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Buy Rupa & Company Ltd Ltd For Target Rs.295 - HDFC Securities

Our Take:

Rupa & Co. for more than 5 decades, is a house-hold branded inner-wear player in India. It has been operating an asset-light business model with a strong focus on constantly creating and nurturing its brands under flagship brand “Rupa”, comprising of 18 sub-brands (Frontline, Macroman, Euro, Softline, Jon, Bumchums, Torrido, Thermocot etc). From being present in the mass and economy segments, the Company has also strategically marked its presence across mid-premium to super premium brands. It has a Pan-India footprint spread across 125,000 retailers through 1000 dealers

Going forward, the company’s key pillars for growth include -1) Constant focus on asset-light business model with expansion through franchise based EBOs(Exclusive Brand Outlet). It plans to open 50 such stores. 2) Enriching its product portfolio with scale up of super-premium licensed brands like “FCUK” and “Fruit of the Loom” 3) Continued endeavor to improve its brand equity with ~6-7% investments behind A&P. Over FY12-20, the company has invested ~Rs. 650Cr in brand promotion activities which accounts for ~7.5% of cumulative revenues. 4) Reinvent its business model with higher pie of revenues from digital channel. In order to accomplish this, it has tied up with leading online marketplace operators like Amazon, Flipkart etc.

Valuations and Recommendations:

Post the Covid-19 pandemic, we believe, low ticket sized branded knitted-wear as a category is all set to go through a structural shift. Rupa’s inherent advantage of strong equity coupled with last mile reach through its robust distribution network developed over last 5 decades makes it a clear beneficiary of consumers shifting towards affordable branded quality products. Margins which are on the uptrend and working capital situation that has improved in FY21 may deteriorate in FY22, but still be better than that in the past. We expect, the company to record a Revenue and PAT of 10% and 29% CAGR over FY20-23E. Higher PAT growth is likely to be mainly on the back of favorable base, cost rationalization measures and constant debt reduction.

The stock is currently trading at valuation of 15x FY22E earnings. We feel the base case fair value of the stock is Rs 265 (17.5x FY22E) and bull case fair value is Rs 295 (19.5x FY22E) over the next two quarters. Investors can buy the stock at LTP and add on dips in the Rs.217-221 band (14.5xFY22E EPS).

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