Multi Bagger - Himatsingka Seide Limited

[UAE Exchange Etrade]

NSE ID : HIMATSEIDE

CMP - Rs.41/-

Business Description

Himatsingka Seide Limited (HSL) is a vertically integrated Home Textile major with a global footprint, engages in the manufacture, marketing, distribution, and retail of home furnishing fabrics in India, the North America, and Europe. The company provides decorative fabrics, such as fabrics for drapes and upholstery for home, as well as for contract and hospitality. In addition, the company manufactures spun and silk blended yarn products. The company commissioned green-field bed linen project at Hassan SEZ in 2007-08. As part of its forward integration initiative it acquired 70% stake in Giuseppe Bellora SpA, Italy and 80% stake in Divatex Home Fashions Inc., and 100% stake in DWI Holdings, New York, in 2007-08. The company used the distribution channel of Divatex, DWI and Bellora to sell its bed linen business. The distribution business is engaged in both the private label and branded space. The company also operates 14 retail stores, including 2 international stores at Dubai and Singapore under the ATMOSPHERE brand name. The company was incorporated in 1985 and is based in Bangalore, India.

Valuation & Recommendation

HSL was only in silk business before 2007 which was high operating margin to the tune of 35% to 38%. In 2007, the company diversified in the bed linen business which was low operating margin. The operating margin fell off substantially to less than 10% in next 3-4 years. The decline in margin was on account of, a) Bed linen business is lower margin business, b) the new bed linen plant took time to stabilize leading to higher operating and fixed cost, c) slowdown in key market of US and Europe, d) high fluctuation in company raw-material prices viz, silk and cotton during last 2-3 years.

The bed linen business has stabilized and is currently operating at 80% capacity utilization. The US market has shown some sign of improvement where the housing sales has shown spurt in the growth on account of the initiation by FED where it has announced mortgage bond buying in last QE3, which will directly impact the housing market. As demand for home textile is directly linked to housing sales, any jump in the housing sale will in turn improve the demand for HSL product.

Post 2007, the silk business was marred by the significant jump in silk prices and slowdown in US and Europe. This has deteriorated the high margin business of +35% to around 22%. We feel that the EBITDA margin in silk business is set to improve to +25% in the next two years time due to the stabilization in the raw-material prices and improvement in capacity utilization from the current 45% in FY12 to 50% in FY13E and 60% in FY14E. We are also of the view that the financial leverage will improve going forward on the account of improvement in capacity utilization without any incremental capex which would result in strong jump in profitability.

We estimate net revenues and net profits to post at CAGR of 9% and 26.8% over 2012-14, respectively.

At the CMP of Rs. 41, HSL trades at P/E of 10x and 7.4x for FY13E and FY14E respectively. The EV/EBITDA stood at 6.5x FY13E and 5.4x FY14E. We initiate coverage on Himatsingka Seide Ltd. with a "BUY" rating based on a 12-month price target of Rs. 54 per share (10x PE FY14E), an upside of 32%.