Moneycontrol
Feb 14, 2018 06:06 PM IST | Source: Moneycontrol.com

Himatsingka Seide Q3 – Operating leverage holds the key to a re-rating

Operating leverage, backward integration, capacity addition (for terry towels), risk diversification, and increased emphasis on sale of brands are the key moats that make Himatsingka Seide a good investment proposition.

Krishna Karwa @krishnakarwa152
 
 
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Himatsingka Seide (market cap: Rs 3,637.9 crore), a stock under our coverage purview, is a vertically integrated home textile manufacturer of upholstery fabrics, drapery fabrics, and bed linen products for the export market. The company’s distribution arm caters to private label programs of major retailers across North America, Europe, and Asia.

In the quarter gone by, Himatsingka’s impressive performance was on the back of operationalisation of the expanded bed sheeting capacity (to the tune of 23 million metres per annum), a better product mix, and robust growth from brands. The company’s branded portfolio stood at Rs 1,100 crore as on 31st December, 2018 (as against Rs 750-800 crore as on 31st December, 2017).

For 9MFY18, the increase in finance cost was on account of higher debt taken for project funding and an increase in inventory holding (due to GST-induced disruptions and delays in receipt of export incentives). A strong rupee versus the dollar led to a foreign exchange loss of Rs 11.3 crore during Q3FY18 (as against a Rs 9.75 crore gain in Q2FY18).

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Why consider Himatsingka?

Backward integration

Himatsingka commenced operations at its cotton spinning facility in February 2018. The yarn output from this unit will serve as an input for the company’s bed sheet manufacturing plant. Starting FY19, the cost savings by virtue of reduced dependence on outside suppliers should aid gross margin accretion.

Operating leverage

Out of Himatsingka’s total bed sheet manufacturing capacity of 46 million metres per annum (mmpa), 23 mmpa was added in H2FY17. The utilisation rate for this incremental capacity (45-50/40 percent for 9MFY18/FY17, respectively) will increase from FY19, consequently aiding top-line and margin growth.

Terry towels

The set up processes pertaining to Himatsingka’s 25,000 metric ton terry towel plant have begun in Q4FY18 and are anticipated to conclude by FY19 end. The asset turnover rate for this project is expected to be 2 times, which is higher compared to the rate (0.9x) for the overall 46 mmpa sheeting capacity.

Yarn sale

In addition to meeting the requirements of the sheeting facility, Himatsingka will sell a small percentage of the fine count yarn manufactured to its customers too (owing to consistent demand). Since this variant fetches better realisations than traditional commoditised yarn, it is likely to be margin-accretive.

Diversification

In a bid to mitigate risks associated with geographic concentration (clients based out of North American regions account for nearly 70-80 percent of the annual export turnover), Himatsingka aims to explore new markets in continental Europe.

Branding

Given the superior margin profile of branded products as against the unbranded ones, Himatsingka remains focused on building its brand portfolio. The company aims to capitalise particularly on the recent sales traction in case of cotton-made bed linen under its ‘Pimacott’ and ‘Organicott’ brands.

Is Himatsingka investment-worthy?

Additional costs (interest and depreciation) pertaining to the newly commissioned spinning project may impact numbers.

In the new spinning facility, only high count yarn will be manufactured. For the relatively low count varieties, Himatsingka may resort to an outsourcing model. This, in turn, could dent margins to some extent.

From Himatsingka’s perspective, the exchange rate scenario (a strong rupee versus the dollar) is unfavourable at present. This may lead to cash flow uncertainties and booking of notional foreign exchange losses (under ‘other income’). The purchase sentiment in the US has been tepid of late.

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After a bout of corrections triggered by market volatility, the stock seems to have rallied pretty noticeably in the past few days. Nonetheless, at 10.9x FY20 projected earnings, we believe that in spite of the above-mentioned transient impediments in the near-term, there is good room for an upside.

For more research articles, visit our Moneycontrol Research Page.
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