By Tejas MDAnother bumper interest rate hike came from the US Federal Reserve on Wednesday - a 75 bps increase which took the US interest rate to 3.25%, the highest it's been since 2008. It's surprising how quickly interest rates have moved up - the rate stood at 0.25% in January 2022.
However, Indian markets have stayed resilient with the Nifty 50 among the best performing indices globally, and flirting with all-time highs over the past few months. There’s been continued momentum in IPOs as well, and we take a closer look at a familiar name that is getting ready to list - FabIndia.
In this week’s Analyticks,
- Dressed for success?: FabIndia hopes to take advantage of the apparel industry's recovery
- Screener: Stocks outperforming Nifty 50 with increasing mutual fund holding, and also in the PE Buy Zone
Apparel industry bounces back post-pandemic, clearing path for IPOs
During Covid, no one was dressing up: it was all trackpants and old t-shirts. Work calls on Zoom got taken with the video off. Events and weddings were being cancelled or postponed. This hit the apparel industry hard, including FabIndia.
Now however, apparel companies are staging a comeback. With the exception of TCNS Clothing, top listed companies like Page Industries, Trent, and Aditya Birla Fashion and Retail (ABFRL) have outperformed the Nifty 50 by a huge margin in the past year.
Companies like Vedant Fashions and Go Fashion, which were listed less than a year ago, have also managed to beat the benchmark index comfortably in the past six months.
FabIndia - which is known for its use of traditional materials and contemporary ethnic wear - wants to time its IPO with the apparel industry’s dramatic recovery. The company filed its draft red herring prospectus (DRHP) with market regulators for its IPO, and received the Securities Exchange Board of India’s (SEBI) nod in January 2022. According to reports, the proposed IPO is sizeable at Rs 4,000 crore. Out of this, the company plans a fresh issue worth Rs 500 crore, on a valuation of Rs 20,000 crore.
FabIndia's fresh issue is for the voluntary redemption of non-convertible debentures or NCDs issued by the company, and prepayment of a portion of its outstanding borrowings. This means that the IPO will not change the way the company does business.
FabIndia's "inclusive capitalism" focus
FabIndia is planning to share the wealth from the IPO with its broader network. Promoters Bimla Nanda Bissell and Madhukar Khera are transferring 4,00,000 equity shares and 3,75,080 equity shares respectively to the artisans and farmers engaged with the company or its subsidiaries. According to FabIndia’s DRHP, the company works with 50,000 artisans and 10,300 farmers as of March 31, 2021.
FabIndia's founders have long talked about "inclusive capitalism", and the business works with a network of "community owned companies" (COCs) owned by artisans and farmers. It remains to be seen how this ownership model will evolve post IPO.
Among the investors selling shares, PI Opportunities fund and Prazim Trading and Investment Company will sell up to 40% and 100% of the equity shares held by them respectively.
Apparel companies’ topline and bottomline jump YoY in Q1FY23 as demand recovers post-Covid
Q1FY23 was the first quarter in two years without a single Covid-19 lockdown. This helped apparel companies post strong topline and bottomline growth YoY. Revenues and net profits of these companies doubled at minimum, with Go Fashion’s revenue jumping by over 5X YoY in Q1FY23 on a low base.
This indicates a strong comeback for apparel companies including FabIndia in FY23. According to FabIndia's DRHP, the company had posted losses in FY21 and H1FY22 due to lockdowns.
However, recent quarterly results from its competitors point to strong revenue and net profit growth in apparels post H1FY22. Barring the two years of the pandemic, FabIndia has been profitable.
The pandemic changes FabIndia’s revenue mix, organic food segment gains
One factor that helped the company contain its losses during the pandemic was the increased demand for healthy food, with a growing preference for organic and immunity booster items. As a result, the revenue contribution from this segment rose from 18.9% in FY20 to 31.1% in FY21.
Low demand for ethnic wear during the pandemic meant revenue contribution from the apparel segment decreased by 12 percentage points in H1FY22 to 46.5% when compared to FY19. However, with demand for clothing bouncing back, the revenue contribution from this segment is expected to recover.
Warning sign: FabIndia’s store count is below pre-pandemic levels
The pandemic was a blow to FabIndia, and in some ways the business may not have fully recovered. Even with the strong rebound in apparel, FabIndia’s store count is not yet back to FY20 levels. As of H1FY22, its total store count stood at 309 against the pre-Covid number of 328.
In comparison, FabIndia's listed peers saw their store count surpass pre-Covid levels in FY22. But revenue generation is not entirely dependent on the number of stores, especially when we consider rising sales from online channels in FY21.
FabIndia’s online retail revenue contribution rose to 18% in H1FY22 from 4% in FY19. Revenue from FabIndia's online channels rose 40-50% during FY20 and FY21, similar to growth for close competitors like Vedant Fashions and TNCS.
But retail outlets still play a major role in capturing market share, and the slow recovery here cannot be ignored.
Can FabIndia capitalize on opportunities amid competition?
The long-term growth plan for FabIndia is on track when it comes to market size, both in apparels and ethnic wear. The apparel industry’s market size bounced back in FY22, and it looks likely that demand will sustain in the coming quarters.
The ethnic wear segment’s market size is expected to grow at a CAGR of 6% over FY20-25E. In addition, the organic foods industry is also on the rise and is expected to grow at a CAGR of 24% during 2021-2026E.
There is no dearth of opportunities for FabIndia to drive its top line and bottom line. But what investors will look for is whether the company is able to capitalize on opportunities, amid competition from its peers. FabIndia is sandwiched between two competitive segments: it directly competes with private label, large-format stores, and also with companies that offer affordable products and sell through online channels. It will have to distinguish itself in an increasingly crowded space.
Screener: Stocks outperforming Nifty 50 with increasing mutual fund holding (PE Buy Zone)
As we see the return of institutional buying in the Indian market,this screener identifies stocks that have outperformed the Nifty 50 index over the past month, and also saw increasing mutual fund holding in the last 30 days. With concerns around market valuations, we only consider stocks in the PE buy zone with a high Trendlyne Durability Score.
The screener shows 27 stocks from the Nifty 500 index. It is not dominated by any one industry but includes stocks from coal, breweries & distilleries, housing finance, and restaurants. Major stocks featured in the screener are Westlife Development, Sapphire Foods, United Spirits and Coal India.
Sapphire Foods has the highest increase in mutual fund holding of 0.9% in August. 10 mutual funds bought into the stock, of which Invesco India Contra Fund is the largest buyer (2.3 lakh shares or 0.36% stake). The stock has outperformed the Nifty 50 index by almost 15 percentage points and is in the PE buy zone with just 14.5% of total trading days spent below the current PE.
United Spirits has one of the highest increases in mutual fund holding with a 0.4% rise in holdings in August. Out of the 66 mutual funds that bought the stock, Nippon India Large Cap Fund - Growth bought the most (14.9 lakh shares or 0.2% stake). The stock has outperformed the Nifty 50 index by 9.6 percentage points and is in the PE buy zone with 16.2% of total trading days spent below the current PE.
You can find more screeners here.
