DOLLAR repositioning itself
Transforming product mix, strong growth outlook, steady balance sheet and with operational efficiency measures at play, Dollar Industries is worth a closer look.
Dollar Industries (NSE: DOLLAR) is engaged in the manufacture and sale of hosiery products, including knitted inner wear, casual wear, and thermal wear. It is the only hosiery and knitwear company in India with a fully integrated production unit.
Brand restructuring initiatives point towards a favourable revenue and margin profile
The company has undertaken several initiatives to restructure itself as a brand and unlock new growth levers while upping operational efficiencies. In FY 2020-21, the company kick started the most notable of the aforementioned initiatives by a move towards a new “Brand Architecture” aimed to rejig its product portfolio. With a strong set of brands already in the mix (Dollar Bigboss, Missy, Force NXT, Champion, Ultra Thermals, Force Go wear) across varied segments, the Company is now transforming itself from a mass market brand (86% of revenues in 2006) to a house of brands focusing mainly on mid-market and premium segment which as on FY20 contributed 43% and 24% respectively of the overall branded B2C revenues. As such, not only are market tailwinds promising for this pivot, they also offer meaningful margin upside by capitalizing on significant cost synergies.
Focusing on core
To overcome the logistical and inefficient decision making stemming out from an overt reliance on trade partners, DOLLAR has taken a technology first approach through Lakshya - a smartphone-compatible play to reach its consumers directly with heightened focus towards on-the-go communication and quick responsiveness. In our view given the nature of the product portfolio, this approach might unlock meaningful value with data-based decision making taking heightened relevance. Furthermore, this tech platform is expected to drive an uptick in inventory management, enhance working capital efficiency and deploy more targeted sales strategies, all leveraging the surging online consumption trends.
A growth play in a growth market
The Indian Textile sector is expected to be a $190 bn (~INR14,407 bn) market by 2026. Within this, the innerwear market is estimated to be valued at $11.83 bn (~INR897 bn) (Men’s ~ 24.19% and Women’s ~ 75.81%) by 2028. This implies a fairly impressive 20.43% CAGR growth. Furthermore, the Indian Athleisure Industry is expected to grow at 20-25% CAGR from 2020-25. Growing digital consumption and spill over effects from COVID-19 has been driving a shift in consumption from unorganised to organised sector. This is further helped by GST rationalization whereby the inverted tax structure which currently benefits the unorganized operators will be eliminated and replaced by a uniform rate which bodes well for organized players such as DOLLAR. At present, the ratio of Unorganised to Organised stands at 50:50 in Men’s, 70:30 in Women’s and 90:10 in Kids categories, all of which are expected to see material downward pressure.
The path to management’s robust guidance
Management is targeting INR20 bn in revenue in FY 2024 (2023-24) implying a 2x jump from the most recently completed full year. To support this, the company has earmarked a capex of INR900 m (over next 1.5 years) to expand its spinning mill capacity and ensure robust raw material availability. DOLLAR also launched its first Exclusive Brand Outlet (EBO) in October 2021 to increase its retail presence and brand outlook.
“Channel Financing” is yet another recent initiative undertaken by the company, whereby the company will be able to fetch upfront payment at the time of billing to distributors. For this, the company has entered into an arrangement with a leading private Sector Bank (ICICI Bank). We expect around 70-80% of the distributors to be eventually enrolled. In our view, this not only bodes well for collection efficiency but can also drive higher revenue velocity and in turn drive up sales over the longer term. As a side-note, the company has minimized the credit risk as the recourse would generally be onto the agent or distributor in charge, not the company.
Steady growth and sound balance sheet management de-risks the investment profile
Over the last 5 financial years the company has delivered a revenue CAGR of 4.76%, whereas the EBITDA has grown at the rate of 13.85% during the same time, highlighting the focus on improving margins and benefits from operational efficiencies coming through . Going forward, the company expects EBITDA margin to stabilise in the 17% range. There is minimal Debt in the company. Debt-Equity stands at a modest 0.29x as on 30 Sept 21, down from 1.41x at the beginning of the year, de-risking the balance sheet further. The company has been also averaging fairly lofty ROE and ROCE of 18% & 28% respectively over the last 5 years.
Valuation on absolute and relative terms looks fairly attractive
DOLLAR currently trades at 21.45x P/E(TTM) and 14.80x EV/EBITDA (TTM). Close Comp Page Industries (NSE: PAGEIND) is running at a hefty P/E & EV/EBITDA multiple of 98.50x and 60x respectively, Kitex Garments (NSE: KITEX) trades at 16.80 P/E and 5.43 EV/EBITDA but with somewhat slower growth outlook. Finally, Rupa & Company (NSE: RUPA) trades at 17.83 P/E and 12.1 EV/EBITDA. For perspective, if DOLLAR achieves its FY2024 revenue and EBITDA margin targets, the EV would need to see a growth of 29% CAGR for next 2.5 years, if we hold the current EV/EBITDA multiple static.
Risk and Mitigation
The company consumes commodities like Yarn and Cotton as its raw material which are highly volatile in nature. In the current times, the company has maintained the large stock for the same but going forward this could create pressure on the margins. At the same time, the company enjoys pricing control over its distributors, partly mitigating supply side shocks.
Our Position
Improving margins, positive free cash flow generation, double digit growth prospects in near future and with sizeable promoter & FII holding, the company looks well positioned to benefit from a multiple re-rating in addition to growth across EBITDA, Net Income and Free Cash Flow. We are LONG.
Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.