Acquisition Of Young Brand Apparel Will Expand US Market Presence And Increase Customer Base

Key Takeaways

• International sourcing strategies and acquisitions enhance S.P. Apparels' revenue and market expansion, including entry into the American market.
  
• Stabilized cotton prices and operational efficiencies improve net margins and earnings through increased capacity utilization and production control.
  
• Fluctuating costs and execution risks, alongside integration challenges and unreached profitability in retail, could threaten revenue and corporate profitability.

Catalysts

Engages in manufacturing and exporting of knitted garments for infants and children in India and internationally.

• The China Plus One and Bangladesh Plus One strategy have led to international retailers considering India as a key sourcing destination, which could boost S.P. Apparels' revenue by increasing its customer base and filling additional capacity.
  
• Stabilized cotton prices and increased utilization rates at the company's dyeing and garment facilities are expected to improve net margins by enhancing operational efficiency.
  
• The acquisition of Young Brand Apparel is anticipated to enhance S.P. Apparels' margins by 4% to 5% through better control over production efficiency and raw material sourcing, thereby improving earnings.
  
• S.P. Apparels' entry into the American market through the acquisition of Young Brand creates growth opportunities in revenue by expanding the customer base beyond Europe and the UK.
  
• The implementation of strategic measures such as maximizing the utilization of current capacities and expanding machine capabilities is targeted to increase capacity utilization and drive revenue growth in the garment division.

S.P. Apparels Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S.P. Apparels's revenue will grow by 20.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ₹1.8 billion (and earnings per share of ₹71.22) by about January 2028, up from ₹860.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 23.6x today. This future PE is lower than the current PE for the IN Luxury industry at 27.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.72%, as per the Simply Wall St company report.

S.P. Apparels Future Earnings Per Share Growth

Risks

• The volatility in cotton prices has previously impacted the spinning division, and although they have stabilized for now, any future fluctuations could adversely affect the company's revenue and margins.
  
• The recent increase in employee expenses and air freight costs have already pressured operational margins, indicating potential risks to maintaining profitability if such costs cannot be efficiently managed.
  
• With the recent acquisition of Young Brand Apparel, there are initial concerns about its impact on EBITDA margins, suggesting integration risks that could affect earnings if synergies are not realized as planned.
  
• The retail division has not yet reached profitability, showing a revenue decline year-on-year and nominal losses. If this trend continues, it could be a drag on overall net margins and corporate profitability.
  
• Although expanding into the U.S. market presents an opportunity, executing the strategy effectively remains uncertain, with potential execution risks that could hinder projected revenue growth if new business does not materialize as expected.

Valuation

• The analysts have a consensus price target of ₹984.67 for S.P. Apparels based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1102.0, and the most bearish reporting a price target of just ₹920.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹20.8 billion, earnings will come to ₹1.8 billion, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 14.7%.
• Given the current share price of ₹810.15, the analyst's price target of ₹984.67 is 17.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.