Management Meet Note January 2, 2019 Rating matrix Singer India (SININ) | 39 Rating : Unrated Target : NA Consumer durable to drive future growth… Target Period : NA Potential Upside : NA We met the management of Singer India (SIL) to get an insight into its business and future plans. Established in 1977, SIL is India’s second Key Financials largest household sewing machines manufacturer/marketer with an | Crore Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 organised market share of ~42%. After getting discharged from BIFR, SIL Revenues 243.4 285.0 239.4 368.5 421.5 has strengthened its core business and increasingly focused on EBITDA 8.6 8.2 8.0 10.9 13.6 diversifying into consumer durables (mainly home appliances). Net Profit 7.0 6.5 6.0 7.7 9.0 Diversification into the appliances category is to leverage old brand EPS (|) 1.3 1.2 1.1 1.4 1.7 Singer and slow growth of the sewing machine industry. The sewing machines market is growing at 3-4% where unorganised pie remains high Valuation Summary at ~40% in volume terms. Despite slow industry growth, SIL recorded Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 sewing machine revenue CAGR of 9% in FY14-18 led by good demand P/E (x) 30.7 33.0 35.9 28.1 23.9 from government and shrinking market share of unorganised players. Price / Book (x) 5.1 4.7 4.5 4.1 3.8 SIL’s overall sales CAGR of 14% in FY14-18 was supported by home EV/EBITDA (x) 23.6 24.8 25.2 19.6 16.4 appliances category, which grew at ~50% in FY14-18 resulting in a sharp RoCE (%) 21.7 21.0 18.1 20.4 19.0 increase in revenue mix from appliances category to 27% in FY18 vs. RoE (%) 16.6 14.4 12.5 14.5 15.7 mere 9% in FY14. PAT CAGR of 6.5% was subdued as profitability from sewing machines was partly offset by losses from the appliances division Price movement (due to initial investments to set up after sales service network). New launches, dealer addition to drive CD sales 70 50000 60 SIL is leveraging its strong brand to expand into home appliance 40000 50 categories. It has also introduced new products in FY18 such as washing 40 30000 machines, gas tops, microwave ovens and solar chargeable lights and 30 20000 further planning to increase the SKUs of existing products and addition of 20 new dealers to push up sales. Though SIL recorded strong segment sales 10000 10 CAGR of 50% in FY14-18, the EBITDA margin remained suppressed due 0 0 to lower profitability from appliances categories (due to lower operating leverage and higher advertisement expenses). However, the CD segment Jun-16 Jun-17 Jun-18 Dec-15 Dec-16 Dec-17 Dec-18 turned profitable for the first time after its launch and made a marginal SININ BSE Sensex profit of | 15 lakh during FY18. Core segment to grow at moderate rate Research Analyst Singer is the second largest player in the sewing machines category with an organised market share of ~42% (~26% of entire market) in FY18. The Sanjay Manyal company has recorded segment revenue CAGR of ~9% in the last five [email protected] years supported by demand from the government. The sewing machines Hitesh Taunk have been distributed by state governments of Gujarat, Andhra Pradesh [email protected] and Telangana under various social schemes like women’s empowerment and poverty upliftment programmes. The company expects moderate revenue growth of ~7-10% in this segment supported by a gradual decline in the unorganised pie post GST and demand remaining intact from rural India (led by various government schemes). At the CMP, the stock is trading at 24x of TTM EPS. Exhibit 1: Financial performance Jun-13 Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 Net sales (| crore) 196.9 243.4 285.0 239.4 368.5 421.5 EBITDA (| crore) 6.4 8.6 8.2 8.0 10.9 13.6 Net Profit (| crore) 15.3 7.0 6.5 6.0 7.7 9.0 EPS (|) 2.9 1.3 1.2 1.1 1.4 1.7 P/E (x) 14.0 30.7 33.0 35.9 28.1 23.9 RoCE(%) 24.8 21.7 21.0 18.1 20.4 19.0 RoE(%) 41.1 16.6 14.4 12.5 14.5 15.7 D/E 0.0 0.0 0.0 0.0 0.1 0.2 Source: Company, ICICI Direct Research, *Year end change from June to March ICICI Securities Ltd | Retail Equity Research Management meet highlights Sewing machines The Indian sewing machines industry is growing at a slower rate of 3-4% (in volume terms) of which the organised category commands ~60% market share. In the organised category, we believe Usha is the market leader in the sewing machine category while SIL commands ~42% market share The company serves retail customers through different products categories such as basic machines (mainly for household uses), heavy duty machines (for tailors and other for other commercial uses) and Zig Zag machines (meant for heavy decorative works, computerised and portable machines) The company is focusing on increasing its product mix towards the Zig-Zag category of sewing machines (portable, used for decorative purpose), which is twice the price of conventional sewing machines. Currently, SIL has ~3899 sales point and 392 sewing schools across India under its extensive distribution network Though SIL has a sewing machine assembly plant at Jammu, the company also outsources manufacturing to third-party vendors at different regions in India. This results in low capex requirement with a lighter balance sheet for SIL Singer expects revenue growth of ~10% (~7% volume growth) in the sewing machine category in the next two years supported by various government led schemes for rural India. The company works with 40-45 days of credit in the sewing machine category Consumer durable Domestic appliances of SIL include irons and steam irons, food processors, mixers, toaster, kettles, air coolers, etc. The company further launched washing machines, gas tops, microwave ovens and solar chargeable lights during FY18. It also plans to enter the refrigerator category in FY20E The company aims to achieve sales growth of ~40-45% in the next two years under the consumer durable category. Singer is simultaneously planning to increase the advertisement expenses as a percent of sales to increase the visibility of products under the Singer brand The dealer sales point has increased to 13475 in FY18 from 8876 in FY17. To increase sales of domestic appliances, the company is aiming to increase revenue per dealer by launching more SKUs, adopting e-commerce route and pushing products to various government institutions such as military canteen Since the company is largely operating through an outsourcing model, no major capex is on the anvil in the near term. However, extended credit periods and higher inventory days (to gain market share in the consumer durable category) translated into higher working capital requirements The company is aiming to achieve overall EBITDA margin of 3-4% in the near term ICICI Securities Ltd | Retail Equity Research Page 2 Exhibit 2: Revenue trend Exhibit 3: EBITDA and EBITDA margin trend 450 16 13.6 4.0 400 CAGR ~15% 14 3.5 12 10.9 3.0 350 421.5 8.6 300 10 8.2 8.0 2.5 368.5 8 2.0 250 (%) (| crore) 6 1.5 200 285.0 (| crore) (| 243.4 4 1.0 150 239.4 2 0.5 100 0 0.0 50 Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 0 Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 EBITDA EBITDA margin Source: Company, ICICI Direct Research, *Year end change from June to March Source: Company, ICICI Direct Research, *Year end change from June to March Exhibit 4: Trend of appliances sales Exhibit 5: Trend of sewing machines sales 120 113.1 350 CAGR ~9% 100 300 CAGR 50% 80.8 250 308.5 80 289.0 200 60 252.1 221.2 150 207.1 (| crore) (| 40 33.1 32.5 crore) (| 22.4 100 20 50 0 0 Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 Source: Company, ICICI Direct Research, *Year end change from June to March Source: Company, ICICI Direct Research, *Year end change from June to March Exhibit 6: PAT remained volatile due to volatility in margin Exhibit 7: Trend of return ratios 10 25 22 20 21 20 8 9.0 18 19 17 16 7.7 15 14 14 6 7.0 12 (%) 6.5 6.0 10 4 (| crore) (| 5 2 0 FY14 FY15 FY16* FY17 FY18 0 Jun-14 Jun-15 Mar-16* Mar-17 Mar-18 RoCE RoE Source: Company, ICICI Direct Research, *Year end change from June to March Source: Company, ICICI Direct Research, *Year end change from June to March ICICI Securities Ltd | Retail Equity Research Page 3 Exhibit 8: Revenue mix during FY14 Exhibit 9: Revenue mix during FY18 Consumer Sewing Consumer Durable Machine Sewing 27% 91% Durable 9% Machine 73% Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research Exhibit 10: Revenue mix in the consumer durable category in FY17 Exhibit 11: Revenue mix in the consumer durable category in FY18 Kettles Others Washing Induction 4% Others 8% cookers Machines 4% Food processor 5% 8% 29% Kettles Fans 3% Induction 7% cookers Geysers 5% 10% Food processor Fans Irons 38% 11% 12% Air coolers Air coolers Geysers 17% 20% 10% Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research Irons 9% Exhibit 12: Distribution mix in FY17 Exhibit 13: Distribution mix in FY18 Canteen Canteen Retail 15% Retail 11% 7% 6% Internet/ Internet/ telesales telesales 4% 3% Exports Exports 2% Wholesale 5% Wholesale Institutional/ 66% MFI 71% Institutional/ 3% MFI 3% Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 4 RATING RATIONALE ICICI Direct Research endeavours to provide objective opinions and recommendations.