Krishna Karwa Moneycontrol Research
Owing to the introduction of the Goods & Service Tax, FY18 had been a challenging year for all consumer-centric companies, including innerwear and leisurewear companies (ILCs). What was commendable, however, was their ability to deliver a sustained financial performance.
Increased emphasis on product premiumisation, higher advertisement spends, network expansion in smaller and mid-tier cities, foray into clothing, and market share gains triggered by progressive formalisation of the Indian economy post-GST should augur well for all ILCs in the long run.
Dollar Industries appears to be reasonably valued, amid ongoing market fluctuations. Page Industries will continue to enjoy premium valuation and can deliver returns in the mid-20s, pretty much mirroring its earnings growth trajectory. We advise investors to accumulate Rupa & Company and Lux Industries on corrections.
FY18 result snapshot
Barring Rupa, ILCs reported healthy year-on-year (YoY) top-line growth in FY18. Margin expansion was observed in all cases too. Page Industries (exclusive licensee for the Jockey brand in India) dominated its peers in terms of operating and bottomline margins quite comprehensively.
For Dollar Industries, the YoY increase in sales was predominantly due to higher volumes. The 10 percent YoY uptick in revenue from its flagship ‘Big Boss’ men’s innerwear brand (40-45 percent of yearly turnover) and benefits from backward integration (spinning) were among the key margin contributors in FY18.
The 19 percent YoY sales growth in Lux Industries was largely volume-based and helped neutralise elevated yarn costs. Margin improvement was led by higher chunk of premium product sales, cost savings and forex gains.
Revenue growth in Page Industries was attributable to strong traction across its 3 segments: men’s innerwear, women’s innerwear, and sportswear. Operating leverage on account of cost control measures enabled the company to offset the disadvantage of lower gross margins (because of high raw material costs).
Rupa registered the lowest YoY sales growth compared to the competition on account of flattish volume growth. Nonetheless, margins improved YoY because of better product mix and efforts towards product premiumisation.
The road ahead
Dollar Industries
Dollar Industries’ joint venture with Pepe Jeans Europe BV will enable it to manufacture and sell top-end fashion innerwear and athleisure wear under the latter’s brand name in South Asia from FY19. The company is also venturing into new retail formats (large format stores and exclusive brand outlets) to augment its revenues.
Efforts to rationalise costs (particularly commissions offered to distributors), coupled with a tilt towards top-tier product offerings (from 65 percent in FY18 to 70 percent or more in FY19), should yield better margins going forward.
Lux Industries
To tap the under-penetrated markets in South India, Lux Industries will add 30-40 distributors in the region each year. To boost exports, the management is eyeing European markets. Premium innerwear brand ‘One8’ will be launched in Q2 FY19. Collectively, these steps will facilitate top-line growth.
The management plans to increase the contribution of high-value innerwear products to total sales (which stood at 21 percent in FY18) over the next 2-3 years. Complete in-house manufacturing (barring stitching activities for low priced products) will help derive economies of scale, thereby improving margins.
Page Industries
Page Industries will increase its 'Jockey' exclusive brand outlet count from 470 in FY18 to 1,000 by FY20. Girls’ wear products will be introduced in H2 FY19 too. The demand outlook for men’s products seems promising. A combination of these factors ensures unhindered revenue visibility.
To maintain an asset-light business, the management aims to increase the share of outsourced manufacturing processes from 25 percent in FY18 to 40 percent by FY20. The resultant high asset turns should help bolster margins further. To tackle cost pressure and prevent margin dilution, price hikes on some products may be announced.
Rupa & Company
Rupa's management, through its strategic tie-up with foreign brands (FCUK and Fruit of the Loom), is shifting its focus from mass segment to premium products. It expects revenues from 'Fruit of the Loom' products to increase to Rs 100 crore by FY19 end as against Rs 25 crore in Q4 FY18.
To facilitate branding and promotional activities, Rupa will spend nearly 8 percent of its total annual turnover in FY19. The move entails creating brand visibility for its top-end brands (Euro, Macroman, FCUK, Fruit of the Loom) to aid margin accretion.
Which stocks can one consider at current levels?
Higher discretionary spending, growing fashion consciousness, enhanced reach of organised retail channels across India, and robust growth potential in relatively smaller women’s and children’s innerwear segments are some of the added tailwinds that make us bullish on this sector as a whole.
From a company-specific perspective, a lot would depend on how risks associated with volatility in cotton prices, cut-throat competition (especially from foreign brands), changing fashion trends and lack of brand loyalty are mitigated.
Dollar Industries trades at a valuation that is considerably less demanding than its peers and possesses the ability to generate earnings at a pace similar to them. The stock has corrected sharply, thus making it investment worthy.
Page Industries will continue to command superior valuations given its best-in-class execution capabilities. Investors can look forward to secular returns in the mid-20s going forward.
Lux Industries and Rupa trade at heady valuations and may be looked at on corrections.
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