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In this post we will look at Cantabil Retail, a company having market capitalization of Rs 500 Cr.
Cantabil Retail India Limited is in the business of manufacturing, designing, branding and retailing of apparel under various brands. The company was started in 1989 as Kapish products private limited. It was in the year 2000 that the company launched its Cantabil brand and opened its first Cantabil store in New Delhi.
The promoter of the company is Mr. Vijay Bansal who has rich experience of nearly three decades in the apparel industry.
The company raised Rs 105 Cr via an IPO in FY11, the objective of the issue was to set up manufacturing facilities, retail stores, retire debt and meet working capital requirements.
The company has four brands and these are targeted to specific segments. Brands of the company include
Cantabil – This brand caters to both men and women in the middle to high income group and offers range of formal wear, party wear, casual and ultracasual clothing
Kaneston – Started in the year 2013. Innerwear and accessories like – belts, socks, ties and handkerchiefs for men are sold under this brand
Crozo – This brand exclusively caters to the women’s segment and was started in 2007
Lil Potatoes – Caters to the kids segment
The company has +200 stores (owned and franchise) in northern, eastern and western parts of the country.
Market cap: 500 cr.
Price to Earnings (P/E) ratio: 23
10 year profit growth (annualized): 20%
Debt to equity ratio: 0.42
There has been a dip in sales in three years starting FY12, the immediate next year after the company had come up with an IPO. Sales dropped by 16% CAGR in the three year period.
What actually lead to this fall?
The company at the time of the IPO had 417 retail outlets (owned + franchise), part of the proceeds Rs 25 Cr from the IPO were to be used to set up 145 new retail outlets, translating into setting up cost of Rs 17 lakh per outlet. It also had a discounting strategy of offering 80% flat discount through out the year. Offering deep discounts and expanding by means of opening stores without focus on profitability is not a sustainable strategy and this was the cause of their undoing. There were losses seen at both the operating and net profit level in these three years.
The company did change its approach in FY12, it decided to do away with the discounting strategy and close stores where they were not making money. For instance it shut down 150 stores of its casual men’s wear brand Lafanso, which had incurred losses of Rs 30 Cr and 10 Cantabil stores. This restructuring exercise cost the company three years and it is only in FY15 that the company saw growth in sales and was in the black the same year.
The company had retreated about its approach in its latest annual report
Sales have increased by 18% CAGR in the FY14-18 period from Rs 100 Cr to Rs 197 Cr in FY18. Operating profits were Rs 20 Cr as compared to operating loss of Rs -3 Cr in FY14. Operating margins in FY18 were 10%. Net profits in FY18 were Rs 20 Cr, similar to the operating profits, this is because there has been adjustments of deferred taxes on previously unrecognised tax losses from previous years. Earnings before tax and exceptional items was Rs 5.73 Cr in FY18. Average net profit margins for FY15-18 accounting for this adjustment was 3%.
We believe the balance sheet on FY18 is in better shape than it was in FY11 due to the below reasons
- Company has invested in fixed assets and these are higher than they were in FY11
- Reduction in absolute amount of borrowings and D/E ratio of 0.42
- Stark improvement in working capital. Inventories in FY11 were Rs 143 Cr as compared to Rs 81 Cr in FY18. There has been a drop in the absolute level of receivables as well
- There was an erosion in the monies that the company had raised in FY11 due to losses in the FY12-14 period, the company is not making any losses currently and back to steadily building up its reserves
One other important aspect of the company we would like to highlight is the working capital nature of the business.
The cash conversion cycle (CCC) which is arrived at as Receivable days + Inventory days – Payable days stands at 102 at the end of FY18. There is a huge improvement since FY10, the peak CCC was seen in FY12 at 252 days, primarily on the back of huge inventory days. The company was expanding its foot print by adding new stores and required inventory to be stocked up in these stores. It had 8 months of inventory in FY11 & 12 as compared to 5 months currently.
There is an improvement in the receivable days as well, it now collects its money from its customers in 19 days as compared to the peak receivable days of 60 days witnessed in the FY11-13 period. These receivables are on the back of credit that it gives to its franchise owners.
There has not been much of a change in the payable days, the company pays its suppliers in 60 days currently. The fastest that it has paid its suppliers is in FY13 & 14 when it paid its suppliers once every 33 days or a month.
How do these figures compare with the competition?
We looked at Kewal Kiran Clothing Ltd (KKCL) and below are our findings
The CCC for the company is 93 days, if one were to exclude this the average CCC for the FY10-17 period is 61 days. Cantabil retail has a long way to go before it can get here, however the improvement in CCC over the years has been encouraging.
Debt/Equity ratio at the end of FY18 was 0.42. The company is not heavily leveraged. In fact the company did retire some debt from its IPO proceeds in FY10 and has maintained this ratio at less than 0.5 during this period.
Below is how the cash flows look for the company over the FY10-18 period
The cumulative cash flow from operations (CFO) for the 9 year period is Rs 34.8 Cr against net profits of Rs -9 Cr. CFO are also cash profits and it is encouraging to see that the cash profits are higher than the net or accounting profits. In the case of the company this was possible because it managed its working capital effectively in the FY12-14 period when the company was seeing losses. As we had mentioned earlier the working capital management has been improving and this is an encouraging sign.
Free cash flow (FCF) is the difference between CFOs and cash flows from investing (CFI). Positive free cash flow generated by the company can be primarily used to pay dividends and interest. It is the cash that is left after the company has made investments in the business from the cash that it has generated from the core operations of the business. Cantabil has cumulative FCF Rs -43.1 Cr, however on looking closer one can observe that these have been lumpy in FY11 and FY12. From FY13 the company has positive FCF, however there has been no consistency.
The ROE and ROIC for FY18 was 21% and 17% respectively, which is very good. However one needs to look at the trend in these ratios over longer periods of time. The ROE and ROIC over longer periods of time look like
FY18 has been a very good year on this front, however the numbers in the FY11-17 period are not impressive. Operating margins, capital turnover and debt are the drivers of ROIC and ROE, company will have to assess which of these levers it can use efficiently which will lead to the increase of these ratios.
Below is the latest shareholding pattern of the company (December,2018)
Promoters own 74% of the company, shares of promoters haven’t been pledged. No mutual funds own the stock, however some private financial institutions do have small holdings in the company.
India’s retail market is estimated to be $670 billion, this is mostly unorganized. Nearly 93% of the trade happens through mom and pop or stand alone stores. GST tax reform will help organized players take away share from unorganized retail. Others factors like – urbanization, higher disposable incomes, retail growth in tier 2 and 3 cities and change in customers tastes and preference will also help organized players.
One other key driver is the increase in GDP per capita. India’s GDP per capita is estimated to be $1800-$1900, as per research the $2000 GDP per capita is an critical level. It has been observed that once a countries GDP per capita crosses the $2000 level there is an significant increase in consumer spending. China for instance crossed the threshold level of $2000 in 2006 and retail sales have taken off since then.
There are risks of course. The brand isn’t available on any of the online big stores anymore (Myntra, Flipkart, Amazon) and there is a huge level of competition there, which can hurt the company’s growth prospects. Store costs are quite high in general and work well in smaller cities where penetration of online sales is relatively small (plus, people like to touch and feel apparel before buying) and that is where the sweet spot for Cantabil will have to be.
The chart shows momentum on the upside. There’s a lot of external investor interest in organized retail, which may be driving prices more than current fundamentals. But there’s a definite improvement in fundamentals too – from their working capital to the sales process.
Note: This is not a recommendation to buy this stock and we just want to highlight the company as showing strong price performance.
Disclosure: The authors at Capitalmind may have positions in the stocks mentioned, please assume our bias exists. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned.