The inside story

Back when the draft red herring prospectus of Page Industries was released in 2006, the company’s balance sheet was at a little over Rs.100 crore. But beyond the numbers, it seemed like a well-run company to most analysts who tracked it. “At that time, the company’s size was different: about Rs.150 crore-200 crore. At that size, the company had free cash flow for the preceding three years and hardly needed capital except for the expansion that it was undergoing. It had fiscal discipline and was cash generating. Logically, it could have funded the same with internal accruals also,” says well-known fund manager Kenneth Andrade. However, no one on the Street could have predicted then that the company would continue with the same growth momentum for a long period of time. 

“It is the only company in the mid-market range where garment prices are between Rs.80 and Rs.200; there is clearly no No.2. Any company looking to compete with Jockey (for which Page Industries is an exclusive licencee) will have to design its products much in the same way, and market them to the same distribution outlets that Jockey has been tapping. It is going to be an expensive strategy to try and break into Jockey’s market base. The only caveat is that per capita incomes — or the people’s spending power — needs to trend higher. If this figure keeps rising steadily, Jockey should not face any problems,” he says.

All things considered, Page Industries has come a long way since its IPO, its earnings and distribution network have grown by leaps and bounds. With a free cash flow of Rs.102 crore and profit of Rs.200 crore in FY15, the Street seems to be rewarding Page for operating in a high entry barrier marketplace and backing it up with healthy financial performance. The company’s stock is trading at Rs.12,686 today, or 3,423% over its issue price of Rs.360.

Laying the ground rules

The company’s success can be credited, in no small measure, to its large distribution network. Growing from just 18 exclusive brand outlets (EBOs) at the time of its public issue, the company today boasts of 223 EBOs. All these outlets are franchisee-owned and require a minimum of Rs.30 lakh as investment. While the brand was available at 14,000 retail stores back in 2006, it can be found at over 35,000 outlets today, including 850 shop-in-shops at large-format stores. Analysts feel that further expansion of the distribution network across tier II, III and IV cities will further drive the company’s revenue growth.

Being a first mover in the premium segment and capitalising on its strong distribution network have worked in the Bengaluru-based company’s favour and granted it a key competitive advantage. Managing director Ashok Genomal, says that the company is slowly but steadily trying to expand into smaller towns. “We are currently present in 1,200 towns and cities,” he adds.

And all this at a time when other brands are struggling to develop a robust distribution network. “Rupa and Maxwell lack control over distribution and manufacturing and have poor aspirational connect. International brands such as FCUK, CK, USPA and Hanes face several hurdles in building a strong distribution network beyond modern retail into hosiery stores,” observe analysts from Ambit Capital in a client note.

According to a recent Motilal Oswal report, Page’s market share in the innerwear industry stands at 5.1%.While it enjoys a leadership position in the men’s premium innerwear segment, the company is competing with brands like Lovable Lingerie (market share 28%) in the women’s segment. The entire men’s and women’s innerwear and leisurewear market is estimated to be Rs.30,200 crore. Within the innerwear category, unorganised players make up for 47% of the market.

And though Page Industries’ online sales lag behind at 3% of the top line currently, the management expects sales through e-commerce portals to contribute 7% of its top line by FY19. “The share of online sales will definitely increase in time and in step with the general market trends. We are ready for this thanks to our own exclusive e-store and other reliable online partners with whom we enjoy a good relationship,” Genomal says.

Some of the company’s largest online partners include Flipkart and Snapdeal. It employs an incentive-based model for distributors instead of giving them high margins, a strategy adopted by brands such as Rupa and VIP as well. According to one of its distributors, the schemes on offer include one that promises a 3% discount on the factory price for every 15 boxes of Jockey products sold. However, analysts say these terms are not fixed and would probably differ from centre to centre, becoming more liberal in areas where the brand is not strong enough yet.

While its distribution network has given the company a strong competitive edge over its peers, it is the product quality and high aspirational value attached to the brand that has given Jockey a distinguished position among Indian consumers. The US-based Hanes has tried to break into Jockey’s customer base in India of late, but industry insiders feel that challenging the brand here is now a tall order.

“There is only one brand in the premium segment, which is Jockey. Hanes doesn’t come close at all, although the brand has been trying to compete with Jockey for a long time. The former tried to go it alone in the Indian market when it was launched but the strategy backfired and the company had to sell its India operations to Arvind,” says Vinod Gupta, managing director, Dollar Industries.

Crunching numbers

Thanks to Jockey’s pricing and distribution network, analysts don’t see any threat to the company from any domestic players. “However, if international brands such as Calvin Klein, Tommy Hilfiger or US Polo start selling their products in India in the same price band as Jockey, then the company’s leadership position in the category could face some challenges,” says Tejas Shah, VP, research, Spark Capital Advisors. A quick price comparison on Snapdeal reveals that a pack of two Calvin Klein cotton briefs is available for Rs.1,099, while a pack of four Jockey cotton briefs is available for Rs.699. Although the prices of cotton — a key raw material for Page — have softened recently, the company is not looking at margin expansion.

The management aims to maintain the operating margin at around 20-21% and believes in taking price hikes to maintain margins. And while operating margins have touched 21% (in FY15) thanks to the removal of excise duty, analysts expect Page Industries to maintain margins at current levels over the next two years. Genomal adds that “strong brand equity and the consistent quality of products have given the company a strong pricing power and, therefore, it is in a unique position of being able to increase prices when required to compensate for increase in costs, while maintaining a value-for-money pricing for our consumers”. The management believes that the brand can sustain 20-25% revenue growth in the foreseeable future, led by 15-17% volume growth, a 3-5% price increase and a close to 5% mix/uptrading benefit.

In the absence of a formidable No.2, Page has grown at a brisk pace, creating immense value for its shareholders. The company has posted 35% revenue and operating profit CAGR over the past seven years (see: On a ramPage). Analysts at Ambit expect a revenue/EPS CAGR of 31%/37% over FY15-FY21, while analysts at Barclays peg the company’s top line growth at 30% CAGR over FY15-FY18 and profits growth at 38% CAGR during the same period.

The prevalent market sentiment says that the company is sitting on several triggers that can drive incremental growth and further shore up its valuations. And the company’s enthusiastic promoters have already started looking at markets beyond India. “We have just entered the UAE, starting with three EBOs and some distribution to MBOs. Our aim is to focus on brand-building first and then step up distribution. We have been supplying to Nepal and Sri Lanka for some years now. We recently opened an EBO in Sri Lanka and the response has been very promising. We intend to expand EBOs there and step up distribution with renewed efforts,” says Genomal. 

Under the current licensing terms that Page holds, it will retain right to the brand till 2030, with the annual royalty payments fixed at 5% of the factory price. Although markets abroad only constitute 1% of overall revenues for Page, analysts at IDFC believe that these markets could provide a sizeable long-term opportunity for the company. The ongoing shift in the category from the unorganised segment towards organised products is another long-term positive for the company. With the premium segment accounting for less than 20% of the innerwear market, rise in disposable incomes and improved availability of premium products will increase the overall premium market pie.

Market observers also believe that leisurewear still remains an underpenetrated segment and can be a meaningful driver for the company. Currently, men’s innerwear accounts for 49% of revenues, while women’s innerwear and leisurewear and socks make for 20% and 31%, respectively. “As a category, leisurewear has grown far faster than men and women’s innerwear. Leisurewear will continue to grow much faster than men and women’s innerwear because this is a highly under-penetrated and highly unorganised segment. For instance, there are no gym wear brands in the market apart from the likes of Nike, Reebok and Adidas. However, none of these sell cotton clothes,” says Rakshit Ranjan of Ambit Capital. 

Room to grow

Analysts at Ambit expect about 36% revenue CAGR for leisurewear over FY15-FY21 (as opposed to the roughly 49% reported over FY10-15) on a larger base, driven by greater penetration of organised sub-segments such as T-shirts, track pants and capris, along with market share gains in categories like thermal wear (see: A different trajectory). Market observers expect the company to launch its kids’ innerwear products in a focused manner over the next six months as well. “It looks like an exciting space, as the segment is still underpenetrated by large brands. So far, this space has largely been dominated by unorganised players,” says Shah.

According to analysts at Ambit, kidswear accounts for 20% of the Rs.17,500-crore innerwear market. Women’s wear is also expected to grow at a steady rate. “We forecast approximately 30% revenue CAGR over FY15-21E (as opposed to the 35% reported over FY10-15) for women’s innerwear and about 36% revenue CAGR (FY15-21E) for bras, supported by a combination of entry into new sub-segments of women’s innerwear, like its recent launch of shapewear,” analysts at Ambit Capital say.

Although the swimwear market is still evolving in India, analysts believe that brand Speedo could also be a long-term opportunity for Page. Genomal says the availability of Speedo will in itself help create a strong ecosystem for swimming in India. In Q2FY16, Speedo’s volumes grew at 10.8% on a Y-o-Y basis. At the end of FY15, the brand achieved a turnover of Rs.23 crore against Rs.19.8 crore in FY14. In FY15, Page set up two more Speedo EBOs, taking the total number to eight. At the end of FY15, the brand was available in 986 stores, including 140 large-format stores across 74 cities, and eight EBOs. With all these plans in place, the company is looking to ramp up its capacity from 195 million pieces to 230 million pieces.

While this would entail a one-time capex of Rs.50 crore in FY16, analysts expect the company to maintain this capex annually. “We continue to plan expansion of our capacity at 15% per annum,” Genomal says, adding that the expansion would be funded through internal sources. According to him, utilisation is always planned at about 80% of the rated capacity. “We are in a capital-light industry. Our fixed asset turnover ratio is in the region of 8.5x. We have been expanding capacity efficiently, as can be seen from our steady growth over the past two decades; we are very scalable,” says Genomal. As per a recent corporate presentation, the company has production facilities at 12 locations (eight in Bengaluru and one each in Mysuru, Hassan, Gowribidanur and Tiptur).

While analysts have no data to quantitatively put in perspective the brand loyalty of Jockey users, the current pool of Jockey consumers looks good enough to help Page sustain a steady growth rate even if the aforementioned triggers fail to play out.