Jitendra Kumar Gupta Moneycontrol Research
Dollar Industries managed to grab eyeballs of investors on Dalal Street after L&T Mutual Fund recently bought about 3.5 lakh of its shares at Rs 1448 a share. There could perhaps be no better endorsement of the company which has struggled to come out of the shadows cast by its rivals.
To be fair, Dollar has been quietly working on its image – and sales – after its brand ambassador and Bollywood actor Akshay Kumar crackled the airwaves with the now famous tagline “Fit Hai Boss”.
It has so far relied heavily on advertising and branding to promote its products, and, to be fair, the bet has paid off. If advertisement costs soared to Rs 161 crore in FY16 from Rs 42 crore in FY14, sales doubled to Rs 822 crore last fiscal year from Rs 396 crore in FY10. The company has set its sights on Rs 1000 crore turnover.
Today, Dollar has emerged as a strong player garnering close to 15 percent market share and is amongst the top three players in the branded hosiery industry.
The company has also widened its reach significantly. It has expanded to 800 dealers, increased its retail presence to 80,000 from 40,000; beefed up sales team to 200 employees from 20. Its balance sheet reflected such a capacity expansion. Capital employed rose 5 times in the past six years. At the end of FY16, it had total debt of Rs 233 crore as against an equity of Rs 145 crore, with debt to equity of 1.6 and interest cover of 3.1, which is still manageable.
What to Watch For
While the investments are beginning to reflect in numbers, the key thing to watch for would be how well the company succeeds in positioning itself as a brand, reap benefits of premiumisation and improve margins an account of operating leverage.
It is worth noting that the percentage of revenue from the premium products has seen a steady increase from 38 percent in FY14 to 55 percent in FY16. The same should impact both margins and return on capital employed positively especially when both capex and opex (particularly advertisement) as a percent of sales start to stabilise.
To illustrate, currently, the company spends almost 20 percent of its sales on advertising. Should this decline at a later date to 10 percent (as revenue starts increasing), the 1000 basis points (10 percent) reduction in advertising as a percent of revenue will result in return on equity jumping to 57 percent from 19 percent.
The interest of serious investors may be the first signal of possible improvement in financial performance. We believe, as an organised player, Dollar Industries stands to benefit from the implementation of GST (Goods & Service Tax) and if the expansion and premiumisation strategy works well, numbers will tell a positive story.
In the first nine months of FY17, after-tax-profit grew 33 percent largely aided by an improvement in margin as topline growth was tepid, impacted largely in the December quarter due to demonetisation. At the acquisition cost of the L&T Mutual Fund, the stock trades at 41 times FY17P earnings, which is a marginal discount to Rupa & Company that trades at 45 times FY17P earnings with superior margin performance.
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