Anything that could go wrong did go wrong for vertically integrated home textile major, Himatsingka Siede (HSL) between 2008 and 2012: teething problems at its new facility at Hassan, an adventure with exotic currency derivatives that left an ₹80-crore hole in its balance sheet and, above all, the gamble of buying out three overseas companies — Divatex, DWI Holdings and Giuseppe Bellora — just when the global credit crisis hit the Indian shores. To add to its woes, raw material prices, especially those of cotton, rose sharply. For an investor who hunts for contrarian bets, HSL is proving to be the proverbial phoenix rising from the ashes.
Up, down, up
Rewind to 2007, when HSL was a leading player in the highly profitable niche segment of silk-blended fabrics for upholstery for upmarket customers globally. Being a manufacturer, the managing director and promoter of the company, Dinesh Himatsingka, had the vision to develop a brand and move up the value chain. The company was cash-rich and a favourite among mutual funds and the markets bought the vision of a standalone manufacturer transforming itself to cover the entire value chain — from design and manufacturing to premium brands and distribution. Institutional investors —prominent among them Azim Premji, who held a more than 3% stake — lapped up the stock, with their cumulative holding exceeding 26%.
In 2007, HSL gobbled up Giuseppe Bellora ($34 million), Divatex ($53 million) and DWI Holdings ($30 million). Giuseppe had a significant share of the luxury market in Italy and was an appropriate platform to expand business in Europe. Divatex, based in North America, was the third-largest distributor of bed linen products, which gave HSL a presence in private labels and licensed brands such as Esprit and Waverly. DWI Holdings, USA, provided licences for luxury home textile brands such as Calvin Klein Homes, Barbara Barry and Peacock Alley. All this seemed a bit more than what HSL could chew, as with every takeover — especially those which involve multiple acquisitions — goes through its own learning curve. For HSL, the learning curve got tougher and longer thanks to the ensuing recession.
By 2011, its net borrowing ballooned to about ₹800 crore and the company reported a loss of ₹16 crore. It seemed that the once cash-rich company could not handle the nasty turn in its fortunes. Analysts began writing off the stock as the failed dream of a promoter in a hurry. The stock hit a low of ₹23 on December 30, 2011; institutional holdings fell to about 12%. But despite the performance issues, I would credit the management for continuing to communicate with the stakeholders and keeping them abreast of the developments at least four times a year after having announced the quarterly results. It’s never easy to face analysts and other stakeholders when you are down in the dumps.
Also a design maverick, Himatsingka ensured that creativity and technology continued to be the driving force of HSL. The combination of intellectual capital through innovative designs and quality through superior technology was the company’s mantra to navigate through tough times. Its first important decision was to limit the loss of the currency derivatives. A close tab on receivables helped improve debtor days from 43 in 2008 to 20 in 2012. This helped HSL bounce back and since then it’s been on a steady course of recovery and growth.
Today, HSL is a vertically integrated textiles major with a presence in drapery, upholstery and bed linen. It has around 10 premium brand licences such as Calvin Klein Home, Barbara Barry, Esprit, Peacock Alley and Giuseppe Bellora, to name a few, across 35 countries in various geographies across the US, Europe, West Asia and India. It also caters to private labels, requirements of large-box retail, institutions in hospitality and real estate, multi-brand outlets and interior designers. The acquisitions in the US seem to be paying off now but Europe could take a little while longer.HSL’s India-Asia centric brand Atmosphere is catching up in the premium segment. With HSL’s core strengths in design and quality, the opportunities in mature markets of the US and Europe are immense. For example, the overall home textiles segment potential in the US is about $30 billion, whereas the segment which HSL operates in — that is, drapery, upholstery and bed linen — is about $10 billion. HSL’s US sales for FY14 were about $285 million, giving it enough headroom for future growth.
The management has also been fairly transparent in its communication and has mostly delivered on its promises. In 2013, the management had projected a turnover of ₹2,500 crore in three years, which should easily be achieved, given its current run rate.
Also, the management’s integrity and high ethical standards are visible in the way they conduct their business. Just to jog back the reader’s memory, in 2001, the group had floated a financial subsidiary that was given a loan of ₹3 crore by HSL. The company lost the money but the promoters made good by contributing from their personal funds and accepting moral responsibility for the decisions of the subsidiary. Succession planning, too, seems to be in place, with Shrikant Himatsingka, son of Dinesh Himatsingka, being actively involved in the management for the past 14 years.
Given its strong brand portfolio, a huge market potential, an effective moat, good business visibility and excellent management, HSL’s bounce-back is the beginning of a long-term growth story. Institutional interest is slowly creeping up — currently at 15% — but nowhere close to the 2007 high. Among the 38 institutions that have invested in HSL, Amansa Capital holds about 6% and Franklin Mutual Fund about 4%. Its market capitalisation is ₹900-plus crore, which is below the threshold level of a large number of institutional investors. This could be a latent potential as the stock eventually moves into the ₹1,000-crore category.
The only threat for HSL is its over-dependence on the US markets at about 80%, and it may need to de-risk the same by expanding in other geographies. On the other hand, a continued recovery in the US could have a multiplier effect on its revenue. The slowdown in China could work to its benefit as procurement costs could fall further. The working capital cycle has improved dramatically and the company has been able to reduce its debt burden. HSL’s revenue has shown a CAGR of 19% over the past three years to ₹2,028 crore in FY14, whereas operating profits galloped 28% to ₹205 crore over the same period.
Though FY15 could be a year of consolidation, I am expecting an EPS of ₹13 in FY16, which translates into a conservative multiple of 12X and should see the stock hit ₹156 levels.
The author has an interest in the stock.