Name    Reco Date    Reco price    Target    Prospero Rating    Report Date*
Singer India Ltd    27Jan2013    Rs. 98    Rs. 150 - Rs. 200    6 / 10    27Jan2013
Our view - Business Fundamentals
 

With over 30 years of presence in the Indian sewing machine space, Singer India Ltd enjoys a strong brand recall and is synonymous with quality sewing machine products. Post the operational and financial crisis suffered over 2005-2008, the company is back on its way to profitability through a focus on sewing machines - the introduction of newer models, expanding distribution reach and improvising training and after-sales support network.

Our primary research reveals the sewing machine is not the product of the yesteryears but a niche product which is here to stay for long.

We believe that improved volumes in sewing machines and expanding distribution footprint of its recently launched kitchen appliances business would ensure healthy sales growth over FY12-15E. Steady-to-improving margins on the back of changing product mix should drive annual pre-tax earnings CAGR of ~15% over the same period. Singer India Ltd is currently under Board for Industrial & Financial Reconstruction (BIFR) and re-starting the Jammu plant is the only pending pre-condition for Singer India to exit the BIFR, post which its sales trajectory and earnings growth can accelerate. Thus, Singer India Ltd should be viewed as an emerging player in the Indian consumer space with steady earnings growth prospectus and a possibility of greater upside in-case it is able to come out of BIFR soon.

Our view - Stock Price, Returns Potential and Investment Strategy

The 150% rise in its stock price since Jun-12 was largely on the back of the company's net worth returning to the positive territory, driven by steady business performance. At CMP of Rs98 per share, the stock trades at 10x trailing twelve months earnings. Our investment premise is based on the fact that even stress case sales and earnings growth at ~10% results in an EPS of Rs10/share and provides a floor to the stock price at Rs80-Rs100. In an optimistic scenario, the company can do an EPS of Rs13/share by FY15E and stable performance over FY12-15E can result in trading multiple expansion to 15x, valuing Singer India at Rs200/share.

We expect the intermittent journey to be volatile given that company still has a small networth, thin margins and convalescing cash position. However, a debt-free balance sheet, asset light model, modest growth from sewing machines and potential upside from the recently launched kitchen appliance business should ensure that company avoids a repeat of 2005 like situation. We would advise our investors to accumulate this stock (max exposure should be 8% of portfolio) in the Rs80-Rs100 band with a three year view. Unrelated diversification and raising excessive debt remains the key risk to our investment argument and we will remain watchful of the same.

A) Introduction

Company Background

Established in 1981, Singer India is the 2nd largest sewing machine company in India with 97% of its revenues accruing from sales of sewing machines and related services. It has entered the kitchen appliances space since 2010, which contributes 2% of sales as on FY12. Due to labour and electricity related issues, its manufacturing facility at Jammu is shut since 2005 and it outsources its entire manufacturing to vendors in Haryana and China. It has nationwide network of 520 dealers and 23 owned stores across the company with a strong presence in South India. As on Jun-12, it registered total sales of Rs150cr and earnings of Rs8cr.

Headquartered in Singapore, Singer Asia is the 75% owner of Singer India. It has a strong presence in Thailand, Pakistan, Bangladesh, Malaysia and Sri Lanka across sewing machine, consumer durables and consumer financing categories. Along with Singer India, it has a revenue base of Rs2000cr and annual earnings to the tune of Rs60cr. Retail Holdings NV holds 54.1% stake in Singer Asia. Singer Asia holds a royalty bearing license from SVP Worldwide for the use of SINGER trademark in Asia and Australia.

Management

Rajeev Bajaj is a Managing Director, Director & Finance Director at Singer India Ltd., a Member at Institute of Chartered Accountants of India, and a Member at Institute of Co Secretaries of India. He is on the Board of Directors at Singer India Ltd.

K. K. Gupta is Non-Executive Chairman at Singer India Ltd. and Vice President at Singer Asia Ltd. He is on the Board of Directors at Hettich India Pvt Ltd. He was previously employed as a part of top management in companies like Brand Trading India Pvt Ltd., Retail Holdings NV, Paradeep Phosphates Ltd., Gautier India Ltd., and West Asia Region by Singer Co. NV.

Shareholding Pattern

As a part of the financial restructuring process, Singer Asia increased its stake in Singer India to 85% in 2009. Since then, it has gradually reduced its stake to 75% to comply with SEBI’s listing guidelines

Source: Company data

Special note on Singer India’s history

The company started as a distribution company in 1980’s and imported most of its products from international vendors. In the 90s, it started its own manufacturing in India through a facility in Sahibabad. The operations were expanded over 1995-2003 by establishing a new plant in Jammu and making it the hub of its manufacturing. During this period, it had also started manufacturing/distribution of refrigerators, colour TVs & household appliances and non-sewing machine business contributed ~40% of the company’s overall revenue in 2002 & 2003. The high working capital requirements, as well as the intense industry-wide price competition in the consumer durables space, strained the company’s profitability. The company reported record net loss of Rs16cr in FY04, thus wiping off 60% of its networth in a single year. Its Jammu factory faced severe labour issues in FY04-FY06 and manufacturing came to a stand-still. By the time company could find suitable vendors and establish quality control, its sales nosedived 66% over FY04-FY06 while high fixed costs resulted in operational losses to the tune of Rs52cr. The company’s networth was completely eroded, had accumulated losses of Rs72cr by Mar-06 and was declared sick by the Board of Industrial and Financial Reconstruction (BIFR) in Sep-06. A restructuring plan was unveiled for the revival of Singer India in 2008.

Chart 1: Strong recovery post the tumultuous decline in FY04-10


 

Source: BS research, Company data

Financial restructuring: A part of the accumulated losses was offset against its share capital, which was reduced by 90% from Rs15.6cr to Rs1.56cr. Its parent, Singer NV infused Rs8.4cr through acquiring additional stake in the company, taking its shareholding from 49% to 85%. At the same time, it reached a one-time settlement with banks, to which Singer India owed Rs33cr, by re-paying Rs7cr. Thus, Singer India's debt was reduced from Rs44cr to Rs15cr and its accumulated losses reduced from Rs72cr to Rs48cr post the financial restructuring. Subsequently, settlement with its unsecured creditors and waiving off of Singer India's borrowings of Rs8cr from its parent resulted in reduction of debt and accumulated losses to Rs4cr and Rs11cr respectively by 2010.

Chart 2: Restructuring complete in FY10, networth inches in the positive territory

Source: BS research, Company data

Operational restructuring: The Company focused solely on its sewing machine business - ensuring effective vendor management and reviving the dismantled distribution network. It started moving away from the distributor based model to dealer based model. Sales improved from the lows of Rs1.5cr per month in Oct-05 to Rs7cr per month by April-09 and clawed back to the black in 2010. Its sewing machine business continues to grow at a healthy pace and its accumulated losses have been wiped off and the company has turned networth positive in Jun-12. The only pending event for Singer India to come out of BIFR is the commencement of manufacturing operations in its Jammu factory, which remains contingent on an agreement with the power ministry of J&K. This event can open doors to a strong and profitable growth trajectory through –

1. In-house manufacturing will ensure margin improvements
    
2. Singer Asia has plans to source sewing machines for Pakistan, Sri Lanka and Bangladesh from this Jammu plant, thus opening doors for exports.
    
3. The company will be able to chart out its own growth strategy once it is out of BIFR.
    

B) About Business

Not a product of the yesteryears, sewing machines still an essential machine

Historically, small scale and cottage industries have been the largest consumers of sewing machines while local tailors and house-wives account for the remaining consumption. Over the past two decades, the advent of ready-made garments and induction of more women in the workforce has resulted in an industry wide moderation of sales as well as the evolution of demand patterns. Mechanized manufacturing of garments have driven a lot of small scale and cottage units out of the garment stitching while demand for traditional sewing machines among the new generation urban nuclear families has declined too. On the other hand, demand for standalone tailors and tailors at shopping malls and large garment showrooms have burgeoned. Also, there is a visible shift from the traditional sewing machine to the zig-zag machines as well as from un-branded machines to branded machines among the urban nuclear families.

The overall annual demand for sewing machines currently stands at ~30 lac units, of which the high-end zig-zag machines constitute ~2 lac units. The organized sector has a market share of ~40% and is dominated by two large players - Usha International and Singer India. The sewing machine market is currently experiencing volume growth of 3%-5%, with organized players experiencing ~8%-10% volume growth. Our research reveals that demand for branded sewing machines will remain robust over the next decade given the following megatrends:

• Garment consumption to remain robust: As per the latest census, ~50% of Indian population is below the age of 25 years and is likely to increase per capita garment consumption. While there is a conscious shift from tailored clothing to ready-made-clothing, sewing machines still remain the key component for the stitching process even in an industrialised set-up. As such, decline in demand from cottage and household industries would be compensated by increase in demand from medium and large industries.
   
• Evolution of large format retail and showroom model: Even though the penetration of this format has been largely responsible for the shift towards ready-made garments, they have also increased the demand for stand-alone tailors. Large format stores, shopping malls and stand-alone showrooms in urban areas generally have an in-house tailor.
   
• Shift from unbranded to branded segment: Demand for better quality, convenience and improved value for money has resulted in a gradual shift towards branded products. Such a trend has been witnessed in most of the consumer segments – innerwear, kitchen appliances, watches, jewellery, foods, etc. Singer India has a strong brand presence in the sewing machine space and is poised to gain market share from its un-organized competitors.
   
• Re-positioning sewing machine as an ‘easy to operate home appliance’: Nuclearisation and shift towards ready-made garments has resulted in sewing machines being perceived as low utility product by young working professionals. Although this section represents a minority, marketing initiative by the sewing machine companies could go a long way in re-kindling demand from the growing segment. USA is a prime example where sewing machines have been positioned as devices that should be used by school kids to make their own fashion clothing.
  
   

Product Demand: The urban retail demand stems for multiple sources – fashion designing students, Muslim women, tailors, garment shops and housewives. The young urban family has never been a big customer and his absence won’t hurt the current 3%-5% industry growth rates. On the contrary, if they start purchasing, growth rates could shoot up. Cottage industries and small scale vendors constitute a large portion of the demand with some large dealers.

Product portfolio: Post the 2005 crisis, Singer India completely exited its consumer durable business and focused solely on its sewing machine business. In 2010, it entered the kitchen appliances space in a small way, at the same time keeping away from core durables such as refrigerator, washing machines and television.

Sewing machines: Being its core competency, this product accounted for 97% of the company's FY12 sales and 100% of its profits. Sewing machines are sold under the Merrit and the Singer brand name. While straight stitch machines or the traditional sewing machines constitute 90% of the total sewing machine volumes sold by Singer India, the company is focused on increasing the proportion of high margin zig-zag sewing machines. The company has a wide range of products in straight stitch and zig-zag sewing machines and product prices vary from Rs3000-7000 per unit and Rs7000-15000 per unit respectively.

Chart 1: Sewing machine sales for Singer India 



Source: BS research, Company data Kitchen appliances: The Company's product range in this category includes mixer, toaster, electric kettle, chopper, etc. The company is slowly expanding its distribution reach and this segment contributes 3% of its total revenue of FY12. This division is currently making a small loss.

Distribution & Marketing: For its sewing machine business, the company has a pan-India network of 25 company operated stores and ~550 dealers across the country. These dealers are retail dealers who sell the sewing machines directly to end customer. The Canteen Stores Department, popularly known as the CSD channel contributes ~5% of annual sales. The company has a strong foothold in South India, where 40% of dealers and 57% of company stores are located. Singer India is slowly looking to expand in the west and north India through a combination of company stores and retail dealers. Once the company is out of the BIFR, it can increase its advertising spends to create awareness.

Training and after sales service plays a crucial role in customer satisfaction and retention. Every dealer of Singer India is capable of imparting basic training on the usage of sewing machines while the company has a strong pan-India after sales service team which can resolve most customer issues very fast.

Manufacturing & Sourcing: The company completely outsources the production of its sewing machines and kitchen appliances. For its straight stitch sewing machines, it has vendors in Ludhiana while zig-zag machines are made through exclusive dealers in China. Singer India has a quality control team that ensures international delivery standards by these vendors. The company has a large manufacturing facility in Jammu which is non operational since the labour issues witnessed in 2005. The manufacturing facility has the capacity to serve the entire local demand as well as export to Singer Asia's subsidiaries in Pakistan, Nepal, Sri Lanka, Taiwan and Malaysia. The Company’s top priority is to re-start its manufacturing facility and tide over the twin issues of low margins and supply side bottlenecks.

Competition: Singer India is the second largest sewing machine manufacturer after Usha International and has a market share of ~15%. While Singer was under deep financial and operational trouble, Usha International enjoyed a period of strong growth over 2003-2009 and captured ~35% of the overall market and 70% of the organized space. The unorganized players have consistently lost market share but still account for ~50% of the overall market as per Singer India's industry estimates. Given the rising preference for branded products across the country, Singer India and Usha International are expected to gain market share from the un-organized players. Pricing power however is limited as regional players compete aggressively on price.

C) Investments Arguments

Positive Arguments
 

1. Direct beneficiary of the consumer boom, growth is here to stay: Sewing machine demand is set to benefit from the various macro trends affecting the country – increasing cloth demand due to changing demographics and shift from non-branded products to branded products. From being a stagnant market in 90s, sewing machine industry is set to grow its volumes by 3-4% annually, with organised players growing at much faster rate.
    
2. Debt free balance-sheet, strong brand recall: Post the completion of its financial restructuring in 2010, the company is completely debt-free. Its asset light model and efficient cash conversion cycle ensures working capital requirements are minimal. The brand ‘Singer’ has been associated with sewing machines since past many decades and enjoys a good recall among retail customers.
    
3. Expanding distribution reach, improving product mix: Penetration in South India is strong, North and West are relatively unexplored and expansion in this region offers big opportunity for Singer India to capture market share from unorganized players. Also, the company has been focusing on high margin zig-zag machines, especially in the urban areas. The company could deliver 10-15% sales growth with improving margins over FY12-15E. We do not factor any potential upside from its kitchen appliances business given its infancy.
    
4. Commencement of Jammu plant and exit from BIFR: Singer India has fulfilled all preconditions for exiting the BIFR except the commencement of its manufacturing facility at Jammu. Negotiations with employees, energy, water supply department and the State government are on and the management expects a favourable resolution of the long pending issues in FY14. The company is free to chart its own growth strategy once it exits BIFR. Furthermore, Singer Asia, its parent has plans to establish the Jammu facility as Asia's manufacturing hub, thus opening doors for jump in exports.
    

Negative Arguments
 

1. Unrelated diversification and store expansion: The Company has recently entered the kitchen appliances, which is highly competitive and has low margins. In the past, the company has entered the consumer durables space – TV, refrigerators, washing machines, etc. In our opinion, these are capital intensive businesses and require large marketing budgets. Any plans to raise debt and fund these ventures could strain the company's recuperating balance sheet. Alternatively, the company may decide to go on an aggressive store expansion drive once it exits the BIFR. This can result in increasing operating costs as well working capital, both of which do not augur well for its fledgling financial position.
    
2. Inability to meet the demand due to supply side constraints: Complete dependency on vendors has resulted in higher costs and occasional supply side delays. Given that large number of Singer India's dealers stock other brands as well, inability to ensure timely supply could result in sales loss for the company. Re-starting its manufacturing facility at Jammu, therefore becomes essential.
    
3. Sudden spike in raw material prices: Gross margins at 21% exposes the company to fluctuations in price of raw materials used for manufacturing sewing machines. Pricing power is limited and price hikes can only happen with a lag. Thus, sudden price fluctuations can result in intermittent earnings volatility.
    

D) Financials

Our base case assumptions do not factor in sales contribution from kitchen appliances segment and any possible upside from re-starting the Jammu plant. The company is currently exempt from paying taxes due to the accumulated losses of the past. Our calculations assume payment of MAT from the second half of FY13. Given the small networth and fledgling balance sheet, there could be intermittent volatility in the earnings.

*Report Date may sometimes be different from Recommended Date as drafting of reports can take time.

 

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