Faze Three Limited- Strong Market Presence and Healthy Order Book Are Supporting Factors
Faze Three Limited has comfortable capital structure. It has significant ability to withstand supply chain pressures on its working capital. Entire internal accruals are being directed to accelerated expansion & operational growth. Faze Three Limited has zero long-term debt since FY18. Current replacement value of factories is estimated at around INR 365 crores, exhibiting significant barrier for entry.
Overview of Faze Three Limited
Faze Three Limited manufactures and exports home textile products, cotton handlooms, furnishing fabrics and textile made-ups. The company has 6 state-of-the-art manufacturing units and these are spread across Silvassa, Vapi and Panipat. Faze Three Limited has diversified product portfolio which includes cotton and rubber backed bathmats, durries, chairpads etc. The company addresses to high-end home textiles segment, while its orders are customised and made as per clients’ specifications. Majority of revenue come from international market. In FY 2021, ~90% of total revenue came from international market. Key export markets are US, UK, Germany, Australia, Hong Kong, Canada, South Africa and others. Thus, the company has global footprints and it continues to supply to top 50+ retailers. It was listed on BSE in 1995 and now has 7 manufacturing locations.
Growth Enablers of Faze Three Limited
- Strong Market Presence and Business Potential: Faze Three Limited has strong presence in global markets, with US making 60% of its entire business. UK/EUR makes up 30% of business and balance is being made by Rest of World. It has strong relationship with top 15 customers over previous 2 decades. The company has seen consistent business across its product lines. Top 15 customers of the company form ~80% of its revenue. These customers comprise of very large retail chains having presence in US, UK, EUR. The company was benefitted from recent move to shift to India for sourcing requirements from erstwhile China across products amongst the company’s customers. Because of COVID pandemic, supply chain disruptions & strong momentum for “China Plus One” led to shift in demand from top organised retailers across globe to India. Customer preferences across USA, UK & EUR tangibly shifted to “other than Made in China” and this was demonstrated from recent trends.
- Capitalizing on Opportunities: Over FY17-21, the company has invested INR40+ crores from internal accruals across units and these investments were focused on new machinery, new technologies & de-bottlenecking. The company has started expansion at Silvassa in Dec 2020 to have 2.5x capacity by Mar 2022 on its spare land under floor coverings /rugs segment. Plans are there to commence expansion in top of bed & blankets segment to improve capacity to 3x of its existing capacity. This has been supported by commitments from several customers, with overall investment touching INR15 crores It has started expansion at Panipat, Handloom Home Textiles division and it focuses to have 3x capacity by Apr 2023. Overall investment which has been earmarked is INR35 crores. All expansions have been undertaken by the company due to tangible opportunity at hand & visibility from existing customers. All expansions should be funded from internal cash accruals. The company plans to focus on reducing its costs and to be most competitive manufacturer for customers, while keeping budgeted net profit margins. Faze Three Limited has strong partnerships with key domestic suppliers/vendors having assured business certainty and upfront payment terms. This helps in securing quality and timely supplies. Total income and PAT for trailing twelve months ended Dec 31, 2021 saw a growth of 42% and 75% respectively over full FY21. Trailing twelve months period covers months from Jan 1, 2021 to Dec 31, 2021. Total income of the company was INR463.6 crores and net profit was INR43.7 crores. These were highest ever TTM tallies for Faze Three Limited.
- Healthy Order Book: Faze Three Limited operates at peak utilisation levels and it has strong order book for few upcoming few quarters. The company has earmarked capex for its product lines which should help it generate strong growth in revenue. Apart from this, revenue should seek support from sourcing shift from China to India as this should result in higher demand levels. The company’s attractiveness is supported by its inhouse capability for design & development & innovations across several product offerings. The company has vertically-integrated business model across its products.
- Economic Variables to Play: GDP of India continues to rebound in FY22 from contraction in FY21 because of COVID crises. Sectoral recovery story has not been uniform. FY22 should be much better than FY21 across sectors. Exports sector addressing USA, UK & Europe did very well in 2H21 and growth stemmed from pent-up demand and supply chain disruption from China. Western governments and global central banks announced fiscal/monetary measures of unprecedented magnitude to make sure that demand stays and businesses continue to operate. These factors contributed to strong exports demand and trend should continue in FY22. India continues to see a paradigm shift in business from informal sector to formal sector on supply side. Shift comes with its cost as informal sector continues to stress out. This is because India relied on its informal economy. In this changed environment, one can expect shift to be long-term structurally positive. Overall, India continues to be in bright spot to benefit from global recovery. Patronage from global investors should continue to lend support. Locally, demand continues to accelerate and stable government should work on growth engine while keeping fiscal and inflation worries aside.
- Supportive Sectoral Dynamics: India is being counted as a leading exporter of textiles and clothing, with China being first. Higher penetration of organized retail, supportive demographics, and higher income levels should stem textile demand. Superior quality and sufficient availability of cotton and polyester support the companies operating in India to become leader in exports. Almost 2/3rd of India’s textile export is to US and UK. China is no longer a manufacturing destination as it was earlier. Furthermore, “China Plus One” initiative accelerated movement of business from China and into India, Vietnam, Bangladesh etc. Given factors like production and supportive government policies, India should be a main beneficiary for textile sector. On organized retail front under category of home textiles, India is a leading exporter of sheets and towels to US, UK & European region. In other products such as technical textiles, floor coverings etc., China is ~10x of India’s share until recently. But there is tangible shift in demand in this sector which is similar to sheets and towels. This shift was seen over previous decade. With this move, existing manufacturing set-ups in India should be able to greatly benefit.
Conclusion
Given that the company is organised, it is uniquely placed to have handloom, technical & rubber backed floorcoverings under its one umbrella. Post CY19, tariffs were imposed on Chinese textiles exports. This led to rising labour & power costs, pollution crackdowns, diminishing incentives etc. As a result, Chinese exports became uncompetitive. In last 12-15 months, huge foreign inflows were seen in new generation technology businesses and manufacturing set ups. “China plus One” initiative led to tangible shift across sectors into India. Global companies chose India over several other South Asian peers as a result of stability in government, economy size, talent availability, incentives/policies, lesser tax rates etc.
Core strengths of Faze Three Limited are strong historical background of business with existing customers and in-house design and development pedigree. Global benchmarked manufacturing facilities /infrastructure supplements these strengths. Healthy and diversified product portfolio and established relations with renowned clients ensure stable revenues and growth opportunities for future. Further, it is a long-term debt free company having sound capital structure.
Stock price of Faze Three Limited has seen a strong run up of ~415.3% just between Feb 1, 2021- Feb 25, 2022.
Relatively, SENSEX has risen by only ~14.9% between Feb 1, 2021- Feb 25, 2022. This exhibits that stock of Faze Three Limited has exceeded performance of SENSEX by a significantly wider margin. Stock of the company trades at ~33.56x of FY21 EPS against sectoral average of ~35.42x. This exhibits that stock trades at cheap valuations, allowing investors to go long. The company continues to have a strong position in Indian textile industry buoyed by healthy export demand and supportive government initiatives.
