Indian Terrain has been a favourite of many smallcap lovers. Apart from mutual funds like DSP Blackrock Small Cap Fund, Reliance Mutual Fund, Birla Sun Life, SBI Magnum, some well-known value investors such as Malabar Investments are seen to be holding this stock. Among shareholders, one important change worth noting is that Reliance Mutual Fund has recently bought close 6 lakh shares of the company at Rs 199.78 a share.
Indian Terrain, which operates an integrated business model from manufacturing to retailing, has uniquely positioned itself in men’s casual wear targeting largely the urban working class population in the age group of 25-44. Thanks to brand recognition and expansion across the cities, the company has clocked a revenue growth of 21 percent during the financial years FY11-16.
Interestingly, this growth has been achieved without much reliance on debt. The company has a debt of Rs 44 crore on an equity of Rs 161 crore and generated close to Rs 22 crore of cash from operations in FY16. In terms of effectiveness of the management, Indian Terrain scores well over some of its peers like Arvind.
Indian Terrain enjoys an operating margin of 14 percent, which is similar to the margins enjoyed by its peer Arvind, but it scores well above its peer in terms of having an asset turnover ratio of almost 1.7 times (Arvind 1.3) and generating 21 percent return on equity (Arvind’s is 14 percent). The company follows an asset-light business model as most of its manufacturing is outsourced enabling it to maintain healthy return ratios.
Moreover, branded apparel space as an investment theme has gathered pace. The market size of premium and semi-premium segment for the men’s clothing is about Rs 16,000 crore. The company has also ventured into kids garments, which is again a Rs 10,000-crore market. Both the segments have been growing at 12-14 percent and are expected to witness similar growth in near future as more and more people choose to wear readymade garments.
In addition to the growing urbanisation, increasing working class population, higher disposable incomes and growing youth population in the country bode well for the market.
Further to complement its growth in apparel business it has also entered into footwear business having a product price range of Rs 3000-6000 per pair. Both kids and footwear are small business, but they will add to the profitability and help it appropriately reduce the cost. Its products are sold at over 1500 counters including over 120 exclusive company store.
While the stock has run up in the recent past from Rs 140 levels in January this year to currently at Rs 205, it is still trading at reasonable valuations. At the current market price of Rs 205, the company is having a market capitalisation of Rs 777 crore, valued 22 times its FY18 estimated earnings.
Valuation is reasonable considering that growth in earnings is expected to be higher led by its efforts to grow both through product diversification and increasing its presence. Second, in the light of decent return ratios, negligible debt in the books, growing cash flows and margins the company has all the merits to trade at slightly higher valuations.