Another bumper interest rate hike came from the US Federal Reserve on Wednesday - a 75 bps increase which took the US interest rate to 3.25%, the highest it's been since 2008. It's surprising how quickly interest rates have moved up - the rate stood at 0.25% in January 2022. 

However, Indian markets have stayed resilient with the Nifty 50 among the best performing indices globally, and flirting with all-time highs over the past few months. There’s been continued momentum in IPOs as well, and we take a closer look at a familiar name that is getting ready to list - FabIndia.

In this week’s Analyticks,

• Dressed for success?: FabIndia hopes to take advantage of the apparel industry's recovery
• Screener: Stocks outperforming Nifty 50 with increasing mutual fund holding, and also in the PE Buy Zone

Apparel industry bounces back post-pandemic, clearing path for IPOs 

During Covid, no one was dressing up: it was all trackpants and old t-shirts. Work calls on Zoom got taken with the video off. Events and weddings were being cancelled or postponed. This hit the apparel industry hard, including FabIndia. 

Now however, apparel companies are staging a comeback. With the exception of TCNS Clothing, top listed companies like Page Industries, Trent, and Aditya Birla Fashion and Retail (ABFRL) have outperformed the Nifty 50 by a huge margin in the past year.

Companies like Vedant Fashions and Go Fashion, which were listed less than a year ago, have also managed to beat the benchmark index comfortably in the past six months. 

FabIndia - which is known for its use of traditional materials and contemporary ethnic wear - wants to time its IPO with the apparel industry’s dramatic recovery. The company filed its draft red herring prospectus (DRHP) with market regulators for its IPO, and received the Securities Exchange Board of India’s (SEBI) nod in January 2022. According to reports, the proposed IPO is sizeable at Rs 4,000 crore. Out of this, the company plans a fresh issue worth Rs 500 crore, on a valuation of Rs 20,000 crore. 

FabIndia's fresh issue is for the voluntary redemption of non-convertible debentures or NCDs issued by the company, and prepayment of a portion of its outstanding borrowings. This means that the IPO will not change the way the company does business. 

FabIndia's "inclusive capitalism" focus 

FabIndia is planning to share the wealth from the IPO with its broader network. Promoters Bimla Nanda Bissell and Madhukar Khera are transferring 4,00,000 equity shares and 3,75,080 equity shares respectively to the artisans and farmers engaged with the company or its subsidiaries. According to FabIndia’s DRHP, the company works with 50,000 artisans and 10,300 farmers as of March 31, 2021.

FabIndia's founders have long talked about "inclusive capitalism", and the business works with a network of "community owned companies" (COCs) owned by artisans and farmers. It remains to be seen how this ownership model will evolve post IPO.

Among the investors selling shares, PI Opportunities fund and Prazim Trading and Investment Company will sell up to 40% and 100% of the equity shares held by them respectively. 

Apparel companies’ topline and bottomline jump YoY in Q1FY23 as demand recovers post-Covid

Q1FY23 was the first quarter in two years without a single Covid-19 lockdown. This helped apparel companies post strong topline and bottomline growth YoY. Revenues and net profits of these companies doubled at minimum, with Go Fashion’s revenue jumping by over 5X YoY in Q1FY23 on a low base. 

This indicates a strong comeback for apparel companies including FabIndia in FY23. According to FabIndia's DRHP, the company had posted losses in FY21 and H1FY22 due to lockdowns. 

However, recent quarterly results from its competitors point to strong revenue and net profit growth in apparels post H1FY22. Barring the two years of the pandemic, FabIndia has been profitable. 

The pandemic changes FabIndia’s revenue mix, organic food segment gains

One factor that helped the company contain its losses during the pandemic was the increased demand for healthy food, with a growing preference for organic and immunity booster items. As a result, the revenue contribution from this segment rose from 18.9% in FY20 to 31.1% in FY21.

Low demand for ethnic wear during the pandemic meant revenue contribution from the apparel segment decreased by 12 percentage points in H1FY22 to 46.5% when compared to FY19. However, with demand for clothing bouncing back, the revenue contribution from this segment is expected to recover. 

Warning sign: FabIndia’s store count is below pre-pandemic levels

The pandemic was a blow to FabIndia, and in some ways the business may not have fully recovered. Even with the strong rebound in apparel, FabIndia’s store count is not yet back to FY20 levels. As of H1FY22, its total store count stood at 309 against the pre-Covid number of 328. 

In comparison, FabIndia's listed peers saw their store count surpass pre-Covid levels in FY22. But revenue generation is not entirely dependent on the number of stores,  especially when we consider rising sales from online channels in FY21.

FabIndia’s online retail revenue contribution rose to 18% in H1FY22 from 4% in FY19. Revenue from FabIndia's online channels rose 40-50% during FY20 and FY21, similar to growth for close competitors like Vedant Fashions and TNCS. 

But retail outlets still play a major role in capturing market share, and the slow recovery here cannot be ignored.

Can FabIndia capitalize on opportunities amid competition?

The long-term growth plan for FabIndia is on track when it comes to market size, both in apparels and ethnic wear. The apparel industry’s market size bounced back in FY22, and it looks likely that demand will sustain in the coming quarters.

The ethnic wear segment’s market size is expected to grow at a CAGR of 6% over FY20-25E. In addition, the organic foods industry is also on the rise and is expected to grow at a CAGR of 24% during 2021-2026E. 

There is no dearth of opportunities for FabIndia to drive its top line and bottom line. But what investors will look for is whether the company is able to capitalize on opportunities, amid competition from its peers. FabIndia is sandwiched between two competitive segments: it directly competes with private label, large-format stores, and also with companies that offer affordable products and sell through online channels. It will have to distinguish itself in an increasingly crowded space.

Screener: Stocks outperforming Nifty 50 with increasing mutual fund holding (PE Buy Zone)

As we see the return of institutional buying in the Indian market,this screener identifies stocks that have outperformed the Nifty 50 index over the past month, and also saw increasing mutual fund holding in the last 30 days. With concerns around market valuations, we only consider stocks in the PE buy zone with a high Trendlyne Durability Score.

The screener shows 27 stocks from the Nifty 500 index. It is not dominated by any one industry but includes stocks from coal, breweries & distilleries, housing finance, and restaurants. Major stocks featured in the screener are Westlife Development, Sapphire Foods, United Spirits and Coal India.

Sapphire Foods has the highest increase in mutual fund holding of 0.9% in August. 10 mutual funds bought into the stock, of which Invesco India Contra Fund is the largest buyer (2.3 lakh shares or 0.36% stake). The stock has outperformed the Nifty 50 index by almost 15 percentage points and is in the PE buy zone with just 14.5% of total trading days spent below the current PE.

United Spirits has one of the highest increases in mutual fund holding with a 0.4% rise in holdings in August. Out of the 66 mutual funds that bought the stock, Nippon India Large Cap Fund - Growth bought the most (14.9 lakh shares or 0.2% stake). The stock has outperformed the Nifty 50 index by 9.6 percentage points and is in the PE buy zone with 16.2% of total trading days spent below the current PE.

You can find more screeners here.

1. Metro Brands: This footwear manufacturer’s stock rose 8.5% on Tuesday, continuing its rally from Monday. The company is rising amid expectations of robust growth as demand for footwear picks up on the back of the economy recovering. The improving economic environment aided the company’s bottom line in Q1FY23. It was back in black on a YoY basis as it posted a net profit of Rs 104.8 crore, beating Trendlyne’s Forecaster profit estimates by 26.3%. Metro Brands’ stock rose more than 35% since announcing its Q1 results. This uptrend in the stock has enabled it to make it into this screener which lists companies in the overbought zone according to the money flow index.

The stock’s PE ratio is 73.7 and is currently trading at a PE neutral zone meaning it has traded 72.9% of the days below its current PE. However, its PE ratio is lower than Campus Activewear and Relaxo Footwear’s PE ratio of 121.5 and 111.3, respectively.  Both these stocks are currently trading in the PE sell zone.

Metro Brands CEO Nissan Joseph says the company’s profit has been improving over the last few quarters because of healthy traction on both offline and online channels, according to reports. The firm launched its presence on e-commerce back in 2010 which has enabled it to expand its presence online. Its online business has grown at a 79% CAGR over the past three years. Going forward, the management plans to add another 260 stores by FY25, a 40% rise from its base of 624 stores at the end of FY22. In FY23, the company plans to open 80-85 stores. According to Motilal Oswal, the company’s high store productively along with its robust cash flow generation will allow it to expand further in the coming quarters. 

2. Ambuja Cements: This cement stock is in the news for several reasons. Firstly, it hit a market cap of Rs 1 lakh crore last Thursday. The stock rose 2.7% in reaction to this. Then the Adani Group completed their acquisition of Holcim’s stake (63.15%) in the company and also announced a capex infusion of Rs 20,000 crore. The company plans to raise this amount by the issue of warrants to Harmonia Trade and Investment Ltd, a promoter group entity. It is yet to receive the board’s approval for this. The stock rose 9% in trade on Monday in reaction to this news. It also shows up on the screener of companies outperforming their industry, with Ambuja Cements outperforming the cement & cement products industry by 21% over the past three months.

However, after all the uproar, news broke on Wednesday of the company’s promoter entities Endeavour Trade and Xcent Trade and Investments pledging their entire stake to fund the acquisition of Holcim’s stake. The pledged shares will be used to raise debt from Deutsche Bank to fund the acquisition. The stock fell 5.7% in the trade as high debt levels are a cause of concern.

Despite this, Jefferies maintains a ‘Buy’ rating on the stock as it expects new leadership and capex plans to drive future growth. Axis Direct maintains a ‘Hold’ rating on the stock despite being positive on the robust capex plans announced by the company. Trendlyne’s consensus recommendation shows mixed reactions among analysts with 16 maintaining a ‘Buy’ and 12 maintaining a ‘Hold’ recommendation on the stock.

3. Persistent Systems: This IT services company held an investor meet on Tuesday and Wednesday where it reiterated double-digit revenue growth in FY23 and FY24 on the back of robust deal wins. However, this failed to enthuse investors and the company’s stock price continued to hover near its 52-week low. This could be because investors remain wary of a high inflationary environment amid slowing global economic growth that could lead to cost optimization by its clients. To add to this, the company derives over 85% of its total revenues from North America and Europe, where the inflation level remains at record levels amid a growth slowdown.

However, in the Q1FY23 earnings call, Persistent Systems’ management said that the demand environment continues to be robust, and is confident of strong growth in the coming quarters. According to Trendlyne’s Forecaster, revenue is expected to rise 6.9% QoQ in Q2. Notably, the company’s revenue has grown consistently over the past eight quarters.

Axis Direct, in its brokerage report released on Monday, kept its ‘Buy’ rating on Persistent Systems with an upside of 22%. The brokerage remains optimistic about the company’s future growth prospects given its robust order book, higher offshoring, presence across diversified geographies, and lower attrition. This company also shows up in the screener that lists companies with a high analyst rating with at least 20% upside. However, the stock is currently trading in the PE sell zone as the stock has traded 80% of the time below its current PE. 

4. Shree Renuka Sugars: This sugar company outperformed the Nifty 50 index by 23.5% over the past week. The surge comes after the firm announced its plans to double its ethanol production capacity after market hours last Friday. This positive price movement pushed the company into this screener which lists stocks with strong momentum with prices above short, medium, and long-term moving averages.

The firm is looking to expand its ethanol manufacturing capacity from 720-kilo litres per day (KLPD) to 1,250 KLPD by December 2022. The management expects to incur around Rs 700 crore on this capacity expansion, according to reports. The company is optimistic about the future prospects of ethanol as the Centre has set a target of blending 20% of petrol with ethanol by 2025, from the earlier target of 2030. The Centre wants to increase ethanol blending in petrol to reduce the country’s oil imports. With the current blending rate at 10%, SRS believes the new target provides vast opportunities to expand its footprint in the segment. According to reports, the ethanol segment is expected to receive investments worth Rs 10,000 crore in the coming years.

Chairman Atul Chaturvedi, believes another key positive of increasing ethanol production is that it allows the firm to hedge against volatility in sugar prices, according to reports. If the sugar prices rise the company will have the option of diverting cane juice into sugar and if ethanol demand is higher than usual, it can be diverted accordingly. 

5. Triveni Engineering & Industries: This sugar maker sold off its entire stake of 21.85% in its listed subsidiary Triveni Turbine for a consideration of Rs 1,609 crore in a bulk deal on Wednesday. The company also outperformed the Nifty 500 index by over 10 percentage points in the past week.

Rati Sawhney, who is the wife of the Chairman Dhruv Sawhney, picked up 10% of the stake sold by Triveni Engineering through an inter-se transfer. The remaining stake was bought by foreign institutional investors like Nomura, Plutus Wealth, Abu Dhabi Investment Authority as well as domestic mutual funds like SBI Mutual Fund and Aditya Birla Mutual Fund. According to the management, the aim behind this stake sale was to kick-start long-term succession planning, have a focused management process for its subsidiary, and exit its non-core business of electrical equipment. 

Notably, Triveni Engineering is managed by the elder son of Dhruv Sawhney, Tarun Sawhney while Triveni Turbine is managed by the younger son Nikhil Sawhney. Now, post this stake sale, there is no cross holding of Triveni Engineering in Triveni Turbine. Basically, the remaining promoter stake of 55.9% in Triveni Turbine is now entirely held by the Sawhney family individually and through an unlisted public company.

In accordance with Tarun Sawhney’s statement, it is highly likely that Triveni Engineering declares a special dividend for the shareholders in order to distribute a part of the sale proceeds. The company may also use a portion of this cash inflow in their upcoming distillery expansion project which involves an outlay of Rs 460 crore. Both these factors have cheered investors and led to the stock’s outperformance.

Trendlyne's analysts identify stocks that are seeing interesting price movement, analyst calls, or new developments. These are not buy recommendations.