Sportking India Ltd Investment call
Updated
Sportking, incorporated in February 1989, is a part of the Sportking Group. The company manufactures cotton, synthetic and blended yarn in counts ranging from 20s to 46s. It has manufacturing units in Ludhiana and Bathinda, both in Punjab. The company has large size capacity of 2.75 lakh spindles and dyeing capacity of 20 tonne per day. It manufactures value-added yarns, such as compact, sustainable and contamination-free cotton yarn, which provide higher realisations than normal cotton yarn.
Products: -
The Yarn business is the largest strategic business unit of the company which manufactures Cotton Yarns, Poly-Cotton Yarns, Fancy Yarns, Acrylic Yarns and Polyester Yarns. The Co also supplies knitted fabric (Single Jersey, French Terry, Fleece etc.) and manufactures garments for Men, Women, Girls and Boys that are made available to customers through their own Retail Outlets.
Geographical Split: -
Domestic (India): 53% in FY21 vs 52% in FY20
Exports: 47% in FY21 vs 48% in FY20
The major exporting destinations of the Co are Bangladesh, China, Hongkong & Singapore.
Associated Brands: -
The Co is associated with brands like Zara, H&M, Ikea, Jockey, Marks & Spencer etc. Its top five clients accounted for 24% of total revenues in FY21.
Manufacturing Facilities: -
The Co has seven manufacturing facilities in India spread across the states of Punjab and Himachal Pradesh. The present total installed capacity of the Co is 2.72 lakh spindles for the manufacturing of Gray/Dyed Cotton/Cotton Blended/Synthetic Yarn. The Co also owns 100 Retail Garment Stores spread across India. The capacity utilization in FY21 stood at 95%.
CRISIL Ratings has upgraded its ratings on the bank facilities of Sportking India Limited (Sportking) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’. Excerpts from the rating report are as follows: -
Key Rating Drivers: -
Strengths:
Sportking has a strong market position in the compact cotton yarn industry, with total spindle capacity of 2.75 lakh and revenue estimated at over Rs 2,000 crore in fiscal 2022. The company has established a strong position in several export markets, such as Bangladesh, China, Egypt and USA. The company also has longstanding relationships with international garment retailers in the USA and Europe and, thus, benefits from its diversified geographic reach. In fiscal 2022, export demand improved with increased competitiveness of Indian spinners in the global market on account of lower domestic cotton prices compared with global prices and supply disruptions amid Covid-19 pandemic. Performance is likely to remain at higher level than historical trends on account of structural changes in export market.
The company consumes about 4 lakhs bales of cotton every year and is, therefore, one of the largest buyers of cotton in India. Large-scale procurement will keep the bargaining power high over the medium term. The company is focusing on de-risking its exposure to basic cotton yarn products and emphasizing on value-added yarns, such as contamination-free cotton yarn, sustainable cotton yarn and multi-twist cotton yarn, which fetch higher margin.
Sportking had a healthy capacity utilisation of over 95% in the last three years, and has therefore, planned additional capacity expansion of 40,800 spindles expected to be commissioned by September’2022. This should further strengthen the business profile of the company.
The company has also approved the installation of the Rooftop Solar Power Project of 20 MW Capacity at its Existing Factory Units for captive consumption in Oct 2021. The project is likely to be implemented in the next 6-8 months. Timely execution of the capex within budgeted cost and achieving expected ramp up will be key monitorable.
Improved spreads between prices of raw cotton and cotton/ synthetic yarn and benefit of operating leverage should help sustain the operating margin at above 15% over the medium term.
TOL/TNW is expected to improve to less than 1 times in medium term despite additional term debt to be availed for capex plans. Adjusted interest coverage ratio expected to be over 15 times in fiscal 2022 because of increase in profitability and is expected at above 8 times in fiscal 2023, driven by better spreads between prices of raw cotton and cotton/ synthetic yarn and healthy capacity utilisation.
Financial flexibility is healthy, as reflected in moderate bank limit utilisation. Adequate liquidity and comfortable financial flexibility will continue to support the debt obligation. Any larger than expected debt funded capex or higher dividend payout resulting in weakening of capital structure will remain key monitorable.
Strong liquidity position: -
Unutilised bank lines stood at Rs 169 crore as of Feb 2022 (bank limit utilisation averaged 65% over the 12 months ended Feb 2022). Net cash accrual, expected over Rs 400 crore in fiscal 2022 and over Rs 200 crores in next 2 fiscal years which will be sufficient to cover debt obligation of Rs 30-40 crores in next 2 years. The company has well spread capex plans over the next three years.
Company financials: -
• Market capitalization at 1528 crore.
• Average Roe for last 10 years 32%.
• 10-year CAGR of sales at 11% and 10-year CAGR of profit at 33%.
• 5-year CAGR of sales at 16% and 5-year CAGR of profit at 80%.
• Debt to equity at 0.70 (less than 1 is good), Interest Coverage at 20.2 (greater than 3 is good), Current ratio at 1.70 (greater than 1.5 is good), FCF to CFO at 46.8%.
• March quarter sales growth at 43.54% end March quarter profit growth at 77.19%.
• TTM sales growth at 65% and TTM profit growth at 310.65%.
• The promoters have increased their shareholding in the Co by 5% between June 2020 and Sept 2021.
• The Co issued bonus equity shares in the ratio of 3: 1 to the eligible shareholders in Sept 2021.
Risks: -
• The company derives over 90% of its total revenue from the yarn sales, which is susceptible to volatility in cotton and cotton yarn prices. As a result, the operating margin fluctuated between 10% - 28% over the last 10 fiscals through 2022. Demand for cotton and yarn is driven by international demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscals 2012, 2015, 2018, 2020 and 2021) wherein demand spiralled and then fell rapidly. Additionally, as Sportking derives close to half of its revenue from the overseas markets, it is susceptible to any significant volatility in forex rates, which is mitigated through foreign exchange forward contracts/ availment of working capital limits in foreign currency.
• Operations are working capital intensive, as reflected in gross current assets estimated at around 165 days as on March 31, 2022, driven by stocking of raw cotton bales being a seasonal product leading to high reliance on debt. On account of high investment in inventory and debtors, working capital loan remains sizeable.
Why is this a good investment??
Stock is trading below its 10-year average PE of 5.9 (current PE 3.72).
Near term demand zone between 970 and 1030.
Products: -
The Yarn business is the largest strategic business unit of the company which manufactures Cotton Yarns, Poly-Cotton Yarns, Fancy Yarns, Acrylic Yarns and Polyester Yarns. The Co also supplies knitted fabric (Single Jersey, French Terry, Fleece etc.) and manufactures garments for Men, Women, Girls and Boys that are made available to customers through their own Retail Outlets.
Geographical Split: -
Domestic (India): 53% in FY21 vs 52% in FY20
Exports: 47% in FY21 vs 48% in FY20
The major exporting destinations of the Co are Bangladesh, China, Hongkong & Singapore.
Associated Brands: -
The Co is associated with brands like Zara, H&M, Ikea, Jockey, Marks & Spencer etc. Its top five clients accounted for 24% of total revenues in FY21.
Manufacturing Facilities: -
The Co has seven manufacturing facilities in India spread across the states of Punjab and Himachal Pradesh. The present total installed capacity of the Co is 2.72 lakh spindles for the manufacturing of Gray/Dyed Cotton/Cotton Blended/Synthetic Yarn. The Co also owns 100 Retail Garment Stores spread across India. The capacity utilization in FY21 stood at 95%.
CRISIL Ratings has upgraded its ratings on the bank facilities of Sportking India Limited (Sportking) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’. Excerpts from the rating report are as follows: -
Key Rating Drivers: -
Strengths:
Sportking has a strong market position in the compact cotton yarn industry, with total spindle capacity of 2.75 lakh and revenue estimated at over Rs 2,000 crore in fiscal 2022. The company has established a strong position in several export markets, such as Bangladesh, China, Egypt and USA. The company also has longstanding relationships with international garment retailers in the USA and Europe and, thus, benefits from its diversified geographic reach. In fiscal 2022, export demand improved with increased competitiveness of Indian spinners in the global market on account of lower domestic cotton prices compared with global prices and supply disruptions amid Covid-19 pandemic. Performance is likely to remain at higher level than historical trends on account of structural changes in export market.
The company consumes about 4 lakhs bales of cotton every year and is, therefore, one of the largest buyers of cotton in India. Large-scale procurement will keep the bargaining power high over the medium term. The company is focusing on de-risking its exposure to basic cotton yarn products and emphasizing on value-added yarns, such as contamination-free cotton yarn, sustainable cotton yarn and multi-twist cotton yarn, which fetch higher margin.
Sportking had a healthy capacity utilisation of over 95% in the last three years, and has therefore, planned additional capacity expansion of 40,800 spindles expected to be commissioned by September’2022. This should further strengthen the business profile of the company.
The company has also approved the installation of the Rooftop Solar Power Project of 20 MW Capacity at its Existing Factory Units for captive consumption in Oct 2021. The project is likely to be implemented in the next 6-8 months. Timely execution of the capex within budgeted cost and achieving expected ramp up will be key monitorable.
Improved spreads between prices of raw cotton and cotton/ synthetic yarn and benefit of operating leverage should help sustain the operating margin at above 15% over the medium term.
TOL/TNW is expected to improve to less than 1 times in medium term despite additional term debt to be availed for capex plans. Adjusted interest coverage ratio expected to be over 15 times in fiscal 2022 because of increase in profitability and is expected at above 8 times in fiscal 2023, driven by better spreads between prices of raw cotton and cotton/ synthetic yarn and healthy capacity utilisation.
Financial flexibility is healthy, as reflected in moderate bank limit utilisation. Adequate liquidity and comfortable financial flexibility will continue to support the debt obligation. Any larger than expected debt funded capex or higher dividend payout resulting in weakening of capital structure will remain key monitorable.
Strong liquidity position: -
Unutilised bank lines stood at Rs 169 crore as of Feb 2022 (bank limit utilisation averaged 65% over the 12 months ended Feb 2022). Net cash accrual, expected over Rs 400 crore in fiscal 2022 and over Rs 200 crores in next 2 fiscal years which will be sufficient to cover debt obligation of Rs 30-40 crores in next 2 years. The company has well spread capex plans over the next three years.
Company financials: -
• Market capitalization at 1528 crore.
• Average Roe for last 10 years 32%.
• 10-year CAGR of sales at 11% and 10-year CAGR of profit at 33%.
• 5-year CAGR of sales at 16% and 5-year CAGR of profit at 80%.
• Debt to equity at 0.70 (less than 1 is good), Interest Coverage at 20.2 (greater than 3 is good), Current ratio at 1.70 (greater than 1.5 is good), FCF to CFO at 46.8%.
• March quarter sales growth at 43.54% end March quarter profit growth at 77.19%.
• TTM sales growth at 65% and TTM profit growth at 310.65%.
• The promoters have increased their shareholding in the Co by 5% between June 2020 and Sept 2021.
• The Co issued bonus equity shares in the ratio of 3: 1 to the eligible shareholders in Sept 2021.
Risks: -
• The company derives over 90% of its total revenue from the yarn sales, which is susceptible to volatility in cotton and cotton yarn prices. As a result, the operating margin fluctuated between 10% - 28% over the last 10 fiscals through 2022. Demand for cotton and yarn is driven by international demand-supply dynamics. In the past decade, the industry has seen five cycles (fiscals 2012, 2015, 2018, 2020 and 2021) wherein demand spiralled and then fell rapidly. Additionally, as Sportking derives close to half of its revenue from the overseas markets, it is susceptible to any significant volatility in forex rates, which is mitigated through foreign exchange forward contracts/ availment of working capital limits in foreign currency.
• Operations are working capital intensive, as reflected in gross current assets estimated at around 165 days as on March 31, 2022, driven by stocking of raw cotton bales being a seasonal product leading to high reliance on debt. On account of high investment in inventory and debtors, working capital loan remains sizeable.
Why is this a good investment??
Stock is trading below its 10-year average PE of 5.9 (current PE 3.72).
Near term demand zone between 970 and 1030.
Note
I am NOT a SEBI registered advisor or a financial advisor. Invest/Trade at your own risk.Note
Somebody commented that this is an operator driven stock and should not be bought. I would like to clarify here that 1. It is not a trading call rather an investment call to be bought in a staggered manner during the downtrend. First support level comes between 970-1030, but that doesn't mean the stock cannot go down below that level. One will do good if he or she invests 1/3rd of investable capital at 970-1030 zone, invests another one third at the next support resistance confluence zone on weekly charts and the rest when the stock closes at a 52 week high. Also, don't invest more than 10% of your total capital in one stock, always diversify.
2. I have also given investment rationales which if one goes through will find that the company has very good fundamentals. Otherwise, CRISIL wouldn't have upgraded its ratings, the company wouldn't have issued bonus shares and promoters wouldn't have raised their stake by 5%. Before commenting everyone should read the whole investment/trade idea.
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