Company Name – S P Apparels Limited (SP Apparels)
Current Share Price – INR 302 (January 30, 2023)
Market Cap – INR 758 cr
1. What is interesting about the stock?
Kids are so soft when they are born. Ask any new parent how careful they are with the newborn! So, one of the more important attributes that parents look for in infant and baby clothing is that the clothes are soft and not rough. Soft baby clothes made from cotton or eco-friendly materials are becoming more popular.
Two key players that focus on kids’ clothing exports are listed on the Indian Stock Market – Kitex Garments and SP Apparels. Kitex Garments has been a case study of poor corporate governance. The share price of Kitex Garments peaked at ~INR 750 in July 2015 before crashing by ~66% within a year. Coming to SP Apparels.
Located close to the textile hub of Tirupur in Tamil Nadu, S P Apparels Limited produces 100% knitted cotton readymade garments. Promoted as a partnership firm by Mr. P. Sundararajan in 1989 and incorporated as a public limited company in November 2005, Company was listed in August 2016 around the time when Kitex Garments was facing challenges.
Company’s manufacturing facilities are in and around Tirupur (knitting, processing, garmenting, printing, and embroidery facilities) and Salem (spinning facility) in Tamil Nadu. SP Apparels is primarily involved in manufacturing and exporting infant wear and childrenswear to apparel retailers based out of the UK and other developed markets. It entered the domestic retail market in FY07 with the acquisition of a 70% equity stake in Crocodile Products Limited and markets its apparel under the Crocodile brand and trades in essentials in the domestic market.
SP Apparels predominantly caters to the high margin value-added infant wear segment and exports to leading UK retailers like Tesco, Primark, and Mothercare, with which it has established relationships. The top three customers contributed to ~80% of revenue in FY22.
Company’s operations are integrated across the textile value chain from spinning to garmenting and further value additions including dying, printing, and embroidery. The company has also expanded its backward process capacities and completed the consolidation and modernization of its existing capacities, which are expected to improve value addition and operating efficiency.
Company has three business divisions:
Garment exports – 88.4% of revenue in H1FY23 with an EBITDA margin (without FX) of 19.5%
SP Apparels UK (trading company) – 5.7% revenue with an EBITDA margin of 2.6%
Retail - 6% revenue with an EBITDA margin of -6.7%
So, the retail business is underperforming. Company had tried to divest the retail business to a promoter-owned company but the shareholders rejected the transaction. It doesn’t reflect well on the Company and its promoters.
A key trigger for the Company could be the signing of an India-UK FTA which would bring the import duty on par with Bangladesh, Sri Lanka, and Pakistan for Indian players and level the playing field.
However, Company could face some challenges with the recession fears in the UK economy and exchange rate volatility.
Why invest in SP Apparels?
Established market presence – long relationship with current customers
Integrated player – ability to capture margin across the value chain, better control of input quality
Strong financial profile – low D/E and D/EBITDA ratio though the working capital is high in the business
2. Key Historical Financials
Revenue and net profit of the Company has increased at a CAGR of 6% and 10% respectively for the last 5 years
Company revenue has shown strong growth in FY22 on Q2FY23 on a YoY basis but the EBITDA margin has sharply come down in Q2FY23 due to higher cotton prices and higher losses in the retail business
SP Apparel has working capital of ~151 days due to a high inventory level
CFO/EBITDA was poor in FY22
ROCE and ROE were healthy in FY22 at 16% and 14% respectively
3. What is my view on company valuation?
Company had an IPO price of INR 268 which is ~10% below the current market price implying horrible returns over the last 6.5 years.
SP Apparel trades at an EV/EBITDA multiple of 4.8x vs Kitex at 4.8x, Gokaldas Exports at 8x, and KPR Mills at 13x. Company trades at P/E (TTM) multiple of 7.7x vs Kitex at 8.3x, Gokaldas Exports at 12.8x, and KPR Mills at 20x. So, the valuation is in line with the other apparel manufacturing companies.
Business looks good but I have the following concerns:
Underperformance of retail business – what is the solution?
High working capital – fashion changes are low in the kid’s segment so the obsolescence risk is low but this could expose Company to exchange rate risks
Rationale of trading business in the UK
I think it would be prudent for long-term investors to evaluate the Company after India-UK FTA gets signed and some of the concerns are alleviated.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Labor-intensive operations – risk from automation?
Exposed to the risk of high input (cotton) prices
Very high client concentration
Poor growth in the last 5 years
Highly competitive industry – both on local and international levels
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.