Mirza International Limtied

CMP = 83 ; Market Cap = 1004 cr.;  P/E= 12.5 ; BV = 39.6

ROCE = 24.44 ; ROE = 20.66 %

Business – Involved in the manufacturing of leather footwear , apparels , and leather. The company owns the famous brand Redtape( upscale mass market) and Oak Street(niche market). The company has a fully integrated business model from the processing of raw hides to manufacturing leather to manufacturing different parts of a footwear to producing a shoe. The footwear production capacity is around 6.4 million pairs of shoes. (currently running at 80 percent utilization).

Last 10 years PAT = 337 cr.

Last 10 years CFO =  572 cr.

This shows that the company is able to successfully convert its profit earned into cash flows from operations.

Sales growth last 10 years = 12 %.

PAT growth last 10 years = 15. 74 %

PAT growth greater than sales growth is a positive.

OPM margins have improved over the years from around 9.4 % in 2007 to 18.5 % in 2016. On further digging we see that one of the main reasons of this has been the other cost component in the income statement has significantly come down as percentage of sales.  This signifies that the company enjoys some operating leverage with size.

The company has 6 integrated in house facilities for producing leather footwear located in UP and Uttarakhand. Capacity for producing shoes is 6.4 million pairs per annum ; its operating at 80 % capacity utilization currently.  The company has the largest tannery in the country with a capacity of 38 mn sq ft. The tannery is operating at a capacity of 50 percent ; OPM 5 percent. This is expected to go up in the coming years. As the sales volume of the shoe business improves the utilization of the tannery will improve , as 50 -60 % of the leather produced is consumed internally by the company.

Export

Exports account for 75 percent of the sales for the company.

For FY 16 Revenue = Rs. 928 cr

Export = Rs. 692 cr .

UK = Rs. 464 cr ( 68 % of exports.) ; US = Rs. 89 cr ( 13 % of exports).

Hence revival of  economy in UK is very crucial for the company , it is being estimated that the economy has already hit rock bottom in UK and is expected to rebound by FY 18.  80 percent of export sales of the company is of white label footwear while balance is of the companies brand Red Tape and Oak Trak. The company sees a great growth potential in the market of US, where it is growing at CAGR of 83 percent for the last 5 years. The company is also trying to increase its presence in new markets like the Middle East .

Domestic Business

Domestic business contributes roughly around 25 percent of the turnover.

FY 16 domestic business revenue = Rs. 236 cr. ;

Leather business contributes around 80 cr and the remaining is through footwear sales( branded).

Company is taking a number of steps to improve its domestic branded sales.

  1. Online presence

Company is improving its sales through e- commerce channels via Flipkart, Amazon , Myntra, Snapdeal, etc. it has set up a 70,000 sq ft warehouse in Noida to serve these channels. The range of products available online are different from the ones in the brick and mortar retail stores.

  1. Launched a new brand called ‘ Bondstreet’.

This is for the affordable segment. Price range of the shoes is Rs. 1200 – Rs. 1900.  This will be manufactured by a third party and will be polymer based. Since majority of Indian Market is in affordable segment and unorganized sector , this can be a great growth opportunity for the company.

The products in this segment will be launched at a discount to its peers initially and sold through a separate distribution channel . The company is targeting some rural areas by the end of FY 17 for selling the products of this brand.

  1. Increasing sales of Red Tape.

The company already has 130 EBOs spread across the country. It is planning to set up 50 more EBOs in the next 2 year taking the number upto 180.

Key Risks

  1. Forex Volatility – Since 75 percent of revenues are exports, currency rate fluctuations can be a threat. The company hedges its export sales to avoid this.
  2. Shortage of skilled labour – 90 percent of total workforce in India is unskilled or semi-skilled. Skilled labour is important in the leather industry. The government of India has taken steps to solve this. Leather Sector Skill Council has been set up.

Investment rationale

  1. Focus on domestic sales growth

The company is focusing on increasing its domestic sales growth by going into e- retail , by increasing number of EBOs , by launching a new brand in the affordable segment .

  1. Revival of the economy in the UK.

Since 50 percent of the revenues of the company is from UK, it is very important for the economy of UK to do well. It is being estimated that the economy of UK has already hit rock bottom and is supposed to be back on track by FY18.

  1. Increasing presence in USA and penetration into new markets.

The company has been growing at a CAGR of 80 percent in the US since the last 3 years . The US represents a huge market for such a company since discretionary spending by the average American is among the highest in the world. The company has already tied up with five major retailers in the US. The company is also exploring new markets such as the Middle East.

  1. Improvement in ROCE, ROE ratios and OPM margins expected in the future.

The company is completely integrated. It produces its own leather and consumes it to produce footwear. The capacity of the tannery of the company has been recently expanded by spending a capex of Rs.100 cr. The tannery is currently operating at utilization of fifty percent and 5 percent OPM. With the utilization of tannery going up, greater amount of leather will either be sold or used by the company for shoe production. Hence this will improve the margins of the company. This will also lead to an improvement in capital return ratios.

  1. Debt has started reducing on the balance sheet

The company has a debt of over 160 cr on the balance sheet , and the interest payment in FY 16 was around 31 cr. The debt component on the balance sheet is expected to reduce which will save interest costs.

If we analyze the debt of 160 cr –

138 cr is short term borrowing and the rest 22 cr is long term borrowing. This is because the inventory portion on the balance sheet is 240 cr. Of this 127 cr is finished goods ( goods in transit) .This portion represents the finished goods which are being shipped abroad. This portion of inventory with respect to sales will come down as the domestic sales growth is expected to be higher than exports. Also the raw material component of inventory will come down with increase in capacity of tannery as most of the raw material will be made internally.