Dollar Industries Ltd - Stock Valuation and Financial Performance

1. Dollar Industries is expanding its distributor network under Project Lakshya, adding 17 new distributors in H1 FY25, and increasing the total to 307. This initiative aims to enhance domestic sales growth, which rose from 26% in FY24 to 31% in H1 FY25. 

2. The company experienced strong demand for thermal products due to a forecasted longer winter season, with thermal wear contributing approximately 10% to revenue.

3. The Force NXT product line saw significant growth, accounting for about 5% of revenue with a 30% increase in value and a 38% increase in volume year-on-year.

4. E-commerce and modern trade channels contributed around 7.5% to total sales, up from 3.6% in Q2 FY24.

5. Management expressed confidence in achieving their guidance of 12% to 13% growth in operating income for the fiscal year, with expectations that the second half will outperform the first half historically. They anticipate that continued focus on strategic initiatives and product mix improvements will drive profitability growth moving forward.

MoneyWorks4Me Opinion

Growth under pressure but margin remains strong. Overall guidance maintained.

Q1FY25 Concall Highlights:

1. Sales: Volume degrowth was 5% and value growth was overall 7% for Q1 FY25, including a 2% increase in Average Selling Price. Sales growth was slow due to the implementation of SAP ERP systems, which has replaced Oracle financial ERP system. This led to a loss of about 25 days’ worth of sales. The impact is expected to reverse in the subsequent quarters. South Indian market (9% of Q1FY25 Sales) is expected to grow by 40% for the full financial year.

2. Margin: The company aims to maintain 35-36% Gross Margins and 11-11.5% EBITDA Margins.

3. Cash Conversion Cycle: While the cash conversion cycle has temporarily worsened due to inventory buildup for the following quarters, the company expects the cash conversion cycle to be at 135 days by March 2025.

4. Distribution: The Lakshya Project continues to do well and overall revenue contribution is expected to increase from 26% in FY24 to 36% in FY25.

Dollar Industries is a high quality innerwear business which has historically grown at a higher rate than the competition. We expect:

• Revenue Growth of 13% over the next few years on the basis of historic track record, growth in new products and distribution debottlenecking.
• Increase in EBITDA Margins from 10% in FY24 to 14% By FY26 on the basis of premium product addition, lower ad spends and cost efficiencies.
• Improved Cash Conversion Cycle from 150 days to 120 days by FY26 on the basis of improved distribution under Project Lakshya.

However, raw material volatility remains a key risk for the company due to the price sensitive nature of its consumer base and the willingness of competitors to lower prices in periods where raw material price reduces. Such impacts are short term and business normalizes as higher priced inventory is cleared from books. 

Please refer to the Initiating Coverage for further details on the company.

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.