Today I am going to talk about Dollar Industries. Dollar Industries is one of the largest innerwear companies in India and has a significant national presence. With over 15% market share in the innerwear category, this Kolkata based company has come a long way, having started in 1973.
Did you know that the company spends 10% of its revenue on advertising alone?
Now, if a company were to spend 10% of its revenue, i.e. INR 100 crs approximately on advertisement during each of the the last couple of years; revenue should skyrocket and so should the value of its brand. Isn’t this obvious?
At least this is what Dollar claims. Let’s find out.
While Dollar’s revenue indeed increased by CAGR of 15% p.a. over the last 10 years, however, it has not translated in increasing its brand value. While the recall value for Dollar’s Big Boss briefs and vests, Missy leggings for women, Dollar Junior and Thermals could be high; however Mere brand recall does not tantamount to enhanced brand value.
Brand value only gets created meaningfully when a company can increase its price without losing its customers. On this front, Dollar seems to have done a commendable job, for its average price per unit has been increasing over the years. The average revenue per unit has increased from average INR 50/unit to more than average INR 80/unit. Also, considering that its revenue has clocked CAGR of 15% p.a. growth over the last 10 years, both volume and Average Revenue per Unit (‘ARPU’) has increased over the period, thereby seeming to create substantial brand value.
However, this seems to be more of an illusion. For the company has only been able to increase its revenue on account of being lax on its credit policy or perhaps engaged in channel stuffing. Now while I cant really comment on Channel stuffing, however the Credit policy can be gauged from the fact that the growth in Debtors has increased more than the growth in the revenue over the last 10 years. Debtors account for 37% of its Gross Sales in FY2020. It was less than 20% couple of years back. Debtors as % of Gross Sales for Page Industries of Jockey fame constitutes only 3% in FY2020.
Why should a company have an increase in debtors when it has been able to create brand value? Shouldn’t the customers be swooning to take over the company’s products if its created brand value is high, thereby either paying in advance or paying for it in cash. Isn’t this obvious?
Apart from high debtors, the company carries significant inventories on its books as well. In fact, Inventory as a % of COGS has moved up from 32% in FY2015 to 68% in FY2020. Well, if the company has really created such a high brand value, why is it that the revenue is not translating to generating cash flows.
In fact, working capital tied to Debtors and Inventories have sapped the profits of the company, thereby resulting in meagre cash flow generation.
Cash Flow from Operations has been a mere INR 12 crores per year on an average over the last 5 years, with barely no cash flow left for equity shareholders.
One saving grace for the company has been that it outsources more than 70% of its production as job-work, thereby investment on the gross block has been minimal. However, this also means that the company’s dependence on its suppliers is high and that it is also susceptible to one of its suppliers competing with it eventually.
Also, Dollar’s debt levels have increased over time. While there is minimal long-term debt, however short-term debt of INR 210 crores in FY2020 does not assuage well for the equity holders, and definitely not a sign of high brand creation.
Hope, the company exercises by bringing its working capital requirements down substantially to get fit!! Till then, it may be best for you to stay fit by avoiding it!!
Please note that these are my personal views. Request you to conduct your own independent research or consult your financial advisor before investing.
Hope you enjoyed listening to this!!
For more interesting topics, you may check out my website, www.jaagrav.com. If you want to reach out to me, you may email me at vikas@jaagrav.com
Thanks!
very insightful.
Thanks Vivek!!