Saral Gyan Hidden Gem - May 2011

EQUITY RESEARCH REPORT

CRAVATEX LTD.

BSE CODE: 509472

Industry: Com. Trading & Distribution CMP: Rs. 778.10 (29/05/2011) Market Cap: 100.54 (Crores) Target Price: Rs. 1600 Date: May 29, 2011 Time Period: 18 – 24 months

Saral Gyan Capital Services www.saralgyan.in

An Independent Equity Research Firm

http://www.saralgyan.in/

HIDDEN GEMS – MAY 2011

TABLE OF CONTENT

S.No Content Page No. 1. Company Background 03 2. Recent Developments 07 3. Financial Performance 08 4. Charts & Graphs 10 5. Peer Group Comparison 12 6. Key Concerns 12 7. Industry Overview 13 8. Saral Gyan Recommendation 16 9. Disclaimer 17

- 2 - SARAL GYAN CAPITAL SERVICES


1. Company Background

The Company was incorporated in 1951 and is currently listed on the Bombay Stock Exchange. It was one of the largest chains of dyers and dry cleaners of it's time. Along with these ventures, the Company also diversified into textile processing and printing. In keeping with the developments in the worlds of fitness and health the Company expanded into the manufacture of sports and casual wear, culminating recently, in the distribution of fitness equipment for home and commercial use. The Company represents several reputed international brands of fitness equipment in India and is the only ISO certified & public listed company in this field. The 21st Century ushered in a whole new perspective towards health and fitness, presenting well‐being as a holistic process incorporating exercise, diet as well as beauty. The Company, therefore, has now integrated beauty therapy into its already versatile list of services. The Company offers a range of advanced international beauty therapies within spas across the country as well as providing clients with high‐end beauty products from one of the leading beauty product manufacturers in the world. The Company continues its presence in the Garment Exports Market and the domestic footwear market where it caters to the needs of several international brands. Divisions: 1. Sports

This contributes distribution of major international brands Fila and Nassau. Fila Sport Spa (Italy) is a globally renowned company, offering high performance technology inspired sports shoes and apparels.



NASSAU Nassau is a Korean Sports and Lifestyle brand which combines style with an innovative approach to styling. DUNLOP: Cravatex is also engaged in marketing and selling of range of sports wear and accessories with brand name Dunlop.

2. Fitness

Cravatex is the only ISO certified public listed Company dealing with fitness equipment. The Company launched Proline Fitness in 1996 which was a pioneer in introducing the personal range of fitness equipments to the Indian Market.

Proline Fitness is the sole importer and distributor for several international brands like Johnson (the 4th Largest Fitness Equipment Manufacturer in the World), Horizon, Vision, Body Solid and Magnum. It has a complete range of fitness equipment for home as well as commercial use.

Fitness : Home

HORIZON: Horizon produces the finest exercising equipment that is both innovative and of the highest quality and which brings good performance and reliability into the home of consumers.

MAGNUM: A complete range of treadmills, cycles, ellipticals for your cardio training needs at affordable prices



Fitness: Commercial JOHNSON: A range of Cardio and Strength of a top grade commercial mould, with consistent quality and performance, it is one of the sturdiest brands in the commercial fitness market.

n.

MATRIX: A complete, technologically advanced and aesthetically superior range of products for high end commercial usage, these machines define and lead the quest for high standards of excellence in the commercial fitness segment. CORPORATE GYM: We supply commercial equipment to corporates, gyms and housing societies. Our services are holistic, ranging from advice, 3D CADCAM layouts and installatio



Management Board of Directors 1. Mr. Rajesh Batra ‐ Chairman‐CEO 2. Mr. Rajiv Wallia ‐ Executive Director 3. Mr. S.D. Israni ‐ Director 4. Mr. H.K. Vakharia ‐ Director The Batra group businesses thrive under the control of Ram Batra's sons, Rajesh and Rajiv. Their carefully developed expansion strategy has created a major international group with a portfolio of textiles, fashion clothing, sportswear, fitness equipment and trading. The group, retains its original core philosophy: to excel, and considers employees to be a truly valuable resource. Consequently, the diversity and quality of management are the group's major strength. Working as a team, they all aim to excel. (Mr. Rajiv Batra manages FILA Europe, which is also owned by the group but not Cravatex).



2. Recent Developments Cravatex recommends dividend & Bonus shares ‐ May 24, 2011 The board of Cravatex in its meeting on 24 May 2011 has recommended dividend at the rate of Rs. 5 per share. The board has approved the issue of bonus shares in the ratio of 1 new equity share for every 1 existing equity share held. Further, the board has approved to increase the authorized share capital of the company from Rs. 2 crores to Rs. 5 crores

Cravatex acquires a wholly owned subsidiary company in UK – March 10, 2011

Cravatex has acquired 100% of 1000 equity shares of £ 1 each of BB (UK), U.K. for a total consideration of £ 1093. By virtue of the said investment, BB (UK), U.K. becomes the wholly owned subsidiary of the company



3. Financial Performance Cravatex reports net profit of Rs. 1.49 crore in the March 2011 quarter Cravatex reported net profit of Rs. 1.49 crore in the quarter ended March 2011 as against net loss of Rs. 0.02 crore during the previous quarter ended March 2010. Sales rose 35.12% to Rs. 22.7 crores in the quarter ended March 2011 as against Rs. 16.8 crore during the previous quarter ended March 2010. For the audited full year, net profit rose 74.80% to Rs. 6.45 crore in the year ended March 2011 as against Rs. 3.69 crore during the previous year ended March 2010. Sales rose 56.10% to Rs. 91.24 crore in the year ended March 2011 as against Rs. 58.45 crore during the previous year ended March 2010. Cravatex net profit rises 10.49% in the December 2010 quarter Net profit of Cravatex rose 10.49% to Rs. 1.79 crore in the quarter ended December 2010 as against Rs. 1.62 crore during the previous quarter ended December 2009. Net sales rose 28.35% to Rs. 24.4 crore in the quarter ended December 2010 as against Rs. 19.01 crore during the previous quarter ended December 2009.

Last 6 Quarters Total Income & Profit

20.218.13

22.75 23.6225.59

23.92

1.79 1.491.640

1.62 1.53

0

5

10

15

20

25

30

Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11

Rs

in C

rore

s

Income 20.2 18.13 22.75 23.62 25.59 23.92

Net Profit 1.62 0 1.53 1.64 1.79 1.49

1 2 3 4 5 6



Current & Expected Earnings:

Particulars (Rs. In Crores) Jun '10 Sep '10 Dec '10 Mar '11 Jun '11 E Sep '11 E Audited / Unaudited UA UA UA UA UA UA

Sales Turnover 22.72 23.62 25.59 23.88 25.89 26.86

Other Income 0.02 0.01 ‐‐ 0.05 0.08 0.07

Total Income 22.75 23.62 25.59 23.92 25.97 26.93

Total Expenses 20.04 20.85 22.38 20.96 22.05 22.95

Operating Profit 2.68 2.77 3.21 2.92 3.84 3.81

Total Extraordinary Inc/Exp ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐

Tax On Extraordinary Items ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐

Net Extra Ordinary Inc/Exp ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐

Gross Profit 2.7 2.78 3.21 2.97 3.92 3.88

Interest 0.33 0.29 0.45 0.47 0.54 0.53

PBDT 2.37 2.48 2.75 2.49 3.38 3.35

Depreciation 0.2 0.21 0.21 0.23 0.27 0.26

Depreciation On Assets ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐

PBT 2.17 2.27 2.54 2.26 3.11 3.09

Tax 0.64 0.63 0.75 0.77 0.89 0.88

Net Profit 1.53 1.64 1.79 1.49 2.22 2.21

Prior Years Income/Expenses ‐‐ ‐‐ ‐0.01 ‐0.01 ‐‐ ‐‐

Earnings Per Share 11.87 12.7 13.88 11.5 17.21 17.13

Equity 1.29 1.29 1.29 1.29 1.29 1.29

Reserves ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐

Face Value 10 10 10 10 10 10

No of Public Share Holdings 323,020 323,020 323,020 323,020 323,020 323,020

% of Public Share Holdings 25 25 25 25 25 25

Expected Earnings for 1st and 2nd Qtr FY 2011‐12: We expect Cravatex Ltd to deliver robust earnings in coming quarters. Cravatex has shown excellent performance in FY 2010‐11 and we believe that company will deliver the similar performance in financial year 2011‐12. Recent announcement of bonus shares and promoters holding of 75% stake is another positive factor to take exposure in this stock keeping a long term view.



4. Charts & Graphs i) Share Price Moving Average: Cravatex Ltd is currently trading above its 50 days price moving average and is having strong support at 600 Rs levels.

ii) Comparative Graph: Cravatex Ltd has outperformed Sensex as well as Small Cap Index and gave returns of 610.49% in last five year. In last one year also Cravatex has outperformed giving returns of 308.98% against Sensex returns of 13%.



iii) Performance Chart:

iv) Share holding Pattern: Promoters share holding is 75% which is maximum allowed stake. 8.61% (out of 25% public holding) has been accumulated by just four individual which may belong to promoters groups.



5. Peer Group Comparison

PEER GROUP Cravatex Talwalkars Timex

Page

Industries Jubilant

Foodworks

CMP 778.10 228.40 37.45 1650 836.30

52 W H/L 892/200 305.80/172.95 25.70/51.50 1875/839.9 848.90/289

Market Cap 100.54 550.80 378.06 1840.39 5389.15Results (in Crores) Mar‐2011 Mar‐2011 Mar‐2011

Mar‐2011 Mar‐2011

Sales 23.88 25.42 39.15 134.06 193.69

PAT 1.49 6.29 2.48 15.62 19.33

Equity 1.29 24.12 10.10 11.15 64.53

EPS 49.95 6.16 0.89 49.86 11.17

P/E 15.58 37.08 42.08 33.09 74.87

There is no listed player in the same segment but we can still compare based on common customer profile, revenue drivers and operating margins.

6. Key Concerns / Risks

The company faces competition in sportswear segment from older players like Adidas, Nike, and Reebok.

Company imports most of the fitness equipment; any weakness in rupee may

affect its margins.

Barclays Ventures has recently expressed interest in offloading its stake in FILA, this may affect the brand in case of any unfavourable outcome.

Slower than expected revival of global economy.



7. Industry Overview Sportswear Industry Sportswear industry, unlike the general category apparel industry, has the advantage of offering all the products (apparel, footwear, accessories) under a single brand name. This indirectly, reduces a lot of pressure on marketing, which otherwise would have to create a brand name for each of the product categories, and most Sportswear Industry importantly offers its customers the entire range thereby reducing cost of customer acquisition. With rapid economic growth, huge population base, rising income levels, changing lifestyle and consumer preferences, India has witnessed tremendous growth in its sportswear industry over the past few years. The country has been exploiting its favorable demographics, which make it one of the most attractive destinations for both domestic and international sportswear players to cash on the highly lucrative market. As a result, all the international players, including FILA, Nike, Adidas, Puma, and Reebok, are striving hard to grab a share of the money‐spinning market. The current size of the Indian sportswear industry is worth over INR 35,500 crores (comprising both organized and unorganized sector), which is expected to grow at a CAGR of around 45% between 2010 and 2012. Opportunities: The premium sportswear industry is expected to grow at high rate due to the following factors:

Increased urbanization Higher Disposable Income Change in Consumer behavior particularly in our target 20‐44 age group Larger marketing spend by Companies creating general awareness for the

category Increased brand awareness by consumers Shift from unorganized to organized sector Rapid expansion of modern retail format

Fitness Equipment & Services Industry Presently, the fitness industry is in its nascent stages. There is complete lack of product differentiation. The market also appears to have a shortage of talent, since qualified personal trainers, and consultants are scarce, which also contributes to the lack of differentiation. This high degree of fragmentation, lack of product differentiation, and



customer price sensitivity result in prevalent price competition and low margins. Yet, on the other hand, awareness about fitness and a healthy lifestyle is growing; along with higher disposable incomes and a growing young population. India presents a huge opportunity for the health and fitness industry with over 65 towns having a population greater than 500,000 as per Census 2001 statistics. Significant changes in lifestyle related to lack of physical activity and increased consumption of fast foods among both affluent and working class population has led to the greater need for healthy lifestyles through sports, fitness centers and counseling on dietary habits. The Indian sports equipment market has experienced strong growth in recent years. The Indian sports equipment market had total revenue of INR 9311cr in 2009, and it is expected to reach a value of INR 12,172cr by the end of 2014. The wellness services industry is a fast growing sector in India today. It encompasses a large number of service segments including beauty services (salon, treatment based beauty products), personal health counseling, rejuvenation (Yoga, Spas) and fitness segments. Within this, the Fitness segment, viz. Gyms, is experiencing healthy growth rates and currently has an estimated market size of USD 113mn. As of 2008, there were 765 fitness clubs in India with total membership of 0.23 million members. (Source: as per the statistics of The IHRSA Asia Pacific Market Report, 2008) This rapid increase in wealth can also be visibly seen in the several posh residential complexes that have emerged in the top few Indian cities like Mumbai, NCR, Chennai, Kolkata, Hyderabad, Bangalore and Pune. This segment of population provides an upscale market for fitness centers to offer not just the basic gym facility but also advanced value added activities like spas, steam/sauna bath, nutrition centers, aerobics, spinning studios and personal training program. Key Drivers for growth of Retail & Branded Merchandize

Indians per capita income has more than doubled in last 10 years. And as income levels increase every year there are more and more new customers entering consumption, resulting in significant market expansion.

Estimated population of 1.1 billion growing at 1.7% p.a., and adding population equivalent of Australia every year.

In India age group of 20‐44 can be identified as prime market for fitness merchandize, equipment, and services.



Changing shape of income distribution, resulting in demand increase for high performance items, even at higher values.

Increasing use of branded, high value products to signal success. Affordability growth > Income growth.

Demographic Mix favoring higher demand

The demographic mix of India's population points to the high potential for growth of the branded merchandize. More than 60% of India's population is in the age group of 15‐45years.

Rising demand for branded merchandize comes primarily from nearly 850 million in 18‐25 age group, another 100million are likely to be added to this target population in the next five years.

Also as urban consumers become more exposed to western lifestyles, through overseas travel and the media, their attitude towards expensive merchandize is relaxing.

They have started finding social value associated with brands.



7. Saral Gyan Recommendation i) The management is well known to investors for creating brands since 1951. They have successfully passed on this expertise to present generation. The management with help of Barclays, made a leveraged buyout of FILA brand in 2008. The brand license will remain with the company for foreseeable future. ii) The Management holds 75% equity in the company and recently declared bonus share which is good for a company with such a low market capital by any standards. iii) The EBITDA margins have shown an improvement from 9.52% last fiscal to 12.2% this fiscal. EPS has grown by impressive 50% with robust top line and bottom line growth. During last fiscal, company increased its working capital on account of new stores, SPA equipment and inventory in trade. iv) The company is in non‐cyclical industry and business is scalable. Company can grow its revenues multi fold by expanding customer reach using franchise model for strong brands like Proline and FILA. v) At current market price of Rs 778.10, dividend yield works out to be 0.58%. On equity of Rs. 1.29 crore the estimated annualized EPS works out to Rs. 50 and the Book value per share is Rs. 188.86. At a CMP of Rs. 778.10, stock price to book value is 4.12. Currently, the scrip is trading at 11 X FY 2011‐12 estimated earnings which make it an attractive buy at current market price. Saral Gyan Team recommends “BUY” for Cravatex Ltd. for a target price of Rs. 1600 over a period of 18‐24 months. Note: Stock has appreciated almost 20% on news of bonus share issue, we suggest taking exposure in stock at a lower price range of Rs. 650 to 725. As stock liquidity is

all quantities. less because of low equity base, we suggest buying this stock in sm

nvestment Rationale I



8. Disclaimer Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company. Disclosure: The author of this article does not hold shares in the recommended company. © SARAL GYAN CAPITAL SERVICES This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Saral Gyan Capital Services (www.saralgyan.in) or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.


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Saral Gyan Hidden Gem - May 2011

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