Cravatex ltd (BSE Code 509472) - Katalyst Wealth Alpha Recommendation 14th Feb'12

Cravatex Ltd (BSE Scrip Code – 509472)Get exclusive distribution rights of FILA & Johnson Health Tech for Rs 130 croresGet exclusive distribution rights of FILA & Johnson Health Tech for Rs 130 crores

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An updated Alpha/Alpha Plus stock recommendation report – 14th Feb’12

Content Index

• An Introduction :- Slide #3

• Business Overview :- Slide #7

• Sports Goods sales – Overview :- Slide #12

• Fitness Equipments sales – Overview :- Slide #18

• Management Quality :- Slide #27

• Financial Overview :- Slide #31

• Concerns :- Slide #36

• Conclusion :- Slide #38


Cravatex Ltd – An Introduction


CRAVATEX was set up in 1951 by Mr. Ramkumar Batra. Mr. Rajesh Batra is the current Managing Director ofCravatex.

Cravatex – Exclusive distribution rights for FILA & Johnson

Cravatex supplies fitness equipment for home and commercial use through a chain of 51 ‘Proline Fitness’ storesspread across India.

Cravatex has exclusive distribution rights till 31st Dec’25 in India, Bangladesh and Sri Lanka to supply fitnessequipment such as treadmills, bikes, and elliptical trainers made by Johnson Health Tech, Asia’s largest and world’sthird largest fitness equipment manufacturer.

Cravatex also has exclusive distribution rights in India and some parts of Europe for shoes and apparels made byFILA, and tennis racquets and balls in India, made by Dunlop.


Investment Snapshot (As on February 14, 2012)

Recommendation :- BUYOriginally recommended in Dec’10 at:- 250-2551st Accumulation Range:- 450-500 (3-4% allocation)Profit Booking :- Refer Alpha/Alpha Plus Weekly for continuous updates

Current Market Price – Rs. 495.00

BSE Code – 509472

Bloomberg Code – CRAV:IN

Dear Members,

As you will find us repeating in the entire report, Cravatex isbasically about getting exclusive distribution rights of brandFILA and Johnson Health Tech (the third largest equipmentmaker in the world) in India and some other countries for justRs 130 crores.

Yes, the above is the entire story about Cravatex, if we have todescribe it in one line.

It’s all about owning exclusive distribution rights of two premierBloomberg Code – CRAV:IN

Market Cap (INR Crores) – Rs 127 crores

Total Equity Shares [Mn] – 2.58

Face Value – Rs. 10

52 Week High / Low – Rs. 562.10 / Rs. 225.58

Promoter’s Holding – 75.00%


It’s all about owning exclusive distribution rights of two premierbrands, while the scale of opportunity for both the brands togrow in India being humongous.

In case of Cravatex, we may not be able to justify the Margin ofSafety (MOS) in conventional terms, but then it’s a case whereeither one gets it naturally/intuitively or does not get at all.

During the last 1 year there have been some importantdevelopments, acquiring the sub-license of FILA in Europebeing one of them and we therefore felt the need of releasingan updated report on the same.

Key Investment highlights

Exclusive distribution rights for Johnson Health Tech Fitness Equipments in India and FILA in India & some partsof Europe for just Rs 130 crore – Cravatex retains the exclusive distribution rights for Johnson Health Tech ‘s fitnessequipments in India, Bangladesh and Sri Lanka till 2025. Johnson Health Tech is the leading company in Asia whilethe third largest in the world in the fitness equipment industry. Besides, Cravatex also holds the exclusivedistribution rights for brand FILA, one of the world’s largest sportswear manufacturing companies.

Humongous scale of opportunity – In recent years, the fitness and sports industry in India is witnessing a paradigmshift with the change in middle and upper class lifestyles in small but significant ways. The average urban Indianprofessional is increasingly becoming health conscious and feeling the need to get into a fitness mode. Thus, thefitness industry has a huge growth potential as only 1.5% of the urban Indian population regularly practicesworkout.workout.

Earning high return on shareholder’s funds – Over the longer term, the company can grow only as fast as itgenerates returns on the funds employed. Well, Cravatex does not have a great track record with pathetic 12-13%return on equity till 2008-09, however over the last 2 years the company has started delivering 20%+ return onequity and is on track to deliver a similar performance for FY 12.

Very attractive valuations – Cravatex is currently quoting at a market cap of Rs 115 crore, while it has net debt ofRs 14 crore (as at 30th Sep’11), thus an enterprise value of Rs 130 crore. For FY 11, Cravatex recorded a net profit ofRs 6.79 crore, while we expect the company to close the year FY 12 with a net profit of Rs 10-11 crore. Besides asmentioned above, one gets exclusive distribution rights for the two finest and leading global brands FILA andJohnson Health Tech for just Rs 130 crores, while the scale of opportunity is huge for both the brands to growimmensely in India.


Business Overview

• Major Products• Distribution Rights• Main revenue streams• Margins – Economies of Scale at work


Major products !!


Distribution Rights


Main revenue streams• For Cravatex there are two major revenue streams:

Sports Goods sales and Fitness Equipment sales. Thesales growth for Sports Goods segment was stagnant tillFY 2009, however the inclusion of FILA brand haspropelled the sports goods sales from 10.50 crore to 50crore in just 2 years.

• The Fitness Equipments sales have grown at the rate of15% on annualized basis for the last 5 years, howeverthe demand economics is very favorable at the momentand Johnson Health Tech has charted out an aggressiveexpansion plan and has signed up with Talwalkars, GoldGym, etc for the sale of Fitness equipments.


Margins – Economies of Scale at work


• As can be observed from the above illustration, the operating profit margins (does not include other income) ofthe company have improved drastically over the years.

• The above is clear indication of the fact that economies of scale is at work, helping the company utilize itsresources in a more profitable manner. However, aggressive marketing in its effort to grow rapidly can againdampen the margins of the company in the short term.

• 2009 was an aberration and it was across the board for all the companies, as the world was reeling under theshock of Lehmann crisis.

Sports Goods sales – Overview• Sports Goods sales – Overview• Sports Goods sales – Overview• Rs 125-150 crore revenue from FILA India by FY 2013• Cravatex – Sub-licensee of FILA in UK & Ireland• Sportswear Industry in India• Reebok India – How is the leader performing?


Sports goods sales - Overview

• Sports Goods sales constitutes distribution of Major international brands FILA, Nassau and Dunlop Sports in Indiaand countries like Bangladesh, Sri Lanka, etc.

• The Sports goods sales was languishing in the region of 3.0-3.9 lakh pieces per annum till 2009, however theinclusion of brand FILA in the portfolio has given a huge fillip with sales going up by more than 400% in terms ofvalue in just two years.

• Besides volume growth, there’s been a 100% increase in Sales realization per piece from Rs 290.25 for FY 2009 toRs 577.75 for FY 2011. As the volume share of FILA increases, the realizations are expected to increase furtherfrom Rs 577.75.


Rs 125-150 crore revenue from FILA India by FY 2013 • Cravatex achieved ~ Rs 40

crore revenue from thesale of FILA products forFY 2011 and is targetingRs 125 crore by FY 2013(from India).

• The company willfranchise most of thestores and therefore notburden its balance sheet,though working capitalthough working capitalrequirement mayincrease (one shouldremain watchful of thesame).

• The pricing of FILAmerchandise is 20-30%cheaper than its peerslike Adidas, Nike, Puma,etc. and thus can be aninstant hit with thevalue, yet brand seekingIndian youth.


Cravatex – Sub-licensee of FILA in UK and Ireland

Besides India, Cravatex also operates the sub-license for the brand Fila, for the Middle East, Northern Africa andspecialty retail in the United Kingdom.

Cravatex acquired 100% of 1000 equity shares of £ 1 each of M/s. BB (UK) Ltd., UK for a total consideration of £1093. By virtue of the said investment, M/s. BB (UK) Ltd., UK is now a Wholly Owned Subsidiary of Cravatex.

The Subsidiary was set up for acquiring a sub-license for the FILA brand for certain distribution channels in UK andIreland. BB (UK) Ltd has the rights to design and supply Fila products to the whole of Europe, the United Kingdomand Ireland. The importance of European market in the overall scheme of operations of Cravatex can be gaugedfrom the fact that sales have gone up from Rs 3 crores to Rs 40 crores in just 2 quarters.


The comparison between Standalone and Consolidated sales

Sportswear industry in India

Indian Sportswear Industry

Organized Industry~ 2500-3000 crore

• Reebok & Adidas - ~65% market share• Puma - ~20% market share• Nike - ~15% market share

Un-Organized Industry(<Rs 1000 price point shoes)

~ 5000 crore

• The organized sportswear and gear market in India is currently pegged at Rs 2,500-3000 crore and it is growing at15-20 per cent annually. It is to do with the fact that the consumer is becoming more health conscious, brandconscious and more fashionable at the same time.

• Besides, there’s a sub Rs 1000 price point unorganized market in India at Rs 5,000 crore. As per Rajiv Mehta,Managing Director, Puma India, the Indian sportswear Industry is still very nascent and the consumers are veryvalue conscious.

• FILA is staring at a huge opportunity as its pricing is cheaper than all the players in the organized segment, whileit’s a well known brand itself, thus serving the aspirations of Indian youth. The company can capture a large shareof both organized and unorganized market in the years ahead.


Reebok India – How is the leader performing?

• Adidas took over theinternational operations ofReebok in 2006 andcurrently Reebok andAdidas command thehighest market share at65% in India.

• As can be observed, forthe year ending 2009,Reebok India (RIC) had abank limit of Rs 300 crore,bank limit of Rs 300 crore,recorded a turnover of Rs540 crore and a net profitof Rs 23 crore at a netprofit margin of 4.25%.

• The business is in generalworking capital intensive,which should be the caseforward for Cravatex, as theshare of sports goods salesincrease.


Fitness Equipment sales – Overview• Fitness Equipment sales – Overview• Johnson Health Tech – Witnessing strong sales growth worldwide• Johnson Health Tech – Eyeing growth in commercial fitness in India• Johnson Health Tech – Eyeing growth in commercial fitness in India• Fitness Equipment industry in India• End-User segment – Institutional segment commands 76% market share• Proline Fitness stores• Rediffusion-Wunderman appointed for the digital media promotion of FILA and

Proline Fitness• Key drivers for the Fitness Equipment Industry in India


Fitness equipment sales – Overview

• Cravatex launched Proline Fitness in 1996 with an objective of introducing the personal range of fitnessequipments in the Indian market, though it has now started focusing on commercial segment too.

• Proline Fitness is the sole importer and distributor for several international brands like Johnson Health Tech. Co.Ltd., Horizon Fitness, Vision Fitness, Matrix and Body Solid.

• Proline Fitness has a Pan India presence with 51 exclusive stores (inclusive of 3 stores in Sri Lanka) in over 25 citieswith an effective and efficient after sales back up. Cravatex plans to increase its presence further in tier I and tier IIcities over the next few quarters.


Johnson Health Tech – Witnessing strong sales growth worldwide

• Since Cravatex distributesJohnson Health Techs Fitnessequipments, for Cravatex todo well in India its importantthat Johnson Health Techshould itself have high targets.

• As can be observed from theillustrations, Johnson HealthTech has been performingpretty well with worldwidesales recording 26% growth insales recording 26% growth inH1 FY 11 over FY 10.

• Moreover, company is aimingfor 25% of Global Fitnessmarket by 2015. Consideringthe standards set by JohnsonHealth Tech in past, the targetis achievable. Importantly,India has assumed significancein Johnson’s scheme ofoperations.


Johnson Health – Eyeing growth in commercial fitness in India

Johnson Health Tech is now aggressively pursuingCommercial Fitness Equipment Market in India. Ascan be observed from the previous slides, JohnsonHealth Tech is the second largest Fitness Equipmentmaker in the Home segment, however it lagsbehind at fourth spot in the commercial fitnessmarket.

The entire sales of Johnson Health Tech in Indiaare routed through Cravatex, being the soleimporter and distributor.

The commercial/institutional segment commands76% market share in the fitness equipmentindustry, against 24% market share of homesegment. Thus, Johnson’s focus on commercialsegment will help Cravatex achieve scale in theFitness Equipment segment.

Moreover, all the leading fitness-club chains areexpanding at a rapid pace. For instance, Talwakars,expanded from 63 health clubs to 100+ health clubsin FY 11 alone, thus generating significant businessopportunity for fitness equipment distributors.


Fitness Equipment Industry in India

In recent years, the fitness industry in India is witnessing a paradigm shift with the change in middle- and upper-class lifestyles in small but significant ways. The average urban Indian professional is increasingly becoming healthconscious and so people are now feeling the need to set aside a time for dedicated exercising.

Fitness Equipment Market – India – Overview:

The fitness equipment market in India is estimated to be worth 12.5 bn IN 2008 ; and is expected to reach INR 63.3bn by 2012. The annual growth rate is expected to be around 50% as only 1.5% of the urban Indian populationregularly practices workout


End-User – Institutional segment commands 76% market share

End-User Segment : They are divided into two segments :-

• Residential or Home Segment – 24% market share• Institutional Segment – 76% market share

Residential Segment :

• Cost is the prime factor while making the buying decision• Equipments used for residential purpose are built with lighter materials• Sold to individuals who prefer working out/exercising at home due to paucity

of time or convenience.of time or convenience.

Institutional Segment :

• Bulk of equipments sold to health clubs / gyms and corporate houses• Equipments used by institutions are more sturdily built and expensive

compared to those used at home.• Quality is the prime consideration and buyers are ready to pay premium for

better quality and technologically advanced products

It is important to note that earlier Johnson’s primary focus was Home segment,however it is now aggressively focusing on Institutional segment and the sameshould help Cravatex as the demand is 3 times that of Home segment.


Proline Fitness stores

Focus on Metros and Tier I cities

In the Fitness equipmentretailing industry, after salesservice and geographicalcoverage of the distributorsare the major differentiatingfactors.

City No. of Stores City No. of Stores

Ahmedabad 1 Lucknow 1

Bangalore 4 Ludhiana 1

Baroda 1 Mangalore 1

Bhopal 1 Mumbai 10

Chandigarh 1 Nagpur 1

Chennai 2 Nasik 1


Cravatex does well in theabove respect with morethan 50 stores spanningacross all the Metropolitansand the major Tier I cities.

As per the informationavailable with us, only GrandSlam Fitness has morenumber of stores thanCravatex.

Chennai 2 Nasik 1

Goa 2 New Delhi 4

Gurgaon 1 Noida 1

Hyderabad 3 Patna 1

Indore 1 Pune 4

Jaipur 1 Raipur 1

Kolhapur 1 Sangli 1

Kolkatta 2 Sri Lanka 3

Rediffusion-Wunderman appointed for the digital media promotion of FILA and Proline Fitness

With the advent of cabletelevision and internet, tele-shopping and onlineshopping have emerged asnew distribution channels.

People have started buyingfitness equipments andsports goods (morespecifically shoes from siteslike Myntra, Bestylish,


like Myntra, Bestylish,Jabong, etc) online as itallows product comparisons,saves time and convenient.

It’s good to note thatCravatex has mandated abudget for digital media, asbesides spending onadvertisements, itsimportant to target the rightaudience.

Key Drivers for the Fitness Equipment Industry in India

Being fit and healthy has never been as popular or as necessary as it is today. With millions of people eager to loseweight and get in shape, the fitness and wellness industry is one of the fastest growing industry today.

Further due to a strong and sustained growth in the economy, disposable incomes have increased at a significantpace creating a huge demand for fitness centers, health clubs etc. According to a recent research by the MckinseyGlobal Institute, the number of household earning over 5 lakhs per annum will increase from 3.6 million in 2005 to8.8 million in 2015. Studies have shown that rural and semi-urban population is increasing expenditure towardsdiscretionary and luxury due to increase in disposable income.

Despite a rapid growth in awareness levels during the past four years, only 1.5 per cent of the urban populationDespite a rapid growth in awareness levels during the past four years, only 1.5 per cent of the urban populationworkouts regularly. The national average is even lesser at 0.1 per cent, against the global figure of 15 to 20 percent.

As per a recent study India currently has over 300 mn people in the 25-30 age bracket and by 2016, 40% of thepopulation will be in the 20-44 age group. Thus even assuming a modest 1% of this population enrolls into a healthclub, in sheer numbers, the potential addition to the fitness market in India is staggering and thus the scale ofopportunity for the companies associated with the industry.

In cities like Bangalore, Mumbai, Chennai, Hyderabad, New Delhi big corporate houses like Air Tel, Wipro, callcenters are already fitting fitness equipments and elliptical machines, Exercise Bikes, Treadmills, Mini Stair Steppers,and other gym equipments in their premises for a healthy work force.


Management Quality

• Shareholding Pattern – Incentive to drive the growth with 75% equity holding• Promoters/Managements’ Profile – Sports and Fitness freaks• Low dividend payout and high return on shareholders funds


Shareholding pattern

• The Promoters of the company have been holding 75.00% equity in the company since long, the maximumpermissible limit.

• It’s good to note that Promoters hold such a sizable stake in their listed entity as the same should keep themmotivated about the good performance of the company and continue with the distribution rights of FILA underCravatex than under any other non-listed group company.

• It’s important to note here that Batra Brothers are the co-owners of FILA UK.


Promoters ProfileIn order for the company to do well in the long run, we believe its important forthe Promoters/Management to be passionate about their business and believe inwhat they are doing. In case of Cravatex, we have adequate reasons to believethat Batra Brothers (Rajesh and Rajiv) are sports and fitness freaks.

A brief view on the profile of Mr. Rajesh Batra and Mr. Rajiv Batra

Rajesh Batra

Mr. Rajesh Batra did his schooling in Campion School, Mumbai and graduatedfrom Elphinstone College, in 1975. He then obtained a Diploma in SystemsManagement from the Jamnalal Bajaj Institute in 1978.

Rajesh BatraManagement from the Jamnalal Bajaj Institute in 1978.

A keen tennis enthusiast, Mr. Batra was the Maharashtra State Champion during1970s and was ranked number 6 in India at that time. He has also representedIndia in the Asian Junior Championships in 1973 where he was a finalist and at theWorld University Games in 1973 in Moscow.

Rajiv Batra

Rajiv Batra graduated with a Commerce degree from HR College in Mumbai in1981. A keen tennis player, Rajiv has won many National titles in India as a Juniorand is currently ranked in Great Britain in the Veterans.


Rajiv Batra

Low dividend payout & high return on shareholders funds

• Cravatex does not have a very high dividend payout, however its good to note the consistency of dividend payoutand a gradual increase over the years in line with the improvement in business performance.

• One should not be concerned much about dividend payout as long as the company is able to deliver 20%+ returnon shareholders funds and as we see it the same is sustainable for the next 3-4 years.


Financial Overview

• Annual Performance• Annual Performance• Quarterly Performance • Cash Flows• Balance Sheet


Annual Performance

It is important to mentionhere that other incomeincludes Rs 4.46 crore asannual rental income fromone of the properties ownedby the company in Mumbai.Thus an improvement inoperating performanceshould be considered afterdeducting other income.

Considering an averageConsidering an averageannual yield of 4-5%, thevalue of this property canalone be worth Rs 80-100crores.

In the last 2 years, the growthin operating sales has beenincredible and that’s onaccount of inclusion of brandFILA in the portfolio ofCravatex.


Quarterly Performance

• In the above, we have considered the standalone quarterly results for FY 12 in order to reflect the growth beingexperienced by the company, though the consolidated numbers are still higher.

• As can be observed, the sharp up-trend in sales experienced during the last two years has continued in FY 12.Though the sales segregation (sports goods and fitness equipments) will be out in Annual Report FY 12, we arepretty sure of the fact that it’s the Sports Goods segment (more specifically FILA) that is firing with all thecylinders.

• The growth in net profits is lower than the growth in sales on account of a combination of factors like: Rupeedepreciation (company imports most of the goods it sells), high interest rates and overall inflationaryenvironment. We expect the trend to reverse over the subsequent quarters, the signs of which are already visible.


Cash Flows

• Sports Goods retailing is aworking capital intensivebusiness, more specifically inthe initial days when thebrands presence is beingmade evident through shelfdisplay while the sales beinglow.

• Till FY 09 the company’s cashflows were in line with thereported earnings, however


reported earnings, howeverfor the last 2 years the cashflows have deteriorated onaccount of increase in sundrydebtors and maintenance ofhigh inventory.

• The good point aboutcompany’s cash flows is theDirect Taxes Paid by thecompany at 30-33% of thereported Profit Before Tax.

Balance Sheet

• At this point of time, wedon’t notice any strains inthe balance sheet ofCravatex, though wehope they don’texcessively leverage inorder to chase growth.

• As per the indicationsfrom the management,from the management,most of the FILA storeswill be franchised, thusthe major concernremains the workingcapital requirement andfor any investor itsimportant to keep a tabon the same.


Concerns


• Its important for Cravatex to retain the exclusive distribution rights of FILA. In case the company losesout on the same, it will have a major negative impact.

• We hope that company does not over-leverage in order to chase excessive growth and market share.

• Sports goods retailing is a working capital intensive business. The cash flows of the company have

Concerns

• Sports goods retailing is a working capital intensive business. The cash flows of the company haveturned negative since the last 2 years and one should remain watchful of the same.

• The company retains exclusive distribution rights for Johnson Health Techs fitness equipments till 31st

Dec’25. The abrupt termination of the agreement can have huge negative impact on the performanceand prospects of the company.


Conclusion


Price chart

• As can be observed from the above illustration, the stock experiences a phase of consolidation and then a sharpup-move.

• At present, Cravatex is stuck in a broad 15% range of Rs 425-500. Any sharp up move beyond 520 may signal abreakout from the trading range of 425-500.

• For those who are not invested, Rs 450-500 is a good range for starting with initial 4% allocation. We may suggestincreasing allocation depending on price correction and developments in business.


Katalyst Wealth – Alpha Portfolio

For more information on Cravatex Ltd, discuss with Ekansh Mittal

Mail Id : [email protected] Mobile: +91-9818866676

Katalyst Wealth Alpha Portfolio service is focused on helping individual investors/institutionsbeat market returns by a wide margin without taking large risks through in-depth research,analysis and follow up on the stock.


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Cravatex ltd (BSE Code 509472) - Katalyst Wealth Alpha Recommendation 14th Feb'12

Business

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cravatex isallocation

exclusivedistribution

fitness equipment sales

attractive valuations

fitness equipment industry

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