SPL Industries : Undervalued Growth – My Personal Take

Background: The textile industry is one of the largest employers in the private sector and therefore it is vital for any job growth in the economy. In the aftermath of covid pandemic there has been serious job losses in the country and it is imperative that the government will take big steps to fuel job growth and will therefore incentivize sectors which have huge job potential. We have already seen numerous sector being incentivized and given the importance of textile sector sooner than later this sector will also be incentivized. Further and probably the biggest tailwind the sector has that it also benefits from the anti China sentiment. This sector is expected to be strongly affected by the the supply chain shift from China to countries like India and Bangladesh and this shift will be particularly beneficial for Apparel producers.

The company: SPL industries is a garment exporter. SPL had been a struggling company for a very long time and eventually in 2013 there was a change in management and the current management took over the company. Ever since, the new management has turned around the company on back off strategy change and cost control measures. It is reflecting in the key efficiency metrics too. Operating margin in the last six years have significantly improved from negative double digits positive mid-teens and is among highest in the industry. Sales have grown more than four times in the period and net profit has increased multifold. The quality of balance sheet has significantly improved with the company becoming almost debt free. One of the additional significant changes that has happened in last couple of years in the company is that it has minimised its manufacturing and is only exporting the garments that are procured from its group entity SPL prints. Why this arrangement – Well, there is some history to this. SPL Industries had not done meaningful up-gradation of its machines and given the health of balance sheet it was decided by the management to get the manufacturing done by shivalik prints ltd, which already had state of the art machines and was in close proximity to SPL Industries. It is also important to note that since this has happened the promoters have increase their stake in the listed company by an additional approx 2% clearly signifying their interest in value creations in the listed company. This has also increased the return on equity and return on capital employed. Further, the operating margins have also improved after this restructuring – this appears to be an interesting move. Having said that one should always keep this on the back of their mind. SPL exports its products to various international retail chains and super stores, predominantly in USA, Europe, Canada and Japan.

Valuations: SPL industries is available at a throwaway PE of of less than 3. The company has almost negligible debt and cash of more than 46 crore which is more than 55% of the current market cap. The company has extremely robust cash flows as well. Promoter holding is at big 68.9%. After all these years the company has come to a situation that they have started paying income tax and this should augur well for stock Re rating. What next – Dividends? Lets see.

Technical: the price seems you have made a double bottom on monthly charts and if one analyses the price action for the last few weeks it appears it is been quietly accumulated at these prices and for me personally the stock looks attractive and valuations are factoring in a lot of negativity. Even in the worst quarter they have given a good EPS and we’re assuming as the world normalizes, hereafter the earnings are only going to pick up.

Disc: No personal investment.

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10 Responses to SPL Industries : Undervalued Growth – My Personal Take

  1. Prashant Hazariwala says:

    Dear Aceinvestortrader,
    Good pick as always. I have a query regarding their new business strategy to buy from Group company SPL prints. Before 5 years they were making losses on manufacturing of garments now they outsource from group entity and making double digit profit so my question is : Is SPL print is so much efficient in manufacturing that they can sell product to SPL industries at such a low rate that both the entity can make profits? Please explain if you have any idea about it,
    I have gone through their annual reports but there is nothing mentioned about procurement from SPL print.
    Thank you

    • annual reports are not the only source of information. pls get in touch with their CS if you have doubt about it and also research more by reading credit reports. you will get your answer.

  2. Rohit Gulati says:

    Dear Ace,
    Thanks for new idea.They have huge cash and liquid investments of around Rs. 42 crores.My ques is why they have not declared dividend then? and why they still have Rs. 4 crore debt.
    I have been trying to contact the CS ,through the website nos. but no response and one of the nos is invalid.
    Secondly,their website also shows outdated old data of previous years.Thanks in advance.

    • this is the first time they have garnered this much cash. i know you point about being suspicious about cash and no problem in being that but if i see the interest income it does suggest that company has this cash. Also connect with CS if you feel you have any further doubts and keep investigating and researching its cash flow and pnl statements of the past years. it always helps.

  3. Rohit Gulati says:

    Dear Ace,
    Even after such good results the stock is languishing at such a low valuation for many days.Then how we as a retail Investor be confident that this share will get picked up in due course by the other market participants,Since the Company is not media friendly or has a IR deptt.

  4. Pranav Shah says:

    Hi Sir, Wha are your views on Avonmore Securities ?

  5. Rohit Gulati says:

    Dear Ace,

    I had spoken to the Company and even mailed them. It looks like the Company is very complacent and not aggressive in PR /Media interactions.Since this is a micro cap Co. and not media savvy hence it is all the more important to be seen and heard.Otherwise I feel however the good company may be will always be unnoticed and languish despite of growth story.
    Await your views…

    • i would keep close scrutniy on results and balance sheet. this is the problem with all micro-caps. keep triangulating the PnL. Hopefully sooner than later things will improve. Good Luck. God Bless !!!

  6. Santosh Sinha says:

    Thanks for concise analysis. Upward price movement has already started. If we believe balance sheet figures, even at current market cap of 145 Cr with 59 Cr cash equivalents and 28 Cr free cash flow last year, valuation looks quite cheap.

    Disclosure : Invested from last 6 months.

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