has experienced strong growth in recent years. The Indian sportsequipment market had total revenue of INR 9311cr in 2009, and it is expected to reach a value of INR 12,172crby the end of 2014.


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The wellness services industry is a fast growing sector in India today. It encompasses a large number ofservice segments including beauty services (salon, treatment based beauty products), personal healthcounseling, rejuvenation (Yoga, Spas) and fitness segments.

Within this, the Fitness segment, viz. Gyms, is experiencing healthy growth rates and currently has anestimated market size of USD 113mn. As of 2008, there were 765 fitness clubs in India with total membershipof 0.23 million members. (Source: as per the statistics of The IHRSA Asia Pacific Market Report, 2008)

This rapid increase in wealth can also be visibly seen in the several posh residential complexes that haveemerged in the top few Indian cities like Mumbai, NCR, Chennai, Kolkata, Hyderabad, Bangalore and Pune.This segment of population provides an upscale market for fitness centers to offer not just the basic gymfacility but also advanced value added activities like spas, steam/sauna bath, nutrition centers, aerobics,spinning studios and personal training program.



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Key Drivers for growth of Retail & Branded Merchandize

What Could be the Growth Drivers? Letsunderstand them

Indians per capita income has more than doubled in last 10years. And as income levels increase every year there aremore and more new customers entering consumption,resulting in significant market expansion.

Estimated population of 1.1 billion growing at 1.7% p.a.,

and adding population equivalent of Australia every year.

In India age group of 20-44 can be identified as primemarket for fitness merchandize, equipment, and services.

Changing shape of income distribution, resulting indemand increase for high performance items, even athigher values.

Increasing use of branded, high value products to signalsuccess.

Affordability growth > Income growth.


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Favorable Demographic Mix

Demographic Mix favoring higher demand

The demographic mix of India's population points to thehigh potential for growth of the branded merchandize.More than 60% of India's population is in the age groupof 15-45years.

Rising demand for branded merchandize comesprimarily from nearly 850 million in 18-25 age group,another 100million are likely to be added to this targetpopulation in the next five years.

Also as urban consumers become more exposed towestern lifestyles, through overseas travel and the media,their attitude towards expensive merchandize is relaxing.

They have started finding social value associated withbrands.


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Cravatex Ltd.


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Basic Details..

Cravatex Ltd is a 59 year old Mumbai based company promoted by Batras, who are also credited with thelargest chain of dyers and dry cleaners of its time in Mumbai. Later they diversified into textile processingand printing. They carry a multi-generation credibility in creating successful brands.

Now they operate mainly in two segments namely sports wear/accessories and fitness equipment The company owns brand license for FILA India and Proline and is engaged in marketing and selling of

entire range of sports wear, and accessories for Dunlop, Nassau. The company has sold off manufacturingmachinery in last fiscal, and is now focusing on brand building.

It offers a wide range of fitness equipment and is one stop shop for layout planning, selection ofequipment, installation, and after sales service backed by its nationwide service backbone. The companyis sole importer and marketer for fitness equipment vendors like Johnson, Body Solid, Horizon, Vision,

Magnum, and Matrix.

In addition to this they also offer a range of advanced international beauty therapies within spas acrossthe country as well as provide clients with high-end beauty products from one of the leading beautyproduct manufacturers in the world.Recent trends from the industry bode 50+% growth in demand forspas.

i il


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Basic Details

The company is shifting its focus away from manufacturing (in line with FILA strategy) and is focused onharnessing growth of branded sports merchandize/accessories/equipment in India.

Company has posted impressive performance since the time it acquired FILA brand license for India. Ithas posted 80% growth in EBITDA in FY10.

H1 FY11 EBITDA is already 548 Lakhs against 860.8 Lakhs in last fiscal.

Very low equity of 1.29cr (12.9 Lakh shares) bodes well for investors. Since, growth is imminent a slightup tick in earnings reflects heavily on EPS.

Company has from this fiscal launched a new digital campaign to promote its products Fit IndiaMovement, and plans to spend 60% of marketing revenue on digital media marketing.

The company markets merchandize in INR 1800-3500 range. The segment caters to youth of the country,who are increasingly media savvy and spendthrift.

Even a conservative 150cr in revenue by 2013 end would translate in market cap of 300cr (based onconservative valuation of brands, since lot of value is inbuilt in the brand name. It is estimated that atleast 100cr is spent to create a brand.)


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Management & Shareholding Pattern

M


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Management..

BOARD OF DIRECTORS

1. Mr. Rajesh Batra Chairman-CEO2. Mr. Rajiv Wallia ExecutiveDirector3. Mr. S.D. Israni Director4. Mr. H.K. Vakharia Director

The Batra group businesses thrive under the control of Ram Batra's sons,Rajesh and Rajiv. Their carefully developed expansion strategy hascreated a major international group with a portfolio of textiles, fashionclothing, sportswear, fitness equipment and trading.

The group, retains its original core philosophy: to excel, and considersemployees to be a truly valuable resource. Consequently, the diversity

and quality of management are the group's major strength.

Working as a team, they all aim to excel. (Mr. Rajiv Batra manages FILAEurope, which is also owned by the group but not Cravatex).

Sh H ldi P tt


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Share Holding Pattern..

As per the Shareholding Disclosures, the Promoters of the company have maximum allowed stake at 75%

8.61% (out of 25%) public holding has been accumulated by just four individuals. These individuals maybe HNIs or from promoter group. They have been increasing their holding slowly over last one year.

The stock is very thinly traded, suggesting that either a closed group of investors have slowly accumulatedit or the stock is already in strong hands (smart money).


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Peer Comparison

P C i


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Peers Comparison

Company (TTM performance) TimexTalwalkars

(FY10)

JubilantFoodWorks(Domions)

PageIndustries(Jockey)

Sales/Turnover (crore) 154.59 66.12 540.35 418.56

Profit (crore) 9.15 7.94 55.49 48.98

NPM% 5.92 12 10.27 11.70

Mcap (crore) 418 621 4067 1699

PE 45.79 58 73.16 34.71

H1 Sept10 Profit (crore) 9.88 7.52 33.72 30.06H1 Sept10 NPM% 10.82 15.70 11.28 12.21

PE (on Projected FY 11) 20.2 32.44 54.73 25.70

There is no listed player in the business, but we can still compare based on common customer profile,revenue drivers, and operating margins. Timex compares well since it is also a multinational brandcatering to youth and is undergoing a major brand promotion in India. Talwalkars being in same industry

gives a good idea of the expected growth and profitability by investors. Thus the comparison reveals theextent of undervaluation of Cravatex Ltd, which is trading at a PE of 12.

A national/international brand commands above average multiples because it has a long life, faithfulcustomer base, and huge investment in making it a brand. Established brands also exploit benefits offranchise easily at a premium and facilitate asset light business model.


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Financial Analysis

I St t t L t 5


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Income Statement Last 5 years The performance of the company for

the last 3 years has improvedsignificantly.

The improvement in performance ison account of consumption growthand focus on marketing.

Last fiscal Net Profit was affecteddue to excess provisioning for earlierperiod tax, else it would have been

higher by 1cr. That would havetranslated into >100% growth y-o-y.

A key point to note here is that themanagement is averse to equitydilution and high debt. At the sametime they are able to grow the

company handsomely.

Topline growth has been impressiveboth in last fiscal and in H1 FY11.The growth is also higher than thegrowth of industry in India.

I St t t Q t l


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Income Statement Quarterly Both top-line and bottom-line

have grown impressively whencompared with 2QFY10.

EBITDA margins have shownan improvement from 9.52%last fiscal to 11.8% this fiscal.

Gross margins are animpressive 30%.

EPS and CEPS have grown byan impressive 50%.

The company is in non-cyclicalindustry, and has showngrowth in each quarter except afew small dips.

The company does not reportsegment results since itconsiders sportswear andequipment as single segment.

B l Sh t


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Balance Sheet Company has not diluted equity since

inception. Going forward it would be agood candidate for bonus.

It has been maintaining fine balancebetween debt and equity, resulting inhigher returns to shareholders.

The company is in franchising andmarketing business, which is assetlight. Hence, no new investment is

required in fixed assets excepttrademarks, marketing rights.

Last fiscal company increased itsworking capital on account of newstores, spa equipment, and inventory intrade. This signals start of a new

growth phase.

Contingent liability is not to worryabout, major part is made up of lettersof credit.


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Investment Rationale

In estment Rationale


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Investment Rationale..

The management is well known to investors for creating brands since1951. They have successfully passed on this expertise to presentgeneration.

The management with help of Barclays, made a leveraged buyout ofFILA brand (international) in 2008. Thus ensuring that the brand licensewill remain with the company for foreseeable future.

Market for sportswear is growing at a fast pace in India, both owing todemographics and performance of Indian sports teams.

The company is trading at a forward PE of less than 10, whereas, peerslike Talwalkars/Page Industries/Timex command 2X-4X PE. It is thustrading at very lucrative valuations.

The company may appear small on present revenues, but a look aroundthe city Proline, FILA stores instills confidence in its reach andgrowth potential.

Company has an enviable client base - Talwalkars, Gold Gym and isvery optimistic on achieving a conservative turnover of 150cr by 2013.

Risks and Concerns


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Risks and Concerns..

The company faces competition in sportswearsegment from older players like Adidas, Nike, andReebok.

Company imports most of the fitness equipment, anyweakness in rupee may affect its margins.

Barclays Ventures has recently expressed interest inoffloading its stake in FILA, this may affect thebrand in case of any unfavourable outcome.

Slower than expected revival of global economy.

Disclaimer


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Disclaimer..

I dontwant 2

read this!!

This document is not for public distribution and has beenfurnished to you solely for your information and must not bereproduced or redistributed to any other person. Persons into

whose possession this document may come are required to observethese restrictions. This material is for the personal information ofthe authorized recipient only.

The recommendation made herein does not constitute an offer tosell or solicitation to buy any of the securities mentioned. No

representation can be made that recommendation contained hereinwill be profitable or that they will not result in loss. Informationobtained is deemed to be reliable but do not guarantee its accuracyand completeness. Readers using the information contained hereinare solely responsible for their action.

HBJ Capital, or its representative will not be liable for the

recipients investment decision based on this report. HBJ Capital,officers, directors, employees or its affiliates may or may not holdpositions in the companies /stocks mentioned herein.


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cravatex ltd - hbj capital's (mps unit) - business insight penny stock reco for dec'10

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