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Cravatex ltd (BSE Code 509472) - Katalyst Wealth Alpha Recommendation 14th Feb'12

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  • 1. Cravatex Ltd (BSE Scrip Code – 509472) Get exclusive distribution rights of FILA & Johnson Health Tech for Rs 130 croresGet exclusive distribution rights of FILA & Johnson Health Tech for Rs 130 crores www.katalystwealth.com An updated Alpha/Alpha Plus stock recommendation report – 14th Feb’12
  • 2. Content Index • An Introduction :- Slide #3 • Business Overview :- Slide #7 • Sports Goods sales – Overview :- Slide #12 • Fitness Equipments sales – Overview :- Slide #18 • Management Quality :- Slide #27 • Financial Overview :- Slide #31 • Concerns :- Slide #36 • Conclusion :- Slide #38 www.katalystwealth.com
  • 3. Cravatex Ltd – An Introduction www.katalystwealth.com
  • 4. CRAVATEX was set up in 1951 by Mr. Ramkumar Batra. Mr. Rajesh Batra is the current Managing Director of Cravatex. Cravatex – Exclusive distribution rights for FILA & Johnson Cravatex supplies fitness equipment for home and commercial use through a chain of 51 ‘Proline Fitness’ stores spread across India. Cravatex has exclusive distribution rights till 31st Dec’25 in India, Bangladesh and Sri Lanka to supply fitness equipment such as treadmills, bikes, and elliptical trainers made by Johnson Health Tech, Asia’s largest and world’s third largest fitness equipment manufacturer. Cravatex also has exclusive distribution rights in India and some parts of Europe for shoes and apparels made by FILA, and tennis racquets and balls in India, made by Dunlop. www.katalystwealth.com
  • 5. Investment Snapshot (As on February 14, 2012) Recommendation :- BUY Originally recommended in Dec’10 at:- 250-255 1st Accumulation Range:- 450-500 (3-4% allocation) Profit Booking :- Refer Alpha/Alpha Plus Weekly for continuous updates Current Market Price – Rs. 495.00 BSE Code – 509472 Bloomberg Code – CRAV:IN Dear Members, As you will find us repeating in the entire report, Cravatex is basically about getting exclusive distribution rights of brand FILA and Johnson Health Tech (the third largest equipment maker in the world) in India and some other countries for just Rs 130 crores. Yes, the above is the entire story about Cravatex, if we have to describe it in one line. It’s all about owning exclusive distribution rights of two premierBloomberg Code – CRAV:IN Market Cap (INR Crores) – Rs 127 crores Total Equity Shares [Mn] – 2.58 Face Value – Rs. 10 52 Week High / Low – Rs. 562.10 / Rs. 225.58 Promoter’s Holding – 75.00% www.katalystwealth.com It’s all about owning exclusive distribution rights of two premier brands, while the scale of opportunity for both the brands to grow in India being humongous. In case of Cravatex, we may not be able to justify the Margin of Safety (MOS) in conventional terms, but then it’s a case where either one gets it naturally/intuitively or does not get at all. During the last 1 year there have been some important developments, acquiring the sub-license of FILA in Europe being one of them and we therefore felt the need of releasing an updated report on the same.
  • 6. Key Investment highlights Exclusive distribution rights for Johnson Health Tech Fitness Equipments in India and FILA in India & some parts of Europe for just Rs 130 crore – Cravatex retains the exclusive distribution rights for Johnson Health Tech ‘s fitness equipments in India, Bangladesh and Sri Lanka till 2025. Johnson Health Tech is the leading company in Asia while the third largest in the world in the fitness equipment industry. Besides, Cravatex also holds the exclusive distribution rights for brand FILA, one of the world’s largest sportswear manufacturing companies. Humongous scale of opportunity – In recent years, the fitness and sports industry in India is witnessing a paradigm shift with the change in middle and upper class lifestyles in small but significant ways. The average urban Indian professional is increasingly becoming health conscious and feeling the need to get into a fitness mode. Thus, the fitness industry has a huge growth potential as only 1.5% of the urban Indian population regularly practices workout.workout. Earning high return on shareholder’s funds – Over the longer term, the company can grow only as fast as it generates returns on the funds employed. Well, Cravatex does not have a great track record with pathetic 12-13% return on equity till 2008-09, however over the last 2 years the company has started delivering 20%+ return on equity and is on track to deliver a similar performance for FY 12. Very attractive valuations – Cravatex is currently quoting at a market cap of Rs 115 crore, while it has net debt of Rs 14 crore (as at 30th Sep’11), thus an enterprise value of Rs 130 crore. For FY 11, Cravatex recorded a net profit of Rs 6.79 crore, while we expect the company to close the year FY 12 with a net profit of Rs 10-11 crore. Besides as mentioned above, one gets exclusive distribution rights for the two finest and leading global brands FILA and Johnson Health Tech for just Rs 130 crores, while the scale of opportunity is huge for both the brands to grow immensely in India. www.katalystwealth.com
  • 7. Business Overview • Major Products • Distribution Rights • Main revenue streams • Margins – Economies of Scale at work www.katalystwealth.com
  • 8. Major products !! www.katalystwealth.com
  • 9. Distribution Rights www.katalystwealth.com
  • 10. Main revenue streams • For Cravatex there are two major revenue streams: Sports Goods sales and Fitness Equipment sales. The sales growth for Sports Goods segment was stagnant till FY 2009, however the inclusion of FILA brand has propelled the sports goods sales from 10.50 crore to 50 crore in just 2 years. • The Fitness Equipments sales have grown at the rate of 15% on annualized basis for the last 5 years, however the demand economics is very favorable at the moment and Johnson Health Tech has charted out an aggressive expansion plan and has signed up with Talwalkars, Gold Gym, etc for the sale of Fitness equipments. www.katalystwealth.com
  • 11. Margins – Economies of Scale at work www.katalystwealth.com • As can be observed from the above illustration, the operating profit margins (does not include other income) of the company have improved drastically over the years. • The above is clear indication of the fact that economies of scale is at work, helping the company utilize its resources in a more profitable manner. However, aggressive marketing in its effort to grow rapidly can again dampen the margins of the company in the short term. • 2009 was an aberration and it was across the board for all the companies, as the world was reeling under the shock of Lehmann crisis.
  • 12. Sports Goods sales – Overview • Sports Goods sales – Overview• Sports Goods sales – Overview • Rs 125-150 crore revenue from FILA India by FY 2013 • Cravatex – Sub-licensee of FILA in UK & Ireland • Sportswear Industry in India • Reebok India – How is the leader performing? www.katalystwealth.com
  • 13. Sports goods sales - Overview • Sports Goods sales constitutes distribution of Major international brands FILA, Nassau and Dunlop Sports in India and countries like Bangladesh, Sri Lanka, etc. • The Sports goods sales was languishing in the region of 3.0-3.9 lakh pieces per annum till 2009, however the inclusion of brand FILA in the portfolio has given a huge fillip with sales going up by more than 400% in terms of value in just two years. • Besides volume growth, there’s been a 100% increase in Sales realization per piece from Rs 290.25 for FY 2009 to Rs 577.75 for FY 2011. As the volume share of FILA increases, the realizations are expected to increase further from Rs 577.75. www.katalystwealth.com
  • 14. Rs 125-150 crore revenue from FILA India by FY 2013 • Cravatex achieved ~ Rs 40 crore revenue from the sale of FILA products for FY 2011 and is targeting Rs 125 crore by FY 2013 (from India). • The company will franchise most of the stores and therefore not burden its balance sheet, though working capitalthough working capital requirement may increase (one should remain watchful of the same). • The pricing of FILA merchandise is 20-30% cheaper than its peers like Adidas, Nike, Puma, etc. and thus can be an instant hit with the value, yet brand seeking Indian youth. www.katalystwealth.com
  • 15. Cravatex – Sub-licensee of FILA in UK and Ireland Besides India, Cravatex also operates the sub-license for the brand Fila, for the Middle East, Northern Africa and specialty retail in the United Kingdom. Cravatex acquired 100% of 1000 equity shares of £ 1 each of M/s. BB (UK) Ltd., UK for a total consideration of £ 1093. By virtue of the said investment, M/s. BB (UK) Ltd., UK is now a Wholly Owned Subsidiary of Cravatex. The Subsidiary was set up for acquiring a sub-license for the FILA brand for certain distribution channels in UK and Ireland. BB (UK) Ltd has the rights to design and supply Fila products to the whole of Europe, the United Kingdom and Ireland. The importance of European market in the overall scheme of operations of Cravatex can be gauged from the fact that sales have gone up from Rs 3 crores to Rs 40 crores in just 2 quarters. www.katalystwealth.com The comparison between Standalone and Consolidated sales
  • 16. Sportswear industry in India Indian Sportswear Industry Organized Industry ~ 2500-3000 crore • Reebok & Adidas - ~65% market share • Puma - ~20% market share • Nike - ~15% market share Un-Organized Industry (<Rs 1000 price point shoes) ~ 5000 crore • The organized sportswear and gear market in India is currently pegged at Rs 2,500-3000 crore and it is growing at 15-20 per cent annually. It is to do with the fact that the consumer is becoming more health conscious, brand conscious and more fashionable at the same time. • Besides, there’s a sub Rs 1000 price point unorganized market in India at Rs 5,000 crore. As per Rajiv Mehta, Managing Director, Puma India, the Indian sportswear Industry is still very nascent and the consumers are very value conscious. • FILA is staring at a huge opportunity as its pricing is cheaper than all the players in the organized segment, while it’s a well known brand itself, thus serving the aspirations of Indian youth. The company can capture a large share of both organized and unorganized market in the years ahead. www.katalystwealth.com
  • 17. Reebok India – How is the leader performing? • Adidas took over the international operations of Reebok in 2006 and currently Reebok and Adidas command the highest market share at 65% in India. • As can be observed, for the year ending 2009, Reebok India (RIC) had a bank limit of Rs 300 crore,bank limit of Rs 300 crore, recorded a turnover of Rs 540 crore and a net profit of Rs 23 crore at a net profit margin of 4.25%. • The business is in general working capital intensive, which should be the case forward for Cravatex, as the share of sports goods sales increase. www.katalystwealth.com
  • 18. Fitness Equipment sales – Overview • Fitness Equipment sales – Overview • Johnson Health Tech – Witnessing strong sales growth worldwide • Johnson Health Tech – Eyeing growth in commercial fitness in India• Johnson Health Tech – Eyeing growth in commercial fitness in India • Fitness Equipment industry in India • End-User segment – Institutional segment commands 76% market share • Proline Fitness stores • Rediffusion-Wunderman appointed for the digital media promotion of FILA and Proline Fitness • Key drivers for the Fitness Equipment Industry in India www.katalystwealth.com
  • 19. Fitness equipment sales – Overview • Cravatex launched Proline Fitness in 1996 with an objective of introducing the personal range of fitness equipments in the Indian market, though it has now started focusing on commercial segment too. • Proline Fitness is the sole importer and distributor for several international brands like Johnson Health Tech. Co. Ltd., Horizon Fitness, Vision Fitness, Matrix and Body Solid. • Proline Fitness has a Pan India presence with 51 exclusive stores (inclusive of 3 stores in Sri Lanka) in over 25 cities with an effective and efficient after sales back up. Cravatex plans to increase its presence further in tier I and tier II cities over the next few quarters. www.katalystwealth.com
  • 20. Johnson Health Tech – Witnessing strong sales growth worldwide • Since Cravatex distributes Johnson Health Techs Fitness equipments, for Cravatex to do well in India its important that Johnson Health Tech should itself have high targets. • As can be observed from the illustrations, Johnson Health Tech has been performing pretty well with worldwide sales recording 26% growth insales recording 26% growth in H1 FY 11 over FY 10. • Moreover, company is aiming for 25% of Global Fitness market by 2015. Considering the standards set by Johnson Health Tech in past, the target is achievable. Importantly, India has assumed significance in Johnson’s scheme of operations. www.katalystwealth.com
  • 21. Johnson Health – Eyeing growth in commercial fitness in India Johnson Health Tech is now aggressively pursuing Commercial Fitness Equipment Market in India. As can be observed from the previous slides, Johnson Health Tech is the second largest Fitness Equipment maker in the Home segment, however it lags behind at fourth spot in the commercial fitness market. The entire sales of Johnson Health Tech in India are routed through Cravatex, being the sole importer and distributor. The commercial/institutional segment commands 76% market share in the fitness equipment industry, against 24% market share of home segment. Thus, Johnson’s focus on commercial segment will help Cravatex achieve scale in the Fitness Equipment segment. Moreover, all the leading fitness-club chains are expanding at a rapid pace. For instance, Talwakars, expanded from 63 health clubs to 100+ health clubs in FY 11 alone, thus generating significant business opportunity for fitness equipment distributors. www.katalystwealth.com
  • 22. Fitness Equipment Industry in India In recent years, the fitness industry in India is witnessing a paradigm shift with the change in middle- and upper- class lifestyles in small but significant ways. The average urban Indian professional is increasingly becoming health conscious and so people are now feeling the need to set aside a time for dedicated exercising. Fitness Equipment Market – India – Overview: The fitness equipment market in India is estimated to be worth 12.5 bn IN 2008 ; and is expected to reach INR 63.3 bn by 2012. The annual growth rate is expected to be around 50% as only 1.5% of the urban Indian population regularly practices workout www.katalystwealth.com
  • 23. End-User – Institutional segment commands 76% market share End-User Segment : They are divided into two segments :- • Residential or Home Segment – 24% market share • Institutional Segment – 76% market share Residential Segment : • Cost is the prime factor while making the buying decision • Equipments used for residential purpose are built with lighter materials • Sold to individuals who prefer working out/exercising at home due to paucity of time or convenience.of time or convenience. Institutional Segment : • Bulk of equipments sold to health clubs / gyms and corporate houses • Equipments used by institutions are more sturdily built and expensive compared to those used at home. • Quality is the prime consideration and buyers are ready to pay premium for better quality and technologically advanced products It is important to note that earlier Johnson’s primary focus was Home segment, however it is now aggressively focusing on Institutional segment and the same should help Cravatex as the demand is 3 times that of Home segment. www.katalystwealth.com
  • 24. Proline Fitness stores Focus on Metros and Tier I cities In the Fitness equipment retailing industry, after sales service and geographical coverage of the distributors are the major differentiating factors. City No. of Stores City No. of Stores Ahmedabad 1 Lucknow 1 Bangalore 4 Ludhiana 1 Baroda 1 Mangalore 1 Bhopal 1 Mumbai 10 Chandigarh 1 Nagpur 1 Chennai 2 Nasik 1 www.katalystwealth.com Cravatex does well in the above respect with more than 50 stores spanning across all the Metropolitans and the major Tier I cities. As per the information available with us, only Grand Slam Fitness has more number of stores than Cravatex. Chennai 2 Nasik 1 Goa 2 New Delhi 4 Gurgaon 1 Noida 1 Hyderabad 3 Patna 1 Indore 1 Pune 4 Jaipur 1 Raipur 1 Kolhapur 1 Sangli 1 Kolkatta 2 Sri Lanka 3
  • 25. Rediffusion-Wunderman appointed for the digital media promotion of FILA and Proline Fitness With the advent of cable television and internet, tele- shopping and online shopping have emerged as new distribution channels. People have started buying fitness equipments and sports goods (more specifically shoes from sites like Myntra, Bestylish, www.katalystwealth.com like Myntra, Bestylish, Jabong, etc) online as it allows product comparisons, saves time and convenient. It’s good to note that Cravatex has mandated a budget for digital media, as besides spending on advertisements, its important to target the right audience.
  • 26. Key Drivers for the Fitness Equipment Industry in India Being fit and healthy has never been as popular or as necessary as it is today. With millions of people eager to lose weight and get in shape, the fitness and wellness industry is one of the fastest growing industry today. Further due to a strong and sustained growth in the economy, disposable incomes have increased at a significant pace creating a huge demand for fitness centers, health clubs etc. According to a recent research by the Mckinsey Global Institute, the number of household earning over 5 lakhs per annum will increase from 3.6 million in 2005 to 8.8 million in 2015. Studies have shown that rural and semi-urban population is increasing expenditure towards discretionary and luxury due to increase in disposable income. Despite a rapid growth in awareness levels during the past four years, only 1.5 per cent of the urban populationDespite a rapid growth in awareness levels during the past four years, only 1.5 per cent of the urban population workouts regularly. The national average is even lesser at 0.1 per cent, against the global figure of 15 to 20 per cent. As per a recent study India currently has over 300 mn people in the 25-30 age bracket and by 2016, 40% of the population will be in the 20-44 age group. Thus even assuming a modest 1% of this population enrolls into a health club, in sheer numbers, the potential addition to the fitness market in India is staggering and thus the scale of opportunity for the companies associated with the industry. In cities like Bangalore, Mumbai, Chennai, Hyderabad, New Delhi big corporate houses like Air Tel, Wipro, call centers are already fitting fitness equipments and elliptical machines, Exercise Bikes, Treadmills, Mini Stair Steppers, and other gym equipments in their premises for a healthy work force. www.katalystwealth.com
  • 27. Management Quality • Shareholding Pattern – Incentive to drive the growth with 75% equity holding • Promoters/Managements’ Profile – Sports and Fitness freaks • Low dividend payout and high return on shareholders funds www.katalystwealth.com
  • 28. Shareholding pattern • The Promoters of the company have been holding 75.00% equity in the company since long, the maximum permissible limit. • It’s good to note that Promoters hold such a sizable stake in their listed entity as the same should keep them motivated about the good performance of the company and continue with the distribution rights of FILA under Cravatex than under any other non-listed group company. • It’s important to note here that Batra Brothers are the co-owners of FILA UK. www.katalystwealth.com
  • 29. Promoters Profile In order for the company to do well in the long run, we believe its important for the Promoters/Management to be passionate about their business and believe in what they are doing. In case of Cravatex, we have adequate reasons to believe that Batra Brothers (Rajesh and Rajiv) are sports and fitness freaks. A brief view on the profile of Mr. Rajesh Batra and Mr. Rajiv Batra Rajesh Batra Mr. Rajesh Batra did his schooling in Campion School, Mumbai and graduated from Elphinstone College, in 1975. He then obtained a Diploma in Systems Management from the Jamnalal Bajaj Institute in 1978. Rajesh Batra Management from the Jamnalal Bajaj Institute in 1978. A keen tennis enthusiast, Mr. Batra was the Maharashtra State Champion during 1970s and was ranked number 6 in India at that time. He has also represented India in the Asian Junior Championships in 1973 where he was a finalist and at the World University Games in 1973 in Moscow. Rajiv Batra Rajiv Batra graduated with a Commerce degree from HR College in Mumbai in 1981. A keen tennis player, Rajiv has won many National titles in India as a Junior and is currently ranked in Great Britain in the Veterans. www.katalystwealth.com Rajiv Batra
  • 30. Low dividend payout & high return on shareholders funds • Cravatex does not have a very high dividend payout, however its good to note the consistency of dividend payout and a gradual increase over the years in line with the improvement in business performance. • One should not be concerned much about dividend payout as long as the company is able to deliver 20%+ return on shareholders funds and as we see it the same is sustainable for the next 3-4 years. www.katalystwealth.com
  • 31. Financial Overview • Annual Performance• Annual Performance • Quarterly Performance • Cash Flows • Balance Sheet www.katalystwealth.com
  • 32. Annual Performance It is important to mention here that other income includes Rs 4.46 crore as annual rental income from one of the properties owned by the company in Mumbai. Thus an improvement in operating performance should be considered after deducting other income. Considering an averageConsidering an average annual yield of 4-5%, the value of this property can alone be worth Rs 80-100 crores. In the last 2 years, the growth in operating sales has been incredible and that’s on account of inclusion of brand FILA in the portfolio of Cravatex. www.katalystwealth.com
  • 33. Quarterly Performance • In the above, we have considered the standalone quarterly results for FY 12 in order to reflect the growth being experienced by the company, though the consolidated numbers are still higher. • As can be observed, the sharp up-trend in sales experienced during the last two years has continued in FY 12. Though the sales segregation (sports goods and fitness equipments) will be out in Annual Report FY 12, we are pretty sure of the fact that it’s the Sports Goods segment (more specifically FILA) that is firing with all the cylinders. • The growth in net profits is lower than the growth in sales on account of a combination of factors like: Rupee depreciation (company imports most of the goods it sells), high interest rates and overall inflationary environment. We expect the trend to reverse over the subsequent quarters, the signs of which are already visible. www.katalystwealth.com
  • 34. Cash Flows • Sports Goods retailing is a working capital intensive business, more specifically in the initial days when the brands presence is being made evident through shelf display while the sales being low. • Till FY 09 the company’s cash flows were in line with the reported earnings, however www.katalystwealth.com reported earnings, however for the last 2 years the cash flows have deteriorated on account of increase in sundry debtors and maintenance of high inventory. • The good point about company’s cash flows is the Direct Taxes Paid by the company at 30-33% of the reported Profit Before Tax.
  • 35. Balance Sheet • At this point of time, we don’t notice any strains in the balance sheet of Cravatex, though we hope they don’t excessively leverage in order to chase growth. • As per the indications from the management,from the management, most of the FILA stores will be franchised, thus the major concern remains the working capital requirement and for any investor its important to keep a tab on the same. www.katalystwealth.com
  • 36. Concerns www.katalystwealth.com
  • 37. • Its important for Cravatex to retain the exclusive distribution rights of FILA. In case the company loses out on the same, it will have a major negative impact. • We hope that company does not over-leverage in order to chase excessive growth and market share. • Sports goods retailing is a working capital intensive business. The cash flows of the company have Concerns • Sports goods retailing is a working capital intensive business. The cash flows of the company have turned negative since the last 2 years and one should remain watchful of the same. • The company retains exclusive distribution rights for Johnson Health Techs fitness equipments till 31st Dec’25. The abrupt termination of the agreement can have huge negative impact on the performance and prospects of the company. www.katalystwealth.com
  • 38. Conclusion www.katalystwealth.com
  • 39. Price chart • As can be observed from the above illustration, the stock experiences a phase of consolidation and then a sharp up-move. • At present, Cravatex is stuck in a broad 15% range of Rs 425-500. Any sharp up move beyond 520 may signal a breakout from the trading range of 425-500. • For those who are not invested, Rs 450-500 is a good range for starting with initial 4% allocation. We may suggest increasing allocation depending on price correction and developments in business. www.katalystwealth.com
  • 40. Katalyst Wealth – Alpha Portfolio For more information on Cravatex Ltd, discuss with Ekansh Mittal Mail Id : ekansh@katalystwealth.com Mobile: +91-9818866676 Katalyst Wealth Alpha Portfolio service is focused on helping individual investors/institutions beat market returns by a wide margin without taking large risks through in-depth research, analysis and follow up on the stock. www.katalystwealth.com
  • 41. Katalyst Wealth Corporate office: G-52, 2nd Floor Sector – 39, Noida – 201301Sector – 39, Noida – 201301 Ph.: +91-120-4109766 Mob: +91-9818866676 Email: info@katalystwealth.com www.katalystwealth.com