While searching for investment opportunity, I stumbled across a textile company which had shown a turnaround in performance with good revenue growth. The company has shown revenue growth as well as EBITDA growth of 60% for the last 2 quarters. The name of the company is Filatex India Ltd. Let me give you my perspective on what’s going on with the company in the blog ‘Filatex India Analysis’.
Before getting to understand more about the company, let me briefly take you through the industry dynamics.
Indian Textile Industry
Polyester Yarn Manufacturing process
The process of manufacturing varieties of yarn is same all through the world and very straight forward, thus leaving very little room for differentiation. Implying it is a commodity product. Therefore requires high capital investment and hence higher debt.
Overall very low margin business. The margin expansion can happen through increasing contribution of value-added products as well as improving operational efficiency.
Filatex India Ltd is growing via the former route.
Indian Textile Industry- Key Pointers
I am sure many of you might be aware of the kind of scale Reliance Industries plays in this segment. Let me give you some pointers to where ‘Filatex India Ltd’ stands.
- Reliance industries manufacture both MEG & TPA. Both the raw material required for making PET resin.
- Reliance Industries which is one of the largest manufacturers of both Terephthalic Acid & PET resin enjoy the ability to price the product(PET resin) cheaper due to backward integration.
- Reliance industries have the ability to sell the product at a cheaper price than it’s competitors. This obviously implies that the larger customers will give first preference to them since there is no differentiation (commodity product) in the product quality among manufacturers.
- Anti-dumping duty on TPA also helps Reliance industries and other TPA manufacturers to have the pricing power. Thus, putting the PET manufacturers (Filatex India Ltd & others) at a disadvantageous position. On Feb 02,2020, the Anti Dumping duty was revoked.
- Reliance India dominates the market with about 50% market share. Being backward integrated, they have a cost advantage. Only tier II or tier III customer will come to companies such as Filatex.
- It is because of the high product demand, the company such as Filatex, have been able to grow and that too at almost 100% capacity utilization.
About the company: Filatex India Ltd
Set up in 1990, Filatex India Ltd started with manufacturing polyester yarn. Since 2008, the company started adding value-added products.
Filatex India had 3 plants, one plant in Noida, one in Dadra (Dadra & Nagar Haveli), one in Dahej (Gujarat). Since the Noida plant was quite small & old contributing just 1% of sales, the management decided to shut down the plant & are in the process of disposing of it.
The latest plant at Dahej is fully integrated i.e. raw material to finished products. The plant at Dahej is based on continuous polymerization. The expansion is taking place at mostly at Dahej plant and are brownfield given the already available land and structure, the company has been adding machinery.
The company has been exporting 20% produce to 34 countries.
To give a sense of the labor-intensive nature of the industry, Filatex India employs around 4000 people, 2000 permanent and 2000 contractual.
Filatex India Analysis- Product Types
Partially Oriented Yarn (POY)
Contribution to sales=30%
Running at almost full capacity
The primary form of polyester yarn
As the name suggests, it is not fully stretched. Drawn about 5 times its original size. Lower tenacity & less uniformity.
Used to make textured yarn.
POY / PFY is largely used in shirtings and suitings,sarees, ladies’ dress material, and knitwear.
Draw Textured Yarn (DTY)
Contribution to sales=24%
Running at almost full capacity
50% of the company’s production is exported
POY is textured. Texturing increases the volume, air & vapor permeability of fabrics.
Used for high-end apparel, high-end sports shoes, sports bags, home furnishings, and zipper tapes.
Fully Drawn Yarn (FDY)
Semi Dull FDY=12% margin
Bright FDY=13-14% margin
Contribution to sales=27-28%
Running at almost full capacity
Filament yarn is drawn at higher spinning speed as intermediate drawing. Enables orientation & crystallization.
FDY is typically used to produce fabrics and textiles for high-end
undergarments, high-end sportswear, and home furnishings.
Contribution to sales=8-9%
Filatex India Textile grade PET chips in Semi-Dull luster.
Filatex India Analysis- Number Analysis
Filatex India Analysis- Positives
Best in the industry among the second tier companies. While its peers are suffering from high debt issue, Filatex India is taking lead by taking their market share.
Pushing towards high-value products such as FDY where the margins are much better and that too Bright FDY.
The incremental capacity addition is being sucked by the market within no time implying good demand for the value-added products of the company. Although the margin expansion still needs some more improvement that will be seen once the debt burden starts reducing.
About 40% of Filatex India’s debt is via External commercial borrowing, primarily from Europe. This enables low borrowing cost of 6-7%, as well as most of the debt, are in Euro which hasn’t appreciated against Rupee.
Have brought down the Cash conversion cycle to just 20 days and generating impressive Cash flow from Operations(Fy18->PAT= ₹60 cr, CF from Operation = ₹188 cr)
Filatex India has location advantage as most of the textile and apparel companies are based out of Gujarat, thus saving on logistical cost.
Only one subsidiary but doesn’t have any business in it.
Government has increased the custom duty from 10% to 20 % which will make import of fabric expensive. The import duty specifies a rate of 20 % on the value or Rs 38/sq. mt. whichever is higher. This will discourage malpractices of under valuing.
Filatex India Ltd: Peer Comparison
Filatex India Analysis- Negatives
- The US has imposed Anti-dumping duty on import of polyester textured yarn from China & India in Oct’18.
- The US also has imposed Anti-dumping duty on import of fine denier polyester staple fiber imports from China and India in Jan’18
- Commodity business
- Due to losses and low-profit margins, the company has not paid any dividend in the last 5 years.