Quite a Stretch

The Kolkata-based hosiery and knitwear manufacturer, Dollar Industries, has kicked up an investor frenzy after getting listed on the NSE on April 21. It seemed like the buyers couldn’t get enough of the stock as it remained locked at its upper-circuit of 5% in five of the 11 trading sessions after getting listed. The stock hasn’t been traded since 2013, when trading was suspended on the Calcutta Stock Exchange following a Sebi directive.  As per the directive, all exchanges were required to either own or tie-up with a recognised clearing corporation.  Following Sebi’s directive to companies who were listed on defunct regional exchanges to offer an exit option to investors, Dollar Industries relisted on the NSE at Rs.1,314 a share.

Since its listing, the share has gained 36% (as on May 8). Institutional investors are already lapping up the stocks. L&T Mutual Fund bought 3.5 lakh shares on April 24 at an average of Rs.1,449 a share. The following day, another foreign institutional investor (FII), Geo Emerging Domestic Opportunities Fund bought 1.7 lakh shares at an average of Rs.1,521 a share. Both investors collectively hold a 6.75% stake in the company.

Dollar Industries, which began its journey in 1996, is the newest entrant among the listed innerwear players. The company, which has Akshay Kumar as its brand ambassador and is best known for its brands - Bigboss, Force and Missy, has the highest advertising and promotional (A&P) spending among its competitors such as Page Industries, Rupa & Company, Lux Industries and VIP Clothing. The company, which currently spends 9.5% of its revenues on A&P, in 2012 spent 20% of its revenues to promote its brands. The efforts paid off for the company as they managed to corner nearly 15% of the organised hosiery market. Nearly 80,000 retailers sell their products across the country. Sales have grown at an average of 15% every year over the past five years and net profits have increased at an average of 27%, driven largely by healthier margins. Operating margins improved from 6.4% to 9.1% during the same period, thanks to nearly 55% of its revenues coming from premium products. 

 The Rs.23,000 crore Indian innerwear industry, is expected to grow at an average of 13% every year over 2015-2023. Nearly 60% of the men’s innerwear market is organised, giving players such as Dollar Industries enough headroom for growth over the long term.  However, the sharp run-up in share price has bumped up valuations. The stock is currently trading 48x its twelve-month trailing earnings.  In comparison, peers such as Rupa and Lux Industries, not only have better margins and return ratios but are also available cheaper, at 39x and 40x their trailing twelve-month earnings making them a lot more attractive. Given Dollar’s expensive valuation, it is unlikely that this innerwear player would be worth the stretch in the near term.