Company Update

March 7, 2017
Rating matrix
Rating : Buy Premco Global (PREGLO) | 460
Target : | 675
Target Period
Potential Upside
:
:
12-18 months
47% FY17E a washout; hope hinges on FY18E...
Whats changed?
Premco Global (Premco) reported a muted Q3FY17 performance;
Target Changed from | 825 to | 675
with net sales for the quarter coming in at | 17.5 crore, down 12%
EPS FY17E Changed from | 37.3 to | 29.8 YoY. The sales de-growth was largely tracking muted export sales
EPS FY18E Changed from | 50.0 to | 40.0 and a slower-than-expected pick-up from the Vietnam plant
EPS FY19E Changed from | 60.0 to | 50.0 From Vietnam, Premco reported sales of | 3.2 crore for the quarter
Rating Unchanged with just breakeven at the EBITDA level
On a consolidated basis, EBITDA in Q3FY17 came in at | 2.7 crore
Key financials while PAT in Q3FY17 was at | 1.7 crore, down 50% YoY
| crore FY16 FY17E FY18E FY19E EBITDA margins for the quarter came in lowest ever at 15.4% vs. the
Net Sales 73.5 78.7 97.7 116.1 usual rate of ~25% plus on account of high raw material and
EBITDA 20.1 18.0 23.0 27.9 overhead costs amid muted sales growth
EBITDA Margins (%) 27.3 22.8 23.5 24.0 TPP scrappage to limit margin expansion but sales growth outlook intact
Net Profit 12.6 9.8 13.2 16.5
Premco has executed an impressive capex programme in Vietnam (total
EPS 38.1 29.8 40.0 50.0
spend ~| 20 crore) pursuant to its customers preference to develop
Valuation summary Vietnam as their sourcing hub. It was envisaged to be a natural
FY16 FY17E FY18E FY19E beneficiary of Trans Pacific Pact (TPP) with free movement of goods
P/E 12.1 15.4 11.5 9.2 across member nations (mainly US). TPP pact as we stand today is almost
Target P/E 17.7 22.7 16.9 13.5 void with US, a key partner, pulling out. This will limit the margin
EV / EBITDA 6.7 7.9 5.8 4.3 expansion at the consolidated level but will not endanger the sales
P/BV 3.0 2.6 2.1 1.8 growth outlook as its customers are already widespread in Vietnam.
RoNW 24.8 16.5 18.7 19.5 Pursuant to it, we have lowered our margin estimates over FY16-19E.
RoCE 32.5 23.2 25.4 26.4
ROIC 56.4 33.2 35.2 41.3
Premiumisation story in innerwear segment intact, benefits Premco
Globally, innerwear is a highly brand conscious market with relatively
Stock data stable consumption patterns. It is expected to grow at 2-5% with
Stock Data | crore premiumisation share largely intact. Domestically, the Indian innerwear
Market Capitalization 152.0 market size is pegged at | 20,000 crore (2014) with the organised sector
Total Debt (FY16) 4.0 comprising ~52% share. It is expected to grow at 13% CAGR to | 68000
Cash and Cash Equivalent (FY16) 21.0
crore by 2024. Domestically, with rising per capita income, higher
Enterprise Value 135.0
52 week H/L 750 / 430
discretionary spending and growing fashion consciousness, innerwear
Equity Capital 3.3 industry is on a strong footing with robust growth, going ahead.
Face Value | 10 Vietnam, first phase commissioned; second getting customer approval
MF Holding (%) 2.2 Premco commenced operations at its Phase I unit in Vietnam and is
FII Holding (%) 0.0 currently awaiting customer approvals for Phase 2, which is due to be
Stock data commissioned by FY17E. On the back of commissioning of the Vietnam
1M 3M 6M 12M facility, we expect volumes to grow at 15.3% CAGR in FY16-19E to 13.8
Premco Global (18.7) (16.1) (17.0) (22.9) crore metre in FY19E (9 crore metre in FY16). Domestic manufacturing
Arrow Textiles (14.8) 1.6 24.6 19.0 sales growth is expected to be largely flat at ~9 crore metre.
Manufacturing sales in Vietnam are expected to grow to ~5 crore metre
Research Analyst by FY19E (~1.2 crore metre in FY17E).
Chirag J Shah Balance sheet strength to grow, expectations drying out, retain BUY!!
shah.chirag@icicisecurities.com Premcos presence in a niche segment coupled with healthy EBITDA
Shashank Kanodia, CFA margins has enticed a lot of investor interest thereby leading to steep
shashank.kanodia@icicisecurities.com price appreciation in the past. However, in the past, it has under delivered
post over promising, thereby leading to a stock price correction.
However, going forward, as market expectations are drying up, we gain
confidence from its lean balance sheet structure and robust return ratios.
On the current asset base, it realises an asset turnover in excess of 2x
with normalised EBITDA margins of ~25% thereby realising core RoICs of
~40%. Therefore, we retain our BUY rating but revise downward our
estimates. Going forward, we expect sales & PAT to grow at a CAGR of
16.5% & 9.5%, respectively, in FY16-19E. It includes a moderation in
EBITDA margin profile (down 330 bps). We now value Premco at | 675,
i.e. 15.0x P/E on FY18E & FY19E average EPS of | 45.0.

ICICI Securities Ltd | Retail Equity Research

 Outlook and valuation
Premco has executed an impressive capex programme in Vietnam (total
spend ~| 20 crore) pursuant to its customers preference to develop
Vietnam as their sourcing hub. It was envisaged to be a natural
beneficiary of the Trans Pacific Pact (TPP) with free movement of goods
across the member nations (mainly US). TPP pact as we stand today is
almost void with US, a key partner, pulling out. This will limit the margin
expansion at the consolidated level but will not endanger the sales
growth outlook as its customers are already widespread in Vietnam.
Pursuant to it, we have lowered our margin estimates over FY16-19E.

Premcos presence in the niche segment coupled with healthy EBITDA

margins has enticed a lot of investor interest thereby leading to steep
price appreciation in the past. However, Premco has, in the past, under
delivered post over promising thereby leading to a correction in stock
price. However, going forward, as market expectations are drying up, we
gain confidence from its lean balance sheet structure and robust return
ratios. On the current asset base, it realises an asset turnover in excess of
2x with normalised EBITDA margins of ~25% thereby realising core
RoICs of ~40%. Therefore, we retain our BUY rating but revise downward
our estimates. Going forward, we expect sales & PAT to grow at a CAGR
of 16.5% & 9.5%, respectively, in FY16-19E. It includes moderation in
EBITDA margin profile (down 330 bps). We now value Premco at | 675,
i.e. 15.0x P/E on FY18E & FY19E average EPS of | 45.0.
Exhibit 1: Valuation Summary
Particulars FY17E FY18E
Old New % Change Old New % Change
Revenue 80.1 78.7 (1.8) 108.4 97.7 (9.9)
EBITDA 20.4 18.0 (11.9) 28.2 23.0 (18.6)
EBITDA Margin % 25.5 22.8 -263 bps 26.0 23.5 -251 bps
PAT 12.3 9.8 (19.9) 16.5 13.2 (19.8)
EPS 37.3 29.8 (19.9) 50.0 40.0 (19.8)
Source: Company, ICICIdirect.com Research

Exhibit 2: Two year forward P/E (Premco Global currently trading at 9.3x)
1000
900
800
700
600
500
(|)

400
300
200
100
0
Nov-11

Nov-12

Nov-13

Nov-14

Nov-15

Nov-16
Mar-12

Jul-12

Mar-13

Jul-13

Mar-14

Jul-14

Mar-15

Jul-15

Mar-16

Jul-16

Mar-17

Price 20x 16x 13x 10x 7x 4x 1x

Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

 Recommendation history vs. consensus estimate
1,000 100
900
800 80
700
600 60
(|)

500

(%)
400 40
300
200 20
100
0 0
Jul-15 Oct-15 Dec-15 Mar-16 May-16 Jul-16 Oct-16 Dec-16 Mar-17

Price Idirect target Consensus Target Mean % Consensus with Buy

Source: Bloomberg, Company, ICICIdirect.com Research; *I-direct coverage on Premco Global was initiated on October 2016

Key events
Date/Year Event
2010 Premco is considering expansion of its current installed capacity and corresponding production on the back of growing demand. It has identified a suitable location
at Vapi for the same.
2011 The company has expanded its installed capacity at Vapi by 1.5 crore metre to reach a total capacity of 11 crore metre. Premco net sales at | 42cr witnessed a 51%
jump as exports doubled to |14.5 cr in FY11 vs |7.1 cr in FY10.
2013 Premco marks the beginning of a turnaround with capacity utilisation rates at 73%. Net sales at | 52.1 crore were driven by both the domestic and export sales
which grew in excess of 55% over previous year. The EBITDA stood at | 8.8 crore with corresponding margins at 16.6%.
2014 The company delivers quality products to its export clients as exports grew by 31% during the year and constitute ~ 70% of total sales. This resulted in further
strenthening of EBITDA margins to 20.8% in FY14 vs 16.6% in FY13
2015 Premco delivered a strong performance as net sales, EBITDA and PAT came in at | 73.5 crore, | 20.1 crore and | 12.6 crore respectively. Premco also entered the
High End name Tape business that offers better margins going forward.
2016 The company plans to set up an additional 7 crore metre capacity in Vietnam at an approximate cost of | 20 cr. The facility is expected to be commissioned in two
phases (3.5 cr metre each) by Q2FY17E and Q4FY17E respectively.
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
1 Harjani (Ashok B) 31-Dec-16 27.7 0.9 0.0 Promoter 64.9 64.9 64.9 64.9 64.9
2 Harjani (Lokesh Prem) 31-Dec-16 13.2 0.4 0.0 FII 0.2 0.2 0.2 0.0 0.0
3 Harjani (Suresh) 31-Dec-16 12.9 0.4 0.0 DII 2.2 2.2 2.2 2.4 2.4
4 Harjani (Prem) 31-Dec-16 8.3 0.3 0.0 Others 32.7 32.7 32.7 32.7 32.7
5 Alwani (Mulchand Gianchand) 31-Dec-16 2.9 0.1 0.0
6 Alwani (Manju Mulchand) 31-Dec-16 2.5 0.1 0.0
7 Harjani (Nisha Prem) 31-Dec-16 1.8 0.1 0.0
8 Chhabria (Neeta Dhirajlal) 31-Dec-16 1.5 0.0 0.0
9 Pattabiraman (R.) 31-Dec-16 1.4 0.0 0.0
10 Harjani (Sonia Ashok) 31-Dec-16 0.1 0.0 0.0
Source: Reuters, ICICIdirect.com Research
Recent Activity
es

Buys Sells
Investor name Value Shares Investor name Value Shares
NA Pattabiraman (R.) -0.05M -0.01M
Chhabria (Neeta Dhirajlal) -0.01M -0.00M

Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

Financial summary (Consolidated)
Profit and loss statement | Crore Cash flow statement | Crore
(Year-end March) FY16 FY17E FY18E FY19E (Year-end March) FY16 FY17E FY18E FY19E
Net Sales 70.1 76.4 94.8 112.7 Profit after Tax 12.6 9.8 13.2 16.5
Other Operating Income 3.4 2.3 2.8 3.4 Add: Depreciation 2.2 3.1 4.1 4.7
Total Operating Income 73.5 78.7 97.7 116.1 (Inc)/dec in Current Assets 0.8 -4.6 -5.8 -5.7
Growth (%) 1.7 7.1 24.1 18.8 Inc/(dec) in CL and Provisions -0.8 0.3 1.0 1.4
Raw Material Expenses 31.3 32.2 42.0 49.9 Others 1.0 1.1 0.8 0.7
Employee Expenses 7.6 11.7 11.2 12.8 CF from operating activities 15.7 9.7 13.3 17.5
Selling Expense 0.0 0.0 0.0 0.0 (Inc)/dec in Investments -8.3 6.1 -7.0 -12.0
Other Operating Expense 14.5 16.8 21.5 25.5 (Inc)/dec in Fixed Assets -6.1 -14.6 -2.0 -2.0
Total Operating Expenditure 53.4 60.7 74.7 88.2 Others 0.2 -0.3 0.7 1.0
EBITDA 20.1 18.0 23.0 27.9 CF from investing activities -14.1 -8.8 -8.3 -13.0
Growth (%) -0.8 -10.6 27.7 21.3 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0
Depreciation 2.2 3.1 4.1 4.7 Inc/(dec) in loan funds 1.0 0.2 -1.0 -0.5
Interest 1.0 1.1 0.8 0.7 Interest & Dividend paid -2.2 -2.1 -2.8 -3.0
Other Income 2.6 1.9 1.9 2.9 Inc/(dec) in Share Cap 0.0 0.0 0.0 0.0
PBT 19.5 15.7 19.9 25.4 Others 0.2 0.0 0.0 0.0
Total Tax 6.9 5.7 6.3 7.9 CF from financing activities -1.1 -1.9 -3.8 -3.5
Minority Interest 0.0 0.1 0.4 1.0 Net Cash flow 0.6 -0.9 1.2 1.0
PAT 12.6 9.8 13.2 16.5 Opening Cash 1.8 2.4 1.4 2.7
Growth (%) 4.1 -21.8 34.4 24.9 Closing Cash 2.4 1.4 2.7 3.6
EPS (|) 38.1 29.8 40.0 50.0 Source: Company, ICICIdirect.com Research
Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios

(Year-end March) FY16 FY17E FY18E FY19E (Year-end March) FY16 FY17E FY18E FY19E
Liabilities Per share data (|)
Equity Capital 3.3 3.3 3.3 3.3 EPS 38.1 29.8 40.0 50.0
Reserve and Surplus 47.5 56.3 67.5 81.7 Cash EPS 44.8 39.1 52.5 64.1
Total Shareholders funds 50.8 59.6 70.8 85.0 BV 153.6 180.2 214.3 257.1
Total Debt 4.3 4.5 3.5 3.0 DPS 3.0 2.5 5.0 6.0
Deferred Tax Liability 0.9 0.9 0.9 0.9 Cash Per Share (Incl Invst) 63.6 42.2 67.2 106.3
Minority Interest / Others 1.3 1.4 1.9 2.8 Operating Ratios (%)
Total Liabilities 57.2 66.4 77.1 91.7 EBITDA Margin 27.3 22.8 23.5 24.0
PAT Margin 17.1 12.5 13.5 14.2
Assets Inventory days 81.2 80.0 75.0 70.0
Gross Block 24.8 37.1 45.1 48.1 Debtor days 47.6 60.0 60.0 60.0
Less: Acc Depreciation 15.1 18.6 22.7 27.4 Creditor days 21.3 20.0 20.0 20.0
Net Block 9.7 18.5 22.4 20.7 Return Ratios (%)
Capital WIP 4.3 7.0 1.0 0.0 RoE 24.8 16.5 18.7 19.5
Total Fixed Assets 14.0 25.5 23.4 20.7 RoCE 32.5 23.2 25.4 26.4
Investments 18.6 12.5 19.5 31.5 RoIC 56.4 33.2 35.2 41.3
Inventory 15.6 16.7 19.5 21.6 Valuation Ratios (x)
Debtors 9.1 12.6 15.6 18.5 P/E 12.1 15.4 11.5 9.2
Loans and Advances 1.8 1.8 1.7 2.0 EV / EBITDA 6.7 7.9 5.8 4.3
Other Current Assets 1.5 1.5 1.7 2.0 EV / Net Sales 1.9 1.9 1.4 1.1
Cash 2.4 1.4 2.7 3.6 Market Cap / Sales 2.2 2.0 1.6 1.3
Total Current Assets 30.4 34.1 41.2 47.8 Price to Book Value 3.0 2.6 2.1 1.8
Current Liabilities 4.1 4.2 5.2 6.2 Solvency Ratios
Provisions 1.9 2.1 2.1 2.5 Debt/EBITDA 0.2 0.3 0.2 0.1
Current Liabilities & Prov 6.0 6.3 7.3 8.6 Debt / Equity 0.1 0.1 0.0 0.0
Net Current Assets 24.4 27.8 33.9 39.2 Current Ratio 4.7 5.2 5.3 5.1
Others Assets 0.6 0.6 0.3 0.3 Quick Ratio 2.1 2.5 2.6 2.6
Application of Funds 57.2 66.4 77.1 91.7 Source: Company, ICICIdirect.com Research
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 4

RATING RATIONALE
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ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
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