Ajay Relan

This is the kind of story dreams are made of. A young man, barely 17 years old, leaves his village in Kutch, Gujarat, in 1993 with ₹100 in his pocket and travels to Mumbai to work at his uncle’s multi-brand store, which sells imported innerwear. Six years later, he sets up his own manufacturing and distribution arm, launching his own brand of Valentine innerwear with the ₹100,000 that he has saved. Today, his company, Ashapura Intimates Fashion, is poised to finish FY16 with revenue of ₹230 crore and a market valuation of approximately Rs.500 crore. This is the story of 39-year-old Harshad Thakkar, still young and still very hungry.

Perfect fit
Harshad talks a good game — the kind that is music to the ears of investors. Yes, he plans to grow at more than 25% for the next several years. Yes, he could grow even faster; after all, the size of the market for his products is gigantic at ₹50,000 crore, with market leader Page Industries owning only 3% of this market.

But Thakkar wants to eschew this more rapid growth because he is debt-averse. He would rather focus on margin expansion through direct sales to consumers via e-commerce sites and company-owned and -operated stores. He believes in staying asset-light. Investments in buildings, plant and machinery can wait; in fact, they may not even be required if the company can develop a network of strong and loyal vendors.

Thakkar would rather spend monies on strengthening the company’s brands, that too through an intelligent ad-for-equity strategy that he is working out with the Times Group. He is looking to push his receivables downwards from 160 days to 130 days, which would bring him on par with the best-in-class competitors. This will help break the year down into two seasons and push the company to design products that fly off the shelves faster so that inventory days are also reduced. 

In short, Harshad understands that we investors love companies that do not gorge on cash but create free cash flow by keeping a tight rein on working capital. Harshad also takes great pains to point out that he believes in excellent corporate governance. At present, one of the companies that manufactures the bulk of Ashapura’s products is not a wholly owned subsidiary but a company that is principally owned by him and his family. He plans to merge it into Ashapura, which will eliminate all conflicts of interest. He proudly points out that it’s Ashapura that owns the Valentine brand, which is symptomatic of good governance as many promoters own the brand in their personal capacity and charge a royalty from the public company in which you and I are minority investors.

Sound strategy
On the business front, Harshad has done several things right. He has created perhaps the largest range of innerwear among his competitors. Ashapura designs, brands, markets and retails clothing products such as loungewear, sleepwear, bathrobes and innerwear for both men and women and has recently added sportswear and kids’ loungewear products to its arsenal. One of Ashapura’s key strengths is its impressive nationwide distribution network of 115 distributors and 14,000 sales outlets. To supplement this distribution strength and improve margins, the company has launched its own e-commerce site, apart from tying up with third-party e-commerce platforms.

A small beginning has been made in tapping the export markets of west Asia and Africa. Because of a wide product basket, the company can profitably own and operate its own outlets and it has 13 of these, with plans for aggressive expansion. The company gets a strong gross margin kicker from these owned outlets.

The strategic backward-integrated relationship with a related party company called Momai Apparels for manufacturing its products gives Ashapura control over quality, inventory and assured supplies. The Valentine brand has reasonable recall and consumer pull, which also allows the company some pricing power. These are the strengths that have led the company to achieve a 21% compounded revenue growth and 37% compounded growth in Ebitda in the three years from FY12 to FY15.

 I believe that the best is yet to come as Ashapura works relentlessly on improving its Ebitda margins by strengthening brand salience and selling more products through its e-commerce site and company-owned and -operated stores.

Long-term bet
The company’s market valuation is approximately Rs.500 crore, and while it may appear cheap relative to its peers, at 15x expected FY16 Ebitda, Ashapura is certainly not inexpensive on an absolute basis. I believe that if Ashapura does the right things, going forward, it can triple Ebitda in the next three years, with a concomitant increase in its stock price. And the reason for my optimism is that it has barely scratched the surface of a huge Rs.50,000-crore market. As consumers become more quality- and brand-conscious, a company like Ashapura can capitalise on this trend and grow disproportionately quicker than the secular organic growth rate of 10% in its product categories.

   What it would need is flawless execution and the highest standards of corporate governance. This would require Harshad to get the best management talent to run the company, implement the best management information systems that can generate actionable business intelligence, relentlessly pursue efficiency in both operations and working capital management and put in place a truly distinguished and independent set of directors to provide inputs about the company’s strategic initiatives, corporate integrity and transparency. I would hold this stock and forget about it. I am confident that it will offer a pleasant surprise when you revisit it three years later.

Disclosure: The author holds the stock in his personal capacity

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