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India’s new-found fondness for fitness gives Cosco plenty of bounce

Locational advantage, GST rollout, a robust brand value, a pan-India fitness uptrend, and an apt product pricing strategy are some of the factors that make Cosco (India) a stock worth considering.

January 31, 2018 / 03:09 PM IST
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The next time India’s exploits in the Champions Trophy inspire you to play gully cricket, notice the name on the ball that the aspiring young fast bowler has hurled at you: Cosco. The company that makes it is benefiting from India’s perennial love affair with cricket, yes, but also from a more recent drive for physical fitness, and that’s showing in the share price.

Background

Established in 1980, Cosco (India) Ltd (CIL) (market cap of Rs 154.7 crore), a Delhi-based company, manufactures and sells sports balls for almost all the commonly and popularly played sports in India under its ‘Cosco’ brand. However, it is the company’s traded goods segment that constitutes a major chunk (approximately 60-65 percent) of the annual revenues through sale of fitness equipment and other accessories.

What makes CIL unique is the 'TINA' (There Is No Alternative) appeal that works for it: it is the only listed player catering to this high growth sports segment in India. Accompanied by solid fundamental tailwinds, quite a few factors seem to be going right for the company's business.

Locational advantage: The company’s location enables it to cater to the prime sport clusters (Gurgaon, Jalandhar and Meerut being the biggest) in the northern states of India rather effectively, although its clients are spread across the breadth of the country.

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GST advantage of being an organised player: India’s sport goods manufacturing space, based considerably on manual processes, is small and fragmented, with the presence of unorganised players pegged at 70-80 percent of the industry size. GST, that aims to introduce the concept of ‘one nation one tax’, will bring the erstwhile unorganised units under the tax net and erode their pricing advantage vis-à-vis organised players. This should help CIL to gain more market share over a period of time.

Brand value: ‘Cosco’ is a recognized sports brand. Some of CIL’s prestigious affiliations with India’s sporting bodies (The World Federation Of The Sporting Good Industry, The Sport Goods Export Promotion Council, The Sports Goods Foundation Of India) stand testimony to the same. Many tournaments in India use the company’s products. To enhance its brand visibility, the company is engaged in sponsorship/partnership agreements for different sporting events in the country from time to time. A reputation for quality standards, backed by a large variety of product offerings, makes the company stand out effectively from its peers.

Fitness habits gaining ground: Sports and fitness, which were previously confined to the financially elite strata of the society, are now pursued by people of all age groups and backgrounds throughout India. The younger generation, that is usually more impacted by the Western lifestyle, is not only health/fitness-conscious but also enthusiastic about actively participating in sports. The emphasis on physical well-being, widely advocated by educational institutions and corporates, among others, should augur well for the industry.

Reasonably priced products: The spending patterns of Indians have witnessed a shift towards branded products owing to a rise in disposable incomes. Though a vast majority of people no longer wish to compromise on quality just to save some extra money, the average Indian remains price-conscious after a point nonetheless. CIL’s forte lies in delivering good quality branded products at prices that are much cheaper than international brands such as Nike and Adidas.

Some risks can’t be ignored: CIL is subject to input price pressure on account of fluctuations in raw material prices like rubber. Like most other retailers, the company faces competition from private-label brands on one hand and cheap Chinese imports flooding the market on the other.

Valuation

Table 1

Table 2

As the long-term financial parameters suggest, FY17 turned out to be a decent year for CIL. We expect the company to maintain a modest growth trajectory without stretching its balance sheet significantly. Despite the pretty stellar run (186 percent price upside in the past one year in comparison to 16.7 percent return of SENSEX during the period), the stock is quoting at a reasonable valuation of 17.9x FY19 expected earnings, thus making it an ideal choice for accumulation for investors looking to participate in the high-growth discretionary consumption theme of India.

Krishna Karwa
first published: Jun 13, 2017 09:03 am

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