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Stock Recommendation | MIRZA INTERNATIONAL LTD (MIL) - BUY - Target Price : 104
Publish date: NOVEMBER 20, 2018
MIL reported lower than expected Q2FY19 in terms of profit due to lower EBITDA margins and higher interest expenses.
□ MIL reported revenue of Rs 2.9bn, a growth of 23% yoy led by 41.7% yoy growth in branded shoes and 8.1% yoy growth in make to order exports. Make to order exports revenue recovered after long time with strong performance in rest of the world market. On domestic side, domestic brand sales grew by 60% yoy driven by robust growth in apparel and strong growth in new brands and products.
□ EBITDA margin declined by 320 bps yoy to 14.4% and was below our estimates on account of lower margins in the branded shoes business on yoy basis led by higher discounts, MTM forex loss due to rupee depreciation and loss in tannery business due to cleaning up of old stock. The company witnessed increase in working capital which took its debt to Rs 3.5 bn (Vs Rs 2.7 bn at the end of Q4FY18).
□ MIL management has maintained guidance for 50% growth in FY19E revenue from domestic brand business based on strong response expected for new brands and apparel. The company has good order in exports business for the next 3 months and expects 2-3% yoy growth in the segment in FY19E.
We have cut our EPS estimates for FY19E & FY20E by 10.7% and 7.3% respectively factoring in lower margins and higher interest expenses in our estimates. The stock is trading at PE of 14.3x and 11x based on FY19E and FY20E revised EPS of Rs 5.7 (vs Rs 6.3) and Rs 7.4 (vs Rs 8.0), respectively. We retain our Buy rating on the stock with revised target price of Rs104 (Vs Rs120 earlier).
Net revenue for Q2FY19 grew by 23% yoy to Rs2.95 bn which was above our estimates of Rs 2.5 bn. The revenue was led by 42% yoy growth in branded shoes business and 8.1% yoy growth in revenue from make to order exports. In exports business (including Red Tape exports), revenue from rest of world grew by 54% yoy (due to growth in France and Italy), with US was flattish and UK market declined by 6.3% yoy. Red Tape brand exports declined by 34% yoy. The exports business has recovered after successive decline for past several quarters. As per the management, the company has good order in exports for next three months, and expects 2-3% yoy growth in FY19 exports.
On domestic side, domestic brand sales grew by 60% yoy which recovered after a slower growth rate in Q1FY19. The company has guided for 50% growth in domestic brand sales expected to be at Rs 5.5-6 bn in FY19E. The growth in domestic brand sales was driven by 90% yoy growth in apparel (at Rs 380 mn and robust growth of 37% yoy in new brands and products which includes Bond Street, Red Tape sports, ladies footwear, etc. In terms of channel, wholesale channel witnessed weakness while E-commerce and retail continued to remain strong. The company is positive on domestic branded footwear business based on large product portfolio catering to various segments. Further, pickup in online stores and new EBOs would also support growth of domestic brands business.
EBITDA for the quarter was flattish at Rs 426 mn (Vs estimates of Rs 413 mn). EBITDA margin for the quarter was at below our estimates at 14.4% (Vs estimates of 16.3%) due to of lower margins in the branded shoes business on yoy led by higher discounts, MTM forex loss due to rupee depreciation and loss in tannery business due to cleaning of old stock.
The EBIT margins in branded shoes business in Q2FY19 was at 16.9% (Vs 20.3% in Q2FY18) and in make to order exports business, it was at 17.2% (Vs 19.4% in Q2FY18). The margin was lower in the quarter due to higher discounts and increased overheads on account of new online stores opened by the company. These stores are yet to contribute significantly and are in process of ramping up. Apart from that, the raw material import (sports shoes, garments, etc) was also expensive due to currency depreciation.
The company expects lower EBITDA margin of 15-16% (vs earlier guidance of 17-18%) may continue for next one year as it would push new brands and products at discounted price.
PAT for the quarter declined by 16.7% to Rs 161 (vs our estimates of Rs 175 mn) on lower margins and higher finance expenses. The finance expenses for the quarter grew by 70.7% yoy to Rs 91 mn as the debt at the end of the quarter grew to Rs 3.5 bn (Vs Rs 2.7 bn in Q4FY18) due to increased working capital. Further, it has utilized Rs 1 bn limit for receivable discounting on exports side. The company expects debt to increase further by Rs 300-400 mn as it requires to meet investment requirement in new online stores and working capital in domestic brand business.
The company has maintained 50% yoy growth guidance in domestic branded shoes and apparel business in FY19E. This would be driven by strengthening of sales and distribution of its brands. The company has currently 40 online stores which are 3-4x larger (~3000-3500 sqft size) than its EBOs (800-1000 sqft size) and sells products at discounted price like online retailers. The company plans to open 25 more online stores in current year to take it to 65 stores. Altogether, the company has 194 stores which includes 40 online stores, 143 offline EBOs and 11 factory outlets which are selling Red Tape branded leather and sports footwear, apparels and accessories. The company has also launched ladies sandals under brand name ‘Mode’ which are sourced from third party. The future expansion of this brand depends upon the initial response. This will expand its product basket and strengthen growth in domestic markets.
■ In terms of distribution, retail contributed 45%, online 40% and wholesale contributed 15% to domestic brand revenue.
■ The company is targeting capex of Rs 400-450 mn in FY19E
■ Capex is expected to peak out in this year and next year onwards the company expects improvement in margins, reduction in working capital and improved cash flows
We believe that the company is aggressively focusing on growing revenue in the domestic market by launching multiple products and brands through retail and online channel expansion. Its aggressive investment in these has resulted in lower margins, higher working capital, negative cash flows and increased debt position and are point of concern. We believe that the success of these brands and products would be the key and may take few years before resulting in improvement in cash flows and reduction in debt.
We have cut our EPS estimates for FY19E & FY20E by 10.7% and 7.3% respectively factoring in lower margins and higher interest expenses in our estimates. The stock is trading at PE of 14.3x and 11x based on FY19E and FY20E revised EPS of Rs 5.7 (vs Rs 6.3) and Rs 7.4 (vs Rs 8.0), respectively. We maintain our Buy rating on the stock (as we see upside in the stock post correction) with revised target price of Rs104 (Vs Rs120 earlier). We have assigned PE of 14x (Vs 15x) on FY20E EPS to arrive at our target price, factoring increased risk on earnings.
Mirza International Ltd (MIL), incorporated in 1979, is engaged in manufacturing and marketing of leather footwear and accessories in the domestic and the international market. 56% of the company’s business comes from international markets where it mostly meets the outsourcing requirements of global retailers and footwear companies. On the other hand, domestic market contributes 44% of its total revenue where it sells leather shoes, sports shoes, sandals, fashion garment and accessories under its brand ‘Red Tape’, ‘Bond Street’. The company is focused on mid to high-end fashion footwear segment and sells its products through exclusive brand outlets, online stores, large format stores, multi brand outlets and online channels. The company has a fully integrated in-house shoe production facility backed by its own tannery with its own pollution treatment plant, and a dedicated design studio.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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