I think this is a category that has the potential to create wealth for investors, category expansion if successfully executed can lead to healthy double digit growth for many years to come. Some business categories are this way, most IT and Pharma companies have made money for investors, looks reasonably likely that this one too. Hence, every single player within the Top 5 in the innerwear category has the potential to do well for investors as long as corporate governance is good.
Then one has to choose businesses based on - product portfolio & category expansion, ability to consistently grow the franchise without increasing business risk, balance sheet quality, corporate governance, investor friendliness and valuation. Page Industries is clearly the best business in this segment in my assessment, don’t think too many would disagree here. The question then is who is the next best?
On most of the parameters that I look for, Lux scored better than Rupa when I looked into this category in 2019. Lux has executed category expansion better (Premium category, exports, leggings, thermal wear and now athleisure) better than Rupa has so far. At a consolidated basis Lux revenue is likely to hit 2,000 Cr for FY21 while Rupa will be around 55-60% of that level. For this reason I believe that in the immediate future (next 3-4 Q’s) Lux may grow faster than Rupa will. Given the investments that both are making into distribution (EBO, LFS and Online in addition to traditional channels), both should see healthy growth going forward if they execute well.
From your own data, both were placed at similar scale about 5 years ago on revenue. But the PAT trajectory of Lux has been more consistent since 2015. Rupa hardly moved the needle on PAT until FY21. Post COVID Lux has become a free cash flow engine and now has net cash on balance sheet. Rupa might get there as well if management continues to execute well. On investor communication too Lux is ahead as compared to Rupa.
On the valuation front too, given the steadier growth that Lux has showcased over the past 5 years and the slightly more evolved category expansion drive, I don’t see how Rupa is way cheaper than Lux. If Lux were at 30 PE and Rupa were at 15 PE it would have been an interesting decision if one has reasons to believe that Rupa will execute better over the next 5 years. I don’t yet have that visibility and neither have I done a corporate governance check on Rupa. Based on numbers alone, Lux looked better to me in 2019 and it still does until Rupa starts showing serious traction on revenue growth.
The Indian market does like PAT improvements but it likes to pay a healthy valuation only if the growth story is secular and can deliver healthy double digit growth over the medium term.
On working capital every player other than Page got stretched after GST but they have all cut back post COVID since the market got organized and the channel refused to live with credit risk. You can see a healthy reduction in Rupa’s debt level too since March 2020. This is clearly an industry wide trend and we should not give individual managements undue credit for this, it is a tailwind that large player has benefited from.
I do track Rupa as a business but haven’t seen the need to do a deep dive yet. When I looked at Lux in 2019 the closest competitor in my assessment was Dollar Ind and not Rupa. Dollar Ind operates at similar level of scale as Rupa does today, yet trades at 1,700 Cr while Rupa trades at 2,300 Cr.
Disclosure: Invested for self and customers, transactions in the past 30 days