Looking for companies which gain the most from operating leverage is core to our investment philosophy. In 2014, China was exiting low-cost manufacturing as costs were rising there. So, we were looking at companies that could gain the most from the change in China’s priorities and operating leverage kicking in due to better utilisation of assets.
Home textiles was one space where India had a natural advantage over China as it had easy access to cotton, a vital raw material, whereas the Chinese did not enjoy any natural advantage. They had to import cotton and then process it. So, many of the Chinese players were moving out of the home textiles space. We were certain that the Indian home textiles players would stand to gain the most given their market share.
One of the companies that looked attractive given its asset-light model was Indo Count Industries. Focused on spinning yarn since its inception in 1988, the management decided to forward integrate into the home textiles segment in 2005. Indo Count had the capacity to manufacture 36 million metre of bedsheets and was exporting to countries like the US, the UK and Australia. It manufactured 50% of the yarn and greige fabric requirement and oursourced the rest. Greige is an unfinished fabric that hasn’t been bleached or dyed and needs to be processed to make the final product, in this case bedsheets. India had excess capacity in yarn manufacturing. You could buy good-quality yarn at reasonable prices. So, they outsourced their yarn requirements. However, Indo Count did 100% of the processing and cutting work in-house, focusing on the designing and finishing of the fabric. The company justifiably focused on front-end processes as it fetched higher margins.
We liked the involvement of the second generation in the operations of the company. It showed dedication and skin in the game. The second generation was involved in marketing and that was the toughest area to crack in the home textiles business. It is typically not easy to convince US retailers like Walmart to select you as a supplier and not buy f