Equity Research: Faze Three

Summary

Faze Three Limited (FTL), promoted by Mr. Ajay Anand in 1985, is engaged in manufacturing and export of superior quality high-end Home Textile products supplied to top retailers across the globe. It has a diversified product line, main products include Bathmats, Chair pads, Blankets, Rugs, Throws, Floor covering, Bedspreads, etc. Currently, the floor covering segment is the dominant product category. The Company is known for its sheer pursuit of innovation, ideas, and designs which reflects in its products, and has enjoyed being a preferred vendor to most of its customers.

ABOUT:

1. Faze Three Limited (FTL), promoted by Mr. Ajay Anand in 1985, is engaged in manufacturing and export of superior quality high-end Home Textile products supplied to top retailers across the globe. It has a diversified product line, main products include Bathmats, Chair pads, Blankets, Rugs, Throws, Floor covering, Bedspreads, etc. Currently, the floor covering segment is the dominant product category. The Company is known for its sheer pursuit of innovation, ideas, and designs which reflects in its products, and has enjoyed being a preferred vendor to most of its customers.

2. The majority of FTL’s revenue (90%) is derived from Exports to the USA (60%), UK, and Europe region (30%). The company has eight facilities to manufacture home textiles situated at Dadra and Nagar Haveli, Vapi (Gujarat), Panipat (Haryana), and Aurangabad (Maharashtra) in India. FTL has a wholly owned subsidiary Faze Three US LLC in the US for marketing purposes. The group carries out Automotive Technical Textiles (Passenger Car Fabrics) under a separate company Faze Three Autofab Limited.

3. The company has laid down a capacity expansion plan with Rs. 80 Cr and a targeted asset turnover of 8 to 10x of new capex. This is in line with the company’s plan to reach up to Rs.1500 Cr annual revenue run rate in the next five to six years.

4. China plus one strategy adopted by major global retailers along with work-from-home culture has resulted in an unprecedented demand for the company’s products. The government’s support in terms of PLI and other benefits has boosted the textiles export industry scenario. Rupee depreciation will also help.

5. Manufacturing Facilities: The company has seven manufacturing facilities including captive process houses. Home & Technical Textiles: Two facilities at Silvassa(UT of DN & DD) and one in Vapi, Gujarat. Handloom Home Textiles: Four manufacturing facilities in Panipat, Haryana. 

FINANCIALS:

• FY22 was a remarkable year for the company as it was able to add significant capacities, management bandwidth, new products, customers & substantial value across all stakeholders.

• Even after a sharp rise in prices of raw materials, Coal/Fuel costs, shipping costs, etc. The company reported its highest ever revenue of Rs. 99.7 crores.

• Margins also improved resulting in strong net profit growth, the Company made a profit of Rs. 21.2 crores.

• The company is currently running at a peak capacity level with zero long-term debt on the balance sheet since FY18 and Rs. 53.5 crores short-term debt due to inflated raw material and transportation costs.

• The company has reported strong earnings growth in Q1 FY23 results. Revenue reported was the highest ever Q1 revenue at Rs.146.5 Cr up 47% YoY and down 5.7% QoQ.

• EBITDA margin improved sequentially at 16.7% vs 15.5% in the last quarter as the raw material prices are cooling off. However, Polyester prices are yet to cool off given the crude rise & currency depreciation impact

• Management has informed that the CAPEX spends are going as per plan and the order visibility has settled from euphoric levels last fiscal to positive/realistic this year across all legacy products.

EXPANSION:

Invested over INR 40 Crs from internal accruals across units for new machinery, new technologies & de-bottlenecking from 2017-2020/

Ongoing Expansions:

• Concluded Expansion at Silvassa April 2021 - June 2022 to have 3x capacity of earlier (brown field) on existing spare land, under
  Floor coverings / Rugs segment. Overall Investment of INR 35 Crs
• Expansion under Top of Bed & Blankets segment (Nov 2021 to Sep 2022) is underway to increase capacity to 3x of existing capacity
  on existing land (brownfield), backed by commitments from various customers. Overall investment INR 20 Crs
• Commenced expansion at Panipat, Handloom Home Textiles division to have 3x capacity by May 2023. Overall Investment INR 35
  Crs (estimated).
• Investment in subsidiary Mats and More Pvt Limited (Aurangabad) to cater to a new category under floor coverings being patio
  mats including outdoors to cater to the existing customers based on business visibility. Investment of INR 12 Crs over July 2022-
  June 2023, building a revenue potential of at-least USD 10 Mln in phase 1 within 3-4 years
• All of the above expansions shall be funded from Internal Cash Accruals
• Company is also under process of evaluating / exploring relevant / ready to use for manufacturing (brownfield opportunities) from
  time to time

Company’s readiness to capitalize on the Opportunity:

• Comfortable Capital Structure. Rated “A-” Long term & A2+ Short term (Aug 2021). Significant ability to withstand supply chain
  pressures on working capital. Entire internal accruals directed towards accelerated expansion & growth in operations
• Zero Long term debt since 2018. Factories / Infrastructure current replacement value estimated > INR ‘400 Crs, poses significant entry
  barrier for new entrants
• Focus on reducing costs, being innovative and most competitive manufacturer for the customer globally while maintaining budgeted
  net profit margins
• Strong partnerships with Key Domestic Suppliers / Vendors (being large corporates) with assured business certainty and upfront
  payment terms to secure quality and timely supplies from best in business
• Invested in Rooftop Solar of 1 MW during the quarter at Silvassa factories for captive consumption contributing up to 30% of existing
  electricity units consumed by said factories. Company’s finished goods warehouses (capacity upto 130 HQ containers at a time) are
  operated by fully Electric lithium-ion fleet of forklifts / reach trucks. Both these initiatives are conscious efforts towards ESG goals of
  the company with sustainable capital paybacks

Risks & Concerns:

• Commodity and currency fluctuation: - Raw material cost contributes almost half of the total cost and has a huge impact on profitability as the company has a lower fixed cost. Operating margins for the company have fallen in Q4FY22 and Q1FY23 from the previous two quarters despite the rising top line.

•  Long working capital cycle:- Stretched working capital cycle is due to the working capital-intensive nature of operations such as specific skills and limitation of capacity involved in the value-added home textiles.

•  Client concentration: - As noted earlier, the company’s clients include giant retail chains in US and Europe as well as some reputed OEMs in the automotive segment. These tend to be sticky to their suppliers, however, this client concentration is still a risk for the company.

Analyst comment:

FTL has been in the business of Home & Technical Textiles manufacturing since 1985. It has seven factory locations including captive process houses. It has built a complete in-house business model from Design to Deliver Yarn to Finished Product. Further, another distinctive factor is the designing capability and efficient turnaround cycle for the handloom, where there is the presence of huge unorganized players who lack adherence to compliance standards required by large brands. The company is uniquely placed to have Handloom, Technical & Rubber backed floorcoverings under one umbrella. The products include Technical & Home Textiles Products, and Handloom Home Textiles Products. As per management, the company is currently in a state where there is huge unfulfilled demand within the existing customer mix offered by the company and that is one of the reasons that they have laid down aggressive capex plan. We assign "BUY" recommendation.

SOURCES:

https://www.sharescart.com/company/faze-three/

https://www.bseindia.com/xml-data/corpfiling/AttachLive/f351ac86-759e-4324-ba0d-abf26c5f9111.pdf

https://www.sharescart.com/company/faze-three/

https://www.careratings.com/upload/CompanyFiles/PR/05092022072146_Faze_Three_Limited.pdf