While going through an article on textile companies, I happen to know about the headwinds faced by these companies in particular export-oriented ones and these hard times seemed over and things are going to get better from here. Looking at the list of such companies, one came differentiated from the others that have bucked the trend, goes by the name 'Himatsingka Seide Ltd'.
Himatsingka Seide Ltd is an export-oriented home textile company.
Before going forward with analyzing this company, let me talk about the sector in general.
Industry: Export oriented textile companies
Coming to the sector, textiles can be either made by polyester(obtained from crude oil) or through cotton. As of today the market is dominated by polyester (65% share) because of the low cost and ease of manufacturing. Synthetic fabric making is quite straightforward with not much differentiation, hence have lower margins. Whereas its counterpart Cotton fabric has much better margins.
US is the largest consumer of cotton based home textiles in the world & India is the largest exporter of home textile products to US with a market share of 50% in Bed Linen followed by China at 19% and India as 39% market share in Towel followed by China at 24% as of 2019. (Source: 2019-20 annual report Welspun India Ltd).
Global Home textile industry is at $52bn in FY20, of which India’s share stands at 15%.
The home textile companies do not have much capacity to pass on a sudden increase in costs. Indian cotton textile manufacturers get orders from US based big box retailers such as Wal-Mart, Macy’s, Target etc. The contract with the US retailers is decided on a pre-determined rates. Only if there is some sustained increase in raw material or too much of continued forex fluctuations, they would be able to renegotiate the prices.
The products get manufactured mostly in Asia for distribution by US based retailers. In general Indian companies cater to mid to high-end segment of this exporting home textile market.
Since almost all of the company’s revenue comes from exports, they need to do currency hedging. Any adverse movement may cause forex loss.
Cotton Home textiles are consumed equally in Europe and US. But because of the import duty imposed by European Union on India to the tune of 9-10% render the Indian products noncompetitive to the imports from Pakistan, Bangladesh & turkey which enjoys 0% import duty due to the free trade agreement with these countries. Also, US is a homogeneous market compared to a fragmented markets in Europe.
You can read more about the polyester yarn manufacturing in the blog: Filatex India Analysis
Himatsingka Seide Ltd: About the company
Incorporated in 1985, Himatsingka Seide Ltd is a vertically integrated home textile company particularly with a focus in the bed linen segment which includes Sheet Sets, Pillowcases, Duvets, Comforters, Decorative Pillows, Bed skirts, Shams.
It is headquartered in Bengaluru and has both its plant in Karnataka.
Given the premium nature of the company’s product, it is primarily exported. US accounts for about 85% of the company’s sales followed by Europe. India has a minuscule contribution to total sales(1.5%).
The company has been manufacturing high thread count yarns using very high-quality cotton that demands a premium in the market.
The company segments its revenue stream into 2 parts:
1. Private label
2. Own & licensed- 2018 it was 70% of sales. In the recent quarter, this share has increased to 85%.
Himatsingka Seide Ltd: Raw Materials
Cotton- The company uses a mix of both Indian as well as America cotton while most of other competitors in India mostly used locally produced cotton.
Cotton is the key raw material which constitutes between 50-60% of the costs. Any increase in raw material prices will affect the company’s margin and vice-versa.
Let me explain to you why the product by Himatsingka Seide Ltd comes under the premium category. First, let us have a look at the types of cotton, there are 3 types of cotton produced:
1. Upland Cotton- 90% market share
2. Egyptian cotton
3. Pima Cotton
Egyptian & Pima cotton contribute to the remaining 10%. Both of them are extra long cotton fiber because of which they are luxuriously soft and immensely strong. Pima cotton is primarily grown in the United States and since the production is just about 5% of total production implying premium pricing for the Pima cotton.
Himatsingka Seide Ltd is the largest consumer of Pima cotton in the world.
Another important aspect of cotton fabrics is the thread count. Thread count is basically the number of threads in one inch of fabric. Higher the thread count, the finer is the fabric. (Max possible is 400 thread count per inch of fabric). Anything more than 330 is luxurious.
Himatsingka Seide Ltd’s products use both higher quality cotton (Pima cotton) & higher count thread. US is a high thread count market so is European Union.
In the recent past, Indian govt has announced MSP of 1.25X of production cost for Cotton. Though it will increase the cost but will encourage farmers to continue growing cotton.
Himatsingka Seide Ltd- Manufacturing Value Chain
Himatsingka Seide Ltd: Company structure
If you look at the company structure on the top, the product gets manufactured under ‘Himatsingka Seide Ltd’ in India and then sells it to its subsidiaries in India & Abroad. These subsidiaries then sell the products either directly or to the retailers.
Given the structure of the company, it would be prudent to look at consolidated numbers due to a lot of related party transactions.
Himatsingka Seide Ltd: Clients & Brands
Himatsingka Seide Ltd has distribution with 7000 Point of sales through which they sell their premium products. Given the premium nature of the company’s product, customers usually want to touch & feel the fabric. Hence most of the sell is via retail stores rather than online.
The company has products in private label as well as branded category. The share of revenue from the branded category is continuously increasing and currently stands at over 80%.
In terms of brands, they have their in-house brands (Pimacott, Bellora, Atmosphere, etc) or via the EXCLUSIVE license agreement with well-known brands such as Calvin Klein, Tommy Hilfiger, Royal velvet, etc. Under the exclusive license agreement for certain geographies, the company is responsible for taking care of the entire manufacturing & distribution. These license agreement are typically for 3-5 years.
If you look at the brands with Himatsingka Seide Ltd, these are kind of names which remains on the top of the head of anyone across the globe: Calvin Klein, Tommy Hilfiger, Royal velvet, etc.
Coming to the distribution part, the company has some of the largest retailers as their clients such as Bed Bath & Beyond, JC Penny, etc. In India, the company provides its bed linen products to 5-star hotels such as Taj, Oberoi, etc
The company also have tried its Exclusive brand outlet(EBO) called Atmosphere in India but it has not been successful.
Himatsingka Seide Ltd: Plants
Hassan, Karnataka
Bed Linen, Terry Towel, Spinning
Sheeting= 61MMPA
Spinning= 211584 spindles
Terry towel= 25,000 TPA { Under Construction}
MMPA= Million Meters per annum
TPA= Tonnes per annum
Doddaballapur, Bengaluru
Drapery & Upholstery =2.2 MMPA
There is a stagnant demand for this segment.
Himatsingka Seide Ltd: Expansion plan
The company started its mega expansion project at its Hassan plant in Oct’2015 with the Capital Expenditure(capex) amounting to just under ₹1300cr.
1. Brownfield sheeting capacity: Increase existing capacity from 23 Million meters per annum(MMPA) to 46 MMPA {Commissioned in Oct’16}
It was further increased to 61MMPA {Commissioned in Q3FY19} by debottlenecking with marginal capex.
While the earlier 23mmpa capacity was running at full capacity. The incremental capacity is running at around 40-45% capacity utilization and is range bound.
Earlier the company was part outsourcing manufacturing of bedsheet but with the new capacity, the almost entire requirement is met in-house. { Margin Accretive}
2. Spinning: 211584 spindles {Backward Integration} Commissioned on 5th Feb 2018. This is running at 100% capacity utilization.
3. Terry towel: Expected Capacity of 25000 TPA
Construction of terry towel facility started in Q4FY18 & is expected to commence production in H1FY20.(The facility commenced commercial production since Oct 03, 2019)
Average realization per kg of Terry towel is around $4.5-$5. Implying a minimum of ₹850 cr of incremental revenue.
With the backward integration, Working capital, Inventory days as expected has increased.
Himatsingka Seide Ltd: Financial Analysis
Himatsingka Seide Ltd- Quarterly analysis
Himatsingka Seide Ltd- Number analysis
While all other players in the industry were faced with diminishing margins, Himatsingka Seide Ltd was able to grow the margins in the past 1- 1.5 years.
Textile companies, in general, have to keep a larger inventory due to the seasonal nature of cotton.
The management of Himatsingka Seide had in a conference call given a target of reaching an EBITDA margin of 26%. Also, with the backward integration, there is increases asset but corresponding increase revenue does not happen. Backward integration primarily helps in margin improvement. But increases working capital requirement and inventory days.
As you can in the table above, in the last one year there is an increase in inventory days as well as working capital.
In terms of debt, as of Q3 FY19, the company had a Net debt of ₹2474 cr and that is significant. Of which term loan was ₹1680 cr and Working capital loan of ₹1021 cr. The debt level will start coming down only post mid-2020 i.e. post commissioning(starting) of terry towel plant.
Key aspects to understand this business
Restocking/ Destocking by US retailers: Can be tracked by import data of US govt
Currency fluctuations
Economic condition
There was a big controversy surrounding products with fake Egyptian cotton tag being supplied to US retailers by Welspun India Ltd in 2016 which actually was an inferior product. Welspun India paid a big price by paying a hefty fine for the error as well as losing out on their customers.
Himatsingka Seide Ltd took that particular event to its advantage promoting Pimacott where using advanced DNA technology source of Pima cotton can be tracked. Later, Bed Bath & beyond has taken exclusivity of selling products with Pimacott tag supplied by Himatsingka.
Since the company derives over 80+% revenue from the US, the company is trying to diversify its geographical presence by focusing on Europe. European Home textile market is larger than the US but still, Indian companies prefer US markets due to the highly fragmented nature of the European market.
Also, Europe gives a duty concession of 9.6% to Pakistan & Bangladesh. Given due to EU policy of duty cut to countries with a per capita income of less than $1000 per annum. But Bangladeshi & Pakistani products usually cater to the lower segment of the demand whereas Indian products cater to mid to higher segment.
Though the margins have improved, the company has been struggling with growth despite the massive expansion. All the revenue growth is due to new brand acquisitions & the existing business growth is hardly something to talk about. That is a problem which comes with premium products. To counter this, the company with its excess capacity has started manufacturing products little down the realization curve.
To encourage export Indian govt in the past used to provide incentives to these companies. But to cut back on subsidies, the Indian government has curtailed these incentives to a large extent.
Coming to the high debt, Problem with such huge debt of about ₹2500 cr is that if things are good then everything is fine but a slight here and there can pose a big problem to the company.
My opinion would be to wait for the terry towel facility to come on stream. That would not only lead to revenue growth but also help reduce debt as there are no further planned expansion post this.
In terms of valuation, it is on a higher side compared to its peers such as Indo Count Industries, Welspun India ltd etc but better has been its performance. Anyway, the current volatility might provide a better entering point.
Q4FY19 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd | National Peroxide Ltd