LUX INDUSTRIES - Can it Scale?

You are right that shareholding pattern change will not matter much in case of Lux because of smaller equity and small FI/DI holding.

But generally in companies with big equity and big FI/DI holding under these kind of fall lot of supply use to come which can’t be absorbed by retailer. And with no new FI/DI and cautious retailer its share price can keep going down or consolidate for a long time before any meanigful move. However, in case of Lux good result and sector tailwind with small equity could save it. Else its natural price was around 2000 to 1500. So, I am keeping aside for time being if it cant go to 2000. Or maybe revisit before next quarter result.

Similar to Q2, the topline growth in Q3 is primarily attributable to pricing power. Do they have so much leeway before they hit the limit of Jockeys as we saw this in Q2 as well? Interestingly the growth this quarter is mainly from Economy segment and Premium segment is flat on volumes.

Premium category has One8, ONN and exports. Export saw a fall YoY while other two grew volumes YoY - clarification from the management in the call today

Other interesting bit was that Lyra is selling women’s innerwear in addition to leggings and lounge wear. Womens innerwear has too many SKU’s and can stretch inventory over a period of time, that is one risk to be monitored over the next few Q’s. It gets mitigated to some extent because

  • Lyra is mostly a distribution and online brand
  • Company’s EBO foray is still in early days (25 stores) and is on the FOFO model
  • Given the 150+ Cr cash position company is in a position to absorb any increase in inventory without having to fund working capital.

On the balance sheet front there aren’t too many risks to worry about, the risk is more on the perception of the market towards the promoters after recent developments

Promoters hold 74% while large investors (funds, LIC, FPI) hold ~15%. Retail holds 11% and the traded volume over the past 7-8 days is clearly much higher than historical numbers. Will be interesting to see how shareholding pattern changes through Q4, there was most likely some large buyer absorbing huge volumes last week one business day after the LC.

Disclosure: Invested

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Q3 call

Few points in addition to @zygo23554 post

  • EBO response is mixed - some good and some not so good - mgmt believes few steady quarters without Corona impact needed to deliver

  • Corporate governance - CFO read verbatim on Lux submission letters to exchanges so far, One good point was call out on Udit Todi not attending selective board meetings on these matters and his stand of not being guilty - all in all nothing new beyond what we already know - mkt has mostly digested it. A settlement will do well for all parties rather than frequent newflows if case drags on.

  • Winterware was spoiler for Lux as well as peers

  • Maintains 20%+ growth guidance

  • eCom at 4000 orders per day, 45 cr/yr, 100 cr+ in 2 yrs

  • South geo distributor addition not moving much due to travel restrictions, 4% of revenue, plan to launch full basket of all products

  • Lyra - 80% bottomware, 10% innerware, 10% athlesure - good to see mgmt pressing on this vertical with higher ad/brand spend in coming times( this category is relarively high growth, high margin and less peneterated than other mature categories)

  • Future sustainable Margins will be 20%+ even as mktg spend revert to 7% type historical range - driven by product mix of higher margin products ( Premium, mid premium, Lyra etc)

  • Export de growth in Premium was attributed to price sensitivity ( Indian guys being expensive than other geo) -, however there was premium volume growth in local markets- resulting in overall premium volume growth being zero

After recent correction, Q3 annualized Valuations are back at 16-18X ebdita in line with peers like Dollar etc, though Margins(21%+ sustainable), return ratios are much higher and closer to Page( which is 45X+ EBDITA), only negative is working capital/cashflow detoriation which seems industry issue and key monitorable.

Invested

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Taking a stab at Lyra valuations/potential by using Gocolors data points

Go colors quarterly updates - mkt share slide

At 8% share of branded market share ( about 600 cr revenue per Q3 @ 145 cr annualized for Gocolors) - branded/organized mkt is at 7500 cr+.

Innerware brands share 8% ( green) that is 600 cr - and per Lux concall 13 % revenue is from Lyra is 13% at approx 85 cr @ Q4 out of total revenue of 650 cr, annualized Lyra is at 340 cr. Out of this 80% is bottomware- thus 270 cr.

Gocolors with 600 cr revenue and 35%+ EBDITA, Lux at 340 cr(270 cr bottomware + 70 cr others) revenue and 25% EBDITA ( Lux Lyra in bracket of 22-26% per Lux q3 presentation)

What this also means Lyra already at 3%+ market share of organized pie on bottomware!!! Need to validate with mgmt in concall.

Gocolors mkt cap is 5500 cr I.e. 30X EBDITA, Lyra at some discount 25X EBDITA is near 2200 cr fair valuations ?

Can 5 year out Lyra on its own can be a $1B valuations( I.e. grow 25%+ YOY from here on, quite possible as Gocolors is growing 30-40% cagr ) - possibility exists and tracking it over time will give answer, opportunity size is quite large .

@zygo23554 and fellow investors - any thoughts?

Above is back of envelope and could be off. Idea is to see far in horizon at med term potential. Also both have different biz models Lux is distribution and mfg vs Gocolors is retail+ outsourced mfg focused.

Invested

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Revenue increasing, opex stable, but free cash flow declining? Where is the cash going?

Anyone who is tracking this in-depth can throw light on this plz?

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Yes Dec 21 cash flow is absolutely scary apart from the operating cash there is also draw down from cash holding investment and borrowing all put together gives huge build up in inventory and receivables this has happened this fy along with the other manegement issues.

But in the concall they have said that it is a conscious build up in the inventory.

Is this is the actual reason for the pull down in price and the sebi order is mere excuse.

Are the big hands dumping some seniors should really do little deep digging here.

May be the market is aware of the cash flow problem we have to see the final full year CF to come to any conclusions.
Anybody closing tracking should be able to give some suggestions.

Discl under trail watch investment


This could be a reason for Inventory buildup

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What management issues and sebi order are you referring to?

The recent corporate governance issue was that one of the executive directors of the company was booked by SEBI under Insider trading when long positions were created by the insiders and the positions were squared off, 4-5 days later with almost 40% gains. Lux Industries Tanks 20% After SEBI Bans Executive Director for Insider Trading By Investing.com.

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Hi @zygo23554 - Valuations/price are back at May 21 levels where the whole episode of insider trading took place, with meaningful discount from peers like Rupa/Dollar as well. No bottoming out yet on chart either. No major deals on buy side reported in exchanges as well. None whatsoever from promoter group buy transactions as well. If anything business is stronger than it was in May 21 and this could be at best a temp distraction for mgmt.

Given you are invested, If you don’t mind sharing, how do you manage behavioral aspect of staying invested with meaningful allocation and future action ( considering exits/trim on pull back vs add on reversal signs) when drawdown is this significant, and the fact that impact of 50% erosion for a relatively paltry quantum of alleged gains, it also creates question mark around perception score for future risk events ( so called quality bucket recovers faster on impacts such as insider trading/IT raids etc.)

This insider issue may not fully resolve for quite a long amount of timeframe, Q4 numbers will be out soon, support on chart is not far away (2000 range), textile sector as whole is in sweet spot(esp exports) - with market being range bound after recent pull back - barring this episode other factors seems stable.

Thanks.

Invested

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This saga is a textbook example of why one should never invest based on borrowed conviction, especially in small caps in India. Also a good example of how the market can diss on a stock that people were so bullish (based on business performance mind you, not just narratives) about till a few months ago.

So long as the thesis is on track and the business keeps delivering, it is easier to keep a sane mind and to believe that the market will eventually price the business at what it deserves. At the current valuation (keeping aside the corporate governance angle), this story is one of the cheapest consumer stories given the industry tailwinds, but the market doesn’t care about numbers during phases when other things assume greater significance. Numbers don’t matter for much in the short term when the stock price keeps making lower lows every week.

Perception of the market will always be the X factor for any small cap in India, this has it’s own cycle too. There will be periods when obvious red flags get ignored and other periods when seemingly minor things punish the stock price for many quarters. On an average the Indian market behaves like an emotion filled teenager when it comes to small caps. 2-3 good Q’s coupled with good narrative can rerate a stock from 20 PE to 45 PE, one bad quarter and a bad narrative can send the same stock back to 20 PE in no time. We’ve seen this in other stories and this stock is no different.

Dumping my emotions into the garbage bin and being objectively probabilistic in my views (and resulting actions) have worked for me in the past. Holding stocks for years together is something that comes naturally to me, I have held 6 stocks (all small caps when first bought) for more than 10 years now. Many of them went through a 60% correction from the peak at times though numbers kept getting better. My largest position fell 50% from the peak in 2018 and stayed there for a good 15 months. But that is me, one should find an approach that works for him/her.

For someone who has a tough time holding onto stock through bad times, dumping stocks at the first sign of trouble might be a better approach. Some people just can’t sleep peacefully when a stock goes down 50%, no matter how convinced they are about business fundamentals.

Disclosure: Invested, no transactions in the past 30 days.

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Thanks for your succinct views, this maturity comes with cycles of experiment + each case experience that one lives through/ builds over time.

For many folks who hasn’t dealt with similar cases in past ( like myself), - knowing it will bounce back someday is a fact as long as biz delivers - is simple part. What needs to be learned is how one deals with drawdowns and underperformance for a prolonged period is something that builds only with time, couple of such cases over journey and one can find patterns of how one reacts/relates. Investing was not supposed to be easy :slight_smile:

Invested from lower levels ( for returns and now behavioral self discovery as well :smile: )

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How are investors in this stock assess the risk of rising D2C brands in this segment?
Brands like XnXX, Bummer, Damensch etc. have fragmented the market by catering to specific niches. So won’t this dent profitability of existing players whose profitability has economies of scale as a major factor?
Also, won’t the total addressable market for these existing players - Rupa, Jockey, Lux shrink as these brands hold up customers in specific niches.

And on top of that, there’s going to be irrational competition as these players are backed by PE and venture backed investments.

I blv the threat f D2C is more on these products than Food products categories bcoz those still require licensing and lab testing approvals.

The gist is this - keeping the mgmt issues apart, while the valuations for Lux today look good if a long secular growth runway is factored in, they won’t be that attractive if we price in the intensity of increasing competition from D2C brands?

@zygo23554, others - your valuable views invited.

Disclosure :- No investment in Lux. Tracking position in Rupa

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Market reaction for insider trading is rather puzzling in different companies. Divi’s lab keeps getting valuation premium based on its business performance and people seems to have almost forgotten its CFO’s insider trading.

Post COVID almost every single consumer business has seen a spike in the proportion of online revenue. Till FY20 this was 3-5% on an average, today it is closer to 10-12%. So yes, D2C brands have a much bigger pie to target today than they did 2 years ago and should logically be a bigger threat at the upper end of the price range.

Innerwear as a category traditionally had a few challenges, low ASP compared to other garments makes unit economics challenging in a store front at low volume compared to selling shirts or trousers. A customer walks in and goes away spending 500 rs on an average, at a retailer margin of 25-30% an innerwear only store will struggle to break even. Hence this was always sold in mom and pop hosiery shops where display space was limited, when the shop owner controls what brands gets seen, it made more sense for innerwear makers to give channel incentives than to spend too much on branding.

Jockey kind of changed the game in India, using Caucasian models to advertise and emphasizing US parentage allowed them to target and capture the urban segment above the economy range. Some of the best known Indian garments brands are named Allen Solly, Peter England, Van Heusen and Louis Phillipe for a reason :slight_smile: With this happening and picking up pace post 2000, innerwear started to morph into a purchase with aspirational undertones compared to a purely utilitarian purchase.

The old economy innerwear makers like Lux, Rupa, VIP who were heavily distribution led started investing into building contemporary brands. But even today, they are stronger in semi urban and higher end of the rural market than in the urban and metro centers.

D2C is basically the next wave where new economy brands can tap into and service demand through the online model for a start, build scale and eventually move to an omnichannel approach. D2C is largely an urban and metro phenomenon so far because that is where consumers are willing to pay a premium for a differentiated value proposition. Almost all of the well known D2C brands are playing at the premium end of the market than at the economy and semi premium end. Hence, D2C brands are competing with the MNC brands like CK, Hanes, FOL and Jockey premium rather than with the economy segment heavy Indian brands like Lux, Rupa & Dollar.

Obviously the managements known this well and almost everyone is doing category expansion across athleisure, loungewear, women’s innerwear, leggings and casual wear in addition to investing into building channels across EBO, LFS, MBO and online.

It has not been easy for a standalone innerwear maker to scale in India. In spite of being well funded the new age players in women’s segment like Zivame, Clovia, Pretty Secrets have found it difficult to scale past 150 Cr revenue. The fastest growth in the overall innerwear category has been done by Van Heusen purely because they are leveraging existing EBO network rather than having to build channels from the scratch.

D2C brands will grow but are unlikely to be a threat anytime soon, especially at the economy and semi premium segments. Most listed players in India play here and not in the premium segment where the price points are INR 500+

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The well known organizations where Insider trading allegations have happened (Divis Labs, Infosys, Titan etc) are cases of some employees being fined for it. Here it is a case of the promoter family getting fined for it. This is seen much more seriously by the market (and rightly so), even if the amount under question pales in comparison to the promoter stake valuation.

The stock obviously deserves to react to the news but to what extent and how long is something that nobody can predict.

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Great breakdown of where Lux fits into the industry.

What do you also think about the fact that the size and muscle of players like Lux enables them to simply acquire competition that would prop up in the D2C space as these players would be relatively small.
We have seen lux acquire Lyra and One 8 as the most recent examples.

Whilst it is tough for a business like Lux to have a true ‘moat’ besides brand name, I believe Lux’s finances is one of the core strengths of Lux where in the prior compounding of cash has enabled them to pump cash into branding, acquisition and changing product mix for future compounding.

Disclosure: Invested

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Though I agree with your observations, but Lux products are available online too. Yes, the bread and butter of traditional innerwear is its distribution channel, but if a consumer wants its products online then they have that option too.

Am not sure how sustainable “only D2C channel” is.

Pardon my ignorance, but could not understand the relevance of this news to this thread. Can you add some comments please?

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