Amalgamation approved by NCLT , effective date for consolidated nos 1 April 2021
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The amalgamation finally goes through. Consolidated PAT likely to be in the range of 200-220 Cr on a revenue base of 2000-2100 Cr for FY21. Post the equity dilution of 19%, the TTM PE will be in the range of 25-26.
Where do we go from here if the business continues to deliver a 13-14% PAT growth over the next 3-4 years? Is a market cap of 4,800 Cr apt for the second largest innerwear maker in the country when the largest player trades at 6x this at a revenue base of 1.5x?
Comparisons with the “chosen few businesses” in India always leads to interesting discussions, we have a real time case study brewing right here. Let’s see what the market says over the next few years
Disclosure: Invested for self and customers, transactions in the past 30 days
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@zygo23554 : - Why isn’t Rupa a better bet compared to Lux industries valuation-wise now. Below are a few points I want to highlight regarding my understanding after studying up the 2 cos : -
(1) Spends on brand building & advertising are more-or- less same as % of sales for both the cos.(Screenshot below) : -
So isn’t it a possibility that the growth of Lux was slightly better purely due to relatively lower base to begin with. If u see extend’s Rupa’s figures for a period of 2009-14, you will see thm also having good double-digit revenue growth and improving profitability akin to a period that LUX is having. Bt arnd 1100 crs. sales growth stalled for Rupa. So why it wont for Lux?
(2) Working Capital cycle improvement : - Lux focusses on this point abt thr tightening up of receivables cycle over last few yrs. On the other hand Rupa started giving extended credit to its dealers arnd 19-20. Dont u think this will help thr reputation in these tough times, as in dealers preference will tilt towards Rupa in future aiding volume growth.
(3) The fight-back initiatives : - As mentioned in the fortune article shared in sm earlier post, the mgmt have realised thr lagging & will take some measures to fight back. Even if they dont succeed, the resultant competitive intensity will result in less than expected growth and profitability for Lux at thr current price.
The post is jst to clarify my understanding of which business is better as an investment at given valuations : - Rupa vs. Lux.
The post is addressed to @zygo23554 , bt I would luv to hear other innvestors’ views too.
Disclosure : - Not invested in Lux or Rupa.
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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
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Many thanks for sharing ur thoughts. I got a clear idea on the factors that bring conviction to ur thesis. My only nagging query can be best summarized as this : -
Q : - How is Dollar Industries of today different from Rupa of 2013-15 period.**
—> Same spends %age of revenues on A&P Brand building**
—> Similar mgmt commentary - Wat if this a HALO EFFECT - last 5 yrs CAGR & returns seem to make the mgmt is taking all the ryt steps for future - Rupa’s commentary of that period seems same
----> Addition of Dollar Industries - With 3 almost equal size competitors now in the fray with no proprietary\structural advantage to any of them - aren’t we discounting more of a better future in current valuations based on past record rather than future
I picked up Rupa to analyze & invest in '15-16 period whr it was coming up from a previous decade of double-digit rev. growth, same story of brands building & future driven by better product-mix, intl retail collaborations etc. In light of weak performance over next 5-yrs, it seemed the mgmt was less in control thn wat thr commentary suggested. I couldnt build up enough conviction thn for Rupa & the other 2 - Dollar & Lux were unlisted at that time.
Plz note that these posts are in no way intended to add confusion or irrelevance. All m saying is that barring the low base effect which helped Lux’s CAGR & returns over last 5 yrs, thr seems to be nothing else to suggest that tilts the ‘MOAT’ in favor of Lux vis-a-vis others.
1 P.S - @zygo23554 or others - if u plan to study Rupa in-depth, start frm AR 2013-14 & AR2014-15 period where it was exhibiting similar characteristics as Lux is showing now.
Disclosure :- Not invested. Also, not able to build enough conviction so far & very near to passing up this entire sector in comparison to other opportunities.
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You bring up an interesting point.
There are phases of growth within a sector where every serious player does well, just that some do better. Watch the IT services trajectory till 2008, pharma trajectory till 2016 and then consumer segment trajectory till 2018. Within the specific category of innerwear, Page Ind was easily doing 20% growth till 2018. Others were growing at a healthy rate but nowhere close to 20%, till Demonetization and GST hit the consumption economy.
There are some more things to look at to. All innerwear players in India are primarily focused on the men’s segment which is hardly 11,000 Cr size. Women’s segment which is 2x the size has just 1 player > 500 Cr revenue which is Page Ind. On the other hand the men’s segment has more than 8 players who do revenue > 500 Cr. Once the men’s category got organized to a healthy extent, the growth rates had to taper down since the category itself grows at a rate of 9-10% in value terms every year.
So when you see every player looking at category expansion, the reason is that growth in their core market growth started slowing. Women’s segment has many challenges involved and it won’t be that easy to capture the market. The road less travelled is less travelled for a reason. Hence companies are branching out into athleisure, kids wear, thermals, casual wear, women’s leggings etc. There is a very clear method the madness that explains why growth rates were high till 2017 and then started falling for almost everyone. This kind of explains what the growth rates were at least in part.
But post COVID has brought some interesting differences to the fore -
Page Ind which is primarily urban focused started showing signs of consumer discretionary to some extent. Lux Industries which is semi urban and economy segment showed signs of consumer essential. For the past 4-5 Q’s Lux Industries revenue growth has been higher than that of Page Ind.
Page Ind had the best balance sheet since AR was low while all others had debt. Post COVID the channel organized and took out long AR cycle, net result is all others have reduced debt and generated free cash flows while Page Ind continues to remain as good as it was.
From here, my bet is that Page Ind will grow at a healthy pace but may not do 20% growth. While next rung of players will continue to do hygienic growth, some of them will grow in the range of 12-14% while some others will continue to do 7-9%.
Who will grow the fastest among the next rung?
The company that can do category expansion and channel expansion well without stressing balance sheet too much. Lux has a potential winner in Lyra since the base rate of growth in that segment is > 20%, Indian women are getting bulkier and leggings will offer more value than jeans and other bottom wear for this reason. Leggings are stretchable, others aren’t. I just hope they don’t overstretch themselves on the inventory front in the quest to open 150 EBO’s soon. Lux also has a dedicated team in place to handle the newer channels (ecommerce, EBO and LFS as and when they get started there). They also have the technology layer in place which should help processes scale. Their younger generation understands branding and the urban consumer better than their fathers do.
As for plans and commentary, I’d rather see actions and invest. Ideally invest when you believe the right things are being done and executed well but the numbers don’t reflect that yet, provided you have the conviction that numbers will eventually get better.
Not a pitch to invest into Lux but detailing my reasons behind why I saw value there even when the growth rate was in the 7-9%. Time will tell whether this thesis is right or wrong.
Disclaimer: Invested for self and customers, I am a SEBI registered IA
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TTM revenue for FY21 is 1298cr. For 3 quarters of FY21 the revenue is 1012 crore. Any reasoning how Lux revenue could hit 2000 crore for FY21?
Pl refer to Page 12 of this Q3 PDF. Consolidated revenue (as the subsidiaries are merged) could be ~2000 cr if Q3 revenue holds for Q4 too.
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Once again many thanks!!! I’m highly indebted to this forum and collaborator\contributors like you who provide valuable feedback & guidance.
To sum up, the last post is a very clear map of where the industry stands and where it is probly heading towards the future. Now it comes down to individual choice regarding the listed businesses & thr valuation vis-a-vis thr strength in the industry.
Disclosure : - Not invested. The analysis phase concluded for now with no clear winner as an investmnt candidate for me 
Kedar - Thanks for posting your notes and thought process. Two questions, if you could share your point of view -
1- What makes Page so efficient in terms of AR/DSO? The same leads to a Cash conversion cycle of < 3 months whereas other have the same in the range of 5~7 months-
| Dollar | LuxInd | Page | Rupa | |
|---|---|---|---|---|
| Receivable/Total Aseet | 44% | 37% | 5% | 25% |
| Inventory/Total Asset | 37% | 39% | 48% | 47% |
| Total Asset (tied) in WC | 81% | 76% | 53% | 72% |
| DIO | 115 | 97 | 89 | 175 |
| DPO | -45 | -43 | -12 | -52 |
| DSO | 136 | 93 | 9 | 94 |
| CCC (Months) | 6.8 | 4.9 | 2.9 | 7.2 |
2- Why is the brand Jockey such an ambassador to sell the products without hiring a Bollywood figure to sell the goods - common theme among other competitors?
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Quick Inferences while studying listed businesses in this industry:
- High promoter holding across industry
- Organized players can grow for 10+ yrs due to big opportunity size, which is growing YoY
- All businesses that I looked at (Page, Lux, Rupa and Dollar) make profit
- Page makes both profit and cash consistently and well ahead of the pack in all parameters including Valuation
Refer the below attached (Numbers sourced from Screener.in. Any mistakes might be due to my oversight.) to derive your own inference.
InnerWear_Industry_Comparative Numbers.pdf (4.6 MB)
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Good set of questions again.
- Why does Page Ind run at such low AR/DSO?
This was the ace in the pack for Page Ind compared to all other competitors, till 18 months ago. At the inventory level there wasn’t much of a difference across players but Page Ind was running at AR of 30-35 days while the rest were at 100+ days. Why could this be? Some thoughts here - Page industries - #680 by zygo23554
Jockey has tremendous brand pull in the urban areas, the store owner does not have to do too much localized marketing at all. Consumers know what they want, they walk in and sales happen. This way, inventory turns for the store owner are high, hence they are willing to pay Page Ind upfront/much earlier compared to competitor channel. This was the reason why all other companies were at D/E of close to 1 while Page Ind was zero debt and was starting to payout a high % of profits as dividends.
Post March 2020, the entire industry has become leaner on working capital since credit to channel has been slashed. All serious players have reduced through the past 12 months with Lux even becoming a net cash company now. Low AR and minimal debt is no longer a strength that Page Ind alone enjoys, this aspect is obviously very important for investors.
- Jockey is a US brand which already has a premium association. It is much cheaper to hire a bunch of good looking Caucasian models than to hire a Bollywood celebrity, Page Ind has this part nailed down very well. Look at the other brand names in India within garments - Allen Solly, Louise Philippe, Van Heusen etc. History tells us that “gora” sounding garment names sell in India, all of these names are made by Indian garment houses. When it comes to ethnic wear, it is a different story. We Indians are a convoluted bunch of folks!
Jockey, Hanes, CK are all genuinely “gora” brands, hence they automatically command a premium association in the minds of Indians. In my China trip 5 years ago I saw the same thing there too. One of the premium shopping streets in Beijing (Wangfujing street in Dongcheng area) has brand names in English whereas the rest of the city has boards mostly in Chinese. One of their local coffee chains was far better on all counts compared to Starbucks and even sold at 70% of the price point, yet had 50% less crowd than any Starbucks store. The Chinese look up to the West and to South Korea when it comes to lifestyle decisions, they don’t care too much about other nations. For some reason, this is how the Asian mindset works.
Hope this answers to some extent.
Disclosure: Invested for self and customers, I am a SEBI registered IA. Transactions in the past 30 days
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Thanks, Kedar. That does provide an outsider’s perspective.
I understand that Lux has become conscious of it’s AR and Cash Conversion cycle, which still will be around 3~4 months and may not change drastically. Per say management :
Also, It’s most likely that the advertisement expense of 7 to 8% of revenue will continue in nearby future as EBO strategy will need national level marketing to keep the channel interest in franchise opportunity. Till date, Lux was primarily a wholesale business that used to sell to 950+ distributors.
Since the Industry’s opportunity size is expanding @ 12% YoY and company is at nascent stage in eCommerce, Premium brand sales, EBO option, the runway for the business is available.
Opportunity Size from Page’s Presentation:
However, the clarity and focus that page has is not evident in any other listed player. Page mastered the Men’s innerwear, and eCommerce sales. Now, they are ready with the platform to start monetization of the adjacent categories (Athleisure, Women Inner Wear and Kidswear) that represent bigger opportunity size.
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Finally Amalgamation of J.M. Hosiery & Co Limited and Ebell Fashions
Private Limited with Lux Industries Limited took place
source : company’s filing
A good report on inner wear industry covering Industry Overview , Page Industries Ltd., Lux Industries Ltd , Dollar Industries Ltd & Rupa & Company Ltd. published by
Disc : Invested in lux industries , This is not any recommendation to buy or sell , Moderator if found this report violate any law can remove the content . this is shared for study purpose only . I am not any sebi approved analyst or broker
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Now that the scheme of amalgamation is complete, can you help us understand how this merger affects the stock price? Will there be any splits or some other corporation action to adjust stock valuation for the new entity which is having a larger balance sheet?
I don’t fully understand how merger of a public and non-public entities will adjust the stock price.
In my understanding, price shall adjust as per market’s collective wisdom and the event is already priced in. What’s the basis?
Considering the above, EPS will increase by around 8% and a capital gain of 5.5 % is already baked in [Mkt Price WAS 1878 on 26-Apr (date on which news was relayed to the exchange) and the same IS1980 now].
This amalgamation was expected and in fact took a long time coming, hence this is unlikely to move the price by much.
As for estimates on what the valuation should be, one should make estimates for the business (including subsidiaries) over a timeframe, adjust the EPS number for the fresh quantity of shares issued and see what the current price is discounting. This has everything to do with the future and not the past.
I am watching for any operational/cost synergies over the next 2-3 Q’s now that the amalgamation has gone through. There should be some possibilities on the marketing and advertising fronts.
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Q4 results came in at 600 Cr revenue and 92 Cr PAT after amalgamation of JMH and Ebell subsidiaries. FY21 PAT for the combined business stands at ~270 Cr
Adjusting for a blip in Q1 FY22, FY22 might see the PAT number go well beyond 300 Cr. In fact annualizing the Q4 FY21 run rate should take the PAT to 350 Cr and beyond, life is rarely that simple and linear though.
The market is thrilled about Q4 numbers and expectedly so.
The usual questions remain -
What can this combined business deliver over the next 4-5 years?
Can it get to a Page Industries like scale and deliver 600 Cr PAT (annualizing Page Q3 run rate)?
Can the valuation gulf between Page Ind and Lux narrow over the next few years? Assuming the working capital improvement isn’t temporary for Lux Ind
Disclosure: Invested, transactions over the past 30 days. I am a SEBI registered IA
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Q4 Concall and Q&A
- The concall was conducted by the New Gen again along with the CFO.
- The merged entity (JM ebell and gen x) are all part of LUX now and have reported a net profit of 90 CR on sales of 600 CR+. This is the highest ever sales and net profit figure by the company and so are the margins.
- Advt spending stands at 6% of sales and might not resume the normal 8% due to second and possibly third wave of covid.
- Sales mix stands at 31% economy , 57% mid premium and rest 12% premium.
- Working capital days reduced to 120 days. They are attributing it to utilising the IT infra and team but this looks like a trend all over the industry.
- There are underlying tailwinds for the sector as the covid lockdowns have resulted into less suppliers , though the demand growth is not that exciting. Organized ones have better bargaining power with the distributors which is reflected in better cash flows due to reduced credit period. The management opines that partly it is due to the brand pull as well but personally i dont think except jockey there is considerate brand pull for the products in the industry.
- Merger is showing synergy and their can be some savings due to Advts overlap. EBITDA margins have gone up by 150 bps because of the merger.
- Few positive developments on the corprate governance side : the company has appointed two independent directors and is also planning to onboard the BIG 4 as their auditing firm in next 12 months.
- market share is 70% rural and 30% urban. Volume growth for the quarter was 30% and rest was price growth of arnd 15%. The company claims that even though yarn prices are in inflationary trend they are able to raise the prices with little lag and the same is easily absorbed by the customer due to demand and brand pull.
- They want to focus on the souther market which is markedly different from the north due to several local languages. No concrete plan and details for the strategy was discussed.
- Covid has mainly hit the woman segment. The new capex should complete in next 12 to 14 months. Demand is very strong in the mid economy and premium segment. they have guided for the EBITDA levels of 20% in the forseeable future.
- A side observation is that the Concall fo the first time was attended by large number of mutual funds like Kotak and BOA … previous concalls which i have attended were mostly attended by few investment firms and research analyst.
This business has hit a sweetspot and the momemtum looks sustainable to me in the medium term. Page and Lux dont differ much when it comes to sales and margin. But the valuation gap is immense. Lets see how and when the markets tries to address the valuation gap.
Best
Divyansh
Disc: Invested from lower levels and added in past few months
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When asked about higher growth especially in the men’s innerwear segment for competitors like Lux and Rupa in yesterday’s concall, Page Industries management said - “Many other brands have started to play the game in the right way. Premiumisation is happening at the unorganised end; the eventual up-trade is going to be Jockeys”.
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With Page increasing its focus in rural segments, tier-3 and tier-4 cities, it will be interesting to see whether Lux can maintain the sales growth and the margins intact.
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While the cost optimization has benefitted both Page and Lux Ind significantly with very low a&p spends, the pricing power of the companies will be tested in the coming year with the current inflationary trends. Jatin Khemani made some excellent points on the same:
Disc - no investments till date
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