Background: Textiles is a very booming sector with many interesting hosiery and Apparels plays, though most of the companies are plagued with high debt and pathetic cash flow. Therefore, we should always be on the lookout for companies that are niche plays with good, strong, ethical and ideally conservative managements with strong financial profile. Spenta International is one such budding company.
The Company: Textiles companies are known to be cash guzzling companies with huge piled-on debt and cash flow problem. Therefore, in this space if you get a cash rich company backed by a strong and ethical but conservative management and in a niche space, it would ideally be a non-brainer investment. Further, if it also is into a branded space, it would add to the sheen of the company. Spenta International (Spenta Socks), is one such cash rich company which is into manufacturing of “Socks” and is known for its high quality socks and has therefore, not lost any customer in last so many years. Company has a manufacturing facility in Palghar on a Five acre (company owned) land parcel. Spenta is supplying socks as white label to most of the retailers in the country and boasts of customers like Reliance retail, Future group, AB etc. Since everything is sourced and supplied locally there is virtually no risk of currency fluctuations, though company is exploring options to export its products which can improve its OPM significantly. Furthermore, unlike other textile companies the company does not experience any Chinese threat which is a significant plus. The company has also started improving its Operating Margins in the recent past. Most importantly company has also launched its own Brand of “Spenta Socks” a few quarters back which is getting good reception in the markets and it has been selling its branded socks on all the major e-tailer platforms. The company is planning to emphasize very strongly on promoting its own brand in coming years and has experienced “very good” reception of their product thus far. At the moment the stock is available only regionally (w.r.t physical stores) but they plan to launch it nationwide in coming future. Realizing the potential of the products and traction that Spenta has started seeing across the industry, there has been a conscious and significant change in the attitude of management towards shareholder wealth creation. Therefore, as a first step last year, they had a share buyback by which they reduced their outstanding shares. Also, this year they announced their maiden dividend and the promoters have clarified that in future they will consistently pay dividends. Furthermore, its important to note that the company has a very small equity base with high promoter holding. In the last couple of years the promoter holding has increased from around 52.9% to around 64% (with no pledge) out of which 4% was bought in the last month from open markets at a price even as high as early 90s. Clearly promoters are seeing much better days on back of growing business and incredible acceptance of its newly launched brand of spenta Socks..
Valuations: The current market cap of company is just around 32 cr and is available at around 9 times FY16 PE whereas other branded apparel companies are trading at sky high valuations. The company has a cash of around 6.25cr which is around 20% of its market cap alone. The company has superb cash flows and has now started paying liberal dividends and as noted earlier the management has stated that they will “never” discontinue dividends. Spenta has reduced its debt by half to around just 0.75cr in last two years. The company intends to become debt free by this year. The company’s own 5 acre land out of which the present factory occupies around 2.5cr and therefore, the company has enough land for expansion as and when required. The company delivered a Q1FY16 EPS of 3.38 vs 4.53 delivered in the entire FY15. The Operating profits also more than doubled YoY with revenues growing to 10.17cr from 8.24cr YoY. Spenta is expecting 15-20% topline grown for the next 2-3 years with improvement on OPM, on back of surging demand from the retailers for supplying white label socks and most promisingly increasing share of its own branded Spenta Socks.
Technicals: The stock is backed by superb technical setup and is close to its all time highs. By the way the stock made this all time highs when the markets were crashing and going from one low to another. After a bit of consolidation the stock has started to make another move and is now slated to go much higher in short to long term.
The Textile companies are coming out of their shell after a multi-decade hiatus. Here we have a cash rich, dividend paying and niche textile company which is on cusp of explosive growth and has tremendous cash flows with low equity base. The company is backed by a young and energetic management that is evolving with time. The launch of their own brand and the acceptance that it has shown is a clear indication of the bright days that the stock can see. The stock is low equity and thus volumes are low so its important that if one decides to go for it, they keep it for the long haul and most importantly those who decide to be part of it, should try their products too…
God Bless !!!
Disclaimer: It is safe to assume that I may have some vested interests in the stock. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.