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
An updated Alpha/Alpha Plus stock recommendation report – 14th Feb’12
Cravatex Ltd – An Introduction
CRAVATEX was set up in 1951 by Mr. Ramkumar Batra. Mr. Rajesh Batra is the current Managing Director of
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.
Investment Snapshot (As on February 14, 2012)
Recommendation :- BUY
Originally recommended in Dec’10 at:- 250-255
1st Accumulation Range:- 450-500 (3-4%
Profit Booking :- Refer Alpha/Alpha Plus Weekly
for continuous updates
Current Market Price – Rs. 495.00
BSE Code – 509472
Bloomberg Code – CRAV:IN
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%
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.
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
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.
• Major Products
• Distribution Rights
• Main revenue streams
• Margins – Economies of Scale at work
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.
Margins – Economies of Scale at work
• 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.
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?
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.
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
• The company will
franchise most of the
stores and therefore not
burden its balance sheet,
though working capitalthough working capital
increase (one should
remain watchful of the
• 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
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.
The comparison between Standalone and Consolidated sales
Sportswear industry in India
Indian Sportswear Industry
~ 2500-3000 crore
• Reebok & Adidas - ~65% market share
• Puma - ~20% market share
• Nike - ~15% market share
(<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
• 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.
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
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
• Key drivers for the Fitness Equipment Industry in India
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.
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
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
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.
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
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.
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
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
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
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
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,
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
important to target the right
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
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.
• 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
• The Promoters of the company have been holding 75.00% equity in the company since long, the maximum
• 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.
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
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.
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 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.
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.
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
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
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
• 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
• 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.
• 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
• Till FY 09 the company’s cash
flows were in line with the
reported earnings, however
reported earnings, however
for the last 2 years the cash
flows have deteriorated on
account of increase in sundry
debtors and maintenance of
• 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.
• 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.
• 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
• 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.
• As can be observed from the above illustration, the stock experiences a phase of consolidation and then a sharp
• 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.
Katalyst Wealth – Alpha Portfolio
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