Thread by @sahil_vi

Mirza International.

Red Tape. Mode. Oaktrak. A thread.

Let us try to understand the possible reason(s) behind recent ferocious price increases. Let us also understand how to analyse a business through innovative means.

Please ReTweet if you find it useful.

🧵🧵🧵 👇

I will structure the deep dive into 5 segments:
1. Industry Trends & Opportunity size
2. Brands/segments
3. Corporate Governance
4. Recent Triggers
5. Scuttlebutt
6. Valuation
7. Anti-thesis
8. Thesis/Conclusion

1. Industry Trends
Mirza international is in the business of building consumer brands for Shoes & Related Athleisure clothes (sports wear, sweat shorts & the likes). Imagine it to be like a middle or low income person’s Nike.

Now what I want to demonstrate through this part is how to do industry analysis. Now that we know mirza is into Shoes. We can look for recent shoe IPOs. We find metro shoes IPO. That becomes a wonderful source of info for us. Metro DRHP 👇
icicisecurities.com/Upload/Article…

Tailwinds::

Entire footwear industry is expected to grow at 15% over next 3-4 years. Apparel industry at 12%. What happens when entire industry grows in double digit??

I think the GIF covers it all.

Is that all as far as tailwinds are concerned?? No. Part of the reason why efficient players like relaxo trade at the valuations that they do is the immense opportunity size for organized retail.

Organized retail penetration is hardly 31% for apparel & 35% for footwear. This means > 2/3rd of all apparel & footwear is still made by the mom & pop small manufacturers. The big wont get bigger. The efficient will get bigger. Organized players like Mirza have huge opportunity.

Footwear Industry is 31,000 cr. Apparel is 1,50,000 cr. Even as a percent of organized footwear/apparel, mirza is tiny (350cr footwear annual sales). Opportunity size is huge.

Thanks to GST, e-commerce marketplaces like amazon/paytm/flipkart (26% CAGR expected over next 3-4 years), organized retail players are gaining market share.

Summary: Apparel & footwear booming. uUorganized to Organized shift. Brick & mortar to online shift. Naaaice.

2. Brands/segments

Mirza’s business consists of 3 segments:
1. Domestic business which is largely branded (think brands similar to relaxo, hush puppies, nike)
2. Exports business which is largely white label (contract manufacturing for other leather brands)
3. Leather sales

Mirza started with tannery operations selling leather. Then forward integrated into making leather shoes. Then realized that leather shoes were going out of vogue & started creating brands for sports shoes & athleisure apparels.

Domestic Branded Business
Mirza’s 1st & iconic brand is Red Tape. Men’s mid-segment sports shoes. The fastest growing large segment of all footwear.

Next brand is Bond Street. This is an affordable mass market brand among the sports shoes categories. Btw All sports mirza makes are made in bangladesh/vietnam. That is part of the reason these are asset light.

Oaktrak is their premium leather brand. This is the forward integration for the tannery/leather segment. They compete with woodland in this segment. All channel checks indicate that this segment is going out of favor. When does one weak leather shoes? Formal occasions.

Mode & Yezdi are their women’s brands. This includes both athleisure/sport shoes & casual footwear.

In addition Mirza has also launched Athleisure apparel as a brand extension of Red tape brand.

The domestic branded biz has been growing at a CAGR of 25-30% over the last 3-4 years & has scaled very well. The export business since it is white label is unpredictable, has no brand recall & quite a poor business. Leather/tannery is poor too.

P&L contains results for domestic (branded) footwear, domestic (branded) apparel, export (whitelabel) footwear, leather divisions. Analyze the segmental margins, ROCEs.

Which segment has highest ROCEs?
Calculate & answer

Which segment has worst ROCEs?
Calculate & answer

Let us calculate the answers.

Domestic shoes division: Segmental (consolidated) assets are 452.39 cr. Segmental liabilities are 267.25 cr. This means that segmental capital deployed is 185.14 cr (Assets - Liabilities).

This segment’s quarter EBIT (Proflt before lnterest & tax) is 11.34 cr. Since last few Qs were covid disrupted I will annualize Q2 EBIT to get annual EBIT. One can generate better estimates. Annual EBIT is 45.36 cr. Thus, the segmental ROCE is 24.5%. Not bad at all.

Redtape Garments division: Segmental (consolidated) assets are 325.5 cr. Liabilities are 196.73 cr. This means that Segmental Capital deployed is (325.5-196.73) = 128.77 cr.

This segment’s Q2 EBIT is 9.51 cr. This leads to annual EBIT estimate of 38 cr. This leads to Segmental ROCE of 29.5%.

Domestic Business together: Capital Deployed = 128.77+ 185.14 = 313.91 cr. EBIT = 38+45.36 = 83.36. Thus, domestic business ROCE is 26.55%. That is pretty interesting.

What’s more? There is significant operating leverage sitting in balance sheet & P&L. Why?? Coz they opened even more branded outlets in FY21 which they havent been able to utilize due to covid. Woudln’t be surprised if domestic ROCE > 30% in post covid world.

Summary: Interesting brands. Seem to cover many of their bases. Domestic branded biz is interesting. High growth (30% CAGR). High ROCE (26%). Rest is sort of meh.

3. Corporate Governance

Let us analyse why this reasonable sounding biz is trading at low valuations. One of the key reasons is corporate governance in the past & present.

What the company did is to take loans from the bank. The promoters guaranteed that company will pay the loans. For that guarantee, they charge a guarantee commission.

You can see that promoters took home 8cr of commissions in FY16 (end of image). FY16 net profits were 72cr. Baap rey. Thats 10% of PAT.

Another area of concern for minority shareholders is that there are massive related party transactions. Eg: Mirza UK which is fully owned by promoter & a private entity does all export sales (end of image).

As you can see above, mirza UK handled 344 cr of exports. Any margin left in Mirza UK benefits promoters at cost of minority shareholders.

You can also see that Euro Footwear does job work (contract manufacturing) for Mirza International & is another big related party transaction.

Hope you're enjoying the deep dive into the belly of the beast. :D

Summary: Guarantee commissions, related party transactions. Promoters enrichering themselves at cost of minority shareholders.

4. Recent Triggers

Okay, so if mirza is essentially marred by RPT (Related Party Transactions) then why study it?? Well, there are 2 kinds of people (investors) in this world.

Those, that believe in blacklisting cos based on corporate governance past & those that are looking to see companies as an evolving movie not a static picture. Nothing wrong with being in any camp. Just that I am in the second. Why??

2 reasons:
1.

https://twitter.com/LuckyInvest_AK/status/1478007457230188544?s=20

Ashish K sir explains it. Generally current valuations discount corporate governance concerns known from the past
2. Have seen many companies corporate governance image evolve. Its definitely dynamic. Investors should remain flexible

As investors we need to focus on where the puck is moving, not where it is right now. Where is the Mirza corporate governance puck moving?

You saw the guarantee commission for FY16. Now see the guarantee commission for FY21.
Notice any difference?? Any idea who Shuja mirza is?

Shuja mirza is actually the head of the domestic biz. He acknowledged in one of the FY20 concalls that guarantee commission is a problem & aim to bring it down over time. They are walking the talk. Guarantee commission down from 8cr to 2cr.

Okay, onto Mirza UK. Guess what is happening to that pesky promoter private entity? It is getting merged into Mirza International (india listed biz we are analysing) so that promoter & minority interests are aligned!!

But that is not all. Mirza international has decided to list their mirza domestic business as Red Tape!! This means that those pesky leather & export divisions (including mirza UK) which were unprofitable and degrowing will be separated out.

Shareholders of mirza int will get 1 share of Red tape for each share of mirza int. This is as sweet as it gets. The only hope that mirza shareholders have is that shuja mirza be given full control of Red Tape to resolve all issues & grow it well.

Okay, onto Euro Footwear. Well, this one is interesting. In one of the concalls pre covid, shuja mentioned how this came into being. There was a competitor which sprung up near their factory. They wanted to ensure that they could co-exist harmoniously

So mirza promoters took 49% stake in euro & made euro a partner in mirza’s growth. Euro is 51% owned by private person. Mirzas own 67% of mirza int. So it wouldnt make sense for them to leave extra margins in euro (general fear with RPT).

Summary: Puck is moving in the right direction. Corporate governance is improving. Can improve more. Concalls need to restart (stopped due to covid).

Btw which camp are you in?

5. Scuttlebutt

One might or might not invest in mirza as per their own comfort. But I want to demonstrate through this thread how one can do scuttlebutt for an online consumer brand.

First thing i did was to order their sweatshirts, shoes, socks. Shoes for my wife. The sweatshirt is good quality. Comfortable. The shoes are comfortable. Light weight the socks are comfortable too.
The ladies' shoes are comfortable too, and my wife likes them.

PS: i am wearing my socks very high over my pyjama (which is not redtape) so that they are visible in the photo. On another scuttlebutt a contact owns redtape store one of the earliest in North India (Ludhiana). They were telling that there is definitely some change in strategy

They are trying to focus more on standard operating procedures. How to behave with customers, ensuring consistent customer experience, how to paint something at the store etc. Will ask for more feedback as soon as possible.

For a consumer facing brand, while it is important to have a scuttlebutt based approach we must also rely on aggregates in order to not get derailed by sampling bias (essentially the fact that a small set of opinions need not be representative of the mean or the mode).

Brands need to capture eyeballs & mindshare before they capture wallet share. One of the best ways I have found to analyze consumer facing brands is through Google Trends.

This represents organic customer curiosity & eagerness to learn about or buy products of the said brand through google search. We can see that customer interest in red tape has been going up over time.

We can also see the dips due to covid waves as customer priorities would have shifted from shoes to essentials. We can see that wave 1 was much worse than wave 2. We can see that customer interest as of now is at all time high.

Let’s also compare the brand interest for Red Tape to that for Relaxo
Relaxo has much lower brand interest than Red Tape. To me, that means that potentially relaxo audiences might be more interested in or otherwise prefer offline purchases rather than researching online.

One can compare with Sparx too if one wants too. Let’s add Metro Shoes (Recent IPO).
Metro shoes interest is even lower than Bata. The interest has also been going nowhere for last 5 years.

This should be of concern to Metro & its investors because what it shoes (pun intended) is that any online sales might be based more on advertising & less on organic interest from customer side. That might mean that the online presence is less organic & sustainable.

All in all, I find the data quite satisfactory for Red Tape. Need to see how the customer interest evolves over a normalized covid free period.

I fully expect Wave 3 to (in the conservative case) dampen customer interest as focus of the consumer shifts from non essentials to essentials & staying at home.

I then analyzed the customer interest using a website called SimilarWeb which can be used to compare websites in terms of traffic, interest etc.
I took their 7 day trial of pro & analyzed redtape & competitors.

Do note that this only analyses traffic coming on to redtape & competitor’s own websites such as redtape.com & metroshoes.net not the traffic going on to 3P aggregators like myntra, amazon, paytm etc.

As suspected, redtape has much better organic traffic than metro shoes:
Lot of metro traffic is through Ads & Paid Search

In fact Redtape’s organic search leads are far better than relaxo, bata & metro all three. Whereas relaxo has lot of direct traffic which makes sense too since it is a much older brand than red tape

Bounce rates compare how many customers landed on your home page but did not go to any of the linked pages (essentially they ‘bounced’ from the home page). Relaxo is at 27%, Red Tape at 35%, Metro shoes at 57%!!!

Short summary: Relaxo is an established brand. Red tape is an upcoming organic brand that people want to learn about & perhaps commerce in. Metro is paying customers to visit its websites but unable to convert them to commerce

6. Valuation
Domestic branded sales (annualizing Q2 results) are around 830 cr. This can do EBIT margins of 10-11%, ROCE of 30%, grow at 30% (led by online sales. Online is 30% of their sales already. 12% for metro)

Exports is around 500cr sales annual run rate. This biz is also 12% EBIT margin. But let us only assign value of 0.5x sales or 250cr to this biz (4x EBIT). (0 value assigned to leather division). Then the domestic biz is available at 2x sales.

For comparison, bata is at 11.5x sales (similar ROCE), relaxo at 13x sales with similar ROCE , metro degrew sales 50% in FY21. has lower ROCE, available at 16x sales.

For comparison all of those competitors are growing much slower than Red Tape.

Would have love to shown a @theTIKR graph. but they made india data paid, & rates are exorbitant to say the least. ARRRRRRGHHH.

@theTIKR 7. Anti thesis

The corporate governance improving could be an ‘act’ with nottiness being performed in other ways to benefit at cost of shareholders. We dont know that & its hard to know. Balance sheet (inventory) management is the key in retail.

@theTIKR This has been in the recent past but can deteriorate if they chase growth without properly managing/handling balance sheet.

Once a chor, always a chor?? Shawshank redemption, but mirza never redemption??

@theTIKR 8. Thesis

I find the valuations dirt cheap. I am ready to take risk of entire thing going to 0. I balance this through position sizing. Downside is limited. Corporate governance is improving on tangible metrics. Position is limited to 3%.

@theTIKR At same time i am fully aware of their notty past & actively seeking all disconfirming evidence. 95% investors want to avoid mirza which is why valuations are low. But i havent found any incremental nottiness yet.

@theTIKR Thesis is that if indeed nottiness is reducing then valuation gap will narrow & Red Tape will trade at higher valuations. Profitable growth funded from internal accruals (high ROCE) will enable value creation.

@theTIKR I could be wrong.

Hope this thread helped you 🙏🙏

I spent about 4 hours making it (this is in addition to time spent researching).

if you're new here consider following if you're interested in reading similar deep dives in the future.

@theTIKR thanks to @Investor_Mohit & @NeilBahal for sharing their thesis on mirza openly.

Thanks of course to VP to enabling me to go over around a decade of mirza history & metamorphosis.

@theTIKR @Investor_Mohit @NeilBahal Resources:
1. metro DRHP:
icicisecurities.com/Upload/Article…
2. Mohit's space:

3. Neil sir's news letters.

@theTIKR @Investor_Mohit @NeilBahal 4. mirza old concalls. eg:

5. Mirza annual reports: eg:
bseindia.com/bseplus/Annual…

<end of thread>

Oops, last option should have been leather. this is what happens when you're tired after a long day's work.

leather is the correct answer btw. sorry for the typo.🙏🙏

Just to be clear i am not advocating that people go & invest in Mirza.

Capital loss is a real possibility for me, for everyone. I am controlling my risk by actively seeking disconfirming evidence 24*7 & through position sizing.

Do not do mindless cloning. Your risk capital, your conviction, your pain, your hain. Your loss, your alpha, your multi begger and your multi bagger.

🙏🙏

My attempt to share process for deep research.

Your gain*

Disclaimer: i am invested & positively biased.

Also do read my important warning :

https://twitter.com/sahil_vi/status/1479520931731021825?t=y50mbRLwdMe7pvM0eV8bSA&s=19

Btw I said 5 then wrote 8. I have a knack to underpromise & over deliver. :) Exactly what i want in my investee companies.

Correct answer is Domestic Apparels. Huge TAM. Wow ROCEs.

While we are on the subject of corporate governance it is probably worth knowing how things stood for relaxo 10 years ago!!
Very similar corporate governance concerns regarding related party transactions.
If anything mirza disclosures are better.