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Indian Terrain Losing its Way?
In Smalll Cap Equity
Atul Gulrajani
Aug 11, 2018
Talking about point 1): IT's stock price decline is nothing new, in the past in 2013, its stock price had declined to Rs. 7.8 in 2013 from a high of Rs. 28 in 2011. The company, founded in 2000 and received a lot of fanfare as a value brand offering unique fashion. Initially, there was a lot of traction and visibility as it brought a certain quality to a market that housed several clones and wannabes. Later in 2010, IT was hived off off from its exporter parent Celebrity Fashions in 2010 and that gave IT all the freedom it needed to create its own unique space. However, according to market analysts IT failed to cash in on this opportunity adequately. And during the same time 2010-2013, cotton prices shot up leading to significant decline in IT's operating profit: from Rs. 6.3 cr in FY11 to Rs. 1.8 cr in FY12 (despite 25% YoY increase in its topline). The cotton prices eased a bit in FY14, leading to recovery in IT's operating profit to Rs. 4.11 cr in FY13 (even though the top line growth slowed to 10% YoY). Probably, IT also cut on its discounts and/or increased prices sacrificing growth in the process. By this time IT's revenue had touched Rs. 150 cr. Market analysts believed that while IT had good products it struggled to market it well. E.g. Raghu Viswanath of Vertebrand Management Consulting then (in 2013) said: "The brand has good products which are quite different from what most other brands and stores offer. But this alone won’t suffice. The brand needs to revisit its positioning. It needs to do some serious soul-searching and come out with a comprehensive, unique value proposition." During this time IT was working hard on its strategy and to change the market's perception that IT is a south-centric company with many of its flagship stores in Chennai, Bangalore and Hyderabad. During 2010-2013, IT opened large stores in Delhi, Lucknow, Mumbai and Pune to be considered as a national brand. However, IT felt it did not communicate enough to change its positioning and used social media extensively to communicate that message. IT in 2013 was supplying to 750 counters, of which only about 200 were in the South. The brand had 86 exclusive brand outlets and a presence in 127 departmental stores then. It added 25 new stores in 2012 and about 20 more in 2013. During the same IT also entered the online retail market towards the end of 2012 and supplied its products to fashion retailers such as Myntra, Jabong and Flipkart. And in the first five months alone achieved Rs 5 cr sales through the online channel. IT since then continued to grow and expand with expansion in physical distribution network and growth in online sales. Cotton prices also started declined considerably (~30%) in FY15 , leading about 80% YoY growth in IT's operating profit also driven by 25% YoY growth in top line. Cotton prices slid further in FY16, and IT achieved another ~80% YoY increase in operating profit even though the top line growth slowed to 10% YoY, benefiting primarily from a one time MAT credit entitlement. During this time IT continued to focus on delivering contemporary and quality products, judicious pricing, waste minimization and cutting superfluous expenses without compromising on the competitiveness of brand investments. IT opened as many as 29 exclusive outlets in FY15 and worked on building the right model, size and throughputs to improve economics. On the cost side, IT faced challenges in terms of increasing real estate costs but addressed the throughput issues to protect margins. Since FY17, the cotton prices started to move up again and reached its peak of 2015 in June 2018, which affected IT's profitability during FY17 and FY18. IT still managed to achieve about 22% YoY growth in topline, however struggled to keep its cost in check, which grew at slightly higher rate. And the one time MAT benefit was no longer there, this led to about 6% YoY decline in its operating profit. If we remove the MAT benefit from FY16, the its operating profit also actually at 14% YoY. in FY18, IT failed to achieve top line growth, however it also managed to keep its costs in check. However, however tax liability, probably due to introduction of GST, which also hampered its top line growth, led to about 8% YoY decline in its operating profit. To conclude, nothing has dramatically changed at IT and in fact it has weathered the twin storm of demonetization and GST along side the massive surge in cotton prices quite well. Its foray into boys segment along with continued strength in online business is likely to help it achieve higher growth in top line. Also, a possible slide or flattening out in the cotton price is likely to help IT achieve commensurate or even higher growth in bottom line. Green shoots of the cotton price decline is already apparent as IT's net profit grew 5% YoY in Q1 FY19 despite a marginal 2% YoY decline in its top line. This makes IT an interesting stock to study and analyse what is in stored in its future. What moves is the company taking, why is it still struggling to achieve top line growth, despite a lower base effect of FY18? Insights into these questions relating to point 4, will help clarify, whether it is a good investment bet at this price of around Rs. 134 at a PE of 19.8 (trailing 12 month).
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Atul Gulrajani

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