Branded Apparel Sector – Primer and Credit Outlook

21 Nov 2019

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 Table of contents

The branded apparel market

Key industry dynamics

Credit framework for the ecosystem

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 Key features of a branded apparel business

Capital towards growth Granularity of revenues

Stores, working capital, new channels Vastly distributed across 1000s of consumers

Long term demand tailwinds Working capital intensive business

Demographics, Organization of retail etc. High inventory and receivables

High predictability to cash flows Scale drives efficiencies

Order book visibility, data integrity and Scale to absorb marketing; brand creation
industry standards key currently considering high mortality

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 Branded apparel market

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 Key trends that have influenced apparel over the past 20 years

2001 – 2010 2010 – 2020

Emergence of organized retail Omni channel as way forward What next?
& brands & emergence of private labels

• Increase in organized retail &
apparel
• Emergence of large format retail as
a channel
• Omni-channel approach to sales; online
a key driver
• Most companies changing to a “brand”
company with an asset light business
• Emergence of new categories?
• Sustainability as a theme likely
to gain more traction in
manufacturing of apparel?

• Proliferation of brands • Emergence of private labels from large • High brand mortality?
retail channels; as being observed in
• Influx of private capital into the FMCG
ecosystem

• Genesis of online channel

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 Expanding market; womenswear growing the fastest

Market size; $ Bn 2015 2020

80 60%
66
50%
60 51 22% 22%
40%
37% 39%
40 32 32 30%
19 20%
20 8 41% 39%
10%
0 0%
2012 2017 2020
Kids Menswear Women Kids Menswear Women
Apparel market Branded apparel Branded %
Source: VC Analysis, company reports Source: VC Analysis, company reports, online sources

• Key drivers include demographics, increase in
organized retail and emergence of new channels
• Omni channel expansion by operators will continue
to drive growth in the branded apparel market
• Contribution of womenswear to the overall apparel
market increasing consistently; expect that the increase
in branded apparel be higher
• Some factors contributing to the same include increasing
number of working women, higher discretionary spending
& the emergence of pan-India brands/newer categories

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 Consistent growth across large listed apparel brands and retailers
Revenue Rs. Bn
Key drivers
CAGR 13% 196

Increasing stores across retail formats

124

Omni-channel expansion
FY15 FY19
Source: VC Analysis, company reports
Data above represents aggregated numbers of 12 listed branded
apparel companies and large format retail
Organic growth driven by penetration of
• Consistent CAGR of ~13% y-o-y branded retail/apparel

• This universe will continue to expand

considering the increase in branded Diversified portfolios across categories
apparel as a % of market contributing to growth

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 Subdued but continued growth in FY20 despite slowdown
Quarterly Revenue and Margin
60 30.0%

55
25.0%
50

20.0%
45

40
15.0%

35
10.0%
30

25 5.0%
2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20
Source: VC Analysis, company reports Revenue (INR billion, LHS) % change y-o-y
Data above represents aggregated numbers of 12 listed branded apparel companies and large format retail

• Growth has continued in FY20 albeit at a slow pace as can be seen from the y-o-y change
• From channel checks, we observe that while secondary sales are increasing, SSG or growth on a LTL basis is
subdued
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 Brand positioning - key growth determinant

3% Segmentation
> Rs. 5,000 Luxury

13%
Rs. 3,000 – 5,000 26%
Premium & Mass
Premium
Rs. 600 – Rs. 3,000 29%
28%
Rs. 300 - 600
Value retail

Mass Economy Mass premium Premium Luxury

Upto Rs. 300
Source: VC Analysis, Industry research, online research

• Market segments based on pricing point behave • The value and economy segment is dominated by
differently & have different growth drivers private label brands of retailers & regional brands

• Channel checks indicate that the mass premium • Pan-India brands operate mostly in the mass
segment is the most immune to a slowdown considering premium & beyond segment
the target segment which includes aspirational buyers
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 Consumer preferences varies across the key categories
Menswear market split Womenswear market split

20% 14%
27%
6%
7% 21%

8% 22% 65%
16%

Shirts Trousers Denimwear T shirts

Ethnic Innerwear Others Ethnic Innerwear Others
Source: VC Analysis, Industry research, online research

• Menswear segment is dominated by work-wear and casual wear; more akin to being classified as western wear

• Pockets of demand & consumer preferences very different across categories – For e.g.:
• Indian wear is dominated by womenswear (~90%) whereas the western wear market is dominated by menswear
• The brand landscape of companies in the universe also mirrors this (presented next slides)

• Fastest growing segments & segments which have seen new entrants include casual wear (men), denims, active
wear, innerwear and western wear (women)
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 Landscape of menswear brands across categories/segments
Ethnic Casual Formal

Luxury

Premium

Mass
Premium

Value

Source: VC Analysis, Industry research, online research; List only illustrative and not exhaustive

• Ethnic wear sees limited proliferation beyond regional brands

• Casual wear and formal wear sees most penetration

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 Landscape of womenswear brands across categories/segments

Luxury

Premium

Mass
Premium

Value

Source: VC Analysis, Industry research, online research; List only illustrative and not exhaustive

• Ethnic wear sees presence of several regional brands & a few pan-India brands; the latter expected to increase given
the widespread adoption of ethnic wear as workwear

• Western wear segment very concentrated in the mass premium & above segments which also indicates relatively
fewer shoppers vis-à-vis other segments
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 What has changed the game for branded apparel?

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 Time to scale has been cut short for new entrants
Brands with limited vintage seen ramping up
1600 • Ethnic wear typically takes
longer to scale; regional
1400 Raymond
competition is one of the
1200 Zara Lux
reasons

1000 H&M US Polo Allen Solly Dixcy • Casual wear the fastest
and most tenable to
800 online, and this has seen
Roadster Manyavar Blackberry
Biba scale
600 Lee Cooper Monte Carlo
W
400
Pepe • Private labels of large
HRX Aurelia retail channels have seen
200 Bewakoof Kalanikethan sale faster (exclusive
CK
GAP Forever New labels also)
0
0 5 10 15 20 25 30 35 40
Source: VC Analysis, company reports, online sources, VCC Edge

a
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 Established brands and new brands have seen scale over the past
few years

Sales CAGR (3 – 4 years)

41%
• Brands that are relatively established and have taken
10+ years to grow to 500/1,000 Cr. have also grown at
29% 27% 28%
24% 24% a high rate despite the high base and competition
23%

• Omni-channel approach to buying, demographic and

macro factors also contribute to this

• Not only are the new brands growing fast, so are the
aLL Bare Indigo Dixcy Biba Manyavar Zara
nation
existing ones
Source: VC Analysis, company reports, online sources, VCC Edge

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 Flow of private capital has fuelled growth
Some recent transactions
Brand/company Segment $ Mn Period • Growth stage capital seen across categories of
Bewakoof.com Value - economy 11 2019 branded apparel (Ethnic, work-wear, casual wear and
Universal Sportsbiz Mass premium 30 2018 innerwear)
TCNS Clothing Mass premium & Premium 140 2016
• Online retail has seen large transactions (likes of
Arvind Diversified 118 2016
Myntra, Jabong and Snapdeal) over the past decade
FLF Diversified 80 2019
Citykart Value retail 15 2019
• Shift seen in private capital moving more towards
Bazaar retail Value retail 50 2018 growth/late stage funding vs. early stage funding
Fabindia Ethnic wear 49 2019
Dixcy Innerwear 125 2017
SHR Lifestyle Ethnic wear 11.5 2019
Jaypore Ethnic wear 18 2019
Source: VC Analysis, company reports, online sources, VCC Edge

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 Emergence of online as a strong channel & marketing medium

Online as a medium Reach Engagement

Online % of sales
• 900 Mn consumers expected to be online by 2021
14% 15%
• Brands are building more engagement before & after
7%
point of sale
4% 4%
• Newer brands on social media have been able to do as
well or better in garnering followers across some
Page Bata Madura Arvind TCNS platforms
Brand Instagram followers
BIBA 278,000
• Large and established brands across apparel have a
W 216,000
dedicated online strategy
Shoppers Stop 146,000
The Label life 281,000 • Omni channel as a theme (online + offline; multi-
Wrogn 204,000 format) is well accepted now
Source: VC Analysis, company reports

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 Increasing focus on private labels by retailers
• Private label products see higher
profitability and present an organic
% of sales customer base to cater to for large retailers

96% • Increased from 80% to 96% for Lifestyle;

holding at 40% for FLFL despite increased
63% sales; Pantaloons moved up by 500 bps over
the last few years
38% 39%
30%
23% • Private label mix typically at 25% - 30% for
10% global retailers

SSL Central Westside Pantaloon Myntra Lifestyle FLFL • Puts pressure on brands that have
Source: VC Analysis, company reports concentration of large retailers

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 Industry Dynamics

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 Key variables that impact companies’ financials

Scale

Channel and inventory management

Unit economics – rentals, commission

and discounts

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 Scale critical to achieve profitability
Revenue V/s EBITDA
35%
Vedant

30%
Kewal Kiran
25%
Adidas
TCNS Lux
20% BIBA
Fab India
Indian Terrain
Rupa Inditex
15% Pepe Dollar
Otto
AND Mohan
10% Credo Dixcy
Tommy Soch
Nike
Raymond
5%

0%
2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000
Revenues in Rs. Mn. Source: VC Analysis, company reports, VCC Edge; As per latest available information

• Turnover of Rs. 250cr. appears to be the inflection point

• Scale is largely linear with few outliers. Sub Rs. 400cr. companies’ EBITDA 8-15%.

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 Channel mix influences financials significantly

Footfalls Conversion Display potential Channel Margin Major Costs Inventory

Very High – Large Rentals, employee

EBO Medium High None On-books
no. of SKU and discount

Very High (35-40%) Commission and

LFS Very High Medium to High High SOR
commission discounts

High (25-30%) Commission and

MBO Medium to high Low Medium SOR/ out-right sale
commission discounts

Online Typically high but Commission and

MP
High Low Very High (30-55%) SOR/ out-right sale
difficult to control discounts

Online Very High – Large

Low Low to medium None CAC and discounts On-books
site no. of SKU

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 EBITDA build-up of some large apparel brands and retailers

120%

100%
9% 7% 9%
15% 15%
22% 13% 8% 22%
80%
16% 4%
10%
6% 8%
1%
12%
14% 25%
6% 1%
60% 0%
11% 11% 10%
16% 4%
15%
40% 13%
64%
50% 48% 48%
20% 42% 38%
34%

0%
Page Industries Trent Aditya Birla Retail Future Lifestyle and TCNS Clothing Lux Industries Kewal Kiran Clothing
Fashion

RM Costs Employee Costs Royalty Costs Sub-contracting Costs Advertisement Costs Rental Costs Selling & Distribution Costs Other Costs EBITDA

Source: VC Analysis, company reports

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 Working capital intensive business
WORKING CAPITAL TRENDS WORKING CAPITAL INTENSITY
Inventory Days (LHS) Receivable Days (LHS) 200 38%

Net Working Capital Days (LHS) 180 36%

Increase here
200 160
attributable partly 34%
180 to GST 140
32%
160 120
140 30%
100
120 28%
80
100 26%
60
80
40 24%
60
20 22%
40
20 - 20%
FY15 FY16 FY17 FY18 FY19
0
FY15 FY16 FY17 FY18 FY19 Revenue (INR billion, LHS) NWC/OI (%, RHS)
Data above represents aggregated numbers of 12 listed branded apparel companies and large format retail; Source: VC Analysis, company reports

• Working capital intensive led by high receivable and inventory days. Both are functions of channel mix and policy.

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 Inventory management remains the key risk in the business
The inventory challenge Liquidation Strategies

• Omnichannel stocking requirements

• Inventory obsolescence risks - Fashion season-based stock End of
Season
• Holding costs – warehousing requirements Sale
• Prevalence of Sale returns – online / LFS channels
Online
sales

Inventory Holding (Days)

Lot Sales

87 The ‘Fast fashion’ solution

178 • Faster response to changing consumer preferences. Designs not
256
tied into seasons.
• Zara, H&M and brands have been the pioneers and have built a
large supply chain to meet their needs.
• Quick inventory turnover and the large reduction in inventory
Zara ABFRL TCNS holding period.
Source: VC Analysis, company reports

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 Companies at low leverage despite the high working capital intensity

Revenue V/s Debt:EBITDA

5.0
Tommy
4.5
Raymond
4.0

3.5

3.0 Otto

2.5

2.0
Soch Lux
1.5

1.0 Indian Terrain AND Rupa

Pepe Fab India
0.5 Credo TCNS Adidas
Kewal Kiran BIBA Mohan Vedant Dixcy Dollar Inditex
0.0
2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000
Revenues in Rs. Mn. Source: VC Analysis, company reports, VCC Edge; As per latest available information

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 Financial metrics across the spectrum

Revenue Average Median Median Median Median Median Median

Scale ‘Cr. Revenue EBITDA Inventory Debtors Creditor Cash cycle Gearing Debt:EBITDA
<100 72 2% 87 98 48 137 0.76 -0.34
100-500 373 10% 88 113 52 149 0.21 0.70
500-1000 703 11% 91 88 44 135 0.02 0.05
>1000 2090 14% 151 25 81 95 0.23 1.07
Source: VC Analysis, company reports, VCC Edge; As per latest available information

• Very thin EBITDA margin to ~14% as we move to the largest players.

• Working capital cycle improves with shifts to inventory from debtors.

• Highest revenue bucket also includes LFRs, resulting in higher average debt owing to capex and stock
requirement

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 Credit approach for this ecosystem

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 Underwriting framework for the sector

Brand strength Sales growth forecasting

Vintage, Geographic reach, Category Market Category growth potential, channel
share, marketing ROI expansion strategy, new brands / extensions

Design & Sourcing Profitability

In-house design capabilities, vendor Gross margins, Discounting, Commissions,
relationships, cost control Rent to revenue

Working capital management Governance

Ageing of inventory, Sales returns analysis, Reputed investors, Strong board, second line
creditor support of management, internal controls

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 What KPIs matter in the ecosystem

KPI Ideal range Remarks

Cost to MRP Multiplier >4x Higher the multiple, higher the pricing power and / or control
on costs
Commissions 30 – 35% Large Format Stores charge average Commissions of ~35%.
Higher commissions will be drag on margins
Gross Margins 50-60% Revenues are booked net of commissions and hence product
margins of ~55% are ideal
Discounts 5 - 10% Full price sell throughs are the key metric to track. The duration
and quantum of discounted sales through the year.
Marketing cost 5 – 7% Brand building – under / over investment is detrimental

Returns 5 -10% LFS / Online sales through the ‘Sale or Return’ mode can
increase product returns which have to be managed again
Inventory days <150 days Given the credit period available from suppliers, higher
inventory / debtor period will result in higher debt
Source: VC Analysis
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 Financial Adjustments

Revenues Reported net of commissions

Discounts Reported as selling expenses

Returns No provision for returns

SOR debtors Inventory shown as receivables

Ind AS 115 & 116 Inflated EBITDA

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 Learnings from past failures in the sector
Learning-s from failures – Some Examples
INDIAN Brand failures follow either of the following axes

• Rapid unravelling of operations due to erroneous

strategy, funding or governance issues

• Gradual demise of brand due to demand issues

Indian / international experiences

• International bankruptcies largely due to demand

INTERNATIONAL
issues and competition

• Indian defaults mainly due to governance – like

other sectors

Source: VC research, online research

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 Case Studies – Apparel sector defaults

Case in point: Reid & Taylor India

• S Kumars Nationwide had licensed the Scottish brand in India and went on an advertising spree with Pierce
Brosnan and Amitabh Bachchan

• The company started facing demand issues post the global economic slowdown which also coincided with the
ready made formalwear availability in India. This against high marketing and rental costs resulted in large losses

• The banks had taken control of the company and referred to NCLT. The Resolution Professional ad unearthed
frauds to the tune of Rs 3,500 crore with respect to wrongful related party transactions.

Case in point: Provogue India

• Rampant expansion till 2014 reaching a network of 100+ EBOs

• Fire in factory in 2014 – allegations of inventory / insurance fraud. Demand slumped post disruption in supply
to the market

• Winding down of sales resulting in very large inventory losses. Company went into CDR / SDR post mounting
losses. Was dragged to NCLT which has ordered the entity to be liquidated.
Source: VC Analysis, online sources
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 Outlook and some questions to be answered

Long term growth fundamentals remain Consolidation of brands or channels?

intact

Brands vs. Channels; where does the

Expect to see more new entrants on the
bargaining power settle?
back of market/category/channel
expansion

Is market relatively insulated from a

Margin pressures will continue to stay; slowdown?
inventory and channel management
continue to remain critical

High brand mortality?

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 Thank you

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