Mandhana Industries: Buy

Backward integration, strong and diverse client base and expanding manufacturing capacity are positives.



Buoyant Indian consumption demand coupled with recovering exports portends a good future for textile players, which straddle both markets. Mandhana Industries makes garments for the export market and fabric for the domestic market. At Rs 241, the stock trades at 12 times the trailing 12-month earnings and 9 times the estimated earnings for FY-12, at a discount to closest comparable Bombay Rayon.

Aiding healthy prospects for Mandhana are its higher margins due to backward integration, established relationships with a wide client base of both retailers and garmenters in domestic and foreign markets, in-house design capabilities and large manufacturing capacity. Slowing Chinese supply to export markets leaves more opportunities for Indian textile players, especially as competing exporters from Pakistan and Bangladesh reel under high cotton prices and export restrictions by the Indian Government.

Investors with a two-to-three year perspective can consider buying the stock of Mandhana Industries. However, given its small cap status, investors are advised to limit portfolio exposure to this stock.

Domestic and export play

With 80 per cent of revenues stemming from domestic markets, Mandhana supplies fabric to reputed garment makers such as Aditya Birla Nuvo, Indian Terrain and ITC. Product lines of clients range from mid-priced to the premium segment. Domestic revenues have clocked a compounded annual growth of 43 per cent over the past three years.

To further tap domestic markets, Mandhana plans to open about 10 retail outlets and launch its own brand from late 2011, calling for an investment of Rs 75 crore over the next two years. While it may well take time to establish its own brand, the company also has the licence to design, market and distribute clothing bearing the name ‘Being Human'. This is the name of the foundation set up by actor Salman Khan, who is also the brand's ambassador. This nine-year agreement will help bring in retail revenues in the near term.

About 20 per cent of revenues come in from export of higher-margin garments. However, over 70 per cent of exports are to European markets, where recovery is still sluggish. Even so, Mandhana exports to some of the more established players such as Tommy Hilfiger, Versace and Armani. It has further added clients such as Mango and the Inditex group in the last two quarters. Client base is also well-spread and the company does not rely on a handful of clients.

Backward integration into weaving and dyeing allows cost controls and healthy margins. Mandhana doubled weaving and garment capacities to an annual 3.6 million meters and 7.2 million pieces respectively; revenues from added garment capacities are likely to flow in FY-12 onwards. It has plans to increase garment capacities to 12 million pieces per annum. Capacity expansion would help the company meet increased demand from overseas clients as they look to consolidate suppliers to lower costs besides bringing in economies of scale.

Financials

Revenues clocked a 38 per cent three-year compounded annual growth to Rs 626 crore in FY-10 while net profits grew 30 per cent to Rs 45 crore in the same period. While cotton prices have reached stratospheric levels over the past six months, Mandhana has been able to pass on hikes in raw material. In fact, operating margins for the nine months ended December 10 improved to 20 per cent from the 18 per cent in the same period the year before.

Net margins stood at 9 per cent for the nine-month period ending December '11 on high depreciation as a result of capacity addition and high interest outgo. Debt-equity stands at a high 2.2 times. However, much of this loan has been taken under the TUFS scheme, resulting in average interest rates of just 6-7 per cent and long repayment periods. Interest cover stands at a fairly reasonable four times on a par with peers. The company also has Rs 31 crore unutilised proceeds from its public offer early last year, which will help meet capex requirements.

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