Monday, September 17, 2012

Stock View: Cravatex


Cravatex is mainly a trading company. It sells fitness equipment (gym and home exercising) under the “Proline Fitness” brand. It is also the sole distributor of FILA and Dunlop in India. Primary customers are gyms and retail customers.

The sector is growing. Health consciousness in growing a lot. Talwalkar’s and Gold’s Gym are growing well. Talkwalkar’s expect to grow 30% in the next 2-3 yrs.
Cravatex has strategic tie-ups with both these chains.


FILA has the lowest market share amongst the established brands of international footwear in India. The market leader is Adidas (including Reebok), followed by Nike & Puma. FILA is just getting into the market and is competitively priced. So, market share is likely to increase provided it can increase its distribution capacity significantly. In the fitness space, the company has 28% of market share.

The promoter holding has been consistent at 75% over a fairly long period.

The company's networth has been steadily rising. From 10.74cr (2002-03) to 30.85 cr (2012).

It has increased its RoE significantly in the last 3 years. This has come mainly from an increase in net margins (probably the FILA brand making its impact felt).

Risks & Concerns

Total debt is 28.14 cr (cons). It has gone up from 17.64 cr (cons) from 2011. D/E is 0.87. It seems to be on the higher side.
Cash flow has been consistently negative over the last 3-4 years.


Valuation


Cashflow is negative so can't really do a DCF analysis.

On EPS estimates, with an assumption of 15% growth for 2013 & 2014, the expected EPS are 36 & 42 for the next 2 years.

Assuming a PE range between 10-15, the optimistic and pessimistic price ranges work out to:-

2013 –> 367 to 551
2014 -> 420 to 630




Conclusion: At CMP (425), the stock price has nearly halved from its high of nearly Rs. 800. The results for Q2 is also likely to be weak and the under-performance for the stock is likely to continue for some more time. On the medium term, however, the stock is priced well enough for adventurous investors to take a bite.

Disclaimer: I am invested in the stock and have a vested interest. Please do your own due diligence before investing.

6 comments:

  1. hi abhishek,
    some doubts in my mind:
    1) cravatex no longer sells dunlop products.license has been terminated probably. how will it impact cravatex's topline
    2) how much confidence you have in management quality.

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  2. Hi Mayur,

    1) I don't recall reading anywhere about the Dunlop license cancellation. In fact,Cravatex's website still has the Dunlop logo, so would be great, if you could send me a link/reference to the news item.

    2) The management is generally good. They have consistently maintained 75% stake in the company. They have been paying dividends as well. Nothing is out there which would suggest that the management is questionable.

    The whole idea of investing in Cravatex is the opportunity size in sports wear and equipment in India.

    The company has also signed on Virendra Sehwag as their brand ambassador for FILA.

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  3. kindly refer to the link below:
    http://www.financialexpress.com/news/dunlop-sports-shoes-now-in-india/47015/0

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  4. The Dunlop news item is from 2002. Going by the current annual report and website of Cravatex, I think they are now the licensee for Dunlop. Not that Dunlop actually makes any major impact to its revenues.

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  5. Might be a little to ask this question. Operating cash flow doesn't seem to cover the interest costs, which is being paid by short term borrowings. Even in such a situation the company is paying dividends and borrowing. Doesn't this raise a red flag? Would like to hear your opinions on this.

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    Replies
    1. *Might be a little late to ask this question.

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