Lovable Lingerie: SELL. Not much loved

The women’s segment makes up about 60 per cent of the overall domestic innerwear market. Lovable Lingerie’s premium brand Lovable commands a good 28 per cent share of the premium innerwear market. Also present at lower price points with brand Daisy Dee, the company has access to a wider consumer base. It is among the few established national innerwear brands.

But the company has not been able to capitalise on its brand strength, with consumers cutting back on spending. Sales growth has been in single digits for eight quarters now.

On the other hand, peer company Page Industries has, through diligent price hikes and successful broadening of its product basket, kept sales growing at above 20 per cent in this period. Maxwell Industries, which retails brands such as VIP and Frenchie, also managed better growth than Lovable Lingerie.

The Lovable stock, with trailing 12-month price-earnings multiple of 32 times, is at a 57 per cent discount to Page. But this discount is justified in the light of its poor performance and smaller size — Lovable’s revenue is almost a tenth of Page’s. Lovable’s valuation is also above its own historical three-year average of 27 times.

Investors can sell their holdings in the stock; those who bought it on our earlier recommendation in 2013 stand to make an absolute profit of 26 per cent.

Lovable Lingerie is present across price points through the Daisy Dee, College Style and Lovable brands. The Lovable brand accounts for about 60 per cent of revenue. Though the essential nature of innerwear does offer some protection, the company does not seem to have made the most of it, compared with peers.

From the March 2013 quarter onwards, revenue growth has been in a band between 4 and 7 per cent. This is significantly below the 15-17 per cent growth in the quarters before.

One reason was that, to draw in wary consumers, Lovable desisted from hiking product prices in 2013-14, even as the cost of cotton and synthetics were rising. That the company simultaneously cut advertising and promotional costs in the 2013-14 fiscal didn’t help either.

Raw material cost, as a proportion of sales, rose from 39 per cent in 2011-12 and 2012-13 to 43 per cent in 2013-14. Staff costs also rose.

Reduced ad-spend and other income helped maintain operating profit margin at the average 20 per cent for that year. For the nine months to December 2014 too, the raw material-to-sales ratio rose. But with no cutbacks in other expenses, profit margin fell 3 percentage points to 15.4 per cent. Capacity expansion, funded through proceeds raised from Lovable’s public offer in 2011, led to higher depreciation outgo. With slower sales as well, net profit grew at a low 5 per cent in 2013-14 and fell 11 per cent for the nine months to December 2014.

The company’s receivables are also mounting, up 82 per cent at end-December 2014 compared with the year-ago period as the company faced trouble in its distribution channel.

The company has since undertaken some price hikes to compensate for higher cost of material and labour. But input prices are now declining as excess supply weighs on cotton and falling crude oil makes synthetics cheaper. The company may not, therefore, be able to raise prices enough to expand growth. While profit margin could improve, a strong underlying sales growth is required for sustained performance.

Lovable plans to focus more on the premium end of its product range to boost growth and margins, but this strategy may take some time to pay off. It also signed a licensing agreement with Adidas late last year to produce and sell the brand for three years. But here too, as there are already many other licensed players retailing the Adidas brand, the agreement may not give the company an edge over peers. Lovable may also need to step up promotional spending which can weigh on margins.

The company still has ₹50 crore left from its public issue proceeds; half of this was earmarked for a joint venture investment which has not yet materialised.

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