Branded Apparel Sector - Part 2

This is part 2 in the series of article discussing Branded Apparel Sector. The previous parts are here:

• Part 1

Trent

This is a Tata Group Company running branded apparel stores under the brand of "Westside".

Financials

The average ROCE of the company over the last five years was 6.58% and lower in the recent years. The average operating profit margin was 5.1% over the last five years and getting lower in recent years. The net profit margin was higher than operating profit margin due to high other income so is of not much use. The consolidated figures are worse than the standalone one. The company has debt of INR 250.52 Crore with net current assets of INR 272.4 Crore and investments of INR 395.18 Crore. I will have to dig deeper to find what the investments are. The asset turnover ratio has declined from 3.79 to 2.17 over the last five years. The operating cash flow was negative in two out of the last five years and is not at all near to the actual net profit made by the company.

Promoters

There is no doubt on the management and promoters here. The problem lies with the industry itself where high competition is keeping the ROCEs down and I can't resist quoting Warren Buffett here:

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact -Warren Buffett

Mutual Fund Holding

As usual since the company is not in as better shape as KKCL we discussed in the last post, a lot of mutual funds including Reliance, HDFC, UTI, SBI and Franklin are holding shares in this company. This is a big negative for me.

Valuations

Even though the company in as good a shape as its competitors like KKCL and Page Industries, the valuations it commands is mind-boggling. The P/E ratio at the current market price of INR 870 is more than 50 and Dividend yield is less than 1%.

Shoppers Stop

The company was started in 1991 and is operating apparel stores.

Financials

The company's ROCE, OPM and NPM data available on moneycontrol does not make sense to me. The company had debt of INR 191.41 Crore at the end of FY10 but it paid INR 160.11 Crore in FY10 in interest which also does not make sense to me. The company had positive cash flows over the last five years. The net current assets were INR 81.96 Crore with investments worth INR 119.67 Crore. The asset turnover ratio has averaged between 3.5 and 4.

Promoters

The same thing mentioned in Trent applies here. The business is very competition intensive and the promoters can't do anything about it.

Mutual Fund Holding

As usual, since the company's financials are nothing to write home about, every Reliance, HDFC and UTI (i.e. Tom, dick and harry) have it in their schemes. This is a big negative for me.

Valuations

At the current market price of INR 730, the company is trading at 43 times trailing twelve month EPS and 9.6 times book value. Dividend yield is just 0.2 percent.

The market prices are not an infallible measure of value. There will always be a small minority of cases in which the price may be speculative but the security measures up to strict investment standards. -Benjamin Graham