Go Fashion (India) Ltd came out with its IPO recently and was subscribed 135.5 times. It made their stock market debut with a strong premium of 90% at ₹1,310 per share on the NSE as compared to its IPO issue price of ₹690.
Go Fashion (India) Ltd is a women bottom wear focused brand selling its products under the brand name "Go Colors" primarily through Exclusive Brand Outlets(EBOs). They claim to be Direct to consumer brand.
Women bottom wear includes Churidar, Leggings, Dhotis, Harem Pants, Patiala, Plazzos, Culottes, Pants, Trousers, Jeggings, Denim etc
Company has the first mover advantage in the 'women bottom wear brand' category.
In the blog, I have covered the below topics:
Industry:
Women's apparel market in India is 36% of total Indian apparel market. Share of Organized retail in women's apparel was 19% in FY15, in FY20 it stood at 33%. Further segmenting the women's apparel market, Ethnic wear constitutes 71% of the market compared to 29% of western wear market in India. Whereas in other major apparel market such as China, Japan, South East Asia, the entire apparel category is made up of western wear products. So India is unique in this sense.
Indian women ethnic wear category includes: Sarees, Salwar Kameez, etc
Coming to the how the products reach customers, lets us see the Apparel retailing channels for different types of brands:
1) Distribution led brands: Standalone brands sold through a retailing structure such as wholesalers & retailers
Eg: Lux, Rupa etc. Sold mainly through traditional retail.
2) Retail led apparel brands: Mainly sell through EBOs(Exclusive Brand Outlets) & LFS(Large Format Stores). Increasing acceptance of such stores. These stores also act as brand building tool.
Eg- Biba, Go colors, H&M, Decathlon, Jockey, M&S etc.
3) Large format stores: Area of 3000-7000 sq ft stores. Offer multiple apparel & lifestyle categories. Eg- Reliance trends, Lifestyle, Max, Pantaloons, Big Bazaar etc.{Mid-Price} V-mart, Vishal Megamart in tier II & III cities & beyond{Value-Priced}.
4) Online channels - Amazon, Flipkart, Myntra etc. Fastest growing channel.
India's women apparel market is highly unorganized with a share of 67% towards unorganized whereas the remaining 33% is split across EBOs, LFS, MBO & E-commerce.
In the last 5 years, the market is getting skewed more towards online channels. In ethnic organized retailing, share of EBO was highest in 2015 at 44% which in 2020 is got dominated by E-commerce at 52% followed by EBO at 24%. According to the DRHP, the shift is mainly due to COVID and will normalize over years.
Coming to the organized women's western wear market, it used to be dominated by EBO at 33% in 2015 which has now shifted to E-commerce at 58%.
Some of the key factors that is helping the industry grow are increase in number of working women, shift towards aspiration rather than need based buying, culture of mix & match, Emergence of e-tailing, Consistent quality at affordable prices etc.
Another factor that we must look at is how things are changing for women's wear.
There are certain changes happening in the women's dressing which I have detailed below:
1. COVID: During & post covid, women apparel industry saw a decline in formal wear but increase in casual wear for a more practical work from home(WFH) life. The sales of Sleepwear, Loungewear & Athleisure is on the rise. Loungewear is something that women is wearing both inside and outside the home today. Women now prefer, comfort in their clothing. Ethnic wear brand BIBA launched its range of sleepwear and loungewear to cater to the home bound customers.
2. Increasing preference by women towards buying contrasting top & bottom wear rather than buying full suit sets. Concept of mix & match has become important part of self-styling for women.
3. Fusion category of bottom wear has taken over women's apparel market both in terms of style and comfort like plazzos & dhotis.
4. Women are now wearing certain bottom wear universally such as Jeggings, Plazzos can go along with western tops, t-shirts, shirts, ethnic kurtas & Kurtis
5. Indian women have transitioned from wearing sarees to 2 piece sets which include SKD (Salwar, Kameez, Dupatta). In the last decade, top & bottom wear for women have begun to widely sold as separates available for mix & match.
Now let us look towards Apparel product types, this is more to be explained from Go Colors point of view:
1) BASIC/CORE: These include products that serve a repeated & functional need of the consumer. For eg: White Shirt, Pair of socks, Innerwear & Bottom wear.
Used on a regular basis carrying a certain product use life. These are discarded and replaced leading to repeat purchase behavior, simply implying certainty of consumer demand.
Color palette is limited & designs do not demand significant changes frequently.
All these leads to undertake planning & merchandising with predictability. Inventory risks are limited due to these products being sold around the year and do not demand changes.
Here customers are focused more on the price, comfort & fit of the product.
Eg: Jockey: Innerwear
Decathlon: Comfort & Sportswear
M&S: Formal wear
Go Color: Women's Bottom wear
2) FASHION: Fashion products are signified by silhouette, colors & appearance. Because of these factors it demands regular change in their offerings.
Eg:- Kurtas for occasion wear, dress for office etc. All these require change in fashion cycles as well as weather i.e. different dresses for cold and summer.
Customers while buying fashion apparel focus more on the design & trends that they are exposed to as being 'In-Style'. With the exposure to social media, customers are now exposed to world wide trends.
All these implies product development, sourcing & inventory planning to account for risks associated with vagaries of a fashion focused products.
Eg- Zara & H&M
W& BIBA in fashion focused ethnic fashion retailers
Reliance trends & Westside are fashion focused LFS across multiple categories.
Core apparel categories have limited discounting such as Go Colors, Lux, Jockey, & Rupa. Exception being the end of season clearance sale to prepare for the next season. Whereas in Fashion apparel, high & frequent discounting is prevalent due to time & vulnerability of these brands to changing trends.
Now, let us look at the Women Bottom Wear category where Go Color focuses on.
Go Colors Women Bottom Wear market comes under the core segment. With tailwind towards organized women's bottom wear market, Organized market is expected to see a CAGR of 24.3% until 2025.
Go Colors has the first mover advantage in women bottom wear category & this category is considered to as the core essential with the brand dedicated to the same.
A first mover has the competitive advantage of being the first in the market. It gives them the benefit of creating & defining that category & rules of the play. Other players are then forced to follow these rules created by the market leader as the market size expands.
About the company: Go Fashion (India) Ltd
The company was incorporated in 2010. The family of the promoter group has background into garment business. In their next venture, they Wanted to focus into space with lesser competition.
To start with, Go Fashion put up first kiosk in Chennai and by 2014, they had 80 kiosks. In 2014, they got investment from a venture capital firm called 'Sequoia', And then they set up first store in Chennai. And now they have 459 stores. Of the 459 stores , 11 are franchised and the rest is owned by the company.
Co. is among the largest women's bottom wear brands in India with a market share of 8%.
The company tries to provide high quality product at reasonable prices. Average selling price of the products are around ₹600. Given that the women's apparel market is fragmented & lack of organized players & limited brand competition in women's bottom wear, help established players like Go Colors to benefit from the growth in bottom wear category. There is an increase in preference for organized retail & movement towards branded category in the evolving category of women's bottom wear.
Women bottom wear includes Churidar, Leggings, Dhotis, Harem Pants, Patiala, Plazzos, Culottes, Pants, Trousers, Jeggings, Denim etc
Company's product is a subsegment of various larger segment of women apparel market. It forms part of activewear, sleepwear, salwar-kameez, Ethnic & trousers/skirts. According to the management, Core categories such as Bottom wear are accepted across the country.
Company operates its stores through a Company Owned and Company Operator model(COCO) i.e. majority of the stores are owned and run by the team of Go Colors. Reason for using COCO model retailing is to ensure efficiency & OFFER CUSTOMER A STANDARD EXPERIENCE & SERVICE.
Also, the company uses cluster based expansion(presence of stores is same area/cities) to have better control over costs via inter-store stock movement, reduced logistics cost, increased inventory optimization . And to address demand in high potential markets.
Go Fashion's profitable unit economics of their EBOs enable them to expand their EBO network across various regions in India. In the last 3 years, co. has opened up a new EBO every 12th day.
Company's business development team helps identify viable location for their EBOs.
Key strengths of the company:
Products are not vulnerable to fashion trends
Products are not seasonal in nature
Company has largest bottom wear across categories of ethnic, western & fusion & denim.
Average selling price of the company is ₹600. It enables them to gain acceptance in tier II & III cities as well
Co has gone through 44 cycles of product development i.e. establishing vendors, quantity of order, colors etc. and now have the entire supply chain in place.
Co has been able to establish economies of scale which is a working capital advantage & is difficult to replicate.
Having been present for over a decade has helped the co create brand equity & connect with the customers.
Given that bottom wear is a horizontal category, it enables multiple extension & new product launches.
Among the few apparel retailers that offer women bottom wear across all categories including ethnic, western, fusion & denims.
Caters to women across all age groups & girls physique.
With the brand 'Go Colors' & round the year relevance of company's products portfolio allows company to retail their products at full price & discounts are offered only in limited circumstances.
Co's reasonably prices, differentiated & quality product portfolio coupled with extensive network helps to sell the product directly to a wider customer base.
Product price range= ₹225 to 1599
Average selling price= 619(FY21)
More than 88.3% of company's product are related at a price lower than ₹1049.
Share of branded women's wear has increased from 19.7% in 2015 to 33% in 2020 at a CAGR of 24.1%.
Products:
Products include: Churidar, Leggings, Dhotis, Harem Pants, Patiala, Palazzos, Culottes, Pants, Trousers, Jeggings, Denims etc. (Never knew there are so many variety of Women Bottom wear :))
Product category: Ethnic wear, Western wear, Fusion wear, Athleisure, Denims, Plus sizes & Girls wear.
Company sold women bottom wear in 50 styles in more than 120 colors (That explains the word 'Colors' in the brand name). Leggings & Churidars contribute 50% of Revenue and Q3 is the best quarter for the company. Q2 & Q4 is a bit lean.
Discounts & Inventory Risk:
Apparel industry is known to offer discounts but bottomwear category has very limited discounts due to the reasons mentioned below. The biggest risk faced by the apparel industry is the inventory risk which is quite low in women bottom wear/core segment.
Why limited discounts offered on core products?
Products are core and essential to customers
Immune to changes in fashion trends & seasonality
Product demand consistent across regions
Products are sold round the year
Benefits of women's bottom wear segment:
Low inventory risk
Top is the fashion & bottom wear is the core. There is lesser discounting on Core products. 97% of the company's products are sold on full price.
Bottom wear being a core essential category & having limited print edition are insulated from changes from in fashion trend and is acceptable across the country.
Anyway Company writes down inventory greater than 365 days by 70%.
Branding:
Since the company is generating a profit margin of more than 10% despite outsourced manufacturing implying pricing power. In order to maintain the margin, the company needs to continue its brand building exercise.
Go Colors uses EBO(Stores) as the primary advertising channel. EBOs have standard visual design & layouts catering to their brand to make them readily identifiable. EBOs are located in high street, Malls, Residential market, in Major metro, tier II & III cities as well as airports i.e. high visibility areas.
LFS(Large Format Stores) also act as marketing front. LFS act as a capital efficient model to expand footprint nationally as they offer the advantage of capital efficiency & brand building opportunity.
Ad expense is 2.5%-4% of revenue and mainly digital. Also work on user generated content .
Co does geo-targeted digital & below the line marketing whenever a new store is opened.
Company uses their 'Go Colors' logo across their product labels and marketing material. Co uses identifiable & standard colors & typography across packaging material at point of sales etc
Coming to the brand name, Company sales all its products under a single brand 'Go Colors' which help the brand to gain more visibility. Something similar 'Indigo Paints' do, selling all its product under a single brand name.
Let us look at another important aspect of the business which is manufacturing.
Manufacturing:
Co follows a Asset Light Business model and outsources the entire manufacturing. The figure below explains the entire manufacturing process.
Distribution Channels:
Go Fashions generated maximum revenue from the Exclusive brand outlets(65-70%). Large Format Store (LFS) such as Reliance retail, Central, Unlimited, Globus stores, Spencers etc contribute around 25% of revenue.
Online (E-Commerce) sales is still very low. It might be due to low/No discount policy of the company.
Given that EBO is the key pillar for the business of the company, I will brief slightly about the how this works.
1. Average EBO size for the company is 500 sq ft and the CAPEX on a single store is 18 lakhs, which the store is able to break-even in 15 months.
2. Of the 459 EBOS, 300 stores will have an annual revenue of 75 lakh each.
Of the 459 stores, 285 EBOs are in high street stores, 165 are in Malls.
60% of EBO is in 8 large cities
3. Co keeps closing down non-performing stores. In FY21, the company closed down 26 stores due to decline in footfalls on account of COVID-19.
4. All EBOs are operated on leased properties with terms varying between 11months to 9 years. All lease agreement contain an early agreement termination clause.
5. Process of selecting suitable location for establishing new stores:
Local population density
Rental lease rate
Market potential
Accessibility & Proximity to their customers
6. Company plans to add 120 EBOs in the next 2 years.
7. Company wants the location to be right. And is willing to Pay a higher price for that
8. Rent under the majority of current stores are under any of the 3 ways:
i. Fixed rent
ii. Higher fixed base rent or a percentage of store's monthly sales revenue
iii. A percentage of store's monthly sales revenue
Another important distribution channel is the Large format stores(LFS) such as Central, Unlimited, Globus Stores, Spencers retail.
LFS is a very imp channel helping the company to brand in an non-expensive way.
Team:
The company is led by :
Prakash Kumar Saraogi, MD- He has 30 years of experience in the garment industry. His experience in exporting garments have helped the company procure quality fabrics at competitive price.
Gautam Saraogi, ED & CEO
Prakash Kr Saraogi is the father of Gautam Saraogi.
Salary of Promoters are quite reasonable at ₹1.3cr for Mr Prakash Saraogi & ₹0.9cr for Gautam Saraogi.
Coming to the other team member, co has total employee strength of 2668.
Design team of 10 members. Design team people regularly participants in trade fair & exhibitions both in India & Abroad to understand the emerging trends.
2376 employees are front end staffs at EBOs and LFS. Each EBO store has 3-4 employees with a store manager whereas LFS has 1 employee each at each LFS.
Financials:
As you can see that the company was on a high growth trajectory when COVID hit in FY21 leading to decline in sales. Since the company generates the majority of the revenue from physical stores which remained shut during the lockdowns.
Given that the Debt of the company is on a higher side at ₹232cr with the decline is revenue & the margins, the Interest coverage ratio was at just 0.9x in FY21.
The profit margins are quite healthy and so does the operating cash flow.
Working capital days= 150 { 100 inventory days + 50 receivable days}
Target is to reduce the inventory days to 90 from the current 100 and receivables to 30 from 50.
Company writes down inventory greater than 365 days by 70%.
Things management has got right:
As of now, the management of the company has got a lot of things right. It started with low cost investment with respect of selling clothes on Kiosks trying to understand the market and that too for 4 long years. Once they have very clear understanding of the market, they ventured into full fledged stores. And grew rapidly from there.
Selecting Women's Bottom wear category which might be considered dull by many and creating brand on such limited color & no print cloth as the base, has worked immensely for them. Since, these are core products and susceptibility to changes are limited, it reduces inventory risk(Key risk for textile retailers).
Using EBO as the marketing tool, the company has reduced the need for external marketing. That simply applies very judicious application of capital.
Outsourcing the manufacturing has managed the company to grow rapidly as they are not tied up with capacity constraints as well as design/range constraint. Retailers need far more wider range than a what a single facility can manufacture.
Smaller CAPEX of 18 lakhs on each store reduces the risk associated with store closure.
Now being the first mover, the growth opportunity is quite big.
Growth strategy:
Expand through EBOs- Cluster based growth. Lower average price point allows them to be present in tier II & III cities
Company will continue to follow 'Company owned Company operated' model for growth.
Grow through e-commerce - Post pandemic there is a shift of consumer being comfortable in purchasing clothes online. Co. is also adapting to online medium. Current online sales=11.9cr.
Leverage company's position in bottom wear
Increase supply chain efficiency
Lot of scope for expanding in bottom wear category since it is a horizontal category enabling multiple extensions and new products.
Expand into loungewear a work from home collection, athleisure & other new product.
Currently present across most parts of south & west India(70% of Revenue) & intend to deepen penetration in that region as well as expand in other areas.
Competition:
TCNS, BIBA, Global Desi, Go Colors, AND, H&M, Zara, M&S, FabIndia etc.
Women bottom wear competition:
Lux- Lux Lyra
Rupa- Softline Leggings
TCNS- They launched their bottom wear brand 'Elleven' in 2020
Risk:
Inventory risk- Only to certain extent
Promoters have pledged 16.56% shares of the company to ' Tata Capital Financial Services Ltd' for a loan of 40cr.
Increasingly other brands are also introducing their own bottom wear brands such as Elleven by TCNS leading to increase in competition.
Company has very little presence on e-commerce channels. And their strategy to sell at full prices might be a hindrance for growth in this segment.
Valuation:
As on 8th Dec 2021, the valuation of the company is ₹6,360cr at the price of ₹1178/share. If we look at Market Cap to Sales ratio (FY20 sales, since FY21 was COVID hit), it comes down to 16x and Price to Earnings came to about 120x.
Usually, retail companies trade at higher valuation given the visibility in the growth by the addition of new stores and to some extent addition of more products.
But in order to hold it for the long term, one should wait for the right time to add at a lower level.