New Decade, Fresh Take

Cravatex Ltd owns FILA brand rights for India, and is the preferred vendor for health equipment sales including Johnson, Matrix. The stock deserves a re-rating as FILA focuses aggressively on Indian market and growing fitness awareness creates market for its equipments growing at 20%. In addition to this a low equity base ensures that the growth is shared with few market participants.

HBJ Capital’s ‚Business Insight‛ stock for the month of December 2010

HBJ Capital, India Web: E-Mail: Call: +91 98867 36791

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Table of Contents
 From the Desk of CEO, HBJ Capital – (Page –5 )  Overview : Cravatex Ltd. – (Page –7 )

 The Indian Sportswear & Equipment Industry – (Page –10 )
 Key drivers for growth of the industry – (Page – 15 )  Cravatex Ltd. – (Page –17 )  Management & Shareholding Pattern – (Page –20 )  Peer Comparison – (Page –23 )  Financial Analysis – (Page –25 )  Investment Rationale – (Page –29 )  Risks & Concerns (Page – 31)  Disclaimer (Page – 32 )

From the desk of CEO, HBJ Capital
Dear Investors,
While making investment look for companies being ignored by everyone else because you may end up finding a hidden gem and once you find one, invest in it and relax. You have done your job and just follow the performance of the company. Wealth creation will happen automatically.

You must be aware of uncertainty in global economy, and expectation of a muted growth in 2011. But still there is good growth expectation for India, pegged at more than 8%. We at HBJ are bullish on India growth, particularly the changing pattern of consumption and rise in disposable incomes. The Middle Class is undergoing a dramatic change with focus shifting from fulfilling basic needs to desires and aspirations. I believe that as the reference point of average consumer keeps moving up the income ladder, so does the demand for branded higher performance items, even though at higher values. The Indian sport industry has also received a fillip from performance of India at international sports events, and acceptance of sports as a profession. I am glad to present an investment idea which exploits synergies between Revival of sports in India, it’s consumption growth and consumer’s growing affinity for branded products. Successful investors have also favored investment in established franchise at deep under-valuation.

The sportswear industry is pegged at INR 35,500 cr, dominated by unorganized sector in non-metros and is expected to grow at 40% for next two years. Low penetration of branded apparels and increasing disposable incomes project a good demand growth for established brands. In addition the fitness equipment market is poised for high growth (30% or more) due to demand from youth for better fitness facilities. The growth is also demonstrated by revenue growth and profit margins of the recently listed Talwalkars.

Our selection for ‚Business Insight‛ pick of the month is CRAVATEX Ltd, also know to few as FILA India, is a 59 year old company with management credited for creating brands from
scratch. It caters to sportswear and fitness equipment industry. And is the only company in business listed on the exchange. The company owns popular brands like Proline and FILA (License for India) and is the only importer and seller for a wide range of fitness equipment manufacturers including – Johnson, Matrix, Panasonic, Horizon, and Magnum. Happy Investing!

Regards, Kumar Harendra, CEO, HBJ Capital, & #912, 1st "F" Main Road, Girinagar 2nd Phase, BSK 3rd Stage, Bangalore – 85 Call : 098867 36791, 080 6568 1134 or Mail :


Cravatex Ltd.- Overview

Some key stats..
 CMP = Rs 594 (December 24th 2010) – The stock is ten rupees paid up. A split into 10 shares of FV 1 will improve the liquidity.
52 week’s high/low = Rs 690/164.25 – The stock recently made a new 52 week high while it has retraced by more than 14% during the ongoing correction. Peak share price = Rs 690 (25th November ‘10) – The stock scaled a new high just a few days back. The stock deserves a re-rating and we may see Cravatex continue making new highs. Trading volume = 1278 shares (approx) per day – The stock witnesses period of high volume during insider buying while usually the volume is low in this counter owing to low equity (12,92, 080 shares only). EPS = Rs 37.16 (TTM) – Company has recorded an EPS of Rs 29.6 (11.71 excluding tax charge of earlier years) for FY 10 while it has already recorded an EPS of Rs 24.57 for H1 Sep’10

 PE = 12.04 On the basis of annualized forward earnings the stock is available at significant discount compared to the industry standards.
 Book Value = Rs 163.4 - The company has low book value and low incremental capital requirements in line with the business model.  Shareholdings : No Of shares [% Share Holding ]  Total FII: 0 lakhs [0%]  Total Non-Institution: 3.23 lakhs [25%]  Total Bodies Corporate Holding: 9,760 [0.76%]  Total Promoters: 9.69 lakhs [75.00%]  Total Outstanding Shares : 12.92 lakhs [100 %]       Debt/Equity = 0.83[Sept’10] ROCE = 27.5% [Mar’10] RONW = 22.4%[Mar’10] Current Ratio = 2.025[Sept’10] Delivered Volume per day = 100% BSE Code 509472

The Indian Sportswear & Fitness Industry !!!

Sportswear Industry

Sportswear industry, unlike the general category apparel industry, has the advantage of offering all the products (apparel, footwear, accessories) under a single brand name. This indirectly, reduces a lot of pressure on marketing, which otherwise would have to create a brand name for each of the product categories, and most importantly offers its customers the entire range thereby reducing cost of customer acquisition. With rapid economic growth, huge population base, rising income levels, changing lifestyle and consumer preferences, India has witnessed tremendous growth in its sportswear industry over the past few years. The country has been exploiting its favorable demographics, which make it one of the most attractive destinations for both domestic and international sportswear players to cash on the highly lucrative market. As a result, all the international players, including FILA, Nike, Adidas, Puma, and Reebok, are striving hard to grab a share of the money-spinning market. The current size of the Indian sportswear industry is worth over INR 35,500 cr (comprising both organized and unorganized sector), which is expected to grow at a CAGR of around 45% between 2010 and 2012.

Sportswear Industry

The premium sportswear industry is expected to grow at high rate due to the following factors –
       Increased urbanization Higher Disposable Income Change in Consumer behavior particularly in our target 20-44 age group Larger marketing spend by Companies creating general awareness for the category Increased brand awareness by consumers Shift from unorganized to organized sector Rapid expansion of modern retail format

Fitness Equipment & Services Industry

Presently, the fitness industry is in its nascent stages. There is complete lack of product differentiation. The market also appears to have a shortage of talent, since qualified personal trainers, and consultants are scarce, which also contributes to the lack of differentiation. This high degree of fragmentation, lack of product differentiation, and customer price sensitivity result in prevalent price competition and low margins. Yet, on the other hand, awareness about fitness and a healthy lifestyle is growing; along with higher disposable incomes and a growing young population. India presents a huge opportunity for the health and fitness industry with over 65 towns having a population greater than 500,000 as per Census 2001 statistics. Significant changes in lifestyle related to lack of physical activity and increased consumption of fast foods among both affluent and working class population has led to the greater need for healthy lifestyles through sports, fitness centers and counseling on dietary habits. The Indian sports equipment market has experienced strong growth in recent years. The Indian sports equipment market had total revenue of INR 9311cr in 2009, and it is expected to reach a value of INR 12,172cr by the end of 2014.

Fitness Equipment & Services Industry

The wellness services industry is a fast growing sector in India today. It encompasses a large number of service segments including beauty services (salon, treatment based beauty products), personal health counseling, rejuvenation (Yoga, Spas) and fitness segments. Within this, the Fitness segment, viz. Gyms, is experiencing healthy growth rates and currently has an estimated market size of USD 113mn. As of 2008, there were 765 fitness clubs in India with total membership of 0.23 million members. (Source: as per the statistics of The IHRSA Asia Pacific Market Report, 2008) This rapid increase in wealth can also be visibly seen in the several posh residential complexes that have emerged in the top few Indian cities like Mumbai, NCR, Chennai, Kolkata, Hyderabad, Bangalore and Pune. This segment of population provides an upscale market for fitness centers to offer not just the basic gym facility but also advanced value added activities like spas, steam/sauna bath, nutrition centers, aerobics, spinning studios and personal training program.

Key Drivers for growth of Retail & Branded Merchandize
What Could be the Growth Drivers? Let’s understand them
 Indians per capita income has more than doubled in last 10 years. And as income levels increase every year there are more and more new customers entering consumption, resulting in significant market expansion.  Estimated population of 1.1 billion growing at 1.7% p.a., and adding population equivalent of Australia every year.  In India age group of 20-44 can be identified as prime market for fitness merchandize, equipment, and services.  Changing shape of income distribution, resulting in demand increase for high performance items, even at higher values.  Increasing use of branded, high value products to signal success.  Affordability growth > Income growth.

Favorable Demographic Mix
Demographic Mix favoring higher demand
 The demographic mix of India's population points to the high potential for growth of the branded merchandize. More than 60% of India's population is in the age group of 15-45years.  Rising demand for branded merchandize comes primarily from nearly 850 million in 18-25 age group, another 100million are likely to be added to this target population in the next five years.  Also as urban consumers become more exposed to western lifestyles, through overseas travel and the media, their attitude towards expensive merchandize is relaxing. They have started finding social value associated with brands.

Cravatex Ltd.

Basic Details..

Cravatex Ltd is a 59 year old Mumbai based company promoted by Batras, who are also credited with the largest chain of dyers and dry cleaners of its time in Mumbai. Later they diversified into textile processing and printing. They carry a multi-generation credibility in creating successful brands. Now they operate mainly in two segments namely sports wear/accessories and fitness equipment The company owns brand license for FILA India and Proline and is engaged in marketing and selling of entire range of sports wear, and accessories for Dunlop, Nassau. The company has sold off manufacturing machinery in last fiscal, and is now focusing on brand building.

 

It offers a wide range of fitness equipment and is one stop shop for layout planning, selection of equipment, installation, and after sales service backed by its nationwide service backbone. The company is sole importer and marketer for fitness equipment vendors like – Johnson, Body Solid, Horizon, Vision, Magnum, and Matrix.
In addition to this they also offer a range of advanced international beauty therapies within spas across the country as well as provide clients with high-end beauty products from one of the leading beauty product manufacturers in the world. Recent trends from the industry bode 50+% growth in demand for spas.

Basic Details…

     

The company is shifting its focus away from manufacturing (in line with FILA strategy) and is focused on harnessing growth of branded sports merchandize/accessories/equipment in India. Company has posted impressive performance since the time it acquired FILA brand license for India. It has posted 80% growth in EBITDA in FY10. H1 FY11 EBITDA is already 548 Lakhs against 860.8 Lakhs in last fiscal. Very low equity of 1.29cr (12.9 Lakh shares) bodes well for investors. Since, growth is imminent a slight up tick in earnings reflects heavily on EPS. Company has from this fiscal launched a new digital campaign to promote its products – ‚Fit India Movement‛, and plans to spend 60% of marketing revenue on digital media marketing. The company markets merchandize in INR 1800-3500 range. The segment caters to youth of the country, who are increasingly media savvy and spendthrift.

Even a conservative 150cr in revenue by 2013 end would translate in market cap of 300cr (based on conservative valuation of brands, since lot of value is inbuilt in the brand name. It is estimated that at least 100cr is spent to create a brand.)

Management & Shareholding Pattern

BOARD OF DIRECTORS 1. 2. 3. 4. Mr. Rajesh Batra Mr. Rajiv Wallia Mr. S.D. Israni Mr. H.K. Vakharia Chairman-CEO Executive Director Director Director

The Batra group businesses thrive under the control of Ram Batra's sons, Rajesh and Rajiv. Their carefully developed expansion strategy has created a major international group with a portfolio of textiles, fashion clothing, sportswear, fitness equipment and trading.

The group, retains its original core philosophy: to excel, and considers employees to be a truly valuable resource. Consequently, the diversity and quality of management are the group's major strength.

Working as a team, they all aim to excel. (Mr. Rajiv Batra manages FILA Europe, which is also owned by the group but not Cravatex).

Share Holding Pattern..

 

As per the Shareholding Disclosures, the Promoter’s of the company have maximum allowed stake at 75% 8.61% (out of 25%) public holding has been accumulated by just four individuals. These individuals may be HNIs or from promoter group. They have been increasing their holding slowly over last one year. The stock is very thinly traded, suggesting that either a closed group of investors have slowly accumulated it or the stock is already in strong hands (smart money).

Peer Comparison

Peers Comparison
Company (TTM performance) Sales/Turnover (crore) Profit (crore) Timex 154.59 9.15 Talwalkars (FY10) 66.12 7.94

Jubilant FoodWorks (Domions)
540.35 55.49

Page Industries (Jockey)
418.56 48.98

Mcap (crore) PE H1 Sept’10 Profit (crore)

418 45.79 9.88

621 58 7.52

4067 73.16 33.72

1699 34.71 30.06

H1 Sept’10 NPM%
PE (on Projected FY 11)





There is no listed player in the business, but we can still compare based on common customer profile, revenue drivers, and operating margins. Timex compares well since it is also a multinational brand catering to youth and is undergoing a major brand promotion in India. Talwalkars being in same industry gives a good idea of the expected growth and profitability by investors. Thus the comparison reveals the extent of undervaluation of Cravatex Ltd, which is trading at a PE of 12. A national/international brand commands above average multiples because it has a long life, faithful customer base, and huge investment in making it a brand. Established brands also exploit benefits of franchise easily at a premium and facilitate asset light business model.

Financial Analysis

Income Statement – Last 5 years
 The performance of the company for the last 3 years has improved significantly. The improvement in performance is on account of consumption growth and focus on marketing. Last fiscal Net Profit was affected due to excess provisioning for earlier period tax, else it would have been higher by 1cr. That would have translated into >100% growth y-o-y. A key point to note here is that the management is averse to equity dilution and high debt. At the same time they are able to grow the company handsomely. Topline growth has been impressive both in last fiscal and in H1 FY11. The growth is also higher than the growth of industry in India. 

Income Statement – Quarterly
 Both top-line and bottom-line have grown impressively when compared with 2QFY10.
EBITDA margins have shown an improvement from 9.52% last fiscal to 11.8% this fiscal. Gross margins impressive 30%. are an

EPS and CEPS have grown by an impressive 50%. The company is in non-cyclical industry, and has shown growth in each quarter except a few small dips. The company does not report segment results since it considers sportswear and equipment as single segment.

Balance Sheet
 Company has not diluted equity since inception. Going forward it would be a good candidate for bonus. It has been maintaining fine balance between debt and equity, resulting in higher returns to shareholders. The company is in franchising and marketing business, which is asset light. Hence, no new investment is required in fixed assets except trademarks, marketing rights. Last fiscal company increased its working capital on account of new stores, spa equipment, and inventory in trade. This signals start of a new growth phase. Contingent liability is not to worry about, major part is made up of ‚letters of credit‛.

Investment Rationale

Investment Rationale..
 The management is well known to investors for creating brands since 1951. They have successfully passed on this expertise to present generation. The management with help of Barclays, made a leveraged buyout of FILA brand (international) in 2008. Thus ensuring that the brand license will remain with the company for foreseeable future. Market for sportswear is growing at a fast pace in India, both owing to demographics and performance of Indian sports teams. The company is trading at a forward PE of less than 10, whereas, peers like Talwalkars/Page Industries/Timex command 2X-4X PE. It is thus trading at very lucrative valuations. The company may appear small on present revenues, but a look around the city – Proline, FILA stores – instills confidence in its reach and growth potential. Company has an enviable client base - Talwalkars, Gold Gym and is very optimistic on achieving a conservative turnover of 150cr by 2013.

Risks and Concerns..
 The company faces competition in sportswear segment from older players like Adidas, Nike, and Reebok. Company imports most of the fitness equipment, any weakness in rupee may affect its margins. Barclays Ventures has recently expressed interest in offloading its stake in FILA, this may affect the brand in case of any unfavourable outcome. Slower than expected revival of global economy.

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient only. The recommendation made herein does not constitute an offer to sell or solicitation to buy any of the securities mentioned. No representation can be made that recommendation contained herein will be profitable or that they will not result in loss. Information obtained is deemed to be reliable but do not guarantee its accuracy and completeness. Readers using the information contained herein are solely responsible for their action. HBJ Capital, or its representative will not be liable for the recipient’s investment decision based on this report. HBJ Capital, officers, directors, employees or its affiliates may or may not hold positions in the companies /stocks mentioned herein.
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