Wednesday, January 9, 2013

Premco Global Ltd- Elastic Profits

Premco Global Ltd is currently in its 29th year of operations.

The company is one of India’s leading manufacturers of Elastic.

Specializing in the manufacture of Woven and Knitted Elastic and non-Elastic Narrow Fabric and Webbing Premco’s extensive product range caters to the apparel, lingerie, sports-related, medical, footwear, luggage, furnishing, and automotive industries

The company’s customer’s include brands/companies  such as The GAP / Old Navy, Sara Lee, Fruit of the Loom, Target Stores, Walmart and many others.

In addition to a vast stock product line, Premco specializes in narrow fabric for custom-specific applications. Color, design, dimension, material and performance are made the way customer wants.

Product showcase link:

Number of employees: 168 ( as of March 31, 2012)

Manufacturing units : 4 ( Dadra, Palghar, Vapi, Mumbai). Dadra contribution to revenue is maximum at about 55%, followed by Vapi & Palghar. Mumbai manufacturing operations are minimal.

Promoter holding : 59.64%  ( Harjani family)
Equity Capital: Rs.3.01 cr
Debt : Rs.7.87 cr ( 5.88 cr-long term + 1.99 cr short term) as of Sept 30,2012
Market price: Rs.31.3
Market Cap: Rs.10.3 cr

Year ended March 31, 2012
Revenue: Rs.33.77 cr
EBIDTA: Rs.3.15 cr
PAT: 0.61 cr
EPS: Rs.2
Dividend per share: Rs.1.20 ( 12%)

6-months ended Sept 30, 2012:
Revenue: Rs.28.58 cr
EBIDTA: Rs.4.15 cr
PAT: 2.09 cr
Key highlights:
1)      EPS / Dividend history for the last 10 years:
         EPS ( Rs.)
Dividend per share (Rs.)
Payout ratio %
Paid up equity capital was Rs.2.97 cr till 2007-08 and thereafter is Rs.3.01 cr.
The dividend pay out ratio might appear irrational, but  importantly from an investor’s perspective, they have maintained the dividend at 12% over the last 5 years.
2)      Realization per  metre of elastic tape:
2009-10: Rs .4.85 ( 538 lakh metres sold)
2010-11: Rs.5.35 ( 702 lakhmetres sold)
2011-12: Rs.6.47 ( 505 lakh metres sold)
3)      Installed capacity : 1110 sq metres in 2010-11 from 850 sq metres in 2009-10
4)      About 50% of revenue comes through exports.
5)      Key raw materials are polyester, nylon, rubber & spandex.
6)      In 2010-11, the company had initiated a capacity increase plan which has got completed in the next year. Gross block increased by about 4cr mainly through investment in plant and machinery.
A little about the Elastic Narrow Fabrics Industry:
1)      Elastic narrow fabrics are an important input to the undergarment industry. They are also used in other garments i.e. shorts, jackets and skirts, moulded luggage, baby diapers, sports goods, medical goods, etc.
2)      Product characteristics
Elastic narrow fabrics are made from an elastomeric yarn and yarns made from cotton, polyester and nylon. More than 3000 different varieties of elastic fabrics are manufactured however, based on manufacturing technology they can be classified as woven and knitted. The fabric is expected to have the following properties:-
3)      Market dynamics and key growth drivers
Elastic narrow fabrics are majorly consumed in inner wears.
Undergarments account for 80 - 85% of the consumption of elastic fabrics.
4)       On an average each undergarment consumes 0.83 meters of elastic. The average price of elastic narrow fabric is Rs. 4.5 to 6.5 per meter.
5)      Current Market size and future potential
The Indian innerwear market has grown at a GAGR of about 14.5% between 2006 & 2011. The growth in the  average selling price in the super premium category . Interestingly, Page Industries Ltd ( of the Jockey fame) has expanded its woven elastic capacity to 2.9 cr metres / year and knitted elastic capacity to 1.4 cr metres/ year.
The Innerwear market in India is currently expected to be about Rs.15,000 cr/ year and expected to grow to about Rs.43,700 cr/year by 2020 growing at a CAGR of 13% outpacing the growth of the overall apparel market. The market is growing, largely driven by premiumization.
All the major international Innerwear brands have commenced operations in India.
@ Current market price of about Rs.31-32, Premco Global provides a good entry point for investors with a 2 plus year investment horizon. The innerwear market is tilting towards premium / super premium products and this shall stand Premco Global in good stead.Overall,a good direct proxy-play on the Innerwear market.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.


  1. I think this is a great pick and looks reasonably undervalued. I have already written/spoken to the management a letter indicating my interest in the scrip and asked responses to some questions. Let me see how they respond. Will post the response here.

  2. These are the questions that I had put upto the management and I am still waiting for reply.

    1) Revenue:

    A) What is the revenue mix (Domestic: International) at present? From PREMCO 2012 Annual Report, it mentions over 46% of sales being derived from exports; what kind of split (sales mix domestic: export) are you aiming for FY13-15?

    B) What are the geographies that you are exporting currently? What are the major labels/brands in terms of sales both domestic and foreign? What kind of new geographies/labels are you aiming to export in the next 3 years?

    c) Premco clocked revenues of nearly 33 cr in FY 2011-12. It has already clocked revenues of nearly 42 cr in FY2012-13. What kind of sales growth you are looking at for next three financial years. How sustainable do you think the growth is and why?

    2) Margins:

    Dec 12 Sep 12 Jun 12 Mar 12 Dec 11
    Sales 1,341 1,547 1,252 973 822
    EBITDA 245 236 103 124 30
    EBITDA margins 18.2% 15.2% 8.22% 12.77 3.64%

    FY11-12 FY10-11 FY09-10 FY08-09 FY07-80
    Sales 3,414.94 4,510.23 2,885.83 3,071.53 2,476.38
    EBITDA 314.98 389.84 295.15 357.39 290.20
    EBITDA margins 9.22% 8.64% 10.22% 11% 11.71%

    EBITDA margins have improved significantly in last two quarters. What do you attribute this to? Are these margins sustainable? How do you see these margins going ahead?

    3) Client Concentration

    What is the revenue concentration from top 10 customers and top 5 customers and top most customer? Also what is your strategy to mitigate the geo-political risk at your major export geographies? There were no contingent liabilities provided for in PREMCO 2012 Annual Report. Does the management do not foresee a risk here?

    What are the reasons for a downtrend in domestic sales?

    4) Capacity utilization

    A) As mentioned in your annual report the only segment that the company operates is elastic, the report talks about improved capacity utilization this year but does not mention a figure around that.

    Would it be possible for you to indicate the capacity utilization figures for Dadra, Palghar and Vapi? Also is the management looking to introduce new capacities and what are the plans for any capex for this?

  3. 5) Is the company looking to maintain a similar Payout Ratio this year or is the company looking to holdback money? If so what could be the possible utilization of this added cash flow?

    6) Claim Settlement:

    From PREMCO 2012 Annual Report: Claims against the company not acknowledged as debts

    • Claims Rs. Nil (P. Y. 503.35 Lacs)

    • Income Tax Liability Rs. 2.42 Lacs (P.Y. 32.01 Lacs)

    How was the claim of 503.35 Lacs settled?

    7) Competition:

    Who are the main competitors? What is the assessment of competition by the company?

    8) Brand building:

    Since the company is not directly catering to consumers but manufactures ancillary items in a B2B segment, what kind of emphasis is on brand building?

    9) What kind of entry barrier do you see for a new entrant. Incase capacity is not an issue what kind of barriers do you see for a new supplier in terms of

    a) Quality (certifications expected/required)
    b) Relationship with managements of various clients
    c) Design related intricacies
    d) Cost efficiencies

  4. I am waiting for a response and in my last discussion with the President of their company she seemed a little outraged to say the least but did not outrightly rejected to respond to my questions.
    I am still invested in the company and would wait a round a fortnight for the response.

  5. Thanks for this post the replies as and when you receive.


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