Dollar Industries ltd - Fit Hai Boss

BUSINESS BACKGROUND
Dollar Industries Limited was promoted by Dindayal Gupta under the name Bhawani Textiles and now has created substantial presence in India under the Dollar umbrella. Dollar is present across segment in innerwear space with its brands Big Boss, Force NXT, Missy, Champion, Ultra, Force Go Wear, Economy range etc. Dollars manufacturing facilities are located at Kolkata,Tirupur, Dindigul, Erode, Delhi and Ludhiana. It has fully integrated facility at Tirupur with presence in spinning, knitting, processing, cutting,stitching and packaging and caters to high end products.
In the past three years, it increased its distribution from 750+ distributors and 70000+ MBOs to 850+distributors and 80000+ MBOs.

A brief from the Annual report:2017
It took us more than 40 years to get to nearly C1000 crore in revenues; we are now driving the Company to achieve the next C1000 crore in just seven years. At Dollar Industries, we recognize that this challenging target will only be achieved if we outperform our sector, with respect to our peers and our retrospective average. And this extensive outperformance will only be achieved if we run our business in a different way from how we have done so until now.
So the big question is: how differently can we run the business in a conventional sector? Where is the room to reinvent our business model?

We were engaged in asset investments that extended our value chain; we seek to emerge asset-light, increasingly preferring to outsource products from like-minded quality-driven manufacturers.

We were a Company that marketed products through traditional distribution networks; we are investing increasingly in modern retail formats to enhance our respect, margins and visibility.

We were a Company that selected to grow patiently through the organic building of our business; we are prospecting inorganic investment opportunities in brands and distribution networks driven by visibility, volumes and value.

Dollar enters in to a JV with PEPE for branded innerwear products:
Dollar Industries has entered in to a JV with PEPE Jeans of Europe which will be a 50:50 joint venture and will involve a capex of Rs 250 crs and be valid for the next 1o years on a exclusive basis for catering to markets like India, Srilanka, Bhutan, Nepal, and Bangladesh.
This partnership under this JV will require Rs 36 crs to be invested each by both partners that is Dollar and PEPE over the next 4 years and the rest will be funded by banks and working capital loans. Dollar expects that it will be in a position to launch these PEPE branded products in the domestic markets by March 2018 (As per last Concall product launch should be around July 2018)
These products would be marketed under the PEPE Jeans London brand here. The products made here will include innerwear and loungewear categories like gym wear, track suits, and sleepwear.

Big Boss new ad: featuring Akshay Kumar, contract with Akshay Kumar is recently extended for next 3 years.
Dollar Big Boss New TVC - HD 40sec - YouTube.

Missy new add: featuring CHITRANGADA SINGH
DOLLAR MISSY NEW TVC 2018 :: CHITRANGADA SINGH :: CARRY ON MISSY - YouTube.



Valuations:
The company was listed in April 2017, Stock hit 52 weeks low during last few days.
Its a consumer business and growth stock, not a value buy @31 PE Multiple.

Peers like Rupe is trading @37X.
Page industry is in another orbit, so it’s not a comparison with Page, but Dollar is being ambitious after the JV with Pepe & new brand launch + ~86cr of Ad spending, rest only time will tell how things turn out.

Investment Rationale:

  • Overall the Innerwear Market is likely to grow at a healthy pace.
    The Indian innerwear market is currently estimated at Rs. 24,000 crs. The segment has grown at 15% during the period from 2010 to 2015. During this period, the share of intimate wear in the total apparel market increased from 6.4% to 7.1%. The innerwear market is estimated to continue at the same growth rate over the next five years and expected to become a Rs. 47,000 crs market which is nearly 8% of the total estimated apparel market, by the year 2020.

  • Unorganized to organized shift beneficiary:
    as currently, almost 65% of this market is unorganized, as aspirations are increasing branded products will gain market share.
    New retail(Online + Organized retail) to support branded sales.

  • Healthy performance across all parameter’s, sales, Margin, PAT, ROCE all are improving and debt is going down, however working capital days has deteriorated after GST, which need to be monitored, although management assured to reduce the same as per concall.

  • Dollar enjoys a wide distribution network which is very important in this business.

  • Premium products to drive EBITDA margin improvement:
    Going ahead focus will be on scaling up ‘Force NXT’ & ‘Missy’ brands.
    Dollar has traditionally been present in the economy and mid-premium segment through its Dollar Regular (Realization Rs 35/piece) and Big Boss (Realization Rs 62 per piece) brands with 34% and 44% revenue contribution, respectively. It is now focusing on super premium category with its brand Force NXT (Realization Rs 114/piece) launched in August 2015 and which contributed 2% of FY17 sales. It aims to grow this brand focused on the aspirational segment to over Rs 1 bn in next 3 years and would go for aggressive advertisement to position it. Further, Missy is expected to do well with women innerwear and leggings.

  • Robust ad spends:
    Dollar is one of the highest spenders (10% of sales) on advertising among peers Page, Rupa and Lux (4%, 8% and 6%, respectively). Dollar is also planning to maintain advertisement spend run rate at 8-10% of revenue in future as well. Of the Rs 86 crs expended in FY17, around Rs 40 crs was on TV, Rs 20 crs was spent on newspaper medium and the balance on outdoor activities. Dollar has roped in celebrities to promote its brand in 2010 wherein Akshay Kumar was brand ambassador

Risks:

  • Valuation risks, as stock is trading at 31PE, hence no margin of safety.

  • Pepe jeans JV: product launch is already delayed by 4-months, may get delayed further.

  • Pepe jeans JV: Joint ventures always have the risks of failure & conflicts.

  • Increased competition from peers like Page Industries, Rupa & Company, Lovable Lingerie, may affect performance.

Product Reviews:
Reviews are good on both Flipkart & Amazon, I have used dollar products and quality is good.

Disc: Tracking position @340, I don’t have much understanding of finances, this post is not a recommendation, the intention is just to start a discussion and have other member views.

References:

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Even though they spend 10% of sales on Advt against (4%,6% of other competitiors) , last 5 year revenue growth is 7-8% CAGR only. The increase in profit comes from increase in margins. Any specific reasons for this ? And if the sales did not grow at similar pace in future , are these margins sustainable.

2000 crore sales in next 7 years from current 1000 crores itself is around 10-11% growth. This target also seems low to me considering high valuations its trading on.

Hi @gagandeep

A few observations from my side. If you look at the inventory it has gone up meaningfully from 2015 to 2016 - from 121 crores to 208 crores. In 2017 it was 204 cr and in 2018 it was 282 cr. It has grown by 33% over that period compared to sales growth of 11%.The payables has not moved by much.

Since inventory forms a major chunk of assets and 50% of topline is material costs there is a possibility that part of the margin expansion has come from the way inventory is accounted for i.e FIFO.

FIFO reduces the cost of goods sold and increases the value of inventory in an inflationary raw material environment and sometimes the margins can increase quite a bit without any real movement in the business prospects just due to the way inventory is accounted. Because of its longish working capital cycle these effects maybe accentuated. Nothing wrong in it - but margins may appear more than what they normally are and ultimately revert to it.

Also have a look at their revenue recognition policy - incentives, cash discounts and rebates are not netted with sales and shown separately as expenses. So the net sales figure maybe even lower if you factor in these

Best
Bheeshma

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May be I am asking a slightly out of context question here. Which all inventory methods are allowed in Indian accounting. Is it FIFO only or LIFO and weighted average method are also allowed. If yes , than how can we know which one is used. I tried searching this in some of the annual reports also , but it was not mentioned that which method they are using.

Yes, most ARs for some reason dont disclose the inventory accounting method used. Even page has no mention of it in its AR. As far as I know, cos that have adopted IndAS which is based on IFRS would use FIFO or weighted since LIFO is not allowed under IFRS. However cos that have used LIFO in past and have changed to FIFO should have LIFO reserves somewhere on the liability side of the balance sheet.

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Thank you @bheeshma & @Rohitsharma for raising concerns.

I just went through the latest concall uploaded by Edelwise recently on 18th June,(I missed it before starting the thread).

After going through the con-call I understand, Managment has been guilty of overpromising & under-delivery, doing aggressive to bad accounting practices (unaccounted expenses of previous quarters, accounted in last quarter, which affected the margins), although Mgt said it was a missed/mistake and blamed mostly on IndAS, but MD being a CA himself, it looks like they might have done intentionally to boost the Margins(as highlighted by @bheeshma).
the analyst in the call really did good job grilling management and conveying dissatisfaction with results and the way Inventory & working capital has been managed.

From the management part, they have appointed new CFO & Assigned some consultants for improving process/efficiency & working capital management, also Mgt committed decent growth(12% normal growth & 8% efficiency & process led growth), let’s see if they meet this guidance.

Since this is a consumer business I would try to track for next 4-5 quarter for business & management improvement, and accordingly can take a call.


Concall Attachment:
earning call_18th June.pdf (1.2 MB)

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I am trying to understand the Pepe jeans JV model in a bit more detailed manner. From the latest annual report , I noticed $261 Lacs were invested. But I cannot understand the funding model. I mean , I am trying to understand whether it was funded from general reverse or loan was taken for the investments.

Can someone help me to understand the same.

Discl. Not invested yet.

Tried to do a comparison between Rupa and Dollar. Both have many similarities. While Rupa has acquired licences for Fruit of the Loom and FCUK, Dollar has partnered with Pepe. Both have simliar product lines across similar segments too. Haven’t researched the management of Dollar yet, but Rupa seems to be doing well on that front too and have the 3rd generation family members managing the foreign brand responsibilities.

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hello
can someone tell what will the location of agm i want to go this time. so where i can know this??

You can find them in the link shared in below topic

In case of Dollar Industries, AGM will most likely be held in Rotary Sadan on Aug 30th.

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Q3 Concall Notes (In no specific order. Noted only what interested me).

  • 26% volume growth contributed to the topline growth
  • 3 price hikes taken since Nov on account of yarn prices which have jumped 35%
  • Missy hit due to legging demand - this should come back
  • Ad spends to be capped around 70 Cr instead of % of Sales
  • EBITDA margins maintainable around 14%
  • Cash flows very healthy
  • 50 new distributors added
  • Theory of constraints replenishment model (Project Lakshya). Weekly automatic replenishment of distributors
  • Future - Produce only based on demand
  • Mandatory for new distributors to be digitized - restructuring distributors as well (Details on slide 12 of Investor Presentation).
  • 133 recv days - stricter on credit. only 50% of orders supplied when receivables not collected on time. Targeting 100-110 days
  • Venturing into lingerie segment next fiscal (within Missy segment)
  • WC debt at 109 Cr and LT debt at just 2 Cr

Note: May have made mistakes and could be positively biased due to holding.

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Good read on the management, especially the 3rd gen which has recently gotten into the business. How The Guptas Took Dollar Innerwear Close To Rs1,000 Crore Revenue | Forbes India

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Relative performance snapshot of Dollar vs Lux.

For last four quarters ( Q420 to Q4 21)

  • Sales growth QoQ follows similar pattern and % for both where Lux has performed slightly better in Q421
  • Divergence in margins is much more accentuated with Dollar going downwards each qtr and Lux improving each qtr, with Q4 Lux at 21% and Dollar at 10%
  • If one listens con calls - one major factor for margin drop in case of Dollar is way high Mktg expenses to support rebranding in Q4( against avg 15 cr per qtr they spent 25 cr ), factoring that they would be around 14-15% in normalized case.
  • Mgmt has guided for 15% Revenue growth and 15% margins for FY22 - this is based on Q4 call at end of may( peak of Wave 2), assume this has considered Q1 22 hit from covid wave 2.
  • Mktg budget for fY22 is back to 60 cr - against 75cr+ in FY21.
  • FY22 for a 1200 cr+ topline, they can deliver 180 cr profit at 15% margins.
  • Mgmt has also guided for further reduction of WC cycle by 15 days in FY22( similar achieved in FY21 over FY20)
  • Project Lakshya ( auto replenishment) seems to be uplifting distributor performance and also ops efficiency credibility of mgmt IMO - FY 22 this needs tracking as such initiative may throw some surprises as well - mgmt has smartly chosen low footprint areas to minimize any disruption

Market has handsomely rerated Lux over last 2 qtrs to a PE ratio of 40+ to a 12K cr mkt cap over FY20 to FY21 for a topline 1950 cr , margins around 20%, Profit at 270 cr , working capital improvement YoY -( possible other triggers as well - additional excitement around mergers of associate company being margin accretive, scale efficiency, export potential etc.)

Can Dollar at 1200 cr topline , margins at 15%, Profit at 180 cr and similar improvement in working capital trajectory can continue rerating stock in FY22? Even at 25% discount at Lux valuations awith target of 30 PE - mkt cap can go to 5400 cr range as mkt gets convinced over coming quarters- current mkt cap is less than 1800 cr.

Industry tailwinds are quite visible for whole sector around unorganized to organized , WFH driven athleisure ramp up etc.

@phreakv6 - would be great to hear your thoughts.

Invested in Lux from lower levels.

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Interesting development- new CFO is Ex CFO of lux industries…

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Excellent Q2FY22 results by dollar. Hoping to see margin expansion & operating leverage come into play way forward.

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Comparison of Market-implied expectation v/s Valuation of Dollar based on my understanding of where it stands today and how far it can go. Thoughts?

Result: Growth required for around 20% CAGR over the next 5 years is very achievable barring any exceptional event.

P.S. I’ve been as conservative as possible with estimates. The key reference for forming my narrative was this report - https://cutt.ly/8Tzr2oR

Pepe jeans joint venture update, G.O.A.T. takeover of Pepe part will be a plus for JV - why? GOAT has reputation of scaling brands digitally at fast pace. While JV hasn’t contributed much in Dollar performance yet, aggression on this front could be seen in coming times, question is can Dollar up ante in sync with GOAT, it can turn out to be a good optionality