Will this parting shot from Rakesh Jhunjhunwala work?

Rakesh Jhunjhunwala’s RARE Investments bought 42.5 lakh shares of Singer India through a bulk deal on August 16 at ₹53.50 per share, acquiring around 8 per cent of the company. Since the news of the late investor’s bet became public, the stock has gained around 23.5 per cent to date and closed at ₹71.2 on the BSE yesterday. Prior to this news, the stock had a lacklustre 1-year return of 4.6%.

Singer India, a small-cap company, is engaged in the business of manufacturing and trading sewing machines and related accessories as well as other domestic appliances. It is headquartered in New Delhi and has its manufacturing facilities in Jammu. The sewing machine segment accounts for 68% of revenues, while the home and kitchen appliances segment makes up for the remaining 32%. The company’s sewing products are marketed under the brand ‘Singer & Merritt’ with showrooms, distribution networks and a strong after-sales service network pan-India.

Financials

The company reported revenue from operations of ₹109.53 crores in the June quarter, which is a near 50 per cent Y-o-Y increase from ₹73.2 crores, but a 12 per cent sequential decrease from ₹124.78 crores reported in the March quarter of FY22. According to the management, inflation and volatility in raw material prices has led to price instability and impacted consumer demand for home appliances. Further, an anticipated correction in raw material prices at the end of the quarter led to destocking by channel partners, prompting lower primary sales.

Net profit stood at ₹ 96 lakhs for the quarter. Despite this being a 243 per cent y-o-y increase from ₹28 lakhs in the corresponding quarter last year, it still is a 60 per cent sequential decrease from ₹2.38 crores. This yearly growth in bottom lines, although backed by strong yearly growth in revenues, may appear high due to a low base effect. Operating margins have remained flat on a yearly basis, but have shrunk from 2.69 per cent to 1.71 per cent sequentially.

Prospects

Singer India is looking to enter the growing industrial sewing machine segment and plans to launch a new product to boost revenues. Some strengths of the company are rural consumption play and an extensive pan-India service and distribution network. It is also low on debt, signalling efficient management of funding requirements, predominantly through internally generated cash. While there are no prominent listed peers for Singer’s sewing machine segment, its operating margins are considerably lower than its peers in the home appliances segment.

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Although the home appliances segment still remains unprofitable on a PBT level, the company expects this segment to be the future driver of revenue growth as the industry is estimated to grow at 10-15 per cent. Its focus is on six product categories to improve margins - fans, juicer mixer grinders/ mixer grinders, washing machines, gas stoves, water heaters and air-coolers.

Moving forward, Singer India is looking to expand its e-commerce platform, revenues of which remained low in FY21-22 due to insufficient supplies and price instability, to register growth. The sewing machine segment is a potential beneficiary on the account of government-aided schemes as the company looks to make the best use of the ‘Make in India’ initiative. Collaboration plans with B2B platforms also auger well for growth.

But at the same time investors need to note that the outlook for the company also comes with risks, with the home appliances market still proving to be economic and price sensitive. The company faces the threats of increasing raw material prices and further price pressure in view of intense competition and fluctuation in foreign exchange rates.

The writer is an intern with BL Portfolio