Vedant Fashions (Manyavar) - Niche Branded Retail

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Vedant Fashions is one of the very interesting consumer retail plays that have got listed recently. It has all the makings of a potential long-term compounder, going just by the numbers - extremely large market size of 1.8 lakh crore, highly fragmented unbranded market, phenomenal market share, industry leading gross margins at 67%, very high operating margins nearing 50% that trickles down to the bottom-line thanks to asset-light nature to make stunning profit margins of 30%, RoCE of 47% even in Covid hit FY22 - so all the characteristics of a big fish in the ocean that can grow for sometime. Being founder led with the entire family running operations closely, gives a lot of skin-in-the-game.

The company’s vision is to instill pride in wearing Indian wear and its mission is to be a dominant player in Indian Wedding & Celebration wear space across gender & age. They want to promote Indian culture and its time-honored values in India & overseas.

Brands
The company has 5 brands - Manyavar, Mohey, Twamev, Manthan and Mebaz with clear placements and propositions for each.

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Manyavar is the oldest brand, launched in 1999. It is focused towards Men and Boys and is distributed across EBOs, MBOs, LFS (Large-format stores) and e-Commerce. Products for men include Kurta, Indo-western, Sherwani, Jacket and accessories. For kids, they sell kurta set & jacket sets. Manyavar’s brand value is strong enough for the company to not offer any discounts/end-of-season sales offers. Other brands in this category are 1/7th of Manyavar’s size

Mohey is the 2nd oldest brand, launched in 2015, targeting women with a product portfolio of lehengas, sarees, gowns and accessories, sold through EBOs and e-commerce. Although its been 7 years, the company is cautious about scaling Mohey aggressively before getting unit economics right. Mohey’s SSSG is higher than the company’s average. The management tracks Mohey’s productivity, dead stock levels, inventory turnover ratio and the conversions at the store level. They seem to be still experimenting here to see if standalone Mohey stores do better than flagship Manyavar-Mohey stores. They also don’t want to offer Mohey in stores less than 3000-4000 sft as they won’t be able to do justice to the collection. They took 3 years to figure out Lehengas will be the center-piece for the brand and in 2019 got Alia Bhatt as brand ambassador and got to 100 Cr sales in 5 years - This is clearly not a company that hurries into things with half-baked plans. Scaling Mohey though is the key thing to watch out for.

Twamev, Manthan and Mebaz were launched in 2019, 2018 and 2017 respectively and the table below covers the brand positioning and price-spectrum

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Product Development
Products evolve from trends and go through a review process and are continuously monitored at a region/store/product level to figure out trends leading to a continuous feedback loop.

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  • Portfolio of colors to use across brands based on celebratory mood and emotion
  • Designers follow color-theory to create appealing apparels
  • Manufacturing involves cutting, embroidery, stitching and finishing - mostly outsourced
  • 2.6 lakh sft warehouse space in Kolkata
  • Suppliers across 42 cities with 460+ registered vendors

Tech
For an apparel brand, Vedant Fashions has significant tech capabilities extending across procurement, production, distribution and supply-chain management.

  • Their in-house ERP software runs across EBOs and connects front-end and backend operations.
  • The POS order management software as well has been built in-house.
  • They have intra-store communication and can move inventory between stores based on demand
  • Jobber and vendor portals to manage communications with suppliers
  • Apps across platforms (iOS, Android, web) to promote end-user sales through their own channel

Ads & Marketing
The spends on marketing and promotions have come down post Covid but used to be in the vicinity of 70 Cr, allowing them to afford Amitabh Bachchan, Ranveer Singh and Alia Bhatt as brand ambassadors.

There are several ad campaigns that you can checkout Taiyaar Hokar Aaiye, Dulhan wali feeling, Diwali wali feeling, Pehno apni pehchaan etc.

Marketing initiatives focus on digital (social media, email), traditional (billboards, multiplexes, tv), in-store (facade, shutters) and through brand building via event sponsorships and brand ambassadors

Retail Footprint
The footprint across brands stands at 1.28 million sft. with 603 EBOs spread across 228 cities and towns in India, as well as 13 international stores in 3 countries (UAE - 7, USA - 5 and Canada - 1). 89% of sales is through EBOs. EBOs are franchise-owned and designed with a lot of aesthetic appeal. 61% of retail presence is in flagship stores.

Opportunity

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  • Apparel industry expected to grow 20-22% CAGR between FY22-FY25
  • Ethnic wear is 32% of overall apparel market in India
  • Women/Men/Kids split in Ethnic wear - 81/10/9
  • Multi-day and multi-event wedding celebrations
  • 10 million weddings per year
  • Not just bride and groom but entire family & close friends targeted
  • Rising social media adoption for festivals and celebrations

Growth Strategy

  • Plans to expand retail space footprint to 2.2 million sft in the next few years
  • Enhance brand appeal through targeted marketing
  • Up-selling (Twamev to Manyavar customers) and cross-selling (Mohey leveraging Manyavar presence)
  • Make acquisitions - Mebaz is an acquired brand. The company had in the past tried to acquire Soch.
  • Capture market share with the relatively new brands that are placed in new market segments (Mohey for women, Mebaz in south-Indian market, Manthan in economy and Twamev in premium)

Moats

  • Strong brand recall for Manyavar and by association for Mohey
  • Proven capabilities in building nation-wide brand
  • Strong ad-spends to maintain brand recall
  • Strong balance sheet and asset-light model allows for growth by acquisitions
  • Integrated manufacturing with long association with jobbers/vendors across 42 cities in India
  • Tech-integrations in the supply chain, help keep good control over inventory, keeping obsolete dead stock levels at a minimum
  • Analytics of secondary sales data for predicting styles allows to close the loop on producing more of what sells
  • FOFO (Franchise-owned Franchise-operated model) allows for asset-light growth. 300+ franchisees with 77% of them operating for more than 3 years. Franchises bring the capital and the company provides all necessary support for choosing store location, management of supply chain and providing training for staff and franchisees - strong symbiosis is a big plus

Management

  • First-gen entrepreneur Ravi Modi is Chairman and MD (13 Cr salary - 116% increase). His story is an inspiring read. He takes care of design and marketing functions
  • His wife Shilpi Modi is whole-time director (9 Cr salary - 201% increase from previous year) and takes care of digital strategy and product lifecycle management
  • His son Vedant Modi is Chief Marketing Officer (50 lakhs salary) and has been leading the concalls and events for the IPO and appears a capable successor to lead the company, so succession risk is not there
  • Rahul Murarka is CFO and has been recently appointed

Financials
Over a 5 year period, sales has grown at 11% and PAT at 24% which is good but not great or excellent. Though the business model is great, the business is still a function of discretionary demand.

The margin expansion though has been phenomenal

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The business has strong cash flow generation owing to needing very little to grow. This could be a cash-machine and if they find profitable avenues to re-invest cash either organically by growing in-house brands or through acquisitions and making prudent buybacks and dividends, this can chug along for a long time.

Valuation
I don’t want to delude myself with a DCF. The bet here is primarily on the TAM, the business model and management. In essence, the bet is on this being a growth stock with low disruption risks. Considering the size of the women’s market, the bet is on Mohey doing what Manyavar has done. At nearly 100x OCF, 93x earnings its not cheap. What you are willing to pay will depend on how optimistic you are about the future and how aware you are about the risks below

Risks

  1. Growing Mohey is a very different ballgame as compared to Manyavar, due to diversity in women’s tastes and size of inventory needed to sate the same
  2. Phenomenal margins and great return ratios can attract a lot of competition
  3. Management still holds 85% of the business and will have to reduce it to 75% over next 2-3 years
  4. Rental market can take away market share. Management is cognizant of the same and watches it closely
  5. Valuation is high with negligible margin of safety

Sources

  1. Annual Report - FY22
  2. DRHP
  3. Concall transcripts - Aug '22 and May '22
  4. Earnings Presentations - Mar '22, May '22 and Aug '22

Disc: Invested around 1100 levels. I could be terribly biased due to my holding. Not SEBI registered and I consider myself a novice. Please do your due diligence

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Thanks for the superb report .

Do they have any competitors at a similar scale or any company that you think can reach their scale?

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they have competition definitely, some of them are jahapanah, swayamvar to compete with manyavar and neeru’s , taneira to compete with mohey. but, undoubtedly vendant fashion is too far in margin level and it’s tremendous effort from team that margins are sustainable at this level.

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They sell about 26 times the number two player in India as per the RHP, if I remember correctly.

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I have few names at back of my mind who are already established/have potential to compete with them:

  1. Fabindia
  2. Raymond
  3. Clai (presently its available in Maharashtra and Karnataka state only, but has strong customer retention value because they have vast array of clothing types from casual, formal, ethnic etc.)
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Vedant’s stock market performance is excellent till now, it is the only company in organized space with pan India ethenic wear retail brands. IMHO it has all the ingredients to be a multi bagger. My only concern is that the promoters are new to the stock Market.

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Risks mentioned in the article:

  1. There’s the valuation for starters. It’s trading at over 100 times its FY22 earnings. Meaning people are willing to pay ₹100 for every ₹1 that the company makes. And that’s crazy.
  2. Then there’s the concentration risk. While the company has nearly 600 exclusive brand outlets, the top five franchisees account for 30% of revenues.
    And while being completely based in Kolkata has helped Vedant Fashions become more efficient, the geographical concentration has a flip side. Natural or manmade disasters could have a significant impact on their supply chain.
  3. There’s also the competition. Big names like Reliance Retail and Aditya Birla have noticed that the organized wedding apparel market is still in its nascent stages. And they don’t want to miss out. So Reliance has been aggressively acquiring various established designers in the recent past. We’re talking brands like Manish Malhotra, Abu Jani-Sandeep Khosla, Ritu Kumar, and Satya Paul. Even Aditya Birla has struck deals with Sabyasachi, Tarun Tahiliani, and Shantanu & Nikhil to grab a piece of this pie.
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By top 5 franchisees does it mean top 5 stores or greater number of stores under those top 5 franchisees? I think it’s a huge difference between both….

I have been interested in this company, one small observation…saw some of Manyavar apparel’s I think in Pantaloon or similar MBO and utterly disappointed by the shelf space, positioning within the store and quality of apparel’s placed there….felt the brand was hugely depressed by that presence….making me not wanting to pay huge premium for the stock valuation….

Could it be desperation to grow by accepting such merchandise placement?

Regarding competition…not sure what exactly RIL is planning by buying so many brands….maybe they will eventually launch a brand of such brands to house all ethnic offerings….Tata also in there now via Utsaa etc.
Personally Soch seems very strong brand and products in women ethnic.
Winning in women ethnic must be closely watched and I strongly feel a new leader will emerge in that space with Tata having strong background via Tanishq and now Utsaa….

Disc. Strongly interested. No position yet. Post only for academic purposes and I can be wrong in all my assessments.

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I believe its the greater number of stores under those top 5. See, RHP Page No 35.

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Actually, according to the Forbes Article, this is precisely why they started opening EBOs.

By 2008, Manyavar set up its first exclusive brand outlet (EBO). “That’s when the real journey began,” says Modi. “Until then, we used to sell for ₹20-25 crore every year.” The company’s first store opened in Bhubaneswar, and over the next year, opened 12 stores. The early ones were opened by the company before it moved to a franchise-led model. “By that time, I was clear that the way forward for any fashion apparel business in India is EBO,” says Modi.
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Modi believed multi-brand outlets were becoming more of a hindrance than being facilitators. “They never used to work on data,” he says. “It was difficult to make them understand anything.

They probably still keep some inventory with those MBOs for customers who visit only MBOs.

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Hello, has anyone reviewed the related party transactions especially “sale of products”?

Are these franchises owned by promoter/KMP in private capacity?

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# MANYAVAR CREATIONS PRIVATE LIMITED

It is wholly owned by promoters and it is in manufacturing of goods.

SHENAYAH RETAIL STORES PRIVATE LIMITED

It is totally different entity, situated in Varanasi. It has totally different directors but why it is still listed under related party is not known yet.

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Tried to find more about all these other entities but not much information is available.

However, out of total sale Rs 1041 Cr (March 2022), only Rs 61.27 Cr is through related party. That’s around 6%.

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That’s not entirely true.

The reason for selling products through MBO are many.

  1. Footfall are generally higher in MBO, so product placement in MBO offers lot of visibility, brand recall and help in building trust. They acts as push towards EBO.

  2. Number of EBO will always be limited in every city and for big cities, MBO offers wide reach and availability to every nook and corner of brand thus increasing sale.

  3. For Rural / Interior market, MBO are still dominant and opening EBO in smaller towns is not economically feasible.

Though this has some merit but it not entirely true.

eg. Peter England has more than 1000 franchisee outlet but they still sell through MBOs.
Same is true for Mufti, US Polo, Allen Solly, Van Heusen and so many others.

This has changed drastically and now many big MBOs work seamlessly with brands.

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This looks like a potential red flag on ethics and promoter intent. What do you think?

Agree, its a small amount. However, the fact that the company/promoter accepts this way of working is concerning. What do your opinion?

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August Concall Highlights:

  1. 8 new stores in Q1.
  2. International Overall( 3 countries & 8 cities, 7 UAE, 5 USA, 1 Canada)
  3. Total stores - 590 across 228 cities & towns.
  4. No quarterly guidance provided, gross margin to be viewed annually (66-67%).
  5. Q2 is a weaker quarter (12-15% of total sales), Q1 - 24%, Q3 - 33-35%, Q4 - 25-27%
  6. Mohey’s SSSG higher than avg SSSG.
  7. Will start experimenting with exclusive Mohey stores.
  8. Twamev beating internal numbers.
  9. Manyavar Mohey stores to be projected as flagship.
  10. High change in consumer preferences, no of designs and technology needed for inventory replenishment stack is complex process which certainly they tend to have a MOAT on.
  11. Breakdown of revenues by individual Brand is not disclosed, will disclose once scaled up to a certain level.
  12. Sales are booked when product are shipped to franchise and not after getting sold to customers.
  13. Kids section revenue is single digit right now.
  14. Also thinking and monitoring rental market. Willing to pivot to that if needed but no such trend till now.
  15. Mohey reached 100 Cr sales in 5 years.
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Not necessarily.
This might have done in order to save taxes or create a strong balance sheet.
But then again, one can never say with 100%, what was the intention of the owners in first place

As long as related party transactions are in single digit, I don’t think there much to worth about.

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Recently I went to a trade exhibition and I came across Manyavar distributor for Maharashtra state.

I asked him about manyavar policy regarding MBOs.

He said, in order to grow Manyavar has decided to focus on MBOs and they have opened SIS (shop in shop) in more than 30 MBO and they are planning to do the same for 100 more.

I think this is the right strategy for the company as it is proven one (almost all brands such as Allen solly, Levi’s, Van Heusen, Mufti, Killer follows this)

Also Manyavar is planning to go to smaller town such as Barshi (population arojnd 1 lakh).

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Is this a norm in branded retail involving franchisees? Are there any brands which book sales only when their franchisees sell to Customers? Thanks

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This is the norm in nearly all retail sales including FMCG, auto etc. That is why you hear of such terms as “channel stuffing” from auto companies. In lean quarters, to boost sales, companies sell to distributors and book the sales. What one needs to see is the returns and how sales are adjusted later.

For Manyavar, as long as the sales are not reversed in the subsequent quarters, there is no concern.

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How one should go about it?

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Trent entering this space

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