Recently we decided to take a look at Page Industries, which is famous for its brand Jockey and another fast-developing brand called Speedo in the swimwear market. Although the company is doing great in terms of business performance, it has become a subject of controversy amongst many investors due to their high valuations combined with slowing growth rates. Let's take a deep dive further...
Company Overview
The company is not the owner but is the exclusive licensee of Jockey International Inc. (USA) for the manufacture and distribution of the Jockey brand in India, Sri Lanka, Bangladesh, Nepal, UAE, Oman and Qatar. Page Industries is also the exclusive licensee of Speedo International Ltd. for the manufacture and distribution of the Speedo brand in India.
The company commenced its operations in India in 1995 with the manufacturing of Jockey products and went public in March 2007. As of March 2020, Jockey products are available in 55000+ outlets and 1900+ cities.
Industry Evolution
The undergarments industry has traditionally been highly fragmented and unorganized which dominated the industry with a market share of roughly 85%~ in 2008. Undergarments were produced by manufacturers in bulk as they played on volumes to benefit from economies of scale with no product differentiation in-sight.
Therefore, the products were manufactured in large quantities and widely distributed to MBOs (Multi-brand outlets) which is nothing but our old preferred local outlets to shop for undergarments. Neither the customers demanded branded undergarments in this segment nor the manufacturers focused on branding.
Undergarments therefore, were manufactured and traded like a commodity and with that the manufacturers got -
(i) no product differentiation
(ii) no pricing power
(iii) limited demand
(iv) negligible scope of expansion
This trend continued to dominate till the early 2000s but slowly started changing with the advent of westernization, increasing disposable incomes and urbanization. As a result, consumers started becoming more fashion-conscious and demanded high quality branded undergarments. This is how the innerwear market is slowly moving away from unorganized -
Source: AR19 Lux Industries, Motilal Oswal research reports
The market share for the organized players in this industry has been almost doubled in the past 10-12 years mainly because the organized market has been growing at a much better pace of 14-15%~ CAGR against unorganized market growth of 7-8%~. The reason for growth differential can be attributed to -
(i) Higher demand for branded / premium products
(ii) More pricing power with branded players
(iii) Increased consumption of innerwear per person due to higher income levels etc.
How Jockey played its role
Jockey i.e. Page Industries was one of the first ones to capture this trend and focussed on branding from the start. The company targetted building an image of quality and comfort about Jockey. Unlike the traditional MBO model, Jockey distributed its products through EBO (Exclusive brand outlets) along with MBOs to reach wider masses and create strong product differentiation.
Let's think of this, the most important thing that people look out for while buying underwear is comfort (more than brand). Jockey has been successfully able to tap the right mix of design and fabric which makes Jockey undergarments one of the most comfortable undergarments in India. Not only that, Jockey has been also providing a wide variety of designs for its products in order to cater to the demands of each and every individual.
It's very rare for a company to get all these things exactly right like Jockey which has been the reason for its high growth in business.
Emerging competition from MNCs
As soon as international companies realized the growing demand for brand-based products as well as India's huge untapped markets, many MNCs have since then entered into the space. For example, Van Heusen and Hanes, the biggest competitors for Jockey commenced operations in 2017 and 2012 respectively. There are several other brands trying to capture market share like US Polo, Rupa, VIP, Dollar etc.
Company Analysis
Page Industries' Jockey operates typically under the mid-premium segment with Van Heusen and Hanes their immediate competitors whereas Rupa, Lux, Dollar etc. currently compete under the economy segment trying to build a premium image in the market. US Polo, Marks and Spencer, Calvin Klein etc. compete in the high-end premium segment.
Page Industries derive 99.5% of its income from India and 98.5%~ sales from Jockey, rest coming from Speedo which is insignificant as of now.
Company's products can be broadly categorized into 4 segments -
(i) Men's innerwear
(ii) Women's innerwear
(iii) Athleisure wear
(iii) Kid's wear and Others
Although the company does not give a breakup of its revenues based on different segments, the management did give a rough breakup of sales in Q4 2019 concall -
Source: Motilal Oswal research reports, ValuePickr and Others.
Men's innerwear makes up almost half of the company's revenues while athleisure wear makes up 25%. Women's and Kid's wear almost makes up the other 25% of revenues.
The below table provides expected segment-wise growth rates and Page's current market share within the segment -
Keeping this in mind, let's discuss future outlook of all the 4 segments with respect to Page -
Men's Innerwear
Page industries earn roughly half of its revenues from men's innerwear. The company initially started with this segment only and later diversified into other segments in order to keep its growth engine running.
Lets start with the basic price point analysis -
Source: Axis Securities research reports, April 2020
As per the above chart (non-exhaustive list), the company typically operates in majorly medium and somewhat premium segment. Since the industry product is such that the biggest attribute that consumers look forward to is (i) comfort and then comes (ii) brand. This essentially leaves us with 2 biggest competitors for Page industries, one Van Heusen and the other being Hanes. Both of these competitors' products have been accepted as comfortable by the consumers. Van Heusen typically has more brand recognition.
Rest of the brands like Rupa, Lux or VIP neither have that kind of comfort nor branding which should worry us atleast for now, although these companies are aggressively trying to create brand awareness by spending huge sums of money in marketing and sales (detailed competitor analysis covered later).
Hanes started operations in India (through Arvind Lifestyle) in 2013 whereas Van Heusen in innerwear division recently commenced operations (through ABFRL) in 2017. Page started operations in India in 1995, securing first-mover advantage. Lack of competition and emerging demand for branded, quality products was the reason for Page's extraordinary growth in sales throughout 2000s and early part of 2010 -
The numbers don't lie! We are not saying that Jockey will face poor growth in the future, its just that the industry is maturing, competition is increasing, base is getting larger and with that growth will eventually taper. For improving the growth rates, Page industries forayed into other areas like -
Women's Innerwear
Unlike men's innerwear, this segment is much more brutally competitive. There are already existing small-scale local brands that cover all price segments. Women's innerwear has high SKUs that cover a wide variety of designs and shapes leading to higher inventory management costs. This segment is expected to grow at 11-13% in the coming few years.
Athleisure wear
This is the fastest-growing segment for Page Industries. With the increasing awareness of exercising and maintaining good health among people, athleisure has picked up pace. There is an emerging trend of leisurewear (casuals) even for outside.
Again, the biggest competitors in athleisure wear for Jockey India is established brands like Nike, Puma, Addidas etc. in the premium segment. Jockey products mainly contributing to the more economical segment has emerging competition from Decathalon, Van Heusen, Maxx etc. Athleisurewear is expected to grow at the fastest pace among all others in question.
Kid's wear and Others
Kids-wear is one new category where Page Industries is aggressively wanting to build its position in. This segment currently contributes only 5-10% to the revenues.
One thing to note is that this segment is still untapped i.e. there is no strongly established and preferred brand in this space as of now. One of the reasons could be, moms usually shop for kids wear and don't seem to have any strong preference for any particular brand for kids-wear. The end users ie. kids do not possess any brand loyalty characteristics. The main driving force in this segment seems to be designing of products and their pricing.
Financial Analysis
As mentioned above, the company is actually growing its revenues at an impressive rate of 20-25%~ CAGR when looked over the past 10 years. However, we see slowing revenue growth when compared over y-o-y. Ignoring March 2020 due to Covid-19 disruptions, the company registered sales growth of 12% in FY19.
When looked at net profit margins, the company has been consistently able to maintain (as well as improve) NPM over the past 10 years. FY10 margins - 11.4% vs 13.8% in FY19.
Extended Du-Pont analysis -
Page Industries' ROE has been more or less averaged around 50%~ for the past 10 years (ROCE being 50-60%). The company witnessed decreasing ROE from 2012 to 2017 due to consistently decreasing leverage. The company has been decreasing debt over the years, and now D/E stands at 0.11 as of FY19.
Increasing asset turns combined with increasing PBT margins due to decreasing interest expense helped maintained ROE.
Analyzing asset turnover further, we find that this ratio has significantly improved due to mainly 1 reason i.e. better capacity utilisations -
Company's gross block grew by 16% CAGR from 2010 to 2019 whereas revenues grew by 26% CAGR over the same period. The real details will come when we do competitor analysis.
Competitor Analysis
Since the financials of innerwear products of Hanes or Van Heusen are not available separately, we will try to analyze Page's position with the next best competitors like Lux, Dollar and Rupa (all in the economy segment). VIP Clothing not considered due to the extremely poor economic conditions of the company.
Not all companies manufacture all the innerwear products but are comparable because the same industry economics govern them. Let's look at how these companies grew in the past few years (Lux, Rupa and Dollar reported sales of Rs. 1000-1200~ cr. in FY19) -
First thing to observe here is that not one, but all the companies are showing slowing sales growth. This is in line with our view of maturing industry with rising competition in the industry.
Second, although sales growth has been slowing, Page has outperformed its competitors in all of the years. This has led to gain in market share for Page in innerwear market. Higher than competitor's sales growth means that Page's products are more preferred in the industry.
This can also be verified from comparing Average collection period (365 / Debtor turnover)
Page takes an average 20 days to collect its revenues from sale of products whereas it takes around 115 days for the rest of the mentioned competitors! What this means is that the distributors and retailers are willing to tie-up the inventory with them and provide cash much faster when compared to Page's competitors. This indicates one thing, the demand for Jockey products is pull-based and flies off the shelves at a much faster rate than other products.
Not only that, another thing to observe here is that the collection period for competitors actually worsened over the years but Page has been successfully able to maintain it despite higher sales growth than the competitors.
In short, the company product is preferred such that it has been selling at higher growth rates and sales are being converted into cash in a much shorter period of time.
Further, comparing average payable period (365 / Creditor Turnover) -
Page has maintained paying off its creditors in the shortest duration of time compared to peers i.e. 40~ days. Others have been increasing their payable period over the past few years. This can indicate either of 3 things -
(i) The competitors are facing financial stress and are trying to improve liquidity position by delaying payments.
(ii) Page has been unable to negotiate better terms with creditors and hence losing out on the growth opportunities by paying out cash too early.
(iii) Page has been trying to maintain good relationships with creditors and has been able to pay quickly because they are receiving money from sales that fast.
Point 2 looks improbable because major raw material i.e. cotton is a commodity product with no pricing power or product differentiation available with the seller. As a result, the seller does not have any negotiating power with him.
In order to analyse Point 1, lets look at the working capital profile of these companies -
Return on Capital Employed -
One thing to observe is that ROCE improved for all firms in general with Page outperforming others with a wide margin. Breaking down ROCE, lets look at how our peerset compares on margins basis -
Gross Profit Margin -
Gross margins largely remained same for all the companies with Page outperforming by minor percentage points. While Dollar and Rupa improved their gross margins in their past 10 years due to decreasing raw material expenses as a % to revenues, Page wasn't able to do so with minor improvement in gross margin coming from decreasing contract labor expenses. Lux specifically reflected deviations in gross profit margins because of some incorrect classification of 'Job work expenses' (contract labor) below the line. The same has been adjusted with some estimation as their reporting was not very clear.
Analyzing EBIT margins further -
Page has shown minor improvement in margins, whereas the rest have shown significant improvement with Lux leading the pack. Inspite of this, Page's EBIT margins in FY19 were 20%~, which is still 33% higher than Lux's 15%~. The reason being economies of scale -
Advertisement spend -
Page spends almost half the % of revenues on advertisement than its peers. Not only that, Page's advertisement spend as a % of revenues has been on a declining trend while Lux and Dollar have been increasing their advertisement spend regularly to build brand image in the fierce market. The reason being, as sales increase, advertisement spend doesnt increase proportionately to revenues. Page having more than double the revenues to its peers will have economies of scale advantage over here.
This was all from the balance sheet and PNL side. Let's look at the free cash flow generating abilities of these firms -
It is better to compare FCFF with Net Income over the years because capex in FCFF is not regular, neither is the WC spend. Therefore, let's compare the peers based on below:
Ratio: Sum of FCFF / Sum of Net Income -
[FCFF = Net Income + Depreciation - Capex + Interest * (1 - Tax) - Change in WC.] Chart to be read as: from 2016 to 2019, Page converted 75%~ of reported profits into Free cash flows.
The above chart clearly shows wide disparity in companies' ability to generate profits into free cash flows. Page is the winner with being able to convert 60-80%~ of profits into free cash flows whereas Dollar is in the worst position here with negligible conversions.
The biggest reason to this is not things like accounting trickery failing to convert to profits or huge gap within depreciation and capex (although capex has been roughly twice to that of depreciation during the years), the main reason can be attributed to how working capital is being managed in the business.
Before taking a deep dive in the working capital needs of these businesses, it is worth mentioning here that the innerwear industry itself is working-capital intensive business with companies needing to maitain high levels of inventories throughout the year. Majority of the money indeed is blocked in inventories as businesses need to maintain high number of SKUs to meet demands from different kinds of people. Coming back to the data -
We found out that these 4 companies in question were putting their money in WC in majorly 3 different areas -
(i) Trade Receivables
(ii) Inventories
(iii) Trade Payables
[Net trade rec = Trade receivables - Trade payables] Chart to be read as: from 2016-2019, Rupa re-invested 68% of cash in Net trade rec and 32% in Inventory when seeing re-investment in working capital for both components only for the mentioned period.
Comparing how peers have been re-investing their money in working capital reveals another insightful difference. Companies other than Page have been heavily investing in Net trade receivables as they might not be able to collect cash from sales in a timely manner and as a result trade receivables on balance sheet are ballooning (also seen this when comparing DSO above). Page on the other hand, has negative net trade receivables which means debtors are paying them cash faster than Page is paying their creditors!
This further strengthens our case of Jockey having a pull-based demand. Their distributors find Page's products being sold easily and thus are ready to pay cash early. Further, this gives Page an opportunity to re-invest more in inventories and keep high SKUs in stock.
What's more interesting is that even then Page's Inventory Days ( 365 / Inventory Turnover ) are lower than that of peers. (Page's inventory days - 175~ compared to peer average - 230~)
Conclusion
This article is not intended to analyse Page being an investment worthy opportunity or not because valuations of such highly priced companies is very subjective and more prone to error. The only motive of the article was to bring out the real strengths and weaknesses of the company in relation to its peers.
To summarise, Page has been able to manufacture the right type of products and correctly position itself in the market that has lead it to being the leader in the whole of innerwear segment. The company is placed such that it is able to reap higher margins due to economies of scale, better terms with debtors due to product selling comfort with distributors, better working capital management and higher free cash flow generation which can be further utilised for expansion and growth.
This was the business view. Considering our views on the negative side, it is rich valuations combined with slowing sales growth. As of writing, Page is trading at a P/E of 60~ while the rest are at 15-25~. If sales growth expectations are not met, one can expect P/E re -rate of the business. Nonetheless, Page's position continues to be held strong and is not expected to be over-powered anytime soon. Even a 12-15%~ sales growth can provide decent returns as margins do not look to be hampered. To analyze expected sales growth, further digging in the sub-segments is required in which Page operates (men, women, kid's wear etc.). We will leave the debate on valuations of Page upon the readers. For us, we continue to monitor the business closely.
Let us know if you found the article helpful by commenting below. We would love to hear your feedback. If you are further interested in valuation, do check out our Market Sentiment Tracker, our own index which reflects the greed/fear in the public and gives an idea of whether the market is trading at a premium or a discount.
Happy Investing!
Thank you for the kind comments, Dherain!
Your analysis is simple and to the point! Keep up the good work! Do create some content on how to achieve clarity in analysis like you, people will be ready to pay!