Premco Global Ltd: Wrapping gains
(BSE Code: 530331) (CMP: Rs.501.65) (FV: Rs.10)
Mumbai-based Premco GlobalLtd (PGL) is a leading manufacturer of Woven and Knit elastic and non-elastic narrow fabrics, tapes and webbings for use in apparel, lingerie, sports related, medical, footwear, luggage, furnishing and automotive industries. Its products conform to ISO 9001-2008 specifications. Founded in 1966, the Premco group has over the years changed the concept of textiles, furnishing and the knitwear industry. From its vast pre-designed product line to made-to-order trim accessories, it caters to the entire elastic industry.
PGL services top international brands such as GAP, Old Navy, Sara Lee, Fruit of the Loom, Target Stores, Wal-Mart, etc. Its products meet custom specific applications for colour, design, dimension, performance and needs of high demanding customers across USA, Europe, Latin America, etc. through its vertical production efficiency and the latest in- technologically advanced machinery backed by a professional and experienced team.
PGL has four state-of-the-art manufacturing facilities across Palghar (Maharashtra), Andheri (Mumbai), Dadra & Nagar Haveli (UT) and Vapi (Gujarat). It uses German, Italian, Indian and
Swiss machinery for all stages of production including warping, covering and finishing. It sources raw material from the best suppliers in its category in order to conform to international standards. It also imports its testing equipment from global leaders to ensure international standards of calibration. Finished products are packed and shipped to specific customer requirements.
The following considerations might help investors take a wise decision.
Overseas Subsidiary: PGL set up a subsidiary - Premco Global Vietnam Company Ltd (PGVCL) at an initial investment of Rs.563.53 lakh (higher than its own share capital). It holds 85% stake in the subsidiary. PGVCL has advanced Rs.920.71 lakh towards short-term working capital requirements, for which interest is charged at the prevailing market rates. The subsidiary was commercialised during Q4FY16, after completing Phase I and II. Operations have since stabilised and the initial teething problems have been overcome. However, the first year
reflected a small operating loss of ~Rs.1.71 crore as the process of commercialisation was gradual. PGL expects ~70% capacity utilisation in FY18 and 100% in FY19.
Exports: The management expects exports to grow at 18-20% CAGR over the next few years due to the anticipated improvement in domestic sales and better penetration in international markets with appropriate restructuring of product mix.
Cost Control: PGL is evaluating the use of solar energy at its Dadra and Vapi plants in order to cut down energy costs besides availing related tax benefits. Further, it is working with suppliers to convert conventional dyed yarn to dope dyed yard to reduce raw material cost by up to 5%. It has also installed J/Q machines to weave wider designs, which result in higher realisations. These machines also help save manpower expenses.
Prospects: The Indian textile & apparel market has grown at ~9% over the last decade as against ~13% of the innerwear industry. In order to increase its market share and create additional capacity, PGL has invested Rs.430.77 lakh to modernise its plants and machinery in India. It is also trying to increase its customer base by introducing new brands in the domestic and international markets. It is also vigorously trying to notch business from known brands such as Rupa, Lux, VIP, etc. The capacity of its Vietnam plant is also being enhanced rapidly to cater to the needs of international brands.
PGL feels that with higher disposable incomes, the innerwear industry will expand rapidly in times to come. The changing habits of Indian consumers to use branded innerwear will enable the Company to cater to the premium segment, which will have a positive impact on its realisations. Its potential to export to global brands will also boost realisations.
Shareholding: The promoters hold 63.95% stake in the Company. Usually, foreign institutions (FIs), Mutual Funds (MFs) and foreign investors do not prefer to invest in companies with small equity where the liquidity is low. But 2.35% stake in PGL is held by MFs, 7.4% by foreign investors and 1.61% by body corporate. It is interesting to note that out of the total 11,91,346 shares available in the public category, 2,16,266 shares are held in the physical form. This could be a positive sign as certain investors may be contemplating to remain with the Company for a long time.
If the MF and foreign holding is excluded, then in real terms only 7,97,908 shares are available as floating stock. The only matter of concern is that there are around 3,200 shareholders only and the shares are thinly traded.
Financials: With an equity capital of Rs.3.3 crore and free reserves of Rs.54.4 crore, PGL’s share book value works out to Rs.175 as at FY17. The Company is debt-free. It posted an EPS of Rs.25.2 and declared 30% dividend for FY17. It has consistently increased its dividend pay-outs. The current market price is cum dividend.
It must, however, be noted that the total earnings for FY17 was lower than FY16. The management clarified that the fall was primarily due to a stronger rupee which appreciated by about 10% against the US Dollar in Q4FY17, resulting in lower realisation of export orders. The Company also lost on Foreign Exchange Forward Premium. Its Forex Hedging policy has since been reworked and the management expects much better performance in the next few quarters. A fall in profits can also be attributed to the diversion of funds for expansion. The management is very confident of higher sales and profitability in FY18.
Overcoming liquidity issues: PGL exhibits a strong balance sheet. Its future business prospects are also good with plans to become an international brand. The only point of concern is that its shares are thinly traded on the stock exchange. However, being dominantly at a point of inflection, circumstances may prompt the management to either issue bonus shares or split its share in a smaller denomination to issue additional shares to its existing investors in an attempt to increase liquidity.
Conclusion: The PGL stock’s 52-week high/low is Rs.695/390. There is no ambiguity that the stock will soon breach its previous high. Investors who have the patience to hold the stock for about two years are likely to hit the jackpot. Buy this goldmine before it is too late.