Bhartiya International (Bhartiya) has been India's leading leather garment exporter for more than a decade. It has emerged as one of the preferred Asian vendors for some of the global brands due to its in-house design capability, superior product quality and strong client relationships. Encouraged by the response to the group's maiden real estate development project in Hebbal (north Bengaluru), Bhartiya has also started focusing on real estate development. Apart from residential projects, which are self-sufficient in terms of funding, Bhartiya plans to create an asset base that will earn steady lease rental income. However, execution and marketing challenges cannot be ruled out. We retain the fundamental grade of 3/5.
Increasing focus on real estate development business
Considering the healthy response to its first real estate project, Bhartiya plans to consolidate its presence in Bengaluru and expand to other South Indian cities. However, as significant management bandwidth is likely to be occupied in monetising the remaining ~17 mn sq ft of land in Hebbal, we expect expansion to take time.
Integrated city plan progressing well; eyeing steady income amid challenges
Bhartiya, through 30% stake in Bhartiya Urban Infrastructure & Land Development Company Pvt. Ltd (BUILDCO), plans to develop an integrated city with saleable area of 20 mn sq ft. Monetisation of the project has started. Of the total planned residential development of 11 mn sq ft, it has launched 3.2 mn sq ft; bookings have been healthy. The company expects the balance 45% of the development, which includes lease earning assets (9 mn sq ft), to provide steady cash flows but we believe there could be execution and marketing challenges.
Leather garment business' growth in line with industry; accessories to drive growth
In the past five years, Bhartiya's leather business grew 14%, in line with industry growth. Despite being present in a highly fragmented industry, the business achieved healthy growth due to the company's in-house design facility and strong client base. Diversification to leather accessories (belts, wallets, bags, etc.) has helped Bhartiya record healthy growth in the past two years; we expect this trend to continue.
Revenues to increase at three-year CAGR of 16%; valuations – CMP has strong upside
Revenues are expected to increase at a three-year CAGR of 16% to Rs 5 bn by FY16 driven by steady growth in the leather garment business and robust growth in the accessories business. EBITDA margin is expected to improve to 9% in FY16 from 7.6% in 9MFY14. PAT is expected at Rs 600 mn in FY16 from Rs 104 mn in FY13 due to share of profit from BUILDCO. We continue to use the sum-of-the-parts (SoTP) method to value Bhartiya. We have rolled forward our projections to FY16 and revised our fair value to Rs 330 per share from Rs 285. At the current market price, the valuation grade is 5/5.
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