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Spice Islands Apparel


Spice Islands Apparel operates in the textiles (95% of revenues) and financial services segments.

The textile business revenues comprise mainly of exports with supplies to the Europe/US markets.  The products include men’s/ladies’ tops, undergarments, and other items in the young fashion segment.  

Management expect booming local demand helped by retail expansion (despite recent FDI rollbacks).  It is operating at practically full capacity.

The company has reported erratic profitability on moderately growing revenues over the last five years – reporting about 1.5cr of operating profits on revenues of about 20cr.  It operated with a marginal net cash position.  It also reported about 11cr of net current assets as at 30th September, 2011.

The business is primarily exposed to the risks of high cotton prices, which included as much as an 80% increase in the prior year.   The customer contracts are signed six or eight months before execution and hence, rising raw material costs cannot be passed on. 

Further, the business is subject to strict international compliance norms that increase costs.  Needless to say, customers have high bargaining power in this industry because they own the brands.   This situation isn’t improved by stiff domestic competition resulting in price wars.

Currently, the business faces the specific risk that its major customers are under stress as a result of slow merchandise offtake due to the spending slowdown in Europe/US.  Management expects likely bankruptcies and liquidations of several customers in the forthcoming year.  Management’s handling of this situation as well as the above risks will have a large impact on shareholder returns.

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