Page Industries, a licensed manufacturer of the popular `Jockey' brand of innerwear in the country, is entering the market with a public issue of equity shares. On offer is a fresh issue of capital by the company along with an offer of sale from the promoters. The company plans to raise between Rs 50 crore and Rs 55 crore depending on the eventual price fixed which would be used, among other purposes, for brand-building and for setting up additional manufacturing facility.
The company's sales have been growing at an annual rate of roughly 28 per cent in the last four years. The net profits have seen an even better rate of annual growth of nearly 60 per cent. There is, thus, little doubt that the company's brand of innerwear has gained market acceptance as evident in the growth of its sales and net profits. On the face of it, therefore, the company's claim to pricing its shares at an earnings multiple of between 22.5 and 25 (depending on the price within the band indicated by the company) based on the annualised profits of first half of fiscal 2006-07, appears reasonable.
A general rule of thumb in investment valuation is that an equity is considered an attractive candidate if the ratio of its P/E multiple to the annual growth rate in profits is below one. In the instant case, it is in the region of 0.5. On a comparison to its closest competitor, Maxwell Industries, manufacturer of the VIP range of innerwear whose current share price values its latest earnings by a multiple of around 22 too, the company's indicative price band for its share does not appear unreasonable.
Competitive parameters
But despite such attractive parameters of valuation, we are of the view that investors are better off avoiding the public offer for the following reasons. One, the market for innerwear is a highly fragmented one with a number of regional players in the branded segment, besides innumerable small players in the unbranded category.
While Page Industries' positioning as a premium product would limit the scope of competition, it must be admitted that the market is characterised by the existence of competing offerings at various price points and there is always the risk of `down trading' — customers settling for an offering at a lower price point — and this must exert some pressure on margins.
There are limits to premium pricing strategies to shore up profit margins, considering that innerwear by its very nature cannot command super luxury positioning that allows consumer to make a life-style statement.Two, the market is also seeing the entry of large apparel manufacturers with established brand equity entering the innerwear market. They are likely to pose a stiff competition to Page Industries, which has no presence in the traditional apparel market. It has a limited presence in the leisure wear segment.
Success at a price
Three, the entry of a number of players in the organised retail trade is likely to be marked by the advent of store brands both in the mass and premium segments across all consumer product categories. Innerwear cannot be an exception to this phenomenon. Even if the likes of Page Industries manage to hold their own amidst the clutter, the success will come at a price.
Historically, pricing power has tended to shift to the players in the organised retail trade with a chain of stores, given the volumes that they can muster. The company is trying to counter this with its own exclusive retail outlets besides a sharp hike in advertising outlays. The success of such a strategy is, however, fraught with uncertainty.
Offer details
The offer, lead managed by IL&FS Investsmart, opens on February 23 and closes on February 27. The net offer to the public is 27.89 lakh shares.