Zodiac Clothing EBITDA up at 23%, PAT up 28%

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Overview:

For the year ended 31.03.2008, the results announced by Zodiac Clothing show a consolidated turnover of Rs.28350 lakhs, against Rs.25920 lakhs in the previous year. This is a growth of approximately 10%. We achieved this with a stable export business (which grew in US$ terms by 10%, in spite of the strengthening of the rupee, which impacted international business revenue from India, as well as conversion of international business revenue from the UAE from AED into INR for consolidation of accounts) and a robust performance by our branded business, which grew by 30%.

 

Our focus on value addition and design content helped us increase our per unit realisation in US$ terms, from both India and Dubai for our international business. Our branded business continued to grow with our own stores (especially like for like) and sales to MBOs remained strong. Besides, our thrust on cost helped us, despite adverse conditions in our international business, to increase our profit significantly from the international business out of both India and the UAE.

 

Our EBDITA increased by approximately 2%, both on a standalone as well as on a consolidated basis, to 15.86% and 17.87% respectively.

 

The consolidated net profit for FY 2007-08 increased handsomely from Rs.2364 lakhs recorded the previous year to Rs.3242 lakhs, registering a growth of 37.14% over FY 2006- 07 (following an impressive growth of approximately 77% in FY 2006-07 over FY 2005-06).

 

The Board of Directors, consistent with the dividend payout policy , and keeping in mind the enhanced profit of the Company, has recommended an increased dividend of 65% for the year 2007-08

 

Industry Scenario

Clothing exports from India have grown a meagre 5% in US Dollar terms. Of the global trade in textiles of approximately USD 550 billion, nearly 60% relates to clothing. The trend in developed economies is that almost all trade in clothing has shifted to readymade clothing, which is also evolving in developing economies, which underscores the potential for the industry both internationally, as well as in India.

 

However, India is not availing of the opportunity of capturing market share. This can be attributed to the appreciation of the Rupee (which has for the last few weeks reversed somewhat, albeit the medium/long term trend of appreciation remains unchanged), the steep increase in interest rates in India and non-addressal of the refund mechanism for Service Tax promised to be refunded. The distress faced by the clothing industry in international markets was not felt by the company, as reflected in the results.

 

The branded business for India continued to be robust for the Company in the period under review. The market in India is evolving rapidly into one where the opportunities are significant.

 

Revenue Analysis

1. Consolidated Turnover Rs. 28350 lakhs YTD March 2008 Vs Rs. 25920 lakhs YTD March 2007. Up by 9.38%%

2. Standalone Turnover Rs. 22823 lakhs YTD March 2008 Vs Rs. 20324 lakhs YTD March 2007. Up by 12.30%

3. UAE Turnover AED. 581 lakhs YTD March 2008 Vs AED 526 lakhs YTD March 2007. Up by 10.46%

 

Analysis : YTD March 2008 Vs. YTD March 2007

Ø EBITDA : Standalone Up 27%

 

Consolidated Up 23%

§ EBITDA Margin : Standalone 15.86% Vs. 14.02%

Consolidated 17.87% Vs. 15.88%

Ø PAT : Standalone 2016 lakhs Up 43%

Consolidated 3242 lakhs Up 37%

§ PAT Margin : Standalone 8.83% Vs. 6.93%

Consolidated 11.44% Vs. 9.12%

Ø EPS Standalone Rs. 24.09 Vs. Rs. 16.85 (on expanded equity post ESOP)

 

Consolidated Rs. 38.76 Vs. Rs. 28.27 (on expanded equity post ESOP)

The performance is attributable to :

1. The focus on containing cost, increasing value addition and design content, increasing unit value realisation in US$ terms helped minimise the impact of the sudden, sharp and rapid appreciation of the INR, which yielded higher profits in the international business both from India as well as from the UAE.

 

2. Impressive 30% growth in the Company's branded business. Zodiac and ZOD! continue to be the most respected brands in their respective segments and are acknowledged as such by both the consumer as well as the trade. Our competition treats us as a role model. Our sales from all our three channels for the branded business in India have grown i.e., National Chain Stores / MBOs as well as Company Owned Stores.

 

3. Increase in the number of Company's own stores as well as renovation of some existing stores (we opened 11 new and renovated 8 existing stores in keeping with the Company's strategy on investing in growing this segment despite delay in opening of Malls) has helped in the healthy growth of both the top line and the bottom line in the branded business. It is most gratifying that in the Company's own stores (LIKE FOR LIKE) sales have grown in healthy double digits. The company's policy of treating each store as a profit centre and ruthless closing down of stores (one during the year under review) underscores the focus on profitability.

 

4. The Company's conservatively aggressive strategy - of strict financial discipline, cost control, de-risking, aggressive hedging of forex exposure, containing finance costs (despite rising interest rates) and global sourcing - are some of the tools that have helped the company achieve outstanding performance.

 

5. The company's Debt was Rs.2,315 Lakhs Vs Rs.2,907 Lakhs (standalone) and Rs. 2,479 Lakhs Vs. Rs 3,180 Lakhs (consolidated).

 

6. The new corporate office building is productive in terms of rental income.

 

7. During the year, Personnel Costs have grown both because of the increased salaries of quality people given the demand for them, as well as because of an increase in our headcount (both at the front end as well as of the back end) due to the expansion of Company-run stores

 

8. The marketing spends have grown (although less than pro-rata) with the growth of the branded business.

 

9. Our increased retail presence has led to an increase in our establishment expenses including rentals and power costs. Electricity costs have risen substantially, also due to steep increase in the cost of electricity (upto 100%, in some parts of the country).

 

10. The raw material costs of the Company have declined marginally.

 

What is really significant is that in the international business, despite the Rupee appreciation resulting in lower overall revenue, the unit price realised by the company declined by a mere 1%. This indicates that the Company was able to attain higher unit realisation in US$ terms, emanating from, besides price increase per se, higher realisation due to greater value addition/value added services.

 

Outlook

The situation in China is becoming increasingly unfavourable for export of clothing (and other items like footwear) because of the appreciation of the Remnibi, reduction of subsidy, higher wages due to high inflation, somewhat greater enforcement of labour laws and the demographic problems arising from the ageing population/single child policy.

 

India has had a record crop of cotton and has moved into the slot of second highest producer of cotton globally. There has been some investment in weaving and processing of fabric, which is expected to gain further momentum.

 

Duty Drawback for the industry has been enhanced to 11%, but still does not fully reimburse taxes (including Service Tax) suffered on inputs. For Service Tax, the notifications of refunds on Service Tax paid on some post manufacturing expenses remains on paper, because of a technical difficulty in claiming the refunds, which needs clarification by the Government.

 

There continues to be considerable volatility in the forex markets. Besides, because of the sub-prime crisis and the resultant effect on the economies of the U.S., (where there is talk of recession) the EU and the UK, there has been turmoil which has fortunately, not affected the company so far, by virtue of the segments in which it operates.

 

India is engaged in discussion on FTA with the EU, although the possible date for closure is still unclear. This should positively impact the Indian clothing industry, because some of our competitors already have favourable bilateral agreements with the EU and some with the US as well.

 

There has been some slow down reported by retailers in India, which has not affected the company thus far because of the strength of Zodiac and ZOD! brands and strengths in product design and quality which are recognised by the end-consumer.

 

We believe that the expected softening of real estate prices will start impacting rentals bringing them to rational levels.

 

Going forward, growth in the international business is likely to be dependent on how the above developments play out; the Government of India and the clothing industry acting in tandem would accelerate the pace of growth. India's cost disabilities need to be addressed to harvest the emerging opportunity.

 

The launch of Z3 in April 2008 (which has met with better-than-projected response), as well as the aggressive rollout of planned new stores, will continue to drive the branded business, especially in the Indian market, which is relatively less turbulent than other markets.The medium/long term India story continues to look strong.

 

Zodiac Employees' Stock Option Plan 2006

The Company has reserved issuance of 2,91,000 Equity Shares of Rs.10/- each for offering to eligible non-promoter Directors / Employees of the Company and its subsidiaries under the Employee Stock Option Plan-2006 (ESOP).

 

During the year 2007-08, the Company has vested 87,300 Options to the eligible non-promoter Directors / Employees for subscribing to equivalent number of fully paid-up equity shares of the Company, at a price of Rs.255.40 per share. The Vesting Options would be exercised over a period of 3 years from the date of vesting, based on specified criteria.

 

Consequent upon that, 23,600 equity shares of Rs.10/- each were issued and allotted to eligible non-promoter Directors / Employees of the Company and thus the Paid-up Share Capital of the company as on 31st March, 2008 stands increased from Rs.8,36,26,260/- to Rs.8,38,62,260/-

 

Mobilisation of Funds

During the year under review, the Shareholders of the Company, at the Extraordinary General Meeting had passed a Special Resolution for the preferential issue of 4,40,000 warrants at a price of Rs.400/- per warrant, to some of the Promoters as per the SEBI Guidelines for Preferential issue contained in the SEBI (Disclosure and Investor Protection) Guidelines, 2000, entitling the warrant holders to apply for equivalent number of fully paid equity shares of Rs.10/- each of the Company in terms of the Special Resolution.

 

4,40,000 warrants have been issued on January 15, 2008, upon payment of 10% of the amount. The balance 90% of the amount is payable within 18 months from the date of allotment of the warrants, if the warrants are exercised.

 

The shareholders of the Company had also approved further issuance of equity up to 15 lakhs Equity shares in any variety of instruments. The plan to raise funds will be pursued when the market conditions stabilise and the Company is able to realise fair valuation. In the meanwhile, internal accruals have adequately provided funds for the immediate needs and additional lines of credit are also being explored.

 

 

Sourced From: Zodiac Clothing Co. Ltd