Stock of the Month (May 2013) – Himatsingka Seide
6 May, 2013
Price: Rs. 34.90
This Stock Analysis report presents a long term outlook and the future prospects of Himatsingka Seide Limited.
Strong Financial Position
Despite the difficult economic conditions, the Company delivered a good performance in FY 2013 with revenues increasing by 18.4% to Rs. 1,689.43 Cr. as compared to Rs. 1,428.69 Cr. in the corresponding previous year. The EBITDA grew by 13 % to Rs. 166.83 Crores as against Rs. 147.62 Cr.
Other Financial Highlights:
(1) Distribution revenue from Calvin Klein Home, Barbara Barry and other private label lines in North America grew by 22.1 % YoY to Rs. 1,419.91 in FY 2013 as against Rs. 1,162.89 in the corresponding previous year.
(2) The revenue from the ‘Atmosphere’ brand sold in India, Middle East and South East Asia grew 8.5 % to Rs. 51.78 Cr. in FY 2013 from Rs. 47.73 Cr. in the corresponding previous year.
(3) Manufacturing revenue from Drapery/Upholstery and Bedding Divisions grew by 9.8 % to Rs. 714.47 Cr. in FY 2013 as against Rs. 650.43 Cr. in the corresponding previous year.
Note: Distribution revenues from Europe, from where the Company derives 11.57 % of its total revenue showed a reduction of 23.7 % to Rs. 88.66 Cr. in FY 2013 from Rs. 116.19 Cr. in the corresponding previous year.
At CMP of Rs. 32.80 (16th September, 2013), Himatsingka Seide stock is trading at a Price Earning of 7.44x. Improvement in U.S. retail and home sales coupled with HSL’s strong presence through licensed brands and private labels in the U.S. and Europe should materialize in a marked improvement in sales in those geographies and thereby strengthen the financial position of the Company in the long term.
Strong Brand Portfolio
HSL is a major distributor of branded luxury home textile products in Asia, Europe and North America. The Company is well poised to seize opportunities available to the textile and apparel sector on account of its brands power, strong domain expertise, and state-of-the-art production facilities and with its continued emphasis on product innovation. It offers privately labeled home textile products to major retailers and is the third largest distributor of upholstery products in the United States.
The portfolio of brands includes Calvin Klein Home (currently the second largest selling bath and bedding brand sold through departmental stores in the United States), Barbara Barry, Peacock Alley, Bellora, Esprit, Waverly and ‘ATMOSPHERE’ which is the HSL’s own brand and has 12 showrooms in India and one each in Dubai, Singapore and Jordan.
Increase in number of stores of ‘ATMOSPHERE’ to drive top-line growth
‘ATMOSPHERE’ is India’s first luxury Home Textile brand. With an exclusive collection of over 2500 products, the brand offers the most comprehensive range of luxury Drapery and Upholstery fabrics for its customers.
The Company is planning to increase the number of stores of Atmosphere from the current 15 (12 in India, and one each in Dubai, Singapore and Jordan.) to 40 stores in the next three years (i.e. by 2015). The Company expects to open a majority of stores in India and a couple of stores in Middle East and South East Asia. The increase in the number of stores will provide strong retail network to capitalize on the rising consumer demand for luxury home furnishing products in these geographies. The increase in the number of stores will result in the higher brand visibility and augment HSL’s market presence.
Competitive Cost Advantage
The global textile buyers consider India as one of the major sourcing destination. Indian textile sector is competitively placed vis-a- vis other global destinations. Foreign companies have been attracted to Indian market for two major considerations. First, Indian textile sector is one of the largest in the world. The premium consumption segment has been expanding significantly over the years and this has drawn the focus of foreign players. Secondly, foreign companies use India as a low cost production base for exports. The Government of India has also promoted a number of export promotion policies for the Indian textile sector in the Union Budget 2013-14. We believe that these low cost advantages backed by government policies should play out in the next 2-3 years as western economies regain their growth trajectory.
The Company faces concentration risk as it derives a majority of its revenue from a small number of customers in the United States. In FY 2013, 83.22 % of sales revenue was from North America.
Any change in consumption pattern in these markets whether by political or economic events could potentially affect the results of the Company.
The Company is dependent on China for quality raw materials for its silk business. Though the Company continues to be the market leader in this space, growing competition from China and other players in India can potentially be a threat to the market share which the Company commands. The Company’s silk business which addresses the high end clientele with its front end luxury brands is impacted s a result of the global recession. In the Bed Linen business, the Company is competing with other large players in India, Pakistan and China, with similar or larger capacities. The challenge will be to acquire market share profitably while competing with other large players in these countries in the current tough macro-economic environment.
Rising Raw Materials prices
High rate of inflation has led to an increase in the general level of prices for commodities and raw materials (both the cotton yarn and silk yarn). The global volatility in the cotton prices has become one of the biggest variable factors in the textile industry impacting realizations and profitability.
The world’s cotton production is expected to decline to 24.9 million tons in 2012-13 due to lower area under cotton cultivation. It is also likely that Government of India may announce higher minimum support price for cotton for the coming season. This along with permission to export cotton more freely may result in increase in cost of cotton for the coming season.