Vedant Fashions (NSE: MANYAVAR) is a wedding and celebration wear retail company. Since its IPO about two Februarys back the stock has performed steadily, currently trading at an eye-popping PE of ~65. In the crowded retail space Vedant Fashions is that rare breed that is profitable, generates cash and has a clear strategy of how it wants to shape the next decade. The company has taken a singular idea – ethnic men’s fashion – and run with it. It is a lesson in discipline, focus and a lucid understanding of the customer segments it caters to. One size does not fit all.
History of Vedant Fashion Limited
Mr. Ravi Modi started the company (through a predecessor entity) in 1999 with a seed capital of Rs 10,000 that he borrowed from his mother. The business was manufacturing and sale of ethnic men’s wear. Initially, his market focus was on territories around Kolata where Mr. Modi is based – WB, Orissa, Bihar, UP, MP. The preferred channel for reaching customers was Multi-Brand Outlets (MBOs), including Kolkata-based Vishal Megamart. Per the story in Forbes India, Mr. Modi – with his dexterity in numbers – was able to structure his business in a way that helped generate both working capital and revenues from year one. This mind for business is one recurring theme that kept coming up in the course of my research.
Within the next 5 years, Mr. Modi had scaled up to start selling to Large Format Stores (LFS) and building a pan-India presence. The expansion was funded by the business; he was not keen on debt financing, based on the advice from his father who ran a retail store in Kolkata’s AC market selling garments and where Mr. Modi had spent the formative 9 years of his life, an experience he terms educational.
In 2006, a break from work eventually led to a redrawing of the strategy. The company, which had so far sold via MBOs and LFS had now decided to set up its first Exclusive Brand Outlet (EBO) and chose Bhubaneswar. Over the next year VFL opened 12 EBOs. About 5 years later and few more EBOs across the country, the company decided to tap into the lucrative overseas market and opened its first international store in Dubai.
Understanding the importance of women’s wear the company launched a new label – Mohey in 2016. This was also the year to enter the lucrative US market in New Jersey. The following year VFL purchased Hyderabad-based Mebaz after talks to acquire Soch fell through. Manthan, a value-driven men’s wear label was launched afresh in 2018 and premier men’s wear Twamev was launched in 2019. A summary from the VFL’s FY23 annual report clearly positions each of the brands.
As of FY23, the company has around 650 EBO stores, across 1.47 million square feet spread in 245 towns and cities in India and 12 overseas (US, Canada, UAE, UK).
Business Model
VFL started as a manufacturer and supplier of men’s ethnic wear to multi brand outlets and large format stores. Eventually, they decided to open EBO (Exclusive Brand Outlets) as primary channel for sales. This decision was led due to a need for deeper understanding of customer preferences and what products worked and which ones didn’t. The data-driven approach has paid off and the company now generates over 92% of its revenue from its EBOs. with the remaining coming from other channels including ecommerce.
While the company steadily increased its footprint across cities and towns, it was careful to keep the business model asset light. Initially, the stores were opened and operated by the company, but they eventually moved to franchise-model (both owned and operated). The focus changed to supply chain, design and marketing. The manufacturing activities are outsourced, with the company limiting their activities to stitching, cutting and finishing and eventual storage and dispatch. This asset light model backed by strong IT infrastructure enables the company to achieve that remarkable feat – the company has positive cash flow.
The focus on technology-based supply chain and inventory replenishment systems enables Vedant Fashions to take data-driven decisions based on real-time monitoring of sales inventory. This enables the company to maintain a tight control on non-moving inventory and send critical information to vendors on sales at product level. The digital order system and the vendor portal has become integral to the purchase and sales operation. In addition, the company has set up a communication system, Wooqer, that facilitates seamless interaction between the EBOs in turn facilitating an omni-channel experience for the customer.
Strategy
Focus on maximizing sales per square foot of stores
Minimize obsolete/dead-stock inventory. Right now, it stands at 3%
No discount/end-of-season sales for the primary brand – Manyavar
Uniform pricing across on-line and off-line channels
Tech-driven supply chain and inventory management with Automated Replenishment System at pin code level
The Ethnic Wear Landscape
(This section is based on the DRHP of Vedant Fashions)
The ready-made garment retail industry is expected to grow at ~20% for the next two years to touch ~Rs 8,200 bn. About 30% of this (Rs 2,400 bn) will come from ethnic wear and a little above half of this (Rs 1350 bn) will come from wedding and celebration wear.
The key drivers for the Indian wedding and celebration market
Huge domestic market of ~10 million weddings per year
Trend towards multi-day events for weddings and festive wear
Rising disposable incomesKey Players
Continued premiumization of wedding and celebration wear categories led by branded players
Better access to tier 2 cities and small town via e-commerce
Data driven omnichannel experience for better customer engagement.
Key Players
Per the DRHP of Vedant Fashions, Manyavar is the leading player in Men’s category with the FY20 revenue exceeding Rs 7,000 million. In terms of revenue buckets and positioning on the value chain, the assessment is as follows.
Clearly, the room for growth is high. The opportunity would come from two sources – increase in the market size for wedding and celebration wear and increasing preference for brands.
Story & Valuation
I take a look at the industry and company numbers from FY20 to FY25 (projected) from DRHP of VFL and subsequent annual reports. Based on CAGR from DRHP numbers, I fill the gaps for intervening years to find the market share of VFL for both ethnic wear and wedding & celebration wear.
Total Market – Currently VFL is focused primarily on wedding and celebration wear and the market for FY25 is expected to be Rs 1,350 billion (per the DRHP). VFL has also stepped into ethnic wear with the Manthan brand to get a share of the much larger Rs 2,400 billion ethnic wear market.
Market Share – VFL crossed 1% market share in the wedding and celebration wear (branded + non branded) in FY23 and is expected to touch 1.3% in FY25. I find the market share steadily increasing. I don’t look at share of branded wear since I believe VHL growth will necessarily involve taking share from the unorganized sector – perhaps more so than taking share from other branded players. In the last 5 years it has seen revenue from Operations go from Rs 8,007.42 million to Rs 13,549.30 million – a jump of 14.5%.
Profitability – while the company has been growing revenues steadily, the expenses and earnings as percent of operating revenue has been steadily increasing showing efficiency in operation. I ignore the effect of OCI on net income to understand the operations for the running year.
Reinvestment – in an interview with Retailers Association of India, Mr. Vedant Modi, Chief Revenue Officer and after whom the company is named, called the company akin to a supply chain company. The business model in practice has several moving parts – the manufacturing is outsourced even as the critical finishing part is handled in–house. The EBOs where the bulk of sales originate are all franchisee-owned and operated. So, the reinvestment requirements are mainly confined to IT infrastructure and acquisitions that will drive future growth.
Risk – The company is asset light and has no borrowing involving interest coverage. The financials are strong. Risk comes from external environment – the changing tastes of retail customers and the degree of product differentiation compared to competitors. I have quantified this risk to 5% of failure in the valuation model
Based on FY23 numbers published by the company, I project the cash flow for the next 10 years. I assume that in the next 5 years, the company will grow at an average of 20%. From year 6 to year 10 the company is projected to see a drop in growth rate before settling down to 7.19% in year 10, which is the current risk free rate. Finally, I assume that the growth rate stabilizes at 7.19% after year 10, the terminal year post which the company grows at constant rate forever. The weighted average cost of capital moves from 14.7% to 9% in the next 10 years. Tax rate goes up gradually from current 18.15% to 25% which is the corporate tax rate of India. CapEx to Sales ratio remains constant at 7.99%
The day I developed the model (19th Jan 2024) the stock was trading at Rs 1,091. I find the stock to be overvalued at this point. With the results of Q3FY24 out, the stock today (25th Jan) closed at Rs 1,119.45.
Drivers
a) Key Factors
No interest bearing long term debt.
Highly profitable and generates free cash flow
Asset light and franchisee-led EBO distribution model
Optimal use of IT infrastructure to manage demand planning, inventory in stores and even input to designers based on sales trends in different areas
Omnichannel enabled sales strategy for seamless customer experience
b) Key Concerns
Rapidly changing tastes and requirements of the customers
Degree of product differentiation not marked.
Disclaimer
I am not an investor in VFL
For this research report, I have used the audited numbers in annual reports and DRHP in good faith.
All my research is based on internet, and I have not interacted with the company in any manner, shape or form
The exuberance for well-run ethical companies is high and often good companies trade at a premium to value derived from cash flow model. This behavior falls in the realm of speculation.
This valuation is based on my research. For suitability of the investment to your portfolio, please work with a SEBI registered Investment Advisor.
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