Premco Global is a technical textile unit manufacturing woven & knitted narrow elastic fabric, which finds application in innerwear. On account of increasing consumer brand & quality consciousness and Premco’s ability to move up the value chain, the company’s prospects look robust. Premco is a supplier to brands like Rupa, Lux in the domestic market and Hanes (US) & Jockey (US) in the international market. On the back of impressive expansion in Vietnam, we expect sales & PAT to grow at a CAGR of 19.0% & 16.3%, respectively, in FY16-19E.

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Highlights of Premco Global

• Niche segment-narrow elastic fabric/tapes:

Premco has a niche business model wherein it manufactures narrow elastic tapes. It has an installed capacity of 11 crore metre with FY16 sales volume at 9 crore metre with blended realisation at ~Rs. 8/metre. It is largely an export oriented unit with exports share in the total sales mix at ~66%. Premco primarily exports value added products in export markets, which fetches higher realisations and consequent high EBITDA margins. Its moat is technical know-how of its product profile, long gestation period of customer approval (entry barrier) & innovative product solutions

• Impressive expansion plans; first phase commissioned:

Premco is currently setting up a narrow elastic fibre plant in Vietnam with a capex of ~Rs. 20 crore. The plant in Vietnam is a result of natural preference of its customers to expand its manufacturing base in Vietnam amid low employee costs and benefits associated with Trans Pacific Pact (TPP). The capex is being implemented in two phases with each phase having a capacity of 3.5 crore metre with revenue potential of ~Rs. 25 crore each. The first phase has already been commissioned in Q2FY17. On the back of commissioning of Vietnam facility we expect volumes to grow at a CAGR of 17.6% over FY16-19E to 14.7 crore metre in FY19E (9 crore metre-FY16)

• Unlevered balance sheet; robust return ratios, moat to sustain:

Premco has a debt free balance sheet with surplus cash on books (Rs. 17 crore as of FY16). Sustained EBITDA margins have resulted in healthy return ratios with FY16, RoE, RoCE & RoIC at 25%, 33% & 56%, respectively. Going forward, we expect sales & PAT to grow at a CAGR of 19.0% & 16.3%, respectively, in FY16-19E. We value Premco at Rs. 825-880, i.e. 15.0-16.0x P/E on FY18E & FY19E average EPS of Rs. 55.0. 

I have attended AGM of Premco Global on July 20 2017. 

Chairman speech

Vietnam plant phase I & II is operational. During FY17, profit were affected due to higher rupee, loss on exchange rate on account of loan extended to subsidiary, one time cost of Rs 2.9 cr to stabilize Vietnam plant. Export decline to primarily due to commencement of Vietnam plant. The company expect 15-20% growth during FY18.


New CEO Shantanu Dey from Mafatlal Industries Joined the company since last 9 months was also present in the meeting. 


Topline:

Marginal Revenue growth to Rs 74.2 Cr in FY17 was main concern. In first quarter 2017, the company completed phase I&II at Vietnam, which is now stabilise. There was operational cost of Rs 2.9 crore which was absorbed during FY17. Sale of license also lost 60-80 lakhs during April-Dec 2016 due to MICE policy. Stronger Rupee from Rs 67 to Rs 64 level during Q4FY17. Depsite all these, all these EBITDA was maintained at higher than 20% level . Other income declined due to lower exchange gain as against Rs 2.1 Cr. During Q4FY17, the company lost Rs 15 lakhs due to adverse exchange rate.


There were question about lower investment on mutual fund investment. The company replied that MTM gain of Rs 2.5 Cr in FY17 which is would be booked only on sale. Hence, ROI on liquid fund is good.

The company has consolidated capacity of Rs 125-130 Cr at full utilization. During FY17, it reported Rs 69 Cr sales in India and Rs 6 Cr in Vietnam. Indian capacity utilization is around 68% currently and Vietnam it is 10-14% during FY17.

During FY18 is expected to reach 45-50 of capacity utilisation at Vietnam. The company has potential to achieve consolidated turnover of Rs 130 Cr (9-10 realisation per mts) at full utilisation at current capacity. The company plan to achieve at the earliest. Indian capacity increased 20% loom capacity by Rs 4 Cr capex. The company would wait first to utilise current capacity before doing further capex.

Vietnam Plant

Fixed cost of Vietnam plant Rs 5 Cr was fully absorbed in FY17. Vietnam added at least 45% per cent in Premco group with Rs 5 Cr Capex. Current asset include working capital funding of Rs 9.2 Cr. Vietnam has import duty of 12% of elastic while around 2% effective duty on imported raw material, giving ~10% benefit to Vietnam elastic manufacturer vis import. The company would have 3 years of tax exemption from first year of profit in Vietnam, then next 3 year at around 4%, which would increase gradually to 15% income tax rate. Vietnam has potential to get margin better then India operation due to modern machine. The company is also in discussion with various other large players operating in Vietnam and reached very near to get order from another large global brand owner.

Client information/Domestic market 

Rupa, Lux etc are being major customer in domestic market. The company has strength in Jaquard which provide superior quality and better margin. Further, innovative input mix, without compromising quality and functionality, also contributed in higher margin for the company. Top 10 customer account for 60% of sale. Q1FY18 is expected be better than last year. Currently the company has around 3 months order. Cutomer in India are increasing in two digit. With GST, organised sector, Premco segment is expected to show better volume growth. The company has set up sales and marketing network with branch in various locations. The company has 17-18 marketing team now. The company plan is trying to add more value added product even in domestic market. Rupa and Lux among top domestic client. In premium end mens segment, the domestic player has 2-3 supplier.


Industry 

Global Industry size is Rs 68,000 Cr (include textile, sport wear, furniture, tapes etc). The company is looking at only mens innerwear currently. It intend to enter into ladies innerwear market in India which has no real good quality supply. The company is very small and has potential to increase size significantly given the large industry size. Currently Indian player cost of manufacturing elastic is 10-15 cheaper as compared with China players.


TPP

While TPP is no more existence, still Vietnam is perferred destination for US based brand owners. None of the company has reduce their production capacity in Vietnam even after TPP agreement is missing.


Having been in the industry for over 30+ years, Premco seems to have expertise in its domain. Even key personnels from Jockey (Page International) get technical inputs from Premco’s founder as he is a veteran in this industry. Based on each and every requirement, they design different products to meet customer expectations. It seems to act as a differentiation for Premco Global.

MIES scheme has been restored by the Government of India. It is likely to increase margins. Because of open policy of the Government, the company might face more competition from international players. But the management stressed that they will be able to sail through such a situation with its products that command higher margins. They enjoy an EBITDA of 28% in an industry that is difficult to operate.

For small companies to scale up and become successful, each and every department should perform in an exceptional manner. A company with an extraordinary sales team but a poor quality product will not succeed. You need a high quality product, management with great execution skills and a stellar sales team to sell these products. They managed to complete Vietnam plant within a span of 9-12 months. Now the key question lies on the ability of its sales and marketing team. If they can convert new brands and bring them to Premco’s client portfolio, then this story could turn out in a different manner.

According to me, domestic demand is never going to be a problem. Key question is capacity utilisation in Vietnam and the ability to grab new clients there. The company strongly believes that Vietnam market is a huge opportunity and it’s the primary reason for expansion. Company has given an estimate of 60% capacity utilisation (Vietnam Plant) during FY18,

Premco considers the following companies as its Key Competitors – Lion Tapes, Spica and Kohinoor (none of them are listed companies)

Clients of Lion Tapes: Dollar, H&M, Rupa, Black Panther, Walmart, Groversons Group, Jockey, Fruit of the Loom, Park Avenue, Hanes, JCPenney, tenor, Omtex. This company supplies elastic for women’s inner wear.

Spica has a manufacturing unit in Vietnam. Will be interesting to see the current margins of these competitors (2016 and 2017). If any one gets data on this, do post it over here.

Every year, they spend atleast 1-2 crores on maintenance capex. They focus on either going for higher technology or for higher capex. Women’s inner wear segment is growing faster than men’s. And there is lack of quality elastic suppliers in India in the women’s segment. But focus for the next 1-2 years is likely to be on the men’s segment as they want to convert sales from existing capacities.

When junior Harjani is doing a good job, I don’t understand the need to get a new CEO on board.

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