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Cravatex Result Updated

Cravatex Result Updated

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Published by Angel Broking

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Published by: Angel Broking on May 17, 2012
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Please refer to important disclosures at the end of this report
 1 
Cravatex Ltd. (Cravatex) is a market leader in providing fitness equipmentdistribution under its brand
Proline Fitness
and represents the 100-year old Italianbrand,
FILA
, in India. Cravatex has recently acquired sub-license to distribute theproducts of
FILA
in the United Kingdom (UK) and Ireland. The company has alsobeen forming strategic partnerships with various health club chains in India such asTalwalkars and Gold Gym in the fitness equipment segment. Cravatex is trading atan attractive 9.8x PE and 0.5x EV/Sales on FY2014E. We recommend Buy onCravatex with a target price of
`
800, based on target PE of 12x and impliedEV/Sales of 0.6x for FY2014E
Investment rationale
Strategic partnership and organic growth to drive 45% growth
Owing to robust organic growth and strategic partnerships the net revenue for thefitness equipment segment is expected to grow at 45% CAGR over FY2011-14E.Cravatex is a market leader in fitness equipment distribution and operates througha wide network of 51 retail stores across India. The company has recently enteredinto strategic partnership with reputed health club chains in India such asTalwalkars and Gold Gym
to
provide them with high-quality equipment andcustomer service
.
Sportswear segment to grow at 67% CAGR
On the back of acquisition of subsidiary, M/s BB (UK) Ltd, Cravatex aims to acquiresub-license for certain distribution channels for
FILA
in the UK and Ireland. Thesubsidiary will design, develop and supply 
FILA
apparel to other markets in Europe.The acquisition is expected to deliver potential annual revenue of around £10mnfor the next two years. Overall revenue from the sportswear segment is thereforeexpected to grow at CAGR of 67% over FY2011-14E.
Strong parentage of 
FILA
 
FILA
is a 100-year old Italian sportswear brand with a strong parentage in sportsapparel, sports accessories and sports footwear industry. The brand plans to set up60-70 stores across India by 2014.
FILA
has plans to be present in almost all largeretail formats such as
 Shoppers Stop
,
Westside
and
Lifestyle.
 
Kim Clijsters
, US opensingles champion is the brand ambassador for
FILA
.
Outlook and valuation
Cravatex’ net revenue is expected to grow at a 58% CAGR over FY2011-14E.EBITDA for the company is expected to grow from
 ` 
6.9cr in FY2011 to
 ` 
21cr inFY2014E, at a 45% CAGR. Net profit of the company is expected to grow from
 ` 
6.4cr in FY2011 to
 ` 
17.2cr in FY2014E. At the CMP of
 ` 
655, the stock is tradingat PE of 9.8x and EV/Sales of 0.5x of FY2014E.
We recommend Buy on Cravatexwith a target price of
`
800, offering an upside of 22% from current levels.
Key financials
Cravatex Net sales(
`
cr)OPM(%)PAT(
`
cr)EPS(
`
)ROIC(%)P/E(x)P/BV(x)EV/ EBITDA(x)EV/ Sales(x)
FY2011 93 7.4 6 25 15 26.5 7.1 27.1 2.0FY2012E 230 5.7 9 36 21 18.1 5.3 14.7 0.8FY2013E 301 4.3 11 42 18 15.5 4.0 14.9 0.6FY2014E 361 5.8 17 67 24 9.8 2.9 9.1 0.5
 Source: Company, Angel Research
BUY
CMP
 ` 
655Target Price
 ` 
800
Investment Period 12 Months
Twinkle Gosar
Tel: 022- 3935 7800 Ext: 6848Gosar.twinkle@angelbroking.com
Cravatex
 Advisory Des
May 16, 2012
 
 
Advisory DeskCravatex
May 16, 2012 2
Investment arguments
Strategic partnership and organic growth to drive 45% growth
Cravatex is a market leader in fitness equipment distribution through its brand
Proline Fitness.
The company distributes products of Johnson Health Tech, the thirdlargest fitness company in the world. Cravatex operates through a wide network of51 retail stores across India.The company has recently entered into strategic partnership with reputed healthclub chains in India such as Talwalkars and Gold Gym
 
to provide them with high-quality equipment and customer service
.
Talwalkars’ expectation of around 30%growth in its business provides growth visibility for Cravatex.Owing to robust organic growth and strategic partnerships the net revenue for thefitness equipment segment is expected to grow at 45% CAGR over FY2011-14E.
Healthy lifestyle and underpenetration provide growth visibility 
The base for people using fitness equipment or enrolling for fitness programs isexpanding rapidly, with an increase in the standard of living of people andincreased awareness about fitness.In 2010, ~39% of India’s total population of 1.2bn was in the 20-44 years agegroup. According to Planning Commission of India, the country’s population isexpected to increase to 1.3bn by 2020. Thus, the company will also have asignificant base of potential consumers – even if a modest 1% of the country’spopulation aged 20-44 years is concerned about fitness.The Indian fitness industry is highly underpenetrated compared to developedcountries, with only 0.4% population compared to 16% in the US possessingmembership in fitness clubs in 2008 (as per The IHRSA Asia Pacific Market Report2008). This provides a potential opportunity to the company.
Increased urban disposable income
 According to Mckinsey Global Institute’s recent research study, India’s urbanpopulation is expected to rise from 340mn in 2008 to 590 mn in 2030,urbanization rate of 40% (lower than seen in most Asian countries due to strictdefinition of Indian Census).The average household disposable income in urbanareas is expected to grow at CAGR of 6.4% from ~
 ` 
60,000 in 2008 to~
 ` 
239,000 in 2030 with an overall growth rate of 6.1% to ~
 ` 
136,000considering the GDP growth rate of 7.4%. Thus, with such a rise in disposableincome it provides strong growth visibility for the company’s fitness segment.
Sportswear segment to grow at 67% CAGR
Cravatex has acquired 100% of M/s BB (UK) Ltd., which is its wholly ownedsubsidiary with effect from February 2011. Through this subsidiary, Cravatex aimsto acquire sub-license for certain distribution channels for
FILA
in the UK andIreland. The subsidiary will design, develop and supply 
FILA
apparel to othermarkets in Europe. The acquisition is expected to deliver potential annual revenueof around £10mn for the next two years. Overall revenue from the sportswearsegment is therefore expected to grow at CAGR of 67% over FY2011-14E.
 
 
Advisory DeskCravatex
May 16, 2012 3
Strong parentage of 
FILA
 
FILA
is a 100-year old Italian sportswear brand with a strong parentage in sportsapparel, sports accessories and sports footwear industry. The brand plans to set up60-70 stores across India by 2014.
FILA
has plans to be present in almost all largeretail formats such as
 Shoppers Stop
,
Westside
and
Lifestyle
.
Kim Clijsters
, US opensingles champion is the brand ambassador for
FILA
.
 
Sports events to provide growth opportunities
 
The Indian sportswear industry is at a nascent stage with increasing organizedretail space. Increasing number of sports events and activities such as CWG andIPL are also providing scope and growth opportunities for players in the industry.Thus, on the back of mounting popularity of sports with increasing number ofevents the sportswear industry is expected to grow at a CAGR 15% over 2011-14as per the company’s estimation.

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