CRAVATEX trade ideas
cravatex- investment (fundamental + technical)The rising phase of Indian consumer discretionary market with the rising middle and upper middle population is no news. The consumption patterns towards F&B and Clothing have risen drastically and within which the Clothing and Footwear market is poised to cross $100bn by 2025.
prntscr.com
Within the crowded clothing and leisure market is Cravatex Ltd . The company is in the sports clothing and sports equipment business with exclusive license for the FILA and Proline brands in the Asian Sub-Continent.The company has the FILA license upto 2043 The company has been struggling over the past two years with slowing demand, trend shifting towards ecommerce discounts and currency depreciation affecting imports. The rising working capital loans also dented the bottom line further. Inspite of the headwinds, consolidated revenues in FY16 and FY17 were 270 crores and 257 crores respectively.
Although, the profitability in the past two-three years, rising debt made the company cripple under pressure, the chain of events since February 2017 are worth noticing and very rarely have I seen a company this small getting into such transformative Balance Sheet restructuring-
1) In December 2016, company incorporated Cravatex Brands Limited (CBL).
2) Till March 16, Company had a single subsidiary BB UK which took care of the its international licensing operations. BB UK clocked a revenue of 110 crores in FY17.
From the Website-
BB UK provides end-to-end design, development and sourcing services for all Fila development within Cravatex and to other Global Licensees. BB UK also operates an exclusive Sub-License given by JD Sports PLC for the Fila brand in the UK and a Sublicense for Accessories for the whole of Europe from the brand owner.
3) In Feb 2017, Company initiated sale of its Fila and Proline business (90% of Standalone Business) on a slump sale basis to its subsidiary CBL for a consideration 32.68 crores. Also, now CBL is its 100% subsidiary. The consideration is paid by issue of equity shares of CBL.
4) In March, CBL receives an investment amount of Rs.75 crores from Paragon Partners. (Not relevant but one of the partners at Paragon is Deepak Parekh's Son). Since, most VCs and Private Equities invest via convertibles/preference shares, on paper it still appears as Cravatex Ltd. holds 100% of CBL. The investment by Paragon was made in the following manner-
a) 57 crores via CCPS (Compulsorily Convertible Preference Shares)
b) 18 crores via Optionally Convertible Debentures
Based on the slump sale basis, we can assume the pre money value of CBL's business as 33 crores (although since it is internal transfer of business it is the most conservative possible value).
The company has not completely disclosed the term sheet (which it should being a public company) but taking into consideration general PE terms, the convertibles would crystallise on the happening of a future event like fund raise, revenue target, IPO etc. Paragon currently has voting rights and 2 board seats along-with other general exit and anti dilution rights.
The reason why the investment was not made within the holding company would definitely be to prevent the Open Offer curve. The PE does have a significant indirect ownership in the company though which would not be clear from the equity holding structure. Another interesting fact is one of the portfolio companies for Paragon has got the SEBI nod for a 400 crore IPO, one year after Paragon invested in them. I do not expect an IPO for CBL that soon but never say never :).
5) Post this funding the company seems to have paid off its long term loan liability. The working capital issues would have dissolved allowing the company to focus on expansion, which was derailed over the years because of host of issues. The balance sheet is significantly streamlined. Would be interesting to see the next year as the company has not disclosed any future expansion or business plans in its public filings.
