May 2, 2017 | PM Securities
Rupa & Co, the largest knitted wear player in India (volume terms) has a widespread reach with over 1000 distributors & over 1,18,000 retail outlets. Until now basic & mid-premium segment brands of Rupa namely Jon & Frontline cumulatively contributed 56% to the top-line. Here on we see a clear shift in managements focus from basic to value added products, recent inclusions of premium & super-premium brands namely “Fruit Of The Loom” & “FCUK” to the product mix is a move ahead in the direction of focus on value-added products. Further more management is also directing efforts towards increasing their presence in high-margin segments like women lingerie & active wear for which there is also a possibility of arrangements with another external brand. We believe in the managements ability & appreciate the realistic targets set by them. Changing product mix to high value products, shift to organised sector due to GST & better margins on value-added product will drive the growth hereon. Currently at Rs.395 it is trading at a P/E of 40x 9MFY17 (Annualised) earnings we opine Long-term investors to accumulate the stock.
We, met Mr. Ramesh Agarwal, Director Rupa & Co. Ltd. to understand the firms business prospects after the recently announced acquisition of exclusive licence to manufacture, distribute, advertise and sell inner-wear and outerwear products of the brand “Fruit of the loom” a wholly-owned subsidiary of Berkshire Hathaway Company (a Warren Buffet Company). Below are some key take-aways from the meeting discussions.
Oban Fashions Private Limited, a wholly-owned subsidiary of Rupa and Company Limited has acquired licences of two external brands FCUK (About a year ago) & Fruit of the loom (About a month ago) to manufacture, distribute, advertise and sell inner-wear and outerwear products against a 5% royalty on revenues. These are 10 year auto-renewable licenses. Manufacturing of all products for both these brands is being outsourced & hence there is no additional CAPEX required.
In the past year a separate channel of pan-india distribution of FCUK was being setup and sales under this brand have already commenced through the distributor network & FCUK’s already existing EBO’s (Exclusive Brand Outlets). FCUK offers super-premium products at about 30% premium to Jockey’s prices, and competes with brands like Calvin Klein. “Broad acceptability of jockey has reduced the brand esteem of jockey & if one wants to get something more premium the options are very limited & FCUK intends to targets this section. Also due to monopolistic market share of jockey distributors & marketers are forced to sell jockey even though their margins are squeezed” - Says Mr. Agarwal.
FCUK is expected to contribute Rs. 300-350 Mn to RUPA’s top-line in the current fiscal year, with gross margins north of 55%.
2) Fruit Of The Loom (FOTL):
FOTL was being distributed in india for a few years and had started to gain good brand equity & demand pull but due to inability of the foreign entity to efficiently manage supply chain in India it was discontinued. As they left on a very good note there is already demand side pull for this brand. Rupa & Co. has been setting up a distribution channel for FOTL’s pan-india distribution & expects start of revenue flows from FOTL by end of August FY18. FOTL is expected to contribute 650-700 Mn to RUPA’s top-line in the current fiscal year, with gross margins north of 55%.
3) Rupa brands:
Rupa & Co. has 11 brand labels namely Frontline, Euro, Bumchums, Jon , Torrido, Thermocot, Softline Leggings, Softline, Macroman, Footline. As of FY16 Jon (Basic Segment) & Frontline (Mid-premium Segment) contributed 28% each to the top-line whereas In tandem with current market dynamics more focus is being placed on active wear i.e Bumchums & management seems to be further interested in adverting in women lingerie business following the steps of page industries where a major chunk of revenues is from Active wear & women lingerie. Management also believes that an external brand tie-up for women lingerie segment would make more sense rather than creating a new brand.
4) Plan ahead:
Rupa & Co’s management had an internal target of doubling the top line to ~20000 Mn by 2021. This target will be achieved by addition of newly incorporated higher value brands FCUK & FOTL aided by organic growth of existing RUPA Brands This shift in product mix will also contribute to higher margins, which is also evident in 9MFY17 gross margins that have expanded by ~5.7% (y-o-y). Currently there are 6 EBO’s & management plans to establish more EBO’s (Exclusive Brand Outlets) under the brand Rupa primarily in south india where the culture of EBO’s is prominent. As of FY16 only 7.4% of Rupa’s top-line was contributed by the south India. This move of management to setup EBO’s on franchise model will enhance visibility & sales and aid higher market share in the region. Once the operations of the brand “Fruit Of The Loom” pick up pace EBO’s under this brand shall also be considered.
Rupa & Co, estd. 1968 has a the largest knitted wear player in India (volume terms) has a widespread reach with over 1000 distributors & over 1,18,000 retail outlets. It has 4 central warehouses, 8000 SKU (Stock Keeping Units), 6 exclusive business outlets(EBO’s), 20 branch offices, 1000 dealer network and 1,18,000 retailers and e-commerce portals. With a rich ~50 year expertise running across 3 generations of Agarwal family, Rupa has managed to establish a portfolio of the following Brands:
1) Imoogi Fashions Private Limited – It is engaged in manufacturing, processing and selling hosiery and outer casual wear products, especially for children up to the age of 12 years under the brand name “Imoogi”
2) Oban Fashions Private Limited – Incorporated with an object of operating Indian business of international brands managed under licensing/ franchise/ joint venture/ ownership arrangements etc.
This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off any securities mentioned in this document.
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