Initiating Coverage: Dollar Industries
13-02-2024

Spinning Growth from Streamlined Working Capital

About the Company

Dollar Industries Limited (DIL) was founded as Bhawani Textiles in 1973, and is a leading Indian Innerwear manufacturer with a 15% market share in the organized market. The company markets its products under brands such as Big Boss, Force NXT and Lehar, which cater to the economy and mass market segments. 

The company has 4 facilities at Ludhiana, Tirupur, Kolkata, and Delhi. The manufacturing is supplemented with an extensive pan-India dealer network of more than 1500 dealers that cater to more than 145,000 retailers across 29 states. The company additionally has 18 Exclusive Brand Outlets.

The company derives 83% of its revenue from menswear, and derives 14% and 3% of its revenue from women’s and children’s clothing respectively. 81% of the company’s revenues are derived from innerwear, while the remaining is derived from outerwear such as athleisure. The company sells products across India, with 44% sales from the North, 23% from East and West respectively, and 10% from the South; along with exports to countries such as Oman, Jordan, Qatar, Kuwait, Bahrain, Yemen, Iraq, Myanmar, Nepal, Nigeria and U.A.E. which contribute 5% to the total revenue. 

Source: Dollar Industries Q3FY24 Investor Presentation

The business relies heavily on celebrity endorsements to drive sales, which leads to high advertising and promotion costs. The company spent Rs 101 crores in FY23 (7.3% of revenue) on advertising and promotion by retaining celebrities such as Saif Ali Khan, Akshay Kumar, and Yami Gautam.

Industry Overview

The Indian Innerwear Industry is dominated by players such as Page Industries (Jockey), Lux Industries, Dollar Industries, Rupa & Company in the listed space and JG Hosiery (Macho), Dixcy Textiles (Dixcy Scott) and V-Star in the unlisted space. The innerwear market is dominated by a large number of small unorganized players which, as a total, make up 60% of the total market. While unorganized players lack distribution and competitive pricing power, their existence hinders the growth of larger players that target lower-income demographics.

Business Performance

Between FY18 and FY23, the company has grown its revenues at an annualized rate of 8.5%, while PAT has fallen at an annualized rate of 4% owing to slowing sales in FY23 and during Covid-19 and the high cost of raw materials respectively. However, the raw material pressure has eased off over the last few quarters, which has led to an improvement in gross margins and inventory destocking in the channel.

Source: Office of Economic Adviser

While FY23 witnessed high raw material prices and low gross margins, 9MFY23 has shown an improvement in gross margins that are expected to be sustained over a long period. 

(In Rs. Million)

Source: Dollar Industries Q3FY24 Investor Presentation

Positives

                We believe that the future prospects of the company would look remarkably different from the past due to changes in the distribution model which would have an exponential impact on growth, margins, and working capital requirements. The company has hired Vector Consulting to implement a pull-based distribution strategy (called Project Lakshya) under the theory of constraints framework, which would result in improved capital efficiency at the retail, distributor, and company level if successfully implemented. Our thesis is based on the following points:

1. Revenue Growth: The management has guided a turnover of Rs. 2000 Cr, which implies a revenue growth rate of ~12%. The rate is higher than the historical rate of 8.5% achieved between FY18-23.
2. Increased Premiumization: The company expects high-margin product contribution to increase from 27% in FY23 to 33% by FY26. This would lead to dual benefits to gross margin levels, with raw material price normalization being the other contributing factor.
3. Cost Reduction & Operational Leverage: Advertising & Promotion costs are expected to reduce to 6-6.5% of sales, compared to 7.3% in FY23. Overall, we expect an EBITDA Margin of 13-14% by FY26.
4. Reduction in Working Capital: Revenue contribution from Vector Consulting’s Project Lakshya distributors is expected to be ~70% by FY26, which would imply lower inventory levels due to pull-based distribution. Distributors under channel financing would reach ~60% by FY26, leading to a reduction in receivables. We expect the working capital cycle to be at 120 days compared to the current working capital cycle of 155 days.

Source: Dollar Industries Q3FY24 Investor Presentation

Risks

1. Raw Material Price Risk: The management’s expectations for FY26 are built around the assumption that raw material prices will remain stable during the period. Cotton yarn is the main raw material for the company, and a significant increase in raw material could lead to a significant increase in inventory costs which may be difficult to pass to customers. An increase in raw material prices would lead to a dual effect of higher costs and lower sales growth, which makes it important to monitor cotton yarn prices.
2. Increased Competition: Lux and Rupa are the main listed competitors of Dollar Industries. In response to Dollar Industries’ change in distribution strategy, competitors may aggressively undercut the company’s prices in the price-sensitive economy segment and/or offer better margins to distributors. These competitive responses do not seem sustainable in the long run, but may cause short-term damage.

Moneyworks4Me Opinion

                While the working capital cycle is expected to improve along with an increase in sales, the valuation already reflects such changes. Valued at a Price to Book ratio of 3.5, it trades at a significant premium to players such as Rupa & Company and Lux Industries, which trade at a P/B of 2.3 and 2.4 respectively, implying a nearly 50% premium on a relative basis. Price to Earnings has not been used due to the depressed level of current earnings which do not represent the actual earnings power of these businesses. While the company will be able to increase its ROCE to 20% along with a sales growth of 12-13% annually by FY26, the current price already factors in the available upside. We value the company at Rs. 480, which translates to a forward P/E of 20 for FY25, and we would wait for a discount to our MRP.