One of the Leading Home Textile Manufacturers in India

Indo Count Industries Limited (ICIL) was incorporated in the year 1988 as M/s. Vishnu Aluminium Limited with an aim of establishing a 100% export-oriented combed cotton yarn spinning unit and later in 1990, the company changed its name to Indo Count Industries Limited and went public. It commenced the spinning operations in 1991, with ~30,000 spindles and gradually scaled up to ~60,000 spindles. In 2007, the company started the home textile division as part of its forward integration strategy, spurred on by the untapped export market, especially in the United States. Operations of this division began with the installed capacity of 60 Mn meters per annum which subsequently scaled up to 90 Mn meters per annum currently. Today, ICIL is the leading supplier of home textiles to global retail giants including Walmart, Target, Bed Bath & Beyond and JC Penney. In India it is available in major stores, such as Home Centre and Shoppers Stop.

Recently, the company launched B2C products such as Layers (for the value segment), ‘Boutique Living' (for the mid-to-high segment), and ‘Boutique Living Luxury,' a D2C product (catering to high-to-premium segment). The home textile division is the mainstay of the company's revenue, and its goods are mostly shipped to consumers in the United States and Europe.

Consolidated Financial Statements

Investment Rationale

Demand Improvement in the United States to aid Revenue Growth
After witnessing the lower demand in the last two years due to various factors such as Brexit, GST Rupee appreciation, etc. the company had a strong come back from Q2FY21; Q1FY21 was impacted on account of Covid-19 induced lockdowns and restrictions. The company witnessed an improvement in volumes of ~29% and ~37% in Q2FY21 and Q3FY21, respectively. The uptick seen in the volumes was on the back of revival in exports of bed linen to the USA and ban of cotton (including raw fibre, apparel and textiles made from Xinjiang-grown cotton) imports from China in USA.

Further, the USA’s Centres for Disease Control and Prevention has recently eased norms related to Covid-19 and said that fully vaccinated people can drop masks in most places. This move is expected to increase retail sales in the US. It is to be noted that despite unprecedented challenges, consumers and retailers demonstrated incredible resilience during November-December holiday season and retail sales during the period saw a growth of 8.3% from USD 729.1 billion in 2019 to USD 789.4 billion. Home improvement was up 14.1%, with e-commerce sales up 79.7%. The company has well-established relationships with big box retailers including Walmart, Target, Bed Bath & Beyond and JC Penney and the company is expected to see an improvement in orders from these retailers as the US is seeing consolidation in retail market, and these players could be largely benefited.

Capital Expenditure Plans to Increase Revenue
Recently, the board of directors has approved ~20% increase in bed linen capacity from 90 million meters to 108 million metres by debottlenecking and balancing its facilities for a total capex of Rs. 200 crores. From the total capex of Rs. 200 crores, Rs. 150 crores will be used to increase bed linen and top of the bed (TOB) product capacity, while the remaining Rs. 50 crores will be used to modernize the spinning machine with compact spinning technology. After modernization, the spinning unit's capacity would also be used to meet the company's captive demand for home textiles.

The total capex will be will be funded by a mix of internal accruals and debt and is expected to be operational in H2FY22. According to the press release by the company, post commissioning, these investments are expected to increase the revenue by ~Rs. 600 crores over the next 2 years.

China Plus One Strategy
Due to the diversification of supply chain triggered by the covid-19 induced disruptions and trade tensions between US and China, manufacturers are avoiding to rely on one geography and looking for replacement. In South-East Aisa region, India is emerging as the most preferred alternative as the country has abundant raw material, cheap labour, and manufacturing infrastructure. Indian cotton is actually less costly and labour cheaper than China. Global manufacturers therefore no longer regard China as an affordable haven.

India is also the world's largest cotton producer. It already is a pioneer in the export of bed linen and terry towel to the US as it has an abundance of raw material. The country is an appropriate alternative to China because it is the second-largest exporter of home textiles. Further, China is facing the hurdle as the US has banned the cotton imports from China’s Xinjiang region (contributing +80% of Chinese cotton production) which results into loss of market share in all cotton segments, especially in home textile. We believe that the diversification strategy by global players would create a huge opportunity for India along with other countries such as Pakistan, Vietnam, etc. The diversification, could in turn, improve the demand for ICIL’s products in the near-to-long term.

Consistent Focus in Value Added Segments of Fashion, Utility and Institutional
In 2017, the company forayed into new bedding segments which includes Fashion Bedding (Comforters & Duvets Shams & Decorative Pillows Quilts, Coverlets), Utility Bedding (Mattress Pads, Protectors, Pillows Down Alt Comforters) and Institutional Bedding (Basic white sheets Shams & Pillows Bed Skirts, Duvet covers). With this step, the company has expanded its addressable market size 3x to USD 14 billion. Currently, China dominates the fashion, utility and institutional segment and India is at initial stage. China+1 strategy is helping to shift these product categories to India and this is expected to create a huge opportunity of ICIL.

In FY21, this category contributed 15% to the revenue of the company and we believe the contribution of this category will increase in the medium term. The segment is margin accretive as it is highly differentiated and customised. The company received ‘Platinum Certification Status’ for sheets and fashion bedding category by JC Penney, one of the large retailers in the US.

Growing Brands through B2C and D2C
To grow in the domestic market, the company has taken initiatives by moving towards B2C and D2C segment through high quality product offerings across varied price points. Recently, it has launched Layers (for the value segment), ‘Boutique Living' (for the mid-to-high segment), and ‘Boutique Living Luxury,' a D2C product (catering to high-to-premium segment).

‘Boutique Living' offers high-quality bed linen and products are available in more than 100 designs and themes. ‘Layers’ is focused on the value market and increase in affordable housing could result into growth of this category in the coming years. The company is building visibility of these products through digital campaigns and leveraging omni-channel & e-commerce distribution. We believe that there is a potential opportunity for ICIL in the domestic market as there is an increased focus on home décor as well as potential revival in the real estate market. The domestic business contributes 1% to the revenue during FY21 and the company expects this to grow to 3% in FY23E. Revenue through E-commerce is also expected to contribute ~8% to the revenue by FY23E which currently stands at 4%. ICIL’s foray into B2C and D2C segment through its own brands is expected to create value for the company over the long-term.

Expected Restoration of Duty Drawback Could Aid Profit Margins
The Central Government of India has announced a new scheme called Remission of Duties or Taxes on Export Product (RoDTEP) which has replaced Merchandise Export from India Scheme (MEIS) and Rebate of State and Central Taxes and Levies (RoSCTL) benefit w.e.f. January 1, 2021. Currently, the industry is awaiting final duty drawback rates under the new scheme and expects same duty drawback to be restored. This is expected to restore profit margins of home textile companies and players in the industry could become more competitive against countries like Pakistan and West Bengal, who currently enjoy Free Trade Agreement (FTA) with European Countries.

Outlook & valuation

We believe that ease in restrictions in the USA related to Covid-19 pandemic would increase the retail spending which could result into increase in sales of big box retailers such as Walmart, Target, Bed Bath & Beyond and JC Penney. The increase in sales of these retailers could, in turn, increase the orders of ICIL as it has established relationships with them. Also, the company’s capex plan is also expected to increase the revenue in the coming years. The new capacity is expected to help ICIL garner Rs. 600 crores of revenue over the medium term. At the current market price of Rs. 162, the stock is trading at 9.4x of FY23E earnings.