Madura PE deal will allow apparel business to take off

By Ajay Jindal

A large private equity deal in Madura, the Aditya Birla Group company, could help create other deals in the apparel space. Frankly, the Indian consumer boom story has not translated into private equity (PE) deals for the garment space.

Kumar Mangalam Birla was considering diluting his stake in Madura Fashion and Lifestyle, formerly Madura Garments, according to a Times of India report _._ Some fairly marquee private equity names like Apax Partners were interested in the deal, the report said. Apax is a bulge bracket PE fund, which makes big, long-term bets. It has been pretty selective in India so far, its one big deal is Apollo Hospitals, where it has a position of almost 14 percent, or about Rs 850 crore.

If Madura takes in PE investors, this would be a welcome development for the garment space, which has seen little PE activity so far. Despite all promise of India’s increasing consumerism, the garment business remains a difficult one, with very few successful businesses. No wonder PE investors have stayed away.

Madura: a prize catch?

It is easy to see why private equity investors would be interested in this deal now. Madura is by far the leading branded apparel business in India. Madura sells brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England.

In 2010-11 (FY11), Madura reached a revenue size of Rs 1,809 crore. This was also a very strong year for Madura as it grew almost 45 percent during the year. The turnover in FY10 was Rs 1,251 crore. Madura has grown aggressively in recent years, and its five-year compounded growth rate is 24 percent.

The one negative - patchy profitability - was also seemingly addressed in FY11. The company appeared to turn around in FY11. It reported a sharp upswing in profitability, with an operating profit (earnings before interest, depreciation, tax and amortisation) of Rs 137 crore compared to a loss in FY10. This sets the stage nicely for a potential dilution to the PE sector.

Yet, the deal, if talks are really on, won’t be easy. While FY11 was a super year on all counts, its previous performance has been patchy. In the last 10 years, the Madura business has made losses at the EBIT level (earnings before interest and tax; segmental profits are reported at this level) in five years. Cumulatively, over the last 10 years, the garment business has made a total EBIT of about Rs 150 crore, paltry compared to the total 10-year revenue of about Rs 7,500 crore.

Garment brands: lacking scale

Besides Madura, there are very few garment businesses of any scale in the country. There are barely 10 listed companies which can be called credible garment companies. Among these, only a few like Raymonds, or Zodiac have shown steady success.

Raymonds, among the oldest garment businesses in the country, is barely half of Madura, with a turnover of Rs 850 crore in FY11. It has grown at 15 percent compounded over the last five years. Raymonds has been consistently profitable though. Arvind Brands was around Rs 650 crore in size in FY10. Zodiac, a steady business, has reached only Rs 360 crore of revenues so far, despite having been around for 50 years.

Among the newer lot, Kewal Kiran seems to be doing well, but it is only around Rs 250 crore. Kouton did attain some size, with FY10 reported revenues of about Rs 1,200 crore, but aggressive growth got it into financial trouble. Indian Terrain is a Rs 120-crore business currently where New Vernon has a 17 percent stake. This is a spin-out from the struggling Celebrity Fashions, where New Vernon, a private equity fund, had originally invested.

Then there are the innerwear companies, currently on a high in stock markets. Page Industries, with a turnover of about Rs 500 crore has a market value of over Rs 2,000 crore. At about four times sales, it has the best discounting amongst branded garment stocks.

An unorganised market

So that’s roughly it; you could add up the listed companies in this space, and struggle to come up with a total revenue of $2 billion, or about Rs 70 per capita.

This is insignificant compared to the total size of the clothing market in India. Clothing represents about 5 percent of household expenditure, according to government data (on private final consumption expenditure). The total clothing market currently could be around $25-30 billion.

Listed garment companies seem to capture barely 10 percent of this market. The largest player, Madura, has barely 2 percent of the total market. The rest is either unlisted garment players, very few of which are above Rs 100 crore in revenue, or fabric companies. There are several fabric players in listed space, (Raymonds, Reid & Taylor, Alok, Arvind, Garden Silk, etc), but PE players are unlikely to back fabric companies due to the low value add.

As much as 70-80 percent of the garment market can still be called unorganised, adding up to $15-20billion. Clearly, this can support emergence of a few more brands. Whether the PE sector will find more deals in it, only time can tell, but a marquee deal like Madura can certainly help the cause_._

(Ajay Jindal, CFA, is an executive director with Four-S Services Pvt Ltd. Views expressed are personal.)

Disclaimer: The author does not have any investment in companies mentioned above.