Arrow Textiles Ltd - Value Pick - Proxy Play

The Ace Investor

Arrow Textiles Ltd

  Listed on both NSE: ARROWTEX & BSE: 533068
Currently trading around 47 with a market cap of around 90 crores.

Promoters hold 68.63% stake.
It has a Debt of around 12 crores.

Total Reserves too are around 12 crores.

Established in 1992 Arrow Textiles Ltd has been into manufacturing wide-range of products for the fashion apparel industry including woven tapes, woven labels, and elastic tapes.

Arrow Textiles supplies key branding items for some of the biggest brands and almost has a full portfolio with clients in entire underwear industry such as Jockey, Amul Hosiery, Rupa Hosiery, VIP, Euro Underwear, Lux Industries.

Arrow also has Spykar, Allen Solly, FILA and BEING HUMAN among other brands as its client.

The company produces 10000+ different items and processes 175 orders a day for customers in and around India.

The company is owned by Jaydev Mody the promoter of Delta Corp and the day to day operations are taken care of by MD Mr Chand Arora.

The company operates a quick service platform on http://easylabelsonline.in

The company is headquartered in Nashik, Maharashtra and has key executives in Mumbai, Delhi, Tirupur, Bangalore, Kolkata, Chennai to deal with their customers.

The company as it is clear by now is a very interesting Proxy-Play to fashion apparel industry as well as entire undergarments industry which is trading at expensive valuations.

Coming to the financials, Arrow has shown stable growth :-

As you can see the company has grown at a stable place, Though it has not been very aggressive.

Due to raw material prices being low, Arrow should have better margins for FY16 and as it has reported in September Qtr numbers the OPM has increased to 35.12% against 24.20% YoY.

For full year FY16 the company is expected to post a net profit in the range of 5.5 to 6 crores with EPS expected to be in the range of 3 to 3.50.

Company is having healthy 3 year ROCE average of 17.50%+

Promoter holding is at 68.63%, FIIs don't have any stake and DIIs own 0.01%, Public holding more than 1% was nil which means a large concentrated equity if the company is only with promoters and the remaining with small retail shareholders in the company.

We have seen how the undergarments story and branded apparel story has played out in the markets, Mega multibaggers like Page Industries and its peers command very premium valuations and in the recent past we have seen proxy play companies such as Premco Global which is a supplier to Hanes underwear for tapes has re-rated massively.

Premco Global though has a slightly different business but is easily comparable to Arrow Textiles because the target customer (b2b) is in the same sector and both Arrow and Premco indulge in key visible branding products for brands.

Premco Global having 70 crores top line is trading at almost 300 crores Market Cap which means Mcap/Sales is around 4 and Current P/E is 26+ whereas Arrow Textiles current Mcap to Sales is around 1.8 and P/E is at 16.

Premco ofcourse is the bigger company but important factor is that Domestic companies are always rated better rather than Export dependent companies. Premco's dependence on exports shows in its numbers as the company's exports amount to almost 75-80% of total revenues which should be a drag for valuations which maybe is priced in at 26 p/e currently.

Premco with export dependence is valued at 26 times and Arrow is at just 16 times, Arrow should have advantage over Premco because of a bigger product portfolio and no risks of foreign currency fluctuations and eurozone crisis etc..

If we assign a p/e of 30 to Arrow Textiles the stock should be above 90-100+.

The proposed Goods & Service Tax (GST) is a boon for companies which operate in sectors such as fashion apparel and undergarments where there is large market share held by unorganized players. GST will put all companies under one tax bracket thus, minimizing the pricing power unorganized players have due to softer taxation.

 Page Industries is trading at P/E of 70, Rupa is trading at P/E of almost 40, Lux Industries too is at 50+ P/E and even the best fashion apparel plays are trading at premium valuations.

In such a scenario it becomes very difficult for Investors to play large-scale changes like GST which will impact the sector in a big way because there is not much value left for investors to get into these biggies. This is when proxy-play becomes attractive and rightly so, Our earlier proxy-play was Vidhi Dyestuffs a food colour play on Packaged Food sector when all Packaged Food companies are at premium valuations... Vidhi has done 17 to 80 in no time and now trading at almost 25-30 p/e which is pretty close to valuations of 40+ which the Packaged Food sector usually commands in the market.

Proxy-plays usually get close to expensive valuations their clients command.

Market Cap wise Arrow is at less than half the valuation Premco commands and I think there can be more rally in Premco too which means Arrow has a wider gap to cover.

I try to understand and dig deep into a company as much i can and in the pursuit I managed to get the number of MD Mr Chand Arora and in hope to get some answers i called him up.

In the short chat i had with Mr Arora there were major takeways for the investors.

Mr Chand Arora claimed that these biggies are their repeat customers and they will always retain it in future too, When asked how? He said over the years since inception the company hasn't "LOST" a single client and the the company has the best technology in the world for its business.

I then einquired as to why the there hasn't been any aggressive growth in terms of revenues. Mr Arora was quite clear on this one and said that they don't run behind small companies and are interested to work with big brands only and at great margins rather than having too many small clients and killing the margins.

A key issue I found in Arrow was lack of dividends which is a problem with the whole Delta group at large (magnets etc)

When asked about Dividend, Mr Arora said that as per the norms he cannot disclose or discuss dividends with me but suggested that I should be positive about it this time around (hinting at a possible dividend this year).

All in All, I feel Arrow Textiles is a quality+value proxy play for a very premium and expensive sector at large.

The idea is simple, The clients of Arrow like Page Industries for instance will keep growing in terms of their manufacturing activity to get to the next level of growth and with its clients manufacturing activity increasing Arrow will be a major beneficiary. Page Industries will benefit when the end consumer buys its product but Arrow benefits in the earlier cycle when Page markets its products. When you market a product you do need branding on it so that reduces any inventory risks in Arrow Textiles that the apparel and underwear sector directly will otherwise be having.

Apart from the fundamentals, Technically too Arrow Textiles is looking really hot right now. Arrow Textiles has broken out of a major technical pattern on daily charts aided with all time best volumes which can propel it to great heights.

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 Arrow Textiles Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

:Links:

Arrow Textiles website

EasyLabels website

Arrowtex Screener

Arrow Textiles 2015 Annual Report