Garment industry beckon equity firms

India is high on PE investors’ radar. No wonder, large global PE investors have either set up India-dedicated funds or increased allocations for Indian investments in their portfolios. And going with the trend, PE investments seem to be the

flavor of the season among niche mid-cap apparel retailers/brands that are scouting for funds to scale up operations. PE investors say there is an increased interest from MNCs to enter India through buyouts or joint ventures, which will help reap a high return through strategic sell-outs. And PE firms are optimistic about the high return which can be earned once MNCs opt for acquisition or JVs for strengthening their presence in India.

The mounting PE interest in Indian apparel and fashion space was seen when Avigo Capital acquired a controlling stake in Spykar Jeans and Future Ventures’ went ahead with a stake buyout in Indus-League. However, industry watchers and analysts are skeptical of this trend. Last month Future Ventures India Ltd (FVIL), Future Group’s investment and business management arm, acquired an additional 5.14 per cent stake in Indus-League Clothing Ltd (ILCL), a group firm, increasing its holding to 91 per cent. ILCL owns brands like Indigo Nation, Scullers, Jealous, Urbana, Urban Yoga besides holding exclusive license for Lee Cooper and Manchester United merchandise.

The latest to join the long list of brands/retailers scouting for PE funds is the Kumar Mangalam Birla led Madura Fashion and Lifestyle. The buzz is that Birla is considering diluting stake in Madura Fashion and Lifestyle, formerly Madura Garments. Global investors like Apax Partners are said to be interested in the deal. Apax is a bulge bracket PE fund, which makes long-term bets. It has been pretty selective in India so far with only one big deal in Apollo Hospitals, where it has a position of almost 14 per cent, or about Rs 850 crores.

Experts say, if Madura takes in PE investors, this would be an encouraging step for the garment space, which has seen little PE activity so far. Despite the given scenario of India’s increasing consumerism, the garment business remains a difficult one, with very few successful businesses. No wonder PE investors have stayed away. According to estimates, listed garment companies seem to capture barely 10 per cent of this market. Among these, only a few like Raymond or Zodiac have shown steady success. Raymond is among the oldest garment businesses in the country, but barely half the size of Madura, with a turnover of Rs 850 crores in FY11. It has grown at a CAGR of 15 per cent over the last five years and growth has been consistently profitable. Arvind Brands was around Rs 650 crores in size in FY10. And the 50-year-old brand Zodiac reached Rs 360 crores revenues.

Among the newer lot, Kewal Kiran seems to be doing well, but it is only around Rs 250 crores. Koutons did attain some size, with FY10 reported revenues of about Rs 1,200 crores, but aggressive expansion got it into financial trouble. This is insignificant compared to the total size of the clothing market in India. According to the government statistics on private consumption expenditure, clothing clocks up 5 per cent of household expenditure. The total clothing market currently is around $25-30 billion. Interestingly, the largest player, Madura, has barely 2 per cent of the total market. If this deal works out it will give a ray of hope to the apparel industry to grab the opportunity from PE.

Madura has grown aggressively in recent years, and its five-year CAGR is 24 per cent. It has brands like Louis Philippe, Van Heusen, Allen Solly and Peter England in its portfolio. In 2010-11, Madura’s revenue was Rs 1,809 crores and it grew almost 45 per cent. In FY11 it reported a sharp upswing in profitability, with an operating profit (earnings before interest, depreciation, tax and amortisation) of Rs 137 crores compared to a loss in FY10. This sets the stage nicely for a potential dilution to the PE sector.

Though talks on PE are going on, if the deal sets in, it won’t be an easy affair. While FY11 is considered as a good year on all counts, its previous performance has been inconsistent. In the last 10 years, Madura has made losses at the EBIDTA 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 EBIDTA of about Rs 150 crores, paltry compared to the total 10-year revenue of about Rs 7,500 crores. It’s possible that the PE sector will find a value deal, and only time can tell whether a marquee deal like Madura can certainly help the cause. If yes, then this can support the emergence of a few more brands.