Lux Industries: Premium products, brand visibility crucial to success

Lux Industries is one of India’s major innerwear cum leisurewear brands for men.  Investments in brand building, ability to sell more high-value products to a diverse customer base, and cost efficiencies are key to Lux’s earnings.

Given expensive valuations, investors would be better off accumulating the stock on corrections.

FY18 was a good year for Lux, with strong volume growth boosting the topline. Volume growth accounted for 16 percent of the total 19 percent growth in sales year-on-year. This helped neutralize higher raw material costs. Margin improvement was primarily attributable to higher sale of premium products, cost savings and forex gains.

The plans ahead

Since this segment caters to price-sensitive buyers, competition from unorganised players is high. Post-GST, organised players such as Lux are well placed to gain market share, as the economics turn unfavourable for the unorganised players. The company will try to make up for lower margins by trying to sell higher volumes.

At present, premium products account for 21 percent of the company’s sales. Lux plans to increase this share, as it will help improve overall margins. This is expected to boost the company’s operating margins over the next 2-3 years.

‘One8’ tie-up

In the second half of FY18, Artimas Fashions, Lux’s wholly owned subsidiary, signed a deal with ‘One8’, a brand launched by Virat Kohli. Lux will manufacture and sell premium quality socks, innerwear and sleepwear under the co-brand ‘One8 by ONN’ globally from Q2FY19. This partnership will enable the company to tap the youth market by leveraging its distribution strengths, the management said.

Network augmentation

For Lux, historically, the key markets have been northern, eastern and western India. To ensure adequate brand visibility in the southern states of the country (an under-penetrated market in comparison), the company will add 30-40 distributors in the region each year. This will strengthen its existing network of over 900 long-term distributors, 160 large format stores and 9 exclusive brand outlets.

Lux will invest heavily in advertisements through its celebrity brand ambassadors (Amitabh Bachchan for the mass segment, Varun Dhawan for the mid-premium segment), to connect with buyers of different age groups and varied preferences. Around 7-8 percent of the company’s annual turnover will be spent on advertising and promotions.

100 percent of Lux’s manufacturing activities are done in-house to achieve inter-process integration and derive benefits of scale through technological automation. Stitching operations for mass and mid-premium products, being less capital-intensive and cheaper, are outsourced. These measures should yield higher asset turns and better returns on capital.

Until now, Lux exported premium men's innerwear products mainly to clients in the Middle East and Africa. The company’s focus is now shifting towards expanding its market to European nations. A weak rupee should improve realisations. Gradually, the contribution of exports to total sales is estimated to increase from the present level of 10 percent in FY18.

Lux announced an organisational restructuring strategy in March. Under this, two knitted apparel manufacturing entities (J.M. Hosiery and Company, Ebell Fashions Private Ltd) of Lux’s promoters group will be merged into Lux in FY19. Contours of the transaction haven’t been finalised as yet.

India’s innerwear market, valued at Rs 24,000 crore in 2015, is projected to grow to nearly Rs 47,000 crore by 2020. Rising per capita spends on such products, increased brand consciousness among masses, growth in online retail and availability of purpose-specific products (loungewear, fashionwear, sportswear, casual wear etc) are some of the key earnings drivers for Lux.

A robust portfolio of brands, consistent earnings performance, minimal capex requirements (maintenance-related only) for the next 2-3 years and market expansion initiatives should help Lux boost its growth. However, risks associated with high competitive intensity (in case of high-margin premium, mid-premium products) and input cost pressure (in case of low-priced mass products) may play spoilsport.

At 44.2 times FY20 projected earnings, the stock is trading pretty close to its 52-week high at this point.  Investors looking to buy the stock should do so at corrections.