Indo Count Industries Ltd - Counting Well; Edelweiss

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About the Company:

Indo Count Industries Ltd. (ICIL) is a leading manufacturer and exporter of Home Textiles. The company undertook forward integration in 2007 and with that it went from spinning to weaving to processing. ICIL boasts of marquee global clients like Walmart, JC Penney and Bed Bath & Beyond. Currently, 85% of ICIL`s revenue comes from exports (70% to the US). The company is diversifying its product mix from bed linen to Fashion, Utility and Institutional segments. ICIL`s strong clientele, expanding product bouquet, entry into new export markets, shift in product mix towards premium products, superior return ratios, asset light model and exit from CDR leading to superior return ratios - 24% RocE and 44% RoE in FY14. At CMP, the company is trading at 6.1x FY17E EPS of INR 54.2/share.

Investment Rationale

• India competitiveness to sustain: Indian Textile exporters are in a favorable position over competitors due to our competitive cost dynamics, skilled labour advantage and supportive government policies & subsidies. Also, India`s cotton surplus status allows easy availability of raw material (India is now the world`s largest cotton producer with 22% market share).
• Made-to-Order business with an expanding product bouquet: ICIL derives ~70% of its overall revenue from the US and has a ~20% share in India`s bed linen exports to that country. It is expanding into new international geographies such as UK, Australia, New Zealand, Japan etc. ICIL exports bed linen on a made-to-order basis, resulting in effective management of the company`s inventory. Going ahead, the company plans to foray into other product segments like Fashion, Institutional and Utility Bedding. ICIL exports to international clients such as Walmart, JC Penney, Target, Bed Bath & Beyond, John Lewis and House of Fraser.
• ICIL to exit CDR by FY15: During 2008, ICIL went into corporate debt restructuring (CDR) due to series of events. In 2007company undertook a cap-ex of INR 210 crores and forayed in Home Textiles however due to global meltdown the utilization levels remained subdued leading to huge financial loss to the company. In addition, it takes around five years to get an entry into the global retailer`s suppliers` list and scale up from there. Moreover, the company lost around INR 70 crores in currency derivatives. It will be out of CDR before March 2015.
• Superior return ratios: One of the key reasons for low return ratios in the Indian textile industry is the low asset turnover. But, unlike its peers, ICIL has done cap-ex in building the front end capacity i.e. processing capacity. The company has the ability to outsource yarn and grey fabric from the open market. This led to high asset turnover, which in turn pushed the return on capital employed (RoCE) higher to 24% in FY14. It also continues to generate healthy ROEs (45% in FY14 from 5.6% in FY11).