I am always of the view that sometimes user of a product or service derives more profits/business than producer of that product or service-just like pharma sector where many companies invest huge sums of money and time for developing a new medicine or product. Only one or two of those will succeed. But a hospital can harness their success for its benefit much better and longer than them. It doesn’t matter for a hospital, who invented the medicine…it can simply use the same irrespective of the producer. The risk of production is only for the producer.
I can see the same thing happening with Indian E-commerce sector. Biggest beneficiaries of e commerce in india will not be retail portles like flipkart or logistics companies-as is perceived by the market these days. Entry barriers to ecommerce portal and logistics business are low. Portals or logistics companies aren’t offering something different from others …everyone is offering the same. There is no product differentiation…we can and will see more such online portals and logistic companies. We picked Gati when it was at 30/-…now it is around 300/- . But I still feel market-in its mad run for logistic companies-is ignoring those who can turn out to be bigger beneficiaries of e commerce evolution in india. These are those consumer product based companies who are unable to reach the every possible consumer due to high cost of distribution in india.
There are many local or regional consumer product brands in india which are offering products of quality on par with global or Indian multinationals…but they are unable to reach scale due to massive distribution clout of these big corporate houses which these small companies can’t afford. Also sometimes it is not competition but sheer cost of distribution that keeps some companies to stay away from some markets. I think these companies can enjoy huge success if they can focus on transforming their business and marketing model. Cost of real estate and dedicated transportation are the biggest hurdles in formulating a viable distribution path. Like cost of real estate in organized retail is around 15% in india as compared to around 7% of western countries. In india a truck normally covers a distance of around 250 km per day at the rate of 20 km per hour which is 500-600 km per day and 60 km per hour in developed world. E commerce with no need of high cost prime location real estate and scattered transportation can eliminate both these.
We’ll study some companies within this framework, however these are not selected purely on e commerce viability model but mainly on their inherent business strength...which will be further sharpened by e commerce.
Rupa & Co. it is one of biggest innerwear company of india competing with Jockey who has taught Indian that not everything is for showing, comfort and personal style is equally relevant when it comes to innerwears. Although Rupa (company is not named after a girl’s name, but “Rupa” is “silver” in Bengali) is larger than Jockey in terms of volume but falls behind when it comes to brand recall and high operating margins. It is visible in their stock prices where Page industries (authorized manufacturer/distributor of Jockey in india for last 50 year or so) is available at a PE ratio of 65 where Rupa is at 25. But I feel there is another side of the story. First of all Rupa doesn’t manufacture its products, it gets it done from third party manufacturers or job workers, it just does bleaching and dyeing on its own. It eats away margins.
In 2013-14 Rupa posted 900 cr of turnover and around 70 cr as net profit, whereas Page industries posted turnover of 1173 cr and net profit of 154 cr. But there is one catch. Rupa spent 73 cr for advertising while Page used only 33 cr. Add this 40 cr extra advertising spend to the net profit of the company and difference of net profits of two companies will become smaller-to 110 cr for Rupa and 154 cr for Page. But this ad spend will come down as with establishment of strong brand recall, the need for high ad spend will be lower.
Also Rupa is a mass market player whereas Page is mainly a premium player where margins are better. But Rupa is focusing and investing big on premium portfolio like Macroman, Euro etc and also endorsed Hrithik Roshan as its brand ambassador. But one thing which I feel it has to take care now is the quality of premium brands, so it should focus on in house manufacturing of these brands to better control quality.
Ecommerce will provide another vertical to increase its reach further although Rupa is having almost 100000 retail points as compared to 23000 of Page.
My another convention that brand loyalty for life style products like staple foods like rice is much stronger than sensory products like Cold drinks, Pizza, noodles etc. People normally are more than willing to change their taste and hence product. Like Maggi is the biggest instant noodle brand in india not due to consumer brand loyalty but because consumers are not able to find out better substitute or some new unique taste. This convention holds true for Rupa due to its high brand loyalty which will become stronger with the focus on new premium products.
Rupa appears cheap when compared with Page industries and keeping in view of the strong demand for branded innerwear in india due to huge young population. Also Lovable lingerie which is a much smaller player as compared to Rupa and with lower brand recall is trading at a PE ratio of 40.
Good buy at current price of 225/-
Borosil Glass, Redington India, Future Retail---will be updated soon
(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)