Leading maker and exporter of novelty fabrics: Orbit Exports (Orbit) is a leading manufacturer and exporter of novelty fabrics exporting its products to over 32 countries. The company is a recognised star export house and operates in the niche area of high-end fancy fabrics, which are mainly used by designers in women’s fashion apparels. It has around 600 clients and serves marquee names like Zara, Calvin Klein, Home Depot, Adriana Purple, H&M and Hobby Lobby. The company is also amongst the largest exporters of Christmas ribbons and other festival related made-up products in India.
Strong turn-around witnessed after management change: In 2003-04 when owing to dismal financials and loss of clients, Orbit was on the verge of being referred to the BIFR the present management led by Pankaj Seth bought the company. The loss-making company, with eroded net worth, was revived and turned around with ethical manufacturing practices and strong connects with clients. Today in the textile space, Orbit generates among the highest margins and returns for its shareholders.
Unique designs and small order size enable to differentiate business and earn superior margins: The company has been able to tap this lucrative high-margin business through its strong focus on design and quality. It has an in-house design studio that produces around 600 designs every season; also no design ever gets repeated and the maximum shelf life of every design does not exceed six months. With its strong grasp on trends in global fashion apparels, high emphasis on quality and on-time delivery along with robust and focused marketing initiatives, the company has been able to transform itself from an ailing textile company to a highly thriving business.
Strong financials; moderate capex to support valuations; initiate Buy rating: Over the last five years, the top line, and operating profit of the company have grown at a CAGR of 15% and 33.7% respectively. The net earnings have grown at a CAGR of 36.8% over the same period. The OPM has been on an expansion spree and currently stands at 27.9% as against 15% in 2011. A strong OPM profile has enabled Orbit to earn higher returns averaging at 21% in RoCE and at 33% in RoE over the last three years. Given the strong financials, niche capabilities and a vigilant management, the company is well poised for a strong growth in earnings. Hence, we expect its top line and bottom line to grow at a CAGR of 19.6% and 22.8% respectively over FY2015-18.
Given the robust earnings potential and enviable return ratios, Orbit is expected to trade at higher multiples. Thus, we expect the stock to get re-rated (in line with its peers like Kitex Garments). We initiate coverage on Orbit with a Buy rating and value the company at 22x its FY2017E earnings to arrive at a price target of Rs630.
Key risk: Around 70% of the company’s revenues come from the export market, a sharp appreciation in the rupee against the other currencies could affect the revenues and earnings of the company.
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