Professional Documents
Culture Documents
Edel Invest
B r a n d s Research
November 2015
Branded Apparel
"Branding a Growth Story"
Raj Gala
Research Analyst
+91 (22) 4088 6137
raj.gala@edelweiss.in
Kshitij Kaji
Research Analyst
+91 (22) 4019 4736
kshitij.kaji@edelweissfin.com
Branded Apparel
Raj Gala
Research Analyst
+91-22- 4088 6137
raj.gala@edelweiss.in
Kshitij Kaji
Research Analyst
+91-22-4019 4736
Kshitij.kaji@edelweissfin.com
Executive Summary
Branded apparel: Potent catalysts in place to spur exponential surge
Indias apparel industrys growth story is set to gain further heft by entry of marquee global brands,
sharpening focus of big domestic business houses and the online revolution kick started by e-commerce
players. The ensuing substantially higher scale of investments and competition are anticipated to fuel faster
growth. Benign inflation and GDP spurt are bound to induce consumers to loosen their purse strings,
boosting discretionary consumption over the medium term. Moreover, favourable demographics (younger
population influenced by western culture), improved affordability & willingness to spend on ones looks &
image, higher GDP per capita spending on apparel, shrinking unorganised sector pie and a burgeoning
middle class palpably brighten the domestic branded apparel industrys long-term outlook. Ergo, we
estimate branded apparel to clock 10-12% CAGR over 2014-19 driven by jump in volumes as well as
realisations. We envisage the share of branded garments in readymade garment segment to catapult to 4648% in 2019 from ~35% in 2014.
Mega trends to boost scale and profitability of players
Changing consumer preferences & incomes, altering business dynamics from traditional season-based
fashion to fast & trendy fashion, among others, are heralding a paradigm shift in the domestic apparel
industry. The Indian middle class, traditionally less fashion and brands conscious, has become fashion savvy
and developed strong brand loyalty. Cash registers of relatively minuscule and obscure foreign as well as
domestic brands have started ringing as they have gained visibility in the modern retail environment.
Moreover, healthy competitive rivalries have ushered industry consolidation, differentiation, design
innovations, manufacturing process improvements, distribution platforms, etc. The online revolution kick
started by e-commerce players has been a definite gamechanger that has single handedly improved
fortunes of small branded apparel players by enhancing their distribution reach. We perceive these enabling
factors as harbingers of exponential surge in scale and profitability of Indian branded apparel players.
Outlook: Right product positioning, low debt, high margin, efficient WC players have winners edge
Indias branded apparel industry is highly fragmented, right from production to retail, which has been a
major roadblock curtailing scale and profitability of businesses. In our view, strong brand, vibrant
distribution network, robust supply base and right product positioning are mandatory ingredients to
enhance profitability of branded apparel players. Hence, from the basket of domestic players, we prefer
businesses with low financial leverage, efficient working capital management and high margins & RoCE. We
initiate coverage on Siyaram Silk Mills with BUY. We remain positive on KKCL, Indian Terrain, Arvind and
Madura Fashion.
Branded Apparel
Mega Trends
Mega trend #1: Changing consumer trends and preferences
In apparels, many new trends are apparent like rising demand for readymade garments is replacing stitched
clothes. Also, price sensitivity has been replaced by quality, brand recall and aesthetics. A younger fashion
conscious population, higher comfort level in western wear, entry of foreign brands and higher penetration of
organised retail are driving preference for casual western wear. The Indian middle class, traditionally less fashion
and brands conscious, has become fashion savvy and developed strong brand loyalty. Womens wear in India is
highly fragmented with organised retail accounting for mere 5% share and is currently dominated by stitched
ethnic wear (salwar kameez and saree). However, rising share of women in work force will spur demand for readyto-wear branded western and ethnic wear. Brands such as Allen Solly and Van Heusen, earlier dedicated exclusively
to mens wear, have now launched a range of womens western wear. Womens ethnic wear is also seeing gradual
shift from unbranded to private labels.
Mega trend #2: Fast fashion creating innovative disruption
Fast fashion implies quickly capturing the latest fashion and catwalk trends and replicating them in a retail format.
This requires an efficient supply chain and quick & inexpensive designing and manufacturing. This philosophy of
quick and outsourced manufacturing, replicating latest designs at affordable prices with a short shelf life, is used
by some of the biggest and most successful international apparel brands such as H&M and Zara. As new products
are launched every week, existing products have a short shelf life, inducing shoppers to visit stores often,
generating higher volumes. As the inventory is fast moving, the need to discount products to clear out stock is low,
keeping margins stable. Zaras strategy of clustered suppliers and designers close to its headquarters helps it move
from design to display in less than 2 weeks and, therefore, it is hailed as the leader of the fast fashion retail
revolution. In India, fast fashion is more women-centric and it has been a huge success, evident from the laudable
performance of fast fashion players such as Max Retail, Westside and Zara. Pantaloon too is betting heavily on it.
Mega trend #3: Modern retail key to success
Earlier, the Indian textile industry was fragmented with only a fraction of the market penetrated by organised
retail. The balance was operated by small, independent retailers with 500 sq ft trading space fragmented across
sub-segments, offering only locational convenience to customers. However, proliferation of malls, high streets,
large format stores and multi-brand outlets in metros has spurred preference for branded apparel. Relatively
minuscule and unknown domestic brands started growing rapidly as they gained visibility in the modern retail
milieu. Their success prompted many international brands to enter India. Recent years have seen increasing
traction in organised retail in tier 1, 2 and 3 cities. Modern retail has focused on wide scale expansion. Branded
apparel players opt for the franchisee format to grow, as franchisees operating on reasonable scale with control
over their working capital are capable of generating free cash flows for a longer period.
Mega trend #4: E-commerce revolution a blessing in disguise
Due to saturation of available retail space and infrastructure and operational challenges, most retailers had to look
for other avenues to reach out to consumers. E-commerce provides this platform anchored by rising internet
penetration and jump in the number of Indians owning an internet-enabled smart phone. E-commerce offers
consumers attractive discounts on good quality trendy products, a larger bouquet of products & brands to chose
from, convenience of cash on delivery and ease in returning products. The online retailing market is expected to
grow to USD44bn by 2018 (USD13bn in 2014) with apparel being one of the biggest beneficiaries (31% online retail
presence already). E-commerce also helps e-tailers in real-time consumer data analytics. These analytics involve
identifying consumer trends which are then combined with other indicators such as income levels to devise
customised offerings, helping e-tailers capture latest trends, accurately target customers and continuously
innovate to stay ahead of competition.
Branded Apparel
Apparel Brands in India
Luxury
Premium
Value/Mass
Branded Apparel
Indian branded apparel - Story in a nutshell
Indias GDP and GDP per capita to increase
740
804
1050
138
Australia
36
377
454
781
1221
Canada
2020E
2015
2019E
5.0%
2018E
0
2017E
5.5%
2016E
500
2014
6.0%
2013
1,000
2012
6.5%
2011
1,500
1080
Japan
1,522
1643
EU-27
7.0%
USA
2,000
Russia
7.5%
Brazil
2,500
China
2,672 8.0%
India
3,000
2025
50%
44%
34%
75%
32%
30%
21%
18%
31%
23%
15%
55%
9%
8%
65%
Japan
USA
China
Europe
India
Indonesia
45%
35%
1950 1960 1970 1980 1990 2010 2020 2030 2040 2050
Non - Working Population (India)
Aged 24 and under
Aged 60+
12%
12%
7%
18%
12%
10%
6%
42%
59%
86%
4%
20%
75%
46%
20%
2000-05
2005-10
2010-15
Essential Consumer Spend
1995
2005
Low Income
2015
Middle Income
2025
Affluent Class
Branded Apparel
Indias personal disposable income growing steadily
3500
3,045
3000
43
2500
1,939
2000
27
1500
17
787
1000
424
500
0
2005
2010
2015
2020E
2009
2014
43.9
2%
11%
2%
Electronics
31.4
5.9
4.4
7.9
Apparel
7%
22.4
47%
16
13.6
2019E
Books
Baby products
8.9
Personal Care
31%
Others
47
37
33
Formal wear
14%
Casual wear
23%
Denim
14%
16
Kids
7
6%
25%
FY 11
Modern Retail (USD bn)
Ethnic
FY 16
Accessories
Fast fashion
FY 21
13%
5%
Mass fashion
1%
Branded Apparel
Branded Apparel
Contents
Executive Summary ........................................................................................................................................... 1
Apparel Brands in India ..................................................................................................................................... 3
Focus Charts Story in a nutshell ...................................................................................................................... 4
Indian Textile Industry: The Numbers Game ................................................................................................... 11
Textile Value Chain .................................................................................................................................. 12
Readymade Garments Long term Outlook & Overview .................................................................... 13
Branded Apparel Players: Financial Snapshot ............................................................................................. .18
Branded Apparel Segment: At an Inflection Point ................21
Industry Growth Drivers..24
Mega Trends Driving Scale and Profitability of Branded Apparel Players .................................................... 29
Mega Trend # 1: Changing Consumer Trends and Preferences....................................................................... 29
Discretionary Spending Increasing .......................................................................................................... 30
Growing Preference of Casual wear ........................................................................................................ 30
Higher Affinity for Western Brands ......................................................................................................... 31
Womens wear: Branded fashion gaining traction, but still highly fragmented ...................................... 33
Mega Trend # 2: Fast Fashion Creating Innovative Disruption ........................................................................ 34
Inditex (Zara): The pioneer of fast fashion & largest global clothing retailer .......................................... 35
Zara in India ....................................................................................................................................... 37
H&M: The second largest global fast fashion clothing retailer ................................................................ 38
Zara versus H&M ..................................................................................................................................... 39
Fast fashion: Largest segment in India apparel market as well ............................................................... 39
Mega Trend # 3: Modern Retail Key to Success .............................................................................................. 40
Indian Modern Retail Players .................................................................................................................. 41
Maduras Distribution Strategy ............................................................................................................... 41
Mega Trend # 4: E-commerce Revolution a Blessing in Disguise .................................................................... 42
India online retailing market to grow at 40% CAGR with apparel being at the forefront ....................... 42
Indian Apparel Market: At Nascent Stage vs China ......................................................................................... 44
China Apparel Brands .............................................................................................................................. 45
SWOT Analysis: Branded Apparel Segment ..................................................................................................... 46
Branded Apparel
Appendix 1: Why Branded Business? .............................................................................................................. 47
Appendix 2: What is a Brand & Key Traits of a Brand ...................................................................................... 48
Trait # 1: Quality ..................................................................................................................................... 49
Trait # 2: Style/Look & Feel .................................................................................................................... 49
Trait # 3: Price ........................................................................................................................................ 50
Trait # 4: Origin-of- Country ................................................................................................................... 50
Trait # 5: Value Proposition ................................................................................................................... 51
Trait # 6: Brand Positioning .................................................................................................................... 52
Appendix 3: Why Apparel Brands Fail ............................................................................................................. 53
Appendix 4: Most Trusted Apparel Brands 2015 (Brand Equity Economic Times)54
Discounted Cashflow Wisdom Investing ...................................................................................................... 56
Valuation Matrix .............................................................................................................................................. 57
Branded Apparel
Company Section
1.
2.
3.
4.
5.
6.
7.
8.
9.
Branded Apparel
10
Branded Apparel
Indian Textile Industry: The Numbers Game
The Indian textile industry is one of the most important industries for the Indian economy as it accounts for
14% of total industrial production, 13% of export earnings and 4% of GDP. It provides employment to over
4.5 crore directly and 6 crore indirectly, rendering it the second largest job creator after agriculture in the
country. India is the second largest textile producer in the world, the largest producer of jute, second largest
producer of raw cotton, cotton yarn, cellulosic fibre/yarn & silk and fourth largest producer of synthetic
fibre. Also, its handloom capacity is the highest in the world (63% of global pie). It is present across the
entire textile value chain (spinning, weaving, readymade garments and home textiles). The total market size
of the Indian textile industry currently stands at USD108bn.
Domestic
USD 81 bn
Yarn/MMF
USD 20 bn
Fabric
USD 34 bn
Exports
USD 27 bn
RMG/ Apparel
USD 27 bn
Yarn/ MMF
USD 6 bn
Fabric
USD 3 bn
RMG/ Apparel
USD 18 bn
In spite of the size and global positioning, enterprises making up the Indian textile industry are minuscule
and fragmented. While the larger, decentralised and unorganised sector consists of handloom, handicrafts,
sericulture, power looms, the organised sector consists of capital-intensive spinning, apparel and
garmenting. Inspite of the sectors fragmented nature, the outlook is promising. Domestic consumption is
expected to be driven by Indian ready-made garments (RMG) and branded garments as they are gaining
prominence in tier 2 and 3 cities as people develop aspirations for good quality and trendy fashions. The
European GDP improvement, Latin American economic progress and easing of geo political tensions in the
Middle East are set to boost Indias exports.
11
Domestic textile consumption and textile exports are expected to clock ~10% CAGR each. Indias share in the
global textile market is set to catapult from 5% in 2015 to 8.0% in 2020. China is expected to vacate
~USD100bn of textile space over the next 5-6 years due to rising labour costs, appreciating currency, high
energy costs and sharpening focus on domestic market. Countries like India, Vietnam, Bangladesh and Sri
Lanka are likely to be key beneficiaries. While total Indian textile exports are estimated to touch USD60bn
over the next 5 years, the textile market will grow to USD221bn by 2021 from USD108bn. The growth will be
driven by readymade garments, within which branded apparel is expected to grow at 10-12% annually and
be worth ~USD65bn by FY18E.
Branded Apparel
Textile Value Chain
The textile value chain consists of 3 main stages, i.e. a) manufacture of yarn (spinning), b) converting yarn
into fabric (weaving/knitting) and c) converting fabric into RMG/home textiles (garmenting). The process
begins with spinning, where the cotton/fibre is converted into yarn and this is done using spindles. The yarn
is then converted into fabric through weaving or knitting using looms, after which the fabric undergoes
further processing like scouring, bleaching, dyeing, washing, finishing, etc., which yields processed fabric
suitable for manufacturing RMG. The final stage of the value chain involves laying, measuring, cutting,
stitching, etc., before the processed fabric is converted into RMG. Garments are finally marketed through a
range of retail and wholesale distribution channels in the domestic market or exported. Of the above
mentioned stages, home textile is more export focused while yarn, fabric and RMG are domestic focused.
Indian players in the textile space are broadly into the above mentioned stages. While some of the players
are only into one of the stages, others are into multiple stages and many are also involved in the entire
textile value chain. The financial performance of any textile company is heavily influenced by its focus area
in the value chain.
Textile Value Chain
RAW MATERIAL
SPINNING
WEAVING/ KNITTING
PROCESSING
RMG
Laying, measuring, cutting, stitching
processed fabric into a readymade
garment (RMG)
DISTRIBUTION
Readymade garments through
wholesale/ retail/ exports
12
Branded Apparel
Readymade Garments (RMG)
The total size of RMG currently is USD45bn, of which domestic market is estimated at USD27bn, while
exports stand at USD18bn. CY14 clocked robust growth on account of orders shifting to India from
Bangladesh due to labour safety concerns in the latter. Also, demand from major importing countries posted
an uptick, catapulting exports 19% in CY14.
RMG segment break-up
RMG
USD 45 bn
Domestic
USD 27 bn
Men
USD 13 bn
Women
USD 11 bn
Exports
USD 18 bn
Kids
USD 2 bn
US
USD 4 bn
EU
USD 6 bn
Others
USD 8 bn
In CY15, domestic volumes are expected to rise 6.5% versus 6.0% growth in CY14, but realisations are
expected to remain flat as apparel manufactures will pass on the decline in raw material costs to consumers.
This will lead to slower growth of 5.5% versus 7.0% in CY14. Exports are also expected to slacken in CY15
with 6-8% volume spurt versus 14% in CY14 due to sluggish demand from Europe and US, strong rupee and
shifting back of orders to Bangladesh and Vietnam.
13
Branded Apparel
Readymade Garments: Long-term Outlook
The long-term trend for RMG looks promising. Domestic RMG is expected to clock 10-12% CAGR, primarily
driven by volume spurt and a mildly positive realisation growth. Favourable demographics, rising incomes
and greater penetration in tier 2 and 3 cities will drive volumes. Lower raw material prices (cotton and manmade fibres) and improved demand will boost margins. Exports are expected to remain subdued at 6% CAGR
due to the same reasons as CY15. However, exports can improve with a weaker rupee, increase in import
demand from the US, shifting of orders from Bangladesh and growth in non-traditional markets such as
Australia, Japan and UAE (Others) that are set to account for more than half of total exports, up from 21% in
CY09.
Domestic RMG market to grow at a CAGR of 10 12%
43
27
17
2009
2014
2019E
6
2
2009
RMG Exports to USA (USD bn)
2014
RMG Exports to Europe (USD bn)
2019E
RMG Exports to Others (USD bn)
Source: CRISIL, Edel Invest Research.
14
Branded Apparel
Domestic Readymade Garments: An Overview
Mens wear
The mens apparel segment clocked 10% CAGR over CY10-15 and is estimated to post 8% CAGR from
USD13bn currently to USD19bn in CY20 with urban and rural segments expected to post CAGRs of around
7.5% and 6.5%, respectively. The mens wear segment is dominated by shirts and trousers, which account
for 32% and 25% of RMG mens segment, respectively. Although sale of shirts will continue to register 6.5%
CAGR, its share is expected to fall to 30% by CY19 as casual wear gains more traction with new variants such
as smart casuals and party wear. Higher preference for readymade shirts will buoy growth. The share of
trousers though is expected to increase to 27% by CY19 at a CAGR of 7% due to shift from stitched to
readymade trousers due to a wider choice of brands, designs, colours, fittings and fabrics in the readymade
category.
Womens wear
The womens apparel segment has clocked 9.5% CAGR over CY10-15 and is expected to post 8.5% CAGR
from USD11.5bn currently to USD17bn in CY20 with urban and rural segments registering about 7% and 6%
CAGR, respectively. Womens wear is dominated by traditional wear (saree and salwar kameez) which
account for 39% and 21%, respectively, but there is an emerging preference for casual western wear.
Although the share of saree in the womens apparel pie is expected to reduce to 35% in CY19, the share of
organised retailers is expected to rise with the introduction of designer retail shops (Ritu Kumar and Satya
Paul). The readymade modern salwar kameez segment is expected to post CAGR of 7% due to reducing
preference for stitched clothes, rural demand and rising number of working women in urban areas. Private
labels are making space for themselves in salwar kameez with brands such as Biba, W, Seven East and
private labels of Shoppers Stop, Pantaloons and Westside.
Childrens wear
Childrens wear segment is expected to grow from USD2.0bn in CY14 to USD2.7bn in CY20 at a CAGR of 6%.
The dominant segments are frocks and baba suits with 54% and 36% market shares, respectively.
26%
32%
Shirts
T-shirts
11%
25%
Saree
21%
39%
Trousers
Jeans
6%
3%
Salwar-kameez
Innerwear
16%
T-shirts
Others
Others
21%
15
Branded Apparel
Indian innerwear segment
Innerwear is one of the high growth categories in the apparel market as it has turned from a traditionally
utilitarian item to an essential fashion staple. The Indian innerwear market stood at USD2.7bn in FY13 and is
expected to clock 13% CAGR to USD5.0bn by FY18 and USD9.1bn by FY23. The womens innerwear market,
driven by value-added products, contributes around 60% to the overall innerwear market and is expected to
post CAGR of 15%, while the mens innerwear segment contributes the balance and is expected to post
CAGR of 9%. A vast majority of the innerwear segment is unorganised, especially womens innerwear. The
Indian innerwear market is sub-divided into super premium, premium, medium and economy segments
based on product pricing.
Indian innerwear industry (USD bn)
Market Segmentation
9.16
Men,
40%
4.96
2.73
Women,
60%
2013
2018
2023
Source: Edel Invest Research.
In mens innerwear, younger consumers in metros primarily fall in the premium segment, while people from
Tier I choose between premium and mass segments. The premium and mid-price segments are expected to
post higher growth as the Indian consumer is getting more fashion conscious and seeking higher comfort,
besides a strong brand name. Demand for variations like seamless intimates, plus size inner wear, body
shape enhancers, etc., is increasing in urban areas.
Womens innerwear is considered more dynamic, with possibility of design variations and new products. The
segment has a higher unorganised share as brand promotion and advertising activities are low. 80% of
womens innerwear market consists of mid-price and economy segment products. However, like mens
innerwear, the mid-price and premium segments are expected to grow rapidly as more players tap this
segment and reduce the dominance of unorganised players by introducing brands.
Men's Innerwear
Women's Innerwear
2%
Super Premium
5%
Super Premium
12%
15%
Premium
Premium
56%
30%
44%
Mid
Mid
36%
Economy
Economy
Branded Apparel
Fabric
RMG
Home Textiles
High
Medium
Low
High
High
High
Low
High
High
Medium
Medium
High
Low
Medium
Low
Medium
Threat of substitutes
High
Medium
Low
High
Entry barriers
Low
Medium
High
Low
Financial Ratios
Yarn
Fabric
RMG
Home Textiles
Asset Turnover
0.8 - 1.8 x
1.0 - 2.4 x
1.2 - 2.8 x
1.2 - 2.2 x
EBIT Margins
9 - 20%
8 - 23%
8 - 25%
8 - 20%
ROCEs
7 - 22%
11 - 32%
11 - 60%
10 - 45%
Growth in the coming 5 years is more likely to be driven by urban consumption of branded apparel spurred
by economic resurgence, urbanisation, higher discretionary spending, digital push and rise in penetration of
organised retail. Organised retail is estimated to post 18% CAGR as brands expand reach to tier-2 and 3
cities through exclusive and multi-brand retail outlets. Branded players in urban areas earn higher unit
realisations as they have the power to charge double than rural areas in return for higher quality, latest
trends and a well known brand name. Therefore, branded players in the organised retail segment have the
highest margins and highest profitability.
17
Branded Apparel
Branded Apparel Players: Financials
The Indian branded apparel industry, currently USD10bn in size and growing at 10-12% p.a., entails immense
growth opportunities for the organised segment,. As attractive as this sound, generating good returns in the
industry is quite difficult. The level of fragmentation, right from production to retail, is high and can limit the
scale of business. In order to generate superior profitability, branded apparel companies not only need to
have a strong brand and distribution network (like FMCG peers), but also need to build a strong supply base
and the right product positioning.
Siyaram
Raymond
Arvind
Madura
Zodiac
KKCL
Indian
Terrain
Zara (Trent)
1,496
5,341
7,851
3,735
394
416
290
729
17%
17%
22%
<75%
52%
100%
100%
100%
18%
16%
19%
25%
5%
18%
24%*
50%*
Operating Margin
12%
8%
13%
12%
6%
24%
12%
19%
5%
2%
5%
NA
2%
16%
6%
12%
ROCE
18%
8%
13%
72%
4%
31%
24%
37%
Debt/ Equity
0.7
4.4
1.2
NA
0.2
0.1
0.3
NA
Ad Spend (% revenues)
3%
5%
1-2%
4-5%
2-3%
4%
4%
0%
EBOs
200
1017
796
1850
129
316
105
16
% EBO Franchisees
90%
<80%
81%
<75%
0%
100%
70%
100%
Page
Maxwell
Rupa
Lovable
1,543
261
973
172
<75%
<75%
<75%
<75%
35%
4%
13%
15%
Operating Margin
21%
11%
14%
14%
13%
2.6%
7%
9%
ROCE
60%
12%
23%
11%
Debt/ Equity
0.4
1.0
0.6
0.3
Ad Spend (% revenues)
4-5%
2%
6-7%
5-7%
EBOs
201
19
0
Source: Company, Edel Invest Research.
Page and KKCL have the highest operating and net profit margins and the highest RoCEs due to lower brand
penetration in innerwear and jeans, respectively, outsourced manufacturing and a franchisee model which
gives higher asset turnover and an efficient working capital management system. Also, these brands have
spent on marketing and creating high quality products which have a strong brand recall and customer
loyalty. The womens ethnic wear segment continues to be dominated by the unorganised retail sector.
Mens formal wear is a crowded market with many brands, while casual wear is witnessing intense
competition.
18
Branded Apparel
Branded Apparel Financials
Siyaram
50%
Siyaram
25%
40%
Zara (Trent)
Raymond
Zara (Trent)
30%
20%
20%
10%
10%
Indian Terrain
Raymond
15%
5%
Arvind
0%
KKCL
Indian
Terrain
Arvind
0%
Madura
KKCL
Madura
Zodiac
Zodiac
*Zara and Indian Terrain - 4 year CAGR as operations commenced in 2011
10%
4%
3%
Siyaram
12%
14%
7%
3%
Siyaram
Raymond
6%
19%
Arvind
3%
Zodiac
Madura
2%
Zodiac
KKCL
KKCL
Indian Terrain
40%
Zara (Trent)
Raymond
Arvind
9%
Madura
23%
1%
Indian Terrain
45%
Zara (Trent)
19
Branded Apparel
Innerwear Financials
Sales Growth (5 year CAGR)
Page
Page
35%
30%
25%
20%
15%
10%
5%
0%
Lovable
25%
20%
15%
10%
5%
Maxwell
Lovable
Maxwell
0%
Rupa
Rupa
Lovable
6%
Rupa
27%
Rupa
33%
Page
52%
Page
63%
Maxwell
5%
Maxwell
9%
20
Branded Apparel
Branded Apparel Segment : At an Inflection Point
Our analysis of Indias biggest brands that are currently ruling the roost such as Arrow, Louis Philippe, Peter
England and Van Heusen, launched in early 1990s, reveals that initially they struggled to grow due to a
higher share of unorganised retail and lower per capita spending on branded apparel. Brands were not
visible and looks & appearance were immaterial. However, with the introduction of malls and retail
penetration in the mid 2000, brands started gaining prominence in terms of consumer visibility. As the share
of organised retail expanded and footfalls in malls increased, premium brands clocked faster growth. This
pre-empted them to increase their presence in malls over a wider geographical area. Sales of individual
brands touched INR500crore in 2010.
The next high growth phase was driven by heavy discounting on products to capture higher market share
and availability of quality products of world famous brands at lower prices, coupled with a large young
population exposed to western trends and fashions. Brands revenues doubled within 5 years on a higher
base and touched INR1,000crore by 2015.
However, we now anticipate commencement of supernormal growth phase with revenues catapulting 2.5x
on an even higher base. This next phase will be heralded by the digital push and e-commerce along with
spurt in Indias per capita income and a higher per capita spending on apparel.
Big RMG brands set to enter supernormal growth phase
Branded Apparel
Huge Scope for Indian Apparel Brands
In terms of international apparel brands, Nike is currently the largest with 2015 revenue of USD30.3bn. It is
followed by H&M, Zara, Adidas and Polo Ralph Lauren. As can be seen, the size of these brands is huge due
to their vast geographical presence. While Nike and Adidas are more sportswear focused, H&M, Zara and
Ralph Lauren cater to mens and womens formal and casual wear.
Top 5 International Apparel Brands
2015
Rank
Logo
Country
2015 Revenues
(USD Bn)
28.3
30.3
15.3
21.2
9.4
14.8
6.8
14.9
6.6
7.1
USA
Sweden
Spain
Germany
USA
However when one analyzes the biggest Indian apparel brands, their size is nowhere close to the global
counterparts. Intense competition, tepid growth and lower discretionary spending have kept the Indian
branded apparel market subdued. Also, these brands are focusing on only metro cities, leading to
saturation. With brands penetrating into Tier 1 & 2 cities and all the industry growth drivers in place, the size
of these brands can grow exponentially based on their success.
Top 5 Indian Apparel Brands (Only Branded Segment)
2015
Rank
1
Logo
2015 Revenues
(USD Bn)
Name
Madura Garments
Louis Philippe, Van Heusen, Allen Solly, Peter
England
Arvind
Arrow, Tommy Hilfiger, USPA, Gant, Flying
Machine, etc.
Pantaloon
Ragmanch, Ajile, SF, F Factor, Bare Denim, JM
Sport, etc.
0.5
0.3
0.3
Raymond
ColorPlus, Parx, Park Avenue, Raymond
0.1
Zara-Trent JV
Zara
0.1
Source: Company, Edel Invest Research.
22
Branded Apparel
Triggers for next leg of growth
Fastest growing
emerging country in
the world
Middle class to
increase from 18% in
2005 to 59% in 2025E
Fastest growth in
personal disposable
income
Highest consumer
confidence index
globally
23
Branded Apparel
Branded Apparel - Growth Drivers
Sustained GDP surge
In the past decade, Indias gross GDP has grown at an average ~7%. India is currently undergoing a structural
transformation with many positives such as falling interest rate cycle due to dipping inflation, improving
capex cycle, stable political scenario, reducing government deficit and highest consumer confidence index.
This transformation along with new initiatives such as GST and Make in India will help the country clock the
highest GDP growth amongst emerging market economies. According to Planning Commission estimates,
the economy is projected to grow at ~8% during the 12th Five Year Plan (2012-17), which is faster than
China. IMF expects Indias GDP to touch USD3tn in 2019 from USD2tn in 2014, making it the seventh largest
economy in the world.
The government is laying emphasis on the textile industry as it is the largest foreign exchange earner and
the second largest employment provider after agriculture and plays a pivotal role in the countrys economic
development.
Indias GDP growth to see continuous increase over the next few years
2,000
7.0%
1,522
9.0%
7.0%
5.0%
6.5%
3.0%
Canada
UK
China
2.0%
Saudi Arabia
USA
2020E
2019E
2018E
2017E
2016E
5.0%
2015
0
2014
5.5%
2013
500
2012
6.0%
2011
1,000
3.0%
India
1,500
12.0%
4.0%
5.0%
Mexico
7.5%
South Africa
2,672 8.0%
2,500
Australia
3,000
3,045
3000
15.0%
14.0%
11.0%
2500
9.0%
1,939
7.0%
4.0%
4.0%
4.0%
Canada
6.0%
UK
2000
1500
2010
2015
2020E
Mexico
China
South Africa
2005
Australia
Saudi Arabia
India
500
424
USA
787
1000
24
Branded Apparel
Domestic private consumption
Domestic private consumption is a significant component of Indias GDP, unlike other developing economies
such as China, Singapore and most other emerging markets. It currently accounts for more than 60% of GDP.
Domestic private consumption has been increasing over the past 20 years, catapulting from INR3tn in 1990
to INR30tn in 2010. As Indias GDP is expected to grow at closer to 8% in the forthcoming decade,
consumption will play an important role and hence domestic private consumption is expected to touch
INR113tn by 2020. The share of wallet will shift from essential items of consumption towards discretionary
items, brightening the outlook for branded apparel.
Indias domestic private consumption to grow at a CAGR of 12.5%
80
52
60
40
36
53
51
60
56
55
54
64
61
69
2000
1,712
1500
38
1,016
1000
20
500
USA
UK
Italy
Switzerland
Germany
France
India
Korea
Thailand
Malaysia
Singapore
China
500
190
0
2000
2010
2015
2020E
50%
75%
44%
34%
9%
30%
15%
31%
21% 23%
65%
55%
Japan
USA
China
Europe
45%
Indonesia
India
8%
32%
18%
35%
1950 1960 1970 1980 1990 2010 2020 2030 2040 2050
Non - Working Population (India) (LHS)
Aged 60+
25
Branded Apparel
Rapid Urbanisation
Although 70% of Indias population lives in rural areas, better opportunities, saturation of agriculture/rural
opportunities and rising labour mobility have led to migration to bigger cities. Various studies have
forecasted that in the next decade middle class (income of INR2lac10lac) will be the dominant section of
the Indian population. The share of middle class has increased from around 18% in 2005 to 42% in 2015 and
will account for 59% of the countrys total consumption, making it the fifth largest consumer market by
2025. Over the past 10 years, the number of overall households has risen 18%, while those of mid- and highincome families have catapulted 82% and 180%, respectively; low-income households have fallen 16%. This
will lead to development of lower tier cities, which are already growing at a faster clip. Income distribution
mix is projected to change with substantial increase in the number of elite and consuming (middle) class and
erosion of the low income deprived segment.
Rising middle and affluent class
1%
13%
7%
12%
20%
18%
42%
86%
59%
75%
46%
20%
1995
2005
Low Income
2015
Middle Income
2025
Affluent Class
It is forecasted that by 2030, around two-thirds of the Indian middle class will be outside metro cities.
Between 2014 and 2050, urban areas are expected to grow by 404mn and China and India will contribute
more than one third to the global urban population increase. Four of Indias cities with 5-10mn inhabitants
currently (Ahmadabad, Bengaluru, Chennai and Hyderabad) are projected to become megacities in the
coming years, from a total of seven megacities by 2030. Indias urban population stood at 32% in 2014 and is
expected to touch 50% by 2050, As urban consumers have higher disposable incomes and easier accessibility
to a wider range of products, discretionary expenses are set to jump, leading to higher spending on branded
products.
Rising urban population
41.2%
35.0%
32.0%
27.5%
2000
2010
2020E
2030E
26
Branded Apparel
Falling inflation leading to lower interest rates = Higher corporate profitability and rise in urban consumption
Poor demand led to low capacity utilization and high fixed costs led to lower margins
1.4
1.2
1.3
1.04
0.8
25.0%
0.94
19.5%
20.0%
16.9%
15.7%
15.0%
0.8
0.6
0.6
0.4
0.4
0.2
0.72
0.57
2000
2005
0.2
0
2015
10.0%
5.0%
0.0%
2000
2005
2015
Prolonged slowdown with high financial leverage resulted in low PAT margins and RoEs
2000
6.2%
2005
10.1%
2015
2.0%
4.0%
2005
21.0%
2015
5.0%
0.0%
11.1%
6.0%
8.0%
10.0%
12.0%
10.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Going forward, falling interest rates due to lower inflation will spur corporate profitability and urban consumption
Falling interest rates
9.00%
14.0
8.50%
8.50%
8.00%
7.75%
8.00%
6.75%
7.25%
6.50%
12.0
10.0
7.75%
7.00%
6.50%
6.25%
8.0
7.4
5.5
6.0
6.25%
4.0
5.00%
4.50%
4.3
2.0
4.75%
Jul/15
Oct/15
Jan/15
Apr/15
Oct/14
Jul/14
Apr/14
Jan/14
Jul/13
Urban
Oct/13
Jan/13
Apr/13
Jul/12
Oct/12
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Interest Rates
Apr/12
0.0
4.00%
Jan/12
5.50%
8.00%
8.5
7.50%
6.00%
Rural
Branded Apparel
Rising consumer confidence
Consumer confidence is an economic indicator measuring consumer optimism in their personal financial
situation and the overall state of the economy. Their perception is correlated with the spending activity and,
therefore, consumer confidence serves as a key indicator for the overall shape of the economy. Lower
consumer confidence leads to higher saving and less spending. Consumer confidence typically increases
when the economy expands and decreases when the economy contracts. Indian consumer confidence is
continuously rising and is currently the highest in the world, which should result in higher spending on nondiscretionary items such as apparels.
Indian consumer confidence Highest in the world
96
95
87
86
Australia
South Africa
Mexico
Q1FY15
97
Canada
FY14
106
Q2FY15
Q3FY15
Q4FY15
China
FY13
107
Saudi Arabia
121
India
120
107
126
USA
128
132
UK
132
129
Consumer Confidence
28
16%
450
14%
12%
10%
12%
12%
10%
6%
4%
160
80
2000-05
2005-10
2010-15
Essential Consumer Spend
5
2000
25
2009
2015
2020E
2030E
29
Western outfits are expected to outpace growth in traditional outfits due to a younger fashion conscious
population, higher comfort level, entry of foreign brands and higher penetration of organised retail. The
share of t-shirts is expected to rise from 6% currently to 8% in 2019 with about 60% being men's wear. As in
the case of jeans, mens share was 92%, but the women's category is expected to clock robust growth. The
market size for jeans is expected to post around 8.5% CAGR over the next 5 years. Steady growth of jeans
and t-shirts will be supported by companies accepting the 2 as office wear and introduction of casual
dressing on Fridays. While semi formal clothing is expected to gain share over formal clothing in the mens
category, suitability of sarees and salwar kameez for occasions such as marriages and social gatherings will
lead to them to continue to hold prominent positions in the Indian women's wear market. Branded textile
segments such as innerwear, womens ethnic wear and casual wear have very low brand penetration due to
high share of unorganized sector and thus hold highest growth potential.
Low brand penetration segments have huge potential
Particulars
T-shirt and Jeans
Innerwear
Shirts
Trousers
Saree
Salwar Kameez
Brand Penetration
2.9
3.5
4.7
3.5
4.0
2.4
Medium
Low
High
High
Low
Low
Source: CRISIL, Edel Invest Research
30
42%
36%
77%
58%
40%
17%
28%
14%
6%
FY13
FY14
FY15
FY11
FY12
FY13
FY14
139%
63%
100%
50%
5%
-26%
FY12
41%
36%
10%
30%
-48%
-18%
FY13
FY14
41%
35%
25%
21%
FY15
6%
-50%
-100%
FY11
Zara EBITDA Growth
35%
FY12
20%
25%
22%
20%
19%
13%
15%
5%
6%
0%
FY14
FY15
21%
22%
21%
15%
15%
13%
11%
10%
9%
8%
5%
22%
19%
10%
10%
FY13
25%
33%
30%
FY15
56%
89%
0%
8%
-4%
150%
10%
9%
-5%
FY12
29%
26%
23%
14%
14%
5%
0%
FY12
FY13
FY14
FY15
FY11
FY12
FY13
FY14
FY15
31
120,000
100,000
1,000
80,000
60,000
40,000
1200
140
1000
120
800
100
118,000
80
600
450
60
400
30,000
40
550
200
20,000
0
Maxwell
16
20
0
0
Page
130
Zara
Rupa
Number of Dealers (RHS)
Zodiac
Number of EBOs
Source: Company, Edel Invest Research.
FY11
FY12
FY13
FY14
FY15
Page
5.1%
2.5%
3.0%
3.3%
4.4%
4.6%
Lovable
1.7%
4.6%
5.1%
5.9%
2.0%
2.6%
Maxwell
2.7%
4.4%
1.7%
5.3%
1.1%
0.6%
Rupa
7.8%
7.7%
7.0%
7.4%
7.7%
6.9%
Zara
NA
0.5%
0.3%
0.3%
0.2%
0.1%
3.9%
3.2%
2.5%
2.6%
3.4%
3.1%
Zodiac
32
1076
1000
800
600
600
400
277
200
0
Westside
FabIndia
Biba
Source: Company, Edel Invest Research.
Most-profitable global fashion retailers (Inditex and H&M) derive 67% revenue from womens wear.
Realising this, many international and Indian brands such as Allen Solly and Van Heusen, predominantly
catering to men, are creating a separate womens section in their exclusive branded outlets. Pantaloon too
is planning to replicate the success of fast fashion in womens apparel through its existing brands. Womens
ethnic wear is also seeing a gradual shift from unbranded to private labels. Women-centric fast fashion
should be a huge success model as evident in Zaras performance in India.
33
34
18
1.95
15
14
2010
2011
2012
2013
2014
2010
2.65
2.68
2012
2013
2.81
2.18
2011
2014
Zara is one of the pioneers of fast fashion with its strategy of imitating the latest fashion and immediately
placing cheaper versions in stores. Brands like Gucci and Prada are constantly trying to move away from
Zara, but the latter keeps getting closer to them in terms of churning fashionable clothes. Also, as new
fashions enter the market often, Zara is quick to replenish its stores with the latest fashions and hence if one
does not buy the product soon, they may never find it again. The now or never syndrome for a consumer
creates an impulse buy as they are getting high-end fashionable clothes cheap. This model also minimizes
the need of discounting products (only 15% of total sales vs Industry at 30-35%) giving Zara an edge over
others in terms of margins. As fashions are imitated, there is no need to take any fashion bets and this limits
the threat of an inventory loss during a downturn. Zara does not spend on advertising. It believes in
marketing by opening showpiece stores in key cherry picked locations. The company believes in investing
heavily in the beauty, aesthetics and location of the store by positioning it as a high-end store selling cheap
apparel. After domestic success, Inditex adopted a wide penetration approach to tap non European and
emerging markets. It currently has 6,683 stores in over 88 countries.
21%
44%
4,607
5,044
5,527
6,009
6,340
2012
2013
6,683
Spain
14%
America
19%
Emerging Markets
2009
2010
2011
2014
Number of Stores
Source: Company, Edel Invest Research.
35
Design creation at HQ
In-house Maufacturing
Distribution
2 days
4 - 8 days
2 days
Inditexs success is due to its connection between stores, in-house designers and its factories. Twice a week,
a local store manager will send an order to HQ based on sales data (data analytics) and communication with
shoppers. The commercial team will then compile the order, adding new products and balancing out
demand with other stores, before sending it to Inditexs manufacturing hub. The commercial team will work
with designers to develop new products to meet new trends. New fashions are produced in relatively small
batches, so flops can be removed after first appearance and hits can be repeated, helping inventory
management. Every single item of clothing that Zara sells comes through Spain. This system helps the
product range evolve rapidly at minimum cost.
Zaras wide penetration and centralized distribution from Spain
36
2011
2012
2013
2014
2015
Sales
147
260
409
571
729
Growth
77.0%
57.5%
39.5%
27.6%
COGS
66
131
209
317
395
Gross Profit
80
128
200
253
333
EBITDA
EBITDA margin %
36
86
90
74
140
25.0%
33.2%
22.0%
13.1%
19.2%
Inspite of its late entry in to India, Zara has the highest profits and margins amongst competitors with the
least amount of stores and no advertisement spend. It has followed the same strategy in India of opening
big elegant stores in key locations and imitating high-end luxury fashion at cheaper prices by constantly
replenishing its collection with the latest trends. Its efficient inventory management, lower advertisement
spending, fewer number of stores and full price sales have helped it post highest margins and profits.
Performance of western brands in India
(INR Cr)
Sales
Profit
Sales
Profit
Sales
Profit
Store
Count
(2013)
Benetton India
380
430
523
666
Inditex - Trent
149
22
259
38
405
45
198
-9
282
-3
375
-17
29
81
140
189
59
2011
2012
2013
Due to its phenomenal success in such a short time, many retailers and mall developers have shown interest
in inviting Zara to their malls as it is a crowd puller. Inditex also follows a process of aggressive store roll outs
once existing stores gain acceptance. The company expanded rapidly in China from 44 stores in January
2010 to 165 stores by 2012. Zara currently has 16 stores in India and is planning to expand to non-metros as
well as tier 2 cities.
37
13.0
13.2
2010
2011
14.5
15.4
2012
2013
17.4
2014
2.20
2010
1.90
2.02
2.05
2011
2012
2013
2.30
2014
The company follows the conventional business model wherein it designs products, but does not
manufacture them. Designing involves taking fashion bets by creating new fashions, fabric and
manufacturing is sourced from lower cost centers like China and India, and products are priced cheap to
generate higher volumes. H&M emphasizes on reducing costs in products which it compensates for by
advertising aggressively and with high discount sales. It believes in deep market penetration and hence has a
narrow geographical exposure with Europe being the primary focus. However, it is gradually expanding to
other countries and opened its first store in India on October 2, 2015, in New Delhi.
H&M sales by geography
16%
Europe
1,988
2,206
2,472
2,776
3,132
3,511
America
13%
72%
Emerging Markets
2009
2010
2011
2012
2013
2014
Number of Stores
Source: Company, Edel Invest Research.
H&M in India
H&M opened its first store in India at the Select Citywalk mall in New Delhi on October 02, 2015, and
clocked a staggering INR1.75crore in sales on opening day, almost double of what Zara sold on its inaugural
day 5 years ago at the same location, according to reports. This translates into an average billing of about
INR27,000 every minute during the 11 hours the store was open or the equivalent of 5,000 pairs of jeans
and 10,000 tops sold. H&M made in one single day what a smaller store like Puma or Adidas would make in
a year. 2,500 eager fans had queued up outside overnight to be among the first to get their hands on H&M's
merchandise.
38
H&M
Sourcing of fabric
Manufacturing
Design
Pricing
Batch sizes
Discounting
Advertising spend
In-house manufacturing
Imitate latest fashions
Higher price points
Small batch sizes unless high demand
Strive for maximum full price sales
No advertising spend
Store Locations
Store aesthetics
Area of focus
Market penetration
23%
14%
6%
25%
13%
5%
Formal wear
Casual wear
Denim
Ethnic
Kids
Accessories
Fast fashion
Mass fashion
1%
39
47
37
33
17.5%
16
7
FY 11
FY 16
FY 11
FY 21
FY 16
FY 21
The industry seized the opportunity and there was a change of preference towards branded apparel with
the introduction of malls, high streets, large format stores and multi-brand outlets in metros. Recent years
have seen an increasing traction in organized retail in tier 1, 2 and 3 cities.
Retailers revenue by cities
Geography
Lifestyle
Pantaloons
Shopper Stop
Trent
Central
Tier-1
71%
39%
49%
40%
37%
Tier-2 & 3
33%
61%
51%
60%
63%
Modern retail has focused on wide scale expansion, leading to subdued margins. One vital metric of this
format remains the throughput of each store. Therefore, initially, one would pilot it out to test different
markets, sizes and towns. Once past the pilot stage, a definitive business plan is drawn up around the
opportunity. Generally, retail players opt for franchisee formats as franchisees operating on reasonable
scale with control over working capital are capable of generating free cash flows for a longer period. The
table below enlists details of Indias biggest retail players who have created a market place of their own
brands and other brands to allow consumers to shop from under one roof.
40
Future Retail
12,293
1,068
3
8%
272
11
1,117
122
26
7%
Shoppers Stop
2,859
186
37
13%
72
3.8
752
32
3.8
5%
Trent (Standalone)
1,323
118
74
5%
83
1.6
827
53
1.9
9%
Pantaloons
1,661
51
-188
NA
134
2.3
722
49
2
NA
However modern retail has evolved now with brands opening outlets to create a higher brand recall and
customer loyalty. Special emphasis has been laid on having a multi-channel distribution strategy.
Multi-channel Distribution Strategy: Key to Success
As retail has evolved, branded players have adopted a multi-channel distribution strategy. The different
channels used are trade, department stores, retail and others, with retail and department stores being the
most successful. Various retail formats like multi-brand outlets (MBOs), SIS (shop in shop) and exclusive
brand outlets (EBOs) are gaining prominence. These distribution channels and explosion in the number of
retail outlets provide branded apparel players plenty of options to reach out to consumers in a cost effective
way. Madura has been one of the most successful branded apparel companies due to its focus on retail and
department stores with a clear reach and penetration strategy. Also, with a franchisee approach, only 15%
of the expansion has been funded by the business.
Maduras Distribution Strategy
1627
3896
2904
915
1945
594
503
330
322
440
95
Trade
1735
599
Department
Stores
Retail
Others
MBOs
FY 10 (number of stores)
SIS
698
EBOs
FY 15 (number of stores)
41
With the introduction of malls, organised retail started penetrating Tier 1 cities. With a young population
infused by rising aspirations and adopting the latest trends, brands started doing well in these cities.
However, after a few years, smaller unsuccessful malls started closing and the successful ones grew in size,
inviting more brands, creating high competition between brands, leading to saturation of the consumer
base. A few retailers tried to venture into Tier 2 cities where the market was largely under penetrated, but
they faced infrastructure and operational challenges.
Retailers were hunting for other avenues to reach out to consumers and the e-commerce boom provided
that platform. Growing internet penetration in India prompted some retailers to go online and reach
consumers directly. India currently has 350mn internet subscribers (second largest internet user base in the
world) and this is expected to touch 500mn by 2019. Also, more locally produced smart phones will have
lower prices, allowing more Indians to shift to internet enabled smart phones. This provided retailers a
platform to move away from the current brick-and-mortar approach to a digital one.
India internet and smartphone users
500
435
382
400
300
470
426
326
272
200
116
100
0
2014
2015
2016E
2017E
2018E
2014
2019E
Soon, e-commerce started gaining traction amongst consumers due to attractive discounts on good quality
trendy products, a larger bouquet of products and brands to chose from, convenience of cash on delivery
and ease in returning products. Even e-tailers benefitted as they could reach out to a wider consumer base
and provide them higher value and save on real estate costs, resulting in efficiencies across the supply chain
and inventory management. Hence, the online retailing market is expected to grow to USD44bn by 2018
(USD13bn in 2014) with apparel being one of the biggest beneficiaries (31% online retail presence already).
The government has also commenced its Digital India programme to enable more households to have
internet connections.
India online retailing market to grow at 40% CAGR with apparel being at the forefront
50
40
31.4
30
2%
2%
11%
Electronics
22.4
20
10
43.9
4.4
5.9
7.9
2010
2011
2012
8.9
13.6
16
7%
Apparel
47%
Books
Baby products
0
2013
2014
31%
Personal Care
Others
35%
399
400
55%
170
59%
38%
2G
3G
21%
2016-17E
228
260
234
265
25.0
20.0
320
15.0
10.0
200
65%
2014
512
600
20%
5.0
6.3
23.3
0.0
2018-19E
4G
2013
2014
2015
2016E
2017E
2018E
Internet Penetration
13%
17%
21%
25%
29%
32%
35%
Internet Users - mn
156
207
272
326
382
426
470
E-shoppers - mn
14
20
30
39
50
57
66
9.0%
9.7%
11.0%
12.0%
13.1%
13.4%
14.0%
E-shoppers %
Data analytics
E-commerce also helps e-tailers in the form of real-time consumer data analytics. Analytics involves
identifying consumer trends and combining them with other indicators such as income levels to devise
customised offerings. This helps e-tailers capture the latest trends, accurately target customers and
continuously innovate to stay ahead of competition, leading to increasing loyalty and higher ticket sizes, in
turn boosting efficiency and propelling growth.
Data analytics includes:
Predicting customer preferences and business impacts based on historical performance of the
customer and other customers in the segment.
As fashion is fast moving and e-commerce and omni-channel distribution has made it even faster, it will be
more challenging to manage a fast fashion high SKU (Stock Keeping Unit) portfolio as one has to keep up
with what consumers want and quickly react to this need and fulfill it before the competition does. One
needs to categorize products across retailers and experiment which is where analytics helps.
43
Branded Apparel
Indian Apparel Market: At Nascent Stage vs China
The Indian RMG/apparel market currently stands at USD45bn and has been expanding at 13% CAGR with an
expanding share of organized retail. However, in comparison with China and the world, India lags in most
indicators. Indias per capita GDP is significantly lower than that of China and its per capita consumption on
apparel is USD37 against Chinas ~USD200 and well below that of developed economies such as Germany
(USD900), US (USD825) and Japan (USD550). The size of mens apparel market in China is currently 7.0x the
size of Indias apparel market despite both having similar population size.
GDP Per Capita based on PPP
14000
12000
98
10000
8000
5837
6000
5707
47
3172
4000
13
2000
0
2009
2006
China Per Capita GDP (USD)
2014
2014
India
China
World
45
267
1389
37
197
200
In terms of overall consumption, while clothing and footwear account for 8% of consumer spending in China,
it is currently only 4% in India. Hence, there is huge potential for spending on apparel consumption to
double; portending humungous opportunity for the branded Indian textile players and the onus is on them
to exploit the opportunity.
14%
2%
40%
3%
2% 3%
11%
33%
17%
4%
4%
8%
8%
16%
5%
Recreations
Financial Service
Education
Insurance Service
Others
Source: Company, Edel Invest Research.
44
Branded Apparel
Rank in 2013
Brand
Product Category
Heilan
1.2
Mens wear
Anta
1.0
Sports wear
Semir
0.8
Casual wear
Metersbonwe
0.4
Casual wear
12
Linin
0.3
Sportswear
Chinese brands have faced a domestic slowdown, intense competition from international brands and fast
fashion. Chinese brands have had to resort to diversifying their product range outside of apparel in order to
grow further. In terms of store numbers, China is now the most important international market for many
major fast fashion brands. It is the largest international market for ZARA and Uniqlo, and the largest
international market in Asia for H&M.
Top 2 Chinese Apparel brands Financials
Brand
Operating
margin
PAT margin
ROE
Heilan
1.94
25%
19%
30%
Anta
1.41
22%
19%
23%
Heilan (HLA), Chinas biggest brand, is positioned as a fast fashion brand with premium quality and midrange pricing with stores located in downtown commercial districts and comprehensive shopping malls in
cities. Started in 2002, by the end of 2014, a total of 3,348 HLA stores have been opened successfully. HLA
owns 3 product seriesbusiness, leisure and fashioncovering 17 product categories and up to 5,000 SKUs
(stock keeping unit). HLA owns over 300 designers providing design guidance to suppliers. Due to the
success of fast fashion Heilan jumped 8 stops to have the highest brand value in China. The entire Chinese
apparel market has witnessed a big churn as can be seen by the rankings.
Anta Sports Products is in the business of designing, developing, manufacturing and marketing sportswear,
including sports footwear, apparel and accessory under its own brand name, ANTA since 1994. Anta Sports
is the official supplier and sponsor of numerous teams, players and associations.
45
Branded Apparel
SWOT Analysis: Branded Apparel Segment
Strength
Growing organized retail. Better
consumer retail experience and
distribution strength.
Weakness
Poor brand positioning and
marketing.
Inefficient Inventory/ Supply
Chain management
Wrong Distribution Strategy
Threat
Many major international
apparel brands have commenced
operations in India realizing that
Indian markets are likely to
emerge as one of the largest
market in the world in the next
few decades.
E-Commerce making brands
commodity.
46
Opportunity
Increasing urban women
population and women
corporate workforce
Increasing brand consciousness
and spending on kids
Increasing online retail
Branded Apparel
Appendix 1: Why Branded Business?
Branding is one of the most important aspects of any business. An effective brand strategy distinguishes
itself from the competition and gives it an edge. A brand can stand for innovation, experience, reliability,
quality, low cost, etc. and is a promise to the customer on what to expect. A brand is created by a
combination of the product/ service, logo, website, packaging, promotional material, communication and
after sales service. Once brand loyalty is successfully established, the brand has the freedom to charge a
premium over competitors, enabling it to make far superior margins. We have enlisted a few brands below
which despite charging a lot more than competitors are still extremely successful and popular due to their
brand loyalty and sustained ability of satisfying consumer needs.
Brand Name
Segment
Louis Vuitton
Handbags
Giorgio Armani
Apparel
Rolls Royce
Cars
Mont Blanc
Pens
Taj
Hotels
Nike
Sportswear
Product
Price
INR 2.5 -4 Cr
47
Branded Apparel
Appendix 2: What is a Brand?
A brand is a name, term, design, product, service, symbol or other features that distinguish one seller's
product from others. Moreover, a brand is a promise. Brands are used in business, marketing,
and advertising.
A brand publicly distinguishes from other products, services, or concepts so that it can be easily
communicated and usually marketed. Branding is the process of creating and disseminating the brand name.
Branding can be applied to the entire corporate identity as well as to individual product and service names.
The aim of branding is to convey brand message vividly, create customer loyalty, persuade the customer to
buy the product and establish an emotional connect with customers. Branding shapes customer perceptions
about a product. Strong brands reduce customers perceived monetary, social and safety risks in buying
goods/services.
Brand Positioning
48
Origin of Country
Branded Apparel
Quality
Quality of goods or services is the utmost prime factor defining whether a brand is good or bad. For
example, when people see clothes "Made in China," the first perception is of low quality product and short
product life. We believe, quality is the key driving factor for a brand to sustain in the long term.
Good Quality Vs Bad Quality Brands
vs.
49
Branded Apparel
Price
Price also plays a very important role in defining a brand. Goods and services must be priced in a way that
achieves profitability for the company and satisfies customers, in addition to adapting to various constraints
such as competition. When a consumer perceives that a company charges high price for a product, he/she
also perceives that high prices are an indication of better quality and prestige.
vs.
Origin-of-Country
Consumers use a number of cues to infer quality and one of them is origin of country. For example, goods
and products Made in China are perceived to be low quality due to poor product quality experience
historically, whereas brands Made in USA are perceived to be of high quality.
Made in US
50
Made in China
Branded Apparel
Value Proposition
Value proposition or differentiation is the No. 1 quality that determines whether people will bother reading
more about your product or hit the back button. A value proposition is a promise of value to be delivered.
Its the primary reason a prospect should buy from you. In a nutshell, value proposition is a clear statement
that explains how your product solves customers problems or improves their situation (relevancy), delivers
specific benefits (quantified value) and tells the ideal customer why they should buy from you and not from
the competition (unique differentiation).
If competition enters with a better proposition or if the brand fails to maintain differentiation (on its own,
over time) consumers lose their basis for selection, manufacturers will lose consumer loyalty/commitment
and Value equation will become dominated by Pricing component rather than by Benefit Delivery.
iPhone
Other Smartphone
R>D
Differentiation
Differentiation
Other
Factors
Other
Factors
51
Branded Apparel
Brand positioning: Positioning is a marketing strategy that aims to make a brand occupy a distinct
position, relative to competing brands, in the customers mind. Brand positioning is defined as the
conceptual place you want to own in the target consumers mind, the benefits you want them to think of
when they think of your brand. An effective brand positioning strategy will maximize customer relevancy
and competitive distinctiveness, in maximizing brand value.
High Fashion
Contemporary
Classic
Value
Mass
Premium
Luxury
Importance of a brand
Branding accounts for 38% of total company value
Brand
Value
Business
Value*
Tangible
Assets, 26%
Brand, 38%
Knowledge,
36%
Brand
Value
Other
intangibles
Other
intangibles
Fixed
assets
Fixed
assets
Time
*Illustrative
Source: Company, Edel Invest Research.
52
Branded Apparel
Appendix 3: Why Apparel Brands Fail
The entire journey of creating a brand to scaling it up and maintaining a leadership position is fraught with
complications and challenges. While most brands find it difficult to scale up and establish themselves, quite
a few reputed brands have failed spectacularly with their strategy and forced to close down. The Indian
apparel industry is heavily competitive due to influx of international brands and changing fashion tastes and
references. This has limited the potential of brands to scale up and the reduced operating leverage
opportunity has dented profitability. E-commerce has further muddied the waters. Good brands like Allen
Solly and Van Heusen have grown consistently by innovating their products and product mix, maintaining a
disciplined balance sheet and a well established distribution network by leveraging their brand name. Below
enumerated are some of the causes of brand failure.
Financial Indiscipline
Excessive leverage
Sacrifice back ended investment for investing in stores
Big gaps in own label, scale and mix (Own labels have 2x margins due
to savings on advertisement and distribution)
Products with low applicability or acceptance in a particular
geography -launch of jackets, clothes without pockets, high priced
denims, etc. in India
53
Branded Apparel
Brand Shifts Around the Power-grid
Branding is about an assurance of consistent quality of service or product. No sustainable brand has been built by throwing money on ads or
celebrity endorsements. In fact, if companies are not sure of offering consistent quality of products or services for the larger audience that they will
get as a result of increased marketing spends; the money spent will fail to protect the brand
4.
100
3.
2.
Diff Rel Qty Know
2. Unrealised Potential
5.
3. New Leaders
1. Emerging Brands
4. Established Leaders
5. Declining Leaders
6. Mass Commodity
50
1.
7. Disappearing
6.
Diff Rel Qty Know
7.
50
Brand Stature Rank
Quality x Knowledge
100
54
Branded Apparel
Appendix 4: Economic Times Brand Equity Most Trusted Brands 2015
Most Trusted Brands identifies brands that have that most special ingredient: the consumer's trust.
Conducted by Nielsen, Most Trusted Brands remains among the largest researches of its kind in India, with a
design sample of 7,200 - distributed across socio-economic classifications, age, income and geography.
The study was carried out in the following 12 cities across India
Zone
City
Top 4 Metro
10L-40L
5L-10L
Delhi
Lucknow
Chandigarh
ATTR1
North
East
Top 4 Metro
10L-40L
5L-10L
Kolkata
Patna
Bhubaneswar
ATTR2
West
Top 4 Metro
40L+
10L-40L
Mumbai
Ahmedabad
Indore
ATTR3
South
Top 4 Metro
40L+
10L-40L
Chennai
Bangalore
Vijayawada
ATTR4
55
Branded Apparel
Discounted Cashflow Wisdom Investing
Sales Growth
100
15%
15%
15%
15%
15%
EBITDA margins
18%
18%
18%
18%
18%
18%
Depreciation/Sales
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
NWC cycle
30
30
30
30
30
30
2.0
2.0
2.0
2.0
2.0
2.0
Core ROCE
25%
25%
25%
25%
25%
25%
Ke
14%
Kd
8%
Tax rate
34%
Debt Ratio
50%
Terminal Growth
3%
Kc
11.0%
Sales
100
115
132
152
175
201
EBITDA
18
21
24
27
31
36
Depreciation
EBIT
15
17
19
22
25
29
NOPAT=PAT + depreciation
13
15
17
20
23
26
Capex
-7
-9
-10
-11
-13
NWC
-1
-1
-2
-2
-2
FCFF
10
11
0.90
0.81
0.73
0.66
0.59
PV factor
PV (High Growth phase)
31
PV (Terminal Value)
130
EV
161
EV/EBITDA
8.9
7.8
ROCE
10%
20%
30%
40%
50%
60%
80%
100%
5%
4.4
6.6
7.3
7.6
7.8
8.0
8.1
8.2
10%
3.6
7.2
8.4
8.9
9.2
9.5
9.7
9.9
15%
2.6
7.9
9.6
10.4
10.9
11.2
11.6
11.9
20%
1.4
8.8
11.1
12.2
12.9
13.3
13.9
14.2
25%
0.0
9.7
12.8
14.3
15.2
15.7
16.5
17.0
30%
-1.6
10.9
14.8
16.7
17.8
18.6
19.5
20.1
35%
-3.5
12.2
17.1
19.5
20.9
21.8
23.1
23.8
40%
-5.7
13.6
19.7
22.7
24.4
25.6
27.1
28.1
56
Terminal Growth
ROCE
10%
20%
30%
40%
50%
60%
80%
100%
3%
10.7
7.7
9.3
10.1
10.6
10.9
11.3
11.5
4%
11.8
8.5
10.3
11.1
11.6
12.4
12.7
5%
13.2
9.7
11.6
12.5
13.1
12.0
13.4
13.9
14.2
6%
15.2
11.3
13.4
14.4
15.0
15.4
15.9
16.2
7%
18.1
13.6
16.0
17.2
17.8
18.3
18.9
19.2
8%
22.7
17.3
20.1
21.6
22.4
22.9
23.6
9%
31.2
24.1
27.9
29.7
30.8
24.1
31.5
32.4
33.0
Source: Company, Edel Invest Research
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57