Initiating Coverage | Footwear
September 1, 2016
Mirza International
BUY
CMP
`84
Red Tape to escalate the green print
Target Price
`113
Mirza International Ltd (MIL) is engaged in manufacturing and marketing leather and
Investment Period
12 Months
leather footwear. It exports its products to the European Union, Germany, the United
Kingdom, the United States, Italy, and France among other geographies. Its brands
Stock Info
include Red Tape and Oaktrak.
Sector
Footwear
Strong growth in domestic branded segment to drive overall growth: In the branded
Market Cap (` cr)
1,011
domestic segment, we expect the company to report a ~24% CAGR over FY2016-18E
to `346cr. We anticipate strong growth for the company on the back of (a) the
Net Debt (` cr)
213
company’s wide distribution reach through its 1,000+ outlets including 120 exclusive
Beta
1.6
brand outlets (EBOs) in 35+ cities and the same are expected to reach 200 over the
52 Week High / Low
145/83
next 2-3 years and (b) strong branding (Red Tape) in the shoes segment. Further, MIL
Avg. Daily Volume
100,469
is enhancing its brand visibility owing to higher ad spend in FY2017. MIL has doubled
Face Value (`)
2
its ad spend over the last five years; ad spends as a proportion of branded product
sales now stand at 9-10%.
BSE Sensex
28,452
Strong global footprint: MIL’s major export revenue comes from the UK
(73%),
Nifty
8,786
followed by the US (14%) and the balance from ROW. Export constitutes ~75% of the
Reuters Code
MIRZ.BO
company’s total revenue. The company is reasonably insulated in terms of client
Bloomberg Code
MRZI.IN
concentration. Its clients include ASDA, River Island, Matalan, ASOS, Elan Polo, and
Steve Madden among others. In the UK, the company has a market share of ~25% in
the men’s leather footwear mid-segment category. We expect the company to report
Shareholding Pattern (%)
healthy growth over the next 2-3 years on back of recovery in the UK market, strong
Promoters
73.8
growth in the US market and with it tapping newer international geographies like the
MF / Banks / Indian Fls
0.3
Middle East countries.
FII / NRIs / OCBs
0.5
Genesis Footwear merger to boost margins: In FY2016, the company acquired
Genesis Footwear which has a better margin profile than it. The deal resulted in MIL’s
Indian Public / Others
25.4
EPS increasing by ~4% and ROE improving from 15.9% to 17.5%. Further, due to this
merger, the company’s capacity has increased from 5.4mn to 6.4mn units. During FY2016,
the company reported net sales of `90cr, EBITDA margin of ~29%, and PAT of `20cr.
Abs.(%)
3m
1yr
3yr
Outlook and Valuation: We expect MIL to report a net revenue CAGR of ~11% to
Sensex
6.7
8.3
50.7
~`1,148cr over FY2016-18E on back of strong growth in domestic branded sales
MIL
(13.4)
(24.4)
318.2
(owing to aggressive ad spend and addition in the number of EBOs & multi-brand
outlets [MBOs]) and healthy export revenues. On the bottom-line front, we expect a
3-year price chart
CAGR of ~11% to `97cr over the same period on the back of margin improvement.
160
At the current market price of `84, the stock trades at a PE of 12.2x and 10.5x its
140
120
FY2017E and FY2018E EPS of `6.9 and `8.0, respectively. We initiate coverage on the
100
stock with a Buy recommendation and target price of `113 based on 14x FY2018E EPS,
80
indicating an upside of ~34% from the current levels.
60
40
Key financials
20
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
0
Net sales
919
927
1,024
1,148
% chg
29.9
0.9
10.4
12.2
Net profit
51
78
83
97
Source: Company, Angel Research
% chg
51.2
78.1
83.0
96.7
EBITDA margin (%)
15.5
18.5
18.0
18.0
EPS (`)
4.3
6.5
6.9
8.0
P/E (x)
19.8
12.9
12.2
10.5
P/BV (x)
3.3
2.4
2.1
1.7
RoE (%)
16.4
18.5
16.6
16.3
RoCE (%)
22.3
22.6
21.5
21.5
Amarjeet S Maurya
EV/Sales (x)
1.3
1.3
1.2
1.0
022-39357800 Ext: 6831
EV/EBITDA (x)
8.6
7.1
6.5
5.8
amarjeet[email protected]
Source: Company, Angel Research, Note: CMP as of September 1, 2016
Please refer to important disclosures at the end of this report
1
Mirza International | Initiating Coverage
Key investment arguments
Strong growth in domestic branded segment to drive overall growth
In the branded domestic segment, we expect the company to report a ~24%
CAGR over FY2016-18E to `346cr. We anticipate strong growth for the company
on the back of (a) the company’s wide distribution reach through its 1,000+
outlets including 120 exclusive brand outlets (EBOs) in 35+ cities and the same
are expected to reach 200 over the next 2-3 years and (b) strong branding (Red
Tape) in the shoes segment. Further, MIL is enhancing its brand visibility owing to
higher ad spend in FY2017. MIL has doubled its ad spend over the last five years;
ad spends as a proportion of branded product sales now stand at 9-10%.
Exhibit 1: Healthy domestic growth expected
400
90
79.4
77.4
74.4
350
80
69.1
69.4
69.4
66.0
70
300
60
250
50
200
40
150
30
100
20
50
10
143
160
201
210
235
292
357
0
0
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017E FY2018E
Net domestic sales
Brand sales as % of Domestic sales
Source: Company, Angel Research
Exhibit 2: Company’s historical ad spend trend
Exhibit 3: Distribution channel profile
13.3
200
14.0
12
12.4
175
180
12.0
11.2
10.7
10
160
10.0
140
8
8.0
120
6
5.6
100
6.0
80
4
60
60
4.0
60
2
2.0
40
20
0.0
0
FY2011
FY2012
FY2013
FY2014
FY2015
0
Ad spend
% of domestic branded sales
Shop in Shop
EBO (owned)
EBO (Franchise)
Source: Company, Angel Research
Source: Company, Angel Research
September 1, 2016
2
Mirza International | Initiating Coverage
Exhibit 4: REDTAPE brand profile - Footwear, Apparel, Accessories etc.
Source: Company, Angel Research
Strong global footprint to drive overall growth
MIL exports its products to the European Union, the United Kingdom, the United
States, Italy, and France, among other geograhies. The company’s major export
revenue comes from the UK (73%), followed by the US (14%) and the balance from
ROW. Exports constitute ~75% of the company’s total revenue. The company is
reasonably insulated in terms of client concentration. Among the company’s clients
are ASDA, River Island, Matalan, ASOS, Elan Polo, Steve Madden etc. In the UK,
the company has a market share of ~25% in the men’s leather footwear mid-
segment category. On the revenue front, the company reported a ~14% CAGR
over the past four years and is expected to generate healthy growth in the coming
few years as well on back of recovery in the UK market, strong growth in the US
market and with it looking to penetrate further across international geographies
like the Middle East countries.
Exhibit 5: Strong Distribution network in US & UK and also reach in 30
countries worldwide
MBO Stores in USA
MBO Stores in UK
500+
1200+
Source: Company, Angel Research
September 1, 2016
3
Mirza International | Initiating Coverage
Exhibit 6: Historical and Projected export trend
Exhibit 7: Export revenue break-up in FY2016
1000
50
13%
39.9
40
800
30
600
14%
20
17.1
400
8.2
10
5.6
4.5
200
0
(2.4)
73%
0
(10)
FY2013
FY2014
FY2015
FY2016
FY2017E FY2018E
Export Revenue
yoy growth (%)
UK
US
ROW
Source: Company, Angel Research
Source: Company, Angel Research
Genesis Footwear merger to boost margins
In FY2016, the company acquired Genesis Footwear which has a better margin
profile than it. The deal resulted in MIL’s EPS increasing by ~4% and ROE
improving from 15.9% to 17.5%. Further, due to this merger, the company’s
capacity has increased from 5.4mn to 6.4mn units. During FY2016, the company
reported net sales of `90cr, EBITDA margin of ~29%, and PAT of `20cr.
Exhibit 8: Financial data of MIL and Genesis Footwear
Mirza International
Genesis footwear
Merged company
Sales
927
90
927.17
Operating Profit
146
26
171.98
Margin (%)
15.7%
28.9%
18.5%
PAT
58
20
78.09
ROE
15.9%
23.8%
17.5%
No of share cr
9.27
3.0
12.03
EPS
6.3
6.7
6.5
Source: Company, Angel Research
About Genesis Footwear: Genesis Footwear is engaged in footwear manufacturing
and has an in-house design studio and R&D facility. Its manufacturing plant is fully
exempt from excise payment as it’s situated in the Kashipur, Uttrakhand, tax free
zone. Before the merger, the company used to buy raw materials from MIL and
also sell shoes to MIL.
September 1, 2016
4
Mirza International | Initiating Coverage
Outlook and Valuation
We expect MIL to report a net revenue CAGR of ~11% to ~`1,148cr over
FY2016-18E on back of strong growth in domestic branded sales (owing to
aggressive ad spend and addition in the number of EBOs & multi-brand outlets
[MBOs]) and healthy export revenues. On the bottom-line front, we expect a CAGR
of ~11% to `97cr over the same period on the back of margin improvement. At
the current market price of `84, the stock trades at a PE of 12.2x and 10.5x its
FY2017E and FY2018E EPS of `6.9 and `8.0, respectively. We initiate coverage on
the stock with a Buy recommendation and target price of `113 based on 14x
FY2018E EPS, indicating an upside of ~34% from the current levels.
Exhibit 9: One year forward PE Chart
160
Share Price
4x
8x
12x
16x
20x
140
120
100
80
60
40
20
0
Source: Company, Angel Research
Exhibit 10: Peer Comparison
Market Cap
EPS
PE (x)
EV/EBITDA (x)
ROE (%)
FY16
FY17
FY18
FY16
FY17
FY18
FY16
FY17
FY18
FY16
FY17
FY18
MIL
1,021
6.5
6.9
8.0
12.9
12.2
10.5
7.1
6.5
5.8
18.5
16.6
16.3
Bata
6,862
11.2
12.9
15.1
47.8
41.5
35.5
24.9
22.5
19.7
13.2
14.1
15.6
Source: Company, Angel Research
Downside risks to our estimates
Any slowdown in global economy could hurt the company’s revenue (75% of
revenue comes from exports).
Volatility in USD and Euro exchange rate against INR can have negative
impact on margins.
September 1, 2016
5
Mirza International | Initiating Coverage
Company Background
MIL is an India-based company engaged in manufacturing and marketing leather
and leather footwear. The company’s operations are segmented as the Footwear
division and the Tannery division. Its Tannery division manufactures finished
leather from raw hides, wet blue and crust and the Footwear division manufactures
finished leather shoes. The company exports its products to the European Union,
Germany, the United Kingdom, the United States, Italy, and France, among other
geographies. It operates an in-house shoe production facility and a design studio
in London. Its brands include Red Tape and Oaktrak. The Red Tape brand’s
product portfolio includes men's footwear, women's footwear, shirts, jackets,
denims, tees, pants/shorts and accessories. Oaktrak is a brand of formal footwear
including casual and urban styles. Oaktrak is sold through independents, small
retailers and multiples.
Exhibit 11: Historical revenue mix
100
80
72
71
69
74
75
77
75
60
40
20
28
29
31
26
25
23
25
0
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017E FY2018E
Domestic
Exports
Source: Company, Angel Research
September 1, 2016
6
Mirza International | Initiating Coverage
Consolidated Profit & Loss Statement
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17E
FY18E
Total operating income
644
707
919
927
1,024
1,141
% chg
16.3
9.9
29.9
0.9
10.4
11.4
Total Expenditure
528
586
776
755
839
935
Cost of Materials
370
404
548
504
570
636
Personnel
33
37
46
59
70
82
Others Expenses
125
145
182
192
200
217
EBITDA
116
122
143
172
184
205
% chg
37.2
5.1
17.1
20.6
7.1
11.4
(% of Net Sales)
18.0
17.2
15.5
18.5
18.0
18.0
Depreciation& Amortisation
20
22
25
26
29
31
EBIT
96
100
118
146
156
175
% chg
38.7
4.0
18.3
23.9
6.5
12.3
(% of Net Sales)
14.9
14.1
12.8
15.8
15.2
15.3
Interest & other Charges
32
32
39
32
34
34
Other Income
0
0
0
2
2
2
Recurring PBT
64
68
79
116
124
143
% chg
27.6
5.3
16.1
47.2
6.9
15.4
Prior Period & Extraord. Exp./(Inc.)
-
-
-
-
-
-
PBT (reported)
64
68
79
116
124
143
Tax
21
24
28
38
41
47
(% of PBT)
32.5
36.0
35.0
32.6
33.0
33.0
PAT (reported)
43
43
51
78
83
96
Add: Share of earnings of asso.
-
-
-
-
-
-
ADJ. PAT
43
43
51
78
83
96
% chg
43.4
43.4
51.2
78.1
83.0
95.8
(% of Net Sales)
6.7
6.1
5.6
8.4
8.1
8.4
Basic EPS (`
3.6
3.6
4.3
6.5
6.9
8.0
Fully Diluted EPS (`)
3.6
3.6
4.3
6.5
6.9
8.0
% chg
43.8
(0.1)
17.9
52.7
6.2
15.4
September 1, 2016
7
Mirza International | Initiating Coverage
Consolidated Balance Sheet
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17E
FY18E
SOURCES OF FUNDS
Equity Share Capital
19
19
19
24
24
24
Reserves& Surplus
233
268
294
398
476
567
Shareholders Funds
251
287
313
422
500
591
Minority Interest
-
-
-
-
-
-
Total Loans
167
212
218
225
225
225
Deferred Tax Liability
21
23
15
15
15
15
Total Liabilities
440
521
545
662
740
831
APPLICATION OF FUNDS
Gross Block
371
441
489
551
591
631
Less: Acc. Depreciation
119
133
181
207
236
266
Net Block
252
308
308
344
356
365
Capital Work-in-Progress
30
7
3
3
3
3
Investments
1
1
1
1
1
1
Current Assets
224
300
346
421
499
588
Inventories
138
192
225
262
294
334
Sundry Debtors
33
42
43
63
76
91
Cash
4
6
6
11
30
48
Loans & Advances
44
56
67
74
87
103
Other Assets
5
3
5
10
11
13
Current liabilities
68
97
115
110
121
129
Net Current Assets
156
203
231
311
378
460
Deferred Tax Asset
2
2
3
3
3
3
Mis. Exp. not written off
-
-
-
-
-
-
Total Assets
440
521
545
662
740
831
September 1, 2016
8
Mirza International | Initiating Coverage
Consolidated Cashflow Statement
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17E
FY18E
Profit before tax
64
68
79
116
124
143
Depreciation
20
22
25
26
29
31
Change in Working Capital
(8)
(48)
(19)
(74)
(48)
(64)
Interest / Dividend (Net)
31
32
39
32
34
34
Direct taxes paid
(19)
(24)
(28)
(38)
(41)
(47)
Others
0
(0)
1
-
-
-
Cash Flow from Operations
89
48
97
61
97
96
(Inc.)/ Dec. in Fixed Assets
(58)
(54)
(59)
(63)
(40)
(40)
(Inc.)/ Dec. in Investments
-
-
-
-
-
-
Cash Flow from Investing
(58)
(54)
(59)
(63)
(40)
(40)
Issue of Equity
-
-
-
36
-
-
Inc./(Dec.) in loans
1
45
6
8
-
-
Dividend Paid (Incl. Tax)
(5)
(5)
(5)
(5)
(5)
(5)
Interest / Dividend (Net)
(36)
(33)
(40)
(32)
(34)
(34)
Cash Flow from Financing
(39)
8
(39)
7
(38)
(38)
Inc./(Dec.) in Cash
(8)
2
(1)
6
19
18
Opening Cash balances
12
4
6
6
11
30
Closing Cash balances
4
6
6
11
30
48
September 1, 2016
9
Mirza International | Initiating Coverage
Key ratios
Y/E March
FY13
FY14
FY15
FY16
FY17E
FY18E
Valuation Ratio (x)
P/E (on FDEPS)
23.3
23.3
19.8
12.9
12.2
10.5
P/CEPS
16.0
15.4
13.3
9.7
9.1
7.9
P/BV
4.1
3.6
3.3
2.4
2.1
1.7
Dividend yield (%)
0.5
0.5
0.5
0.5
0.5
0.5
EV/Sales
1.8
1.7
1.3
1.3
1.2
1.0
EV/EBITDA
10.1
10.0
8.6
7.1
6.5
5.8
EV / Total Assets
2.3
2.0
1.9
1.6
1.4
1.2
Per Share Data (`)
EPS (Basic)
3.6
3.6
4.3
6.5
6.9
8.0
EPS (fully diluted)
3.6
3.6
4.3
6.5
6.9
8.0
Cash EPS
5.3
5.4
6.3
8.6
9.3
10.5
DPS
0.4
0.4
0.4
0.4
0.4
0.4
Book Value
20.4
23.4
25.3
34.4
40.9
48.4
Returns (%)
ROCE
22.9
20.0
22.3
22.6
21.5
21.4
Angel ROIC (Pre-tax)
23.2
20.3
22.5
23.0
22.4
22.8
ROE
17.3
15.1
16.4
18.5
16.6
16.2
Turnover ratios (x)
Asset Turnover (Gross Block)
1.7
1.6
1.9
1.7
1.7
1.8
Inventory / Sales (days)
78
99
89
103
105
107
Receivables (days)
18
22
17
25
27
29
Payables (days)
27
35
33
30
30
28
WC cycle (ex-cash) (days)
69
86
74
98
102
108
September 1, 2016
10
Mirza International | Initiating Coverage
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
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offering of securities of the company covered by Analyst during the past twelve months.
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Disclosure of Interest Statement
Mirza International
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
September 1, 2016
11