Indian Terrain Fashions Ltd - Diwali Special

HAPPY DIWALI TO ALL READERS..HAVE A HAPPY, FUN & SAFE DIWALI!

Muhurat Trading Time: 11 Nov 2015, 5:45 PM to 6:45 PM.

The Ace Investor

Indian Terrain Fashions Ltd

  Listed on both NSE: INDTERRAIN & BSE: 533329
Currently trading around 660 with a market cap of around 470 crores.

Promoters hold 30.85% stake.
It is a Debt Free company with Zero Long Term Debt.

Total Reserves are around 119 crores.

Indian Terrain Fashions Ltd is an Indian branded apparel company, It mainly operates in a niche space of men's casual wear segment with its own brand "Indian Terrain" which enjoys really good brand recall among consumers.

Indian Terrain is a part of Celebrity Group, their other listed company Celebrity Fashions has ceased to exist and it is the resources of Celebrity Fashions that has given birth to Indian Terrain which ultimately was demerged.

Indian Terrain is a premium brand targeted at the mid-income group with the price points for core products (casual shirts/trousers) being between 1400 to 2800.

Around 80% of the total turnover of Indian Terrain comes from Casual Shirts and Trousers.

The term "Casual shirts" covers a wide variety including the business casuals, smart casuals, resort casuals and partywear casuals.

The fashion trends for men have been increasingly getting casual centric, in the past perfect office attire used to be all about formals but now the perfect office attire is becoming more ambiguous by the day, now wearing a casual chequered shirts to the office is the trend and the trend on rise.

At end of 2014, Indian Terrain had 3.7 lakh registered loyalty program members while majority of customers do not go for such loyalty memberships it does give a idea about the kind of brand-recall the company enjoys.

Indian Terrain has a pan-India presence, The company retails its products via 700+ multi-brand outlets, 130+ doors of large format stores, 100+ exclusive brand outlets, and presence on all leading e-commerce websites.

Indian Terrain has its own e-commerce platform on its website and offers great festive deals and discounts too.

India has world's largest youth population according to a U.N. report with about 356 million 10-24 year olds despite having a smaller population compared to China.

By 2020 India is set to become the world's youngest country: In 2020 the median individual in India will be 29 years.

This is very positive factor for Indian Terrain as the Youth is their target customer.

Wearing a Shirt is not a luxury but a necessity so that adds a lot of margin of safety in this sector.

Coming to the financials, Indian Terrain has witnessed great growth :-

 

From FY11 to FY15 the growth has been great.

FY12 was eclipsed by Global Recession, the impact can be seen on the profitability of the company in the said year but the important factor is that despite recessions the sales had grown.

The company reported wonderful topline growth of 48% at end of FY14 and now it has grown to 290 crores in FY15 reporting a topline growth of  25%.

Before looking at further positives in Indian Terrain let us take note of the two key issues or flags that can be seen in Indian Terrain :-

Pledged Promoter Holding

Trade Receivables

Regarding the pledged promoter holding, I have heard from credible sources that after clearing the long-term debt the company will now get rid of the pledged promoter holding too and it can be soon or we have to wait a bit more for that.

Indian Terrain has about 95 crores of Trade Receivables at end of FY15, However this is not abnormal for the company as it has historically had the trade receivables and it has steadily increased now maybe with the e-commerce push because of the fund cycle of the e-commerce companies which are in heavy losses.

Trade Receivables become an issue when they come all of a sudden, hinting at fudged sales and also one should look at the Receivables Turnover Ratio which should not dip under 1 in the best case.

If we look at the Receivables Turnover Ratio for Indian Terrain it is at 3.36 at end of FY15 improving slightly from 3.17 in FY14.

Even Kewal Kiran Clothing which owns brands like Killer and Lawman PG3 has had the trade receivables but their RTR is better at 5.79.

The company has announced purchasing the manufacturing facility it has currently availed on lease from its related party Celebrity Fashions at amount not exceeding 16 crores which is at fair market price and the company is not going to use the QIP proceeds of 75 crores that it has recently raised from marquee investors like SBI, Malabar but from internal accruals and partly from term loan from bank.

Indian Terrain Fashions this week reported its September 2015 quarter numbers and they were really good, thanks to the debt repayment the interest costs have reduced and that has expanded the net margins.

H1 2016 EPS for Indian Terrain stands at 23.86 as against 16.06 in H1 2015.

If we consider no growth against 2015 numbers, Indian Terrain should report EPS of 14.43 for H2 2016 taking the full year EPS to 38.29.

However late festive season this year means the company is expected to do better than FY15 in terms of final two quarters for the year.

Indian Terrain today mimics the Page Industries of FY 2009-2010 when it was growing at around 30% and was trading at similar valuations of around 17 times to its earnings when stock price was around 450.

Indian Terrain has raised 75 crores in January 2015 where it allotted 14.12 lakh shares at the price of 531 each to Malabar India Fund, SBI, DSP Blackrock and Amundi Funds.

Malabar India Fund is the same fund which had invested in Page Industries at the price of around 450-500 and it also boasts of investments in major multibaggers like Symphony, Hawkins, Eclerx among many apart from Page Industries.

Bulk Deal data shows, Malabar purchased another small chunk of 45,505 shares at 599 recently in August 2015. Vijay Kedia has purchased 30,000 shares from BSE at around 550 in Jan 2015 and Om Kedar Investments of Prof. Mankekar has purchased 38,500 shares in various transactions early this year around 550.

At current market price of around 660, Indian Terrain is trading at only 17 times FY16E which is highly undervalued for such a good brand play in the fashion apparel segment even as KKCL (Kewal Kiran) trades around 50 times.

Here is a comparison table of all the companies operating in this sector :-

Just look at the way Indian Terrain has been wrongly undervalued for long, Zodiac with inferior margins is trading at 70 times its earnings, Kewal Kiran at 40 times, Future Lifestyles at 80 times and Indian Terrain at only 17 times.

Major reason for under-valuation is the lack of equity capital, 30% with promoters and almost 50% with institutions and big players makes it only 20% available to the retail investors, To change this the company has approved a stock split which should also trigger a re-rating as volumes will pick up.

Fair value for Indian Terrain should be atleast 35 times which takes it to 1340 and 45 times rating takes it to 1720 with present set of earnings.

It may sound like an over-statement but Indian Terrain is my bet as the Next Page Industries if not it should be atleast the next Zodiac, KKCL with major re-rating.

Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Indian Terrain Fashions Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

:Links:

Indian Terrain website

Indian Terrain Screener

Indian Terrain Annual Report 2015

QIP News

Indian Terrain Bulk Deals

Malabar Fund Investments

Latest Quarterly Results - SEP15