27-Nov-2019 : SP Apparel is one of the leading manufacturers and exporters of knitted garments for infants and children in India. It provides end-to-end garment manufacturing from yarn to finished products including body suits, sleep suits, tops and bottoms. It is also the sub-licensee to manufacture, distribute and market adult menswear products in India under the crocodile brand.

SP Apparel came out with an IPO in the year 2016. The main purpose of the IPO to fund capital expansion and repayment of loans to reduce leverage. From 2016 till date, SP Apparel has fully invested the IPO proceed earmarked for capacity expansion. It has also expanded its footprints in the retail segment for crocodile brands.

SP Apparel has two subsidiaries i.e. Crocodile Products Pvt Ltd and SP Apparels (UK) Pvt Ltd. SP Apparel has 70% holding in Crocodiles Products Pvt Ltd. SP Apparel (UK) Pvt Ltd mainly looks after the UK operation. Though the contribution to the bottom-line by the subsidiaries is miniscule.

From FY-2013 to FY-2017, SP Apparel’s operational revenue increased from 4014 million to 6330 million at a CAGR of 10%. Whereas the EBIDTA and PAT increased at the CAGR of 17% and 103%. However, post financial year 2017, the company faced some headwind in the form of Brexit and higher cotton price. In the financial year 2018, the company’s revenue and EBIDTA increased 4.65% and 2.17% YoY respectively. In the financial year 2019, the company performed better. The revenue of the company increased by 25%, whereas EBIDTA and PAT increased by 26.5% and 53.5%. This has been possible on a low base and improvement in external condition.

The company has quite robust balance sheet. The company has non-current borrowing of 625 million and current borrowing of 1530 million after the first half of financial year 2020. The debt equity ratio stands at 0.44 and interest coverage ratio is 18.53 at the end of financial year 2019. The company is hovering around the level of Rs 200, which is close to its book value of Rs 188. In FY-19, the company’s return on equity was 16.9%.

In the first half of financial year 2020, the company’s export volume was 33 million compared to 59.9 million for the full financial year 2019. Thus the company is seeing traction on volume front. Though the realization has been slightly moderated owing to different product mix, new plant preparation cost, airlift cost etc. The cotton price was also on the higher side and hence the gross margin declined in the first half of 2020. The gross margin declined to 54%, which is around 300 basis point down QoQ. The management has guided for flat revenue for the second half of the financial year.

The company doesn’t have any major CAPEX plan going forward. Its current utilization rate is 68%. So it can leverage its unused capacity as the order intake increases. The company is currently available at a PE of ~7, which is much below its average PE. We believe that the stock will be re-rated based on strong fundamental going forward. Over and above, as it increases its capacity utilization, the stock may become a multiplier. As per Government directive, the company also will forego lesser amount of tax. Considering all these factors, we have estimated a target price of Rs 445 in the next twenty four months’ time.

Risk :

• The company’s top five clients contribute around 80% revenue.
• Volatile cotton price is always a risk to the profit of the company.
• As the company earns majority of its revenue from export, foreign exchange is always a risk.
• Discontinuance of different Government incentives may affect the bottom-line.
• The outcome of Brexit is still unknown.

BSE Code: 540048

NSE Code: SPAL

Written by Research Analyst (SEBI Registered) Suvendu Manna

Disclaimer: The research analyst has position in the stock as on the date of writing this article.

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