Valuing a promising small-cap, apparel retailer using DCF

In this post, I discuss a promising small cap company with strong revenue and profit growth, robust cash flow generation, and high return ratios. I also attempt to value this company using DCF model, and the excel file of the model is available for premium members to download and study.

With that, let's begin our analysis.

Normally, the apparel industry is seen as a moderately risky one owing to its over-dependence on the state of the economy. If the broader consumption in the economy declines owing to, say, recession, then the apparel sales may reduce, thus impacting the stock prices of apparel retailers.

Presently, however, though the global economy has been reeling under macroeconomic stress caused by the Russia-Ukraine war crisis, India’s economy has stayed quite resilient. Of course, a major “unexpected” risk is the worsening of this crisis, leading to a surge in inflation and a fall in demand.

But if that risk does not materialize (note the “if”), then the apparel industry may do well this year. It also did well in the second half of last year.

For instance, note this: According to a recent report by real estate experts CBRE, the fashion and apparel retailers expanded their stores from July to December 2022 amounting to a share of more than 42 per cent in the overall leasing during the period. As per RBI’s monthly report on the state of the economy as of May 2023, this year’s GDP growth is “likely to be led by private consumption, supported by a revival of rural demand.”

So, assuming that exogenous shocks -- such as the Russia-Ukraine war crisis, or the inflation rising to uncomfortable levels -- do not play a spoilsport on India’s economy, I wouldn’t mind taking some exposure to the apparel industry – especially if the company I am currently studying looks strong.

This company, as we will discuss below, has great return ratios (both return on equity and return on invested capital, hereby referred to as ROE and ROIC respectively), strong cash flow generation, zero debt, great revenue and profit growth, and also reasonable valuation.

If you are interested in learning more, continue to read below.

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