Manyavar : Vedant Fashion Ltd

Can it be next Titan Ltd ?

Why this company ?

This idea came to me in an unusual way. Usually, I look for signals such as a huge stock price or a time correction, a great business trading at its decade-low valuation, or an entrepreneur taking a new bet that offers nice optionality with low risk. I mostly don’t engage in scuttlebutt due to laziness and time constraints, but in the case of Vedant Fashion Ltd (VFL), it all happened by chance.

Two years ago, when I got married, I found it super easy to buy wedding dresses from VFL at a reasonable price point compared to the unorganized market. Recently, I explored the entire unorganized market in Delhi (Chandni Chowk, etc.) and the organized market with my brother-in-law for his wedding. To my surprise, I found that Vedant Fashion Ltd offered far better quality/design at similar price points compared to the unorganized market. We spent weeks exploring all the shops in Chandni Chowk market.

The great thing about this business is that wedding markets are recession-proof, and consumers are not very price conscious. Manyavar (men’s clothing) is a market worth possibly 10,000 to 15,000 Cr, and VFL enjoys just a 10% market share in it. Moreover, 80% of the market is dominated by unorganized players.

VFL is a category creator and has been successful in making Indians wear ethnic clothes in weddings through its branding. Additionally, it is the only clothing company that enjoys 40% margins due to its superior business model.

Apart from Manyavar, which generates 80% of the revenue, Vedant Fashion Ltd (VFL) has ventured into adjacent markets with its other brands:

Mohey is VFL's mid-premium flagship women's brand, launched in 2015. It is currently the largest brand in India, with the most number of stores as of FY20. Mohey focuses on women's Indian wedding and celebration wear, and this market could easily be 10x bigger than Manyavar. I feel that it is highly likely that VFL will be able to capture 10% of this market in the next 3-5 years, which means revenue doubling just because of Mohey.

With Manthan, VFL is trying to disrupt the low-end markets with its value brand, which offers Indian wedding and celebration wear clothing for men. Following a refreshed launch in 2018, products are sold primarily through multi-brand outlets, large-format stores, and online platforms. The management expects to cater to the sizable number of mid-market weddings and other celebrations through this brand.

With Twamev, VFL's premium brand in men's Indian wedding, the company is trying to disrupt the premium wear and celebration wear market, which is priced between Manyavar and other luxury boutique brands.

The company has a separate vertical for kids and is witnessing good growth in the category. The share of kids in the company's overall revenue is currently at about 3%.

All of these new ventures offer good optionality to the investors.

In conclusion, VFL's new ventures, apart from Manyavar, offer significant potential for growth and profitability. With Mohey's focus on the mid-premium women's Indian wedding and celebration wear market, Manthan's value brand for men's Indian wedding and celebration wear, Twamev's premium brand for men's Indian wedding, and the separate vertical for kids, VFL is diversifying its offerings and positioning itself for further growth. These new ventures offer investors good optionality and make VFL an attractive investment opportunity.

Vedant Fashion Ltd appears to be an attractive investment opportunity. With its strong market position, category creation, and recession-proof business model, it has the potential for growth and profitability.

How it all started is fascinating story - (His life lessons)

(source :Forbes India)

In his mid-20s, Ravi Modi wanted to buy a Mercedes, he said “My belief was that if you can afford it, buy it,” At that time it was just four-year-old business, Manyavar, was doing reasonably well and money was flowing smoothly. However, as he firmed up his plans to buy a Mercedes, his father, who had earlier inadvertently brought out the entrepreneur in Modi, asked his son a few questions. And then doled out some sound advice.

“He asked me whether I can afford it. I said I can,” the soft-spoken Marwari tells (source :Forbes India). “He asked me if my business was sustainable. I said yes. He said you will require capital. I said yes. He asked me if my business has the potential to grow. And I said yes.” Modi adds: “Then he told me, ‘Thode din ke taklif zindagi bharka aaram, ya thode din ka aaram, zindagi bharki taklif (Pain for a few days, and you can have a lifetime of relaxation, or relax for a few days, and you could have pain for the rest of your life)’.”

That stuck with him forever. Modi skipped his plan to buy a Mercedes, and instead decided to plough back all the profits into the business to avoid falling into a debt trap as he expanded. He stuck with his Honda City for the next 15 years, until his son asked him to change it after a family friend met with an accident. “That’s when I bought my Mercedes in 2017,” Modi says.

“In Class 2, I got 100 in mathematics, and my mother threw a party,” says Modi. “In Class 3, when I got 100, my mother didn’t give a party. That’s when I realised that nobody celebrates the same achievement twice. I needed some kick and I started solving the paper faster.” By the time he appeared for his Class 12 exam, he finished his mathematics papers in 45 minutes, scoring a near cent. “Anybody who remembers me from school days would remember me for mathematics,” says the soft-spoken billionaire.

That meant, by the time he was 13, Modi joined his father at their retail store, which sold everything from shirts and pants to jeans, after school. “I found a lot of interest,” says Modi. “Somehow, I didn’t realise that my entire childhood from 13 years went in my store.” While he did contemplate doing an MBA after graduating in commerce from St Xavier’s college, Kolkata, his father suggested otherwise. “The real MBA happened in those nine years between 13 and 22,” says Modi.

Turning point

By 2005-06, Modi had begun selling his products to large format stores (LFS)—from Future Group to Shoppers Stop and Westside—building a pan-India presence. Heeding his father’s advice, he ensured he did not take on debt, and instead channelled most of the money into the business.
In 2006, to take care of his ailing father, Modi stepped away from work for some six months. “I used to work like a typical entrepreneur, managing everything. Life was very busy. Then I realised we were unnecessarily involving ourselves in operations. The business was running well without me for six months. From that day I understood, that instead of ROI (return on investment), it should be return on time invested (ROTI). I realised I should not waste time on things where I don’t add any value,” he says.

That took him back to the drawing board—to focus on strategy for the next phase of growth. By 2008, Manyavar set up its first exclusive brand outlet (EBO). “That’s when the real journey began,” says Modi. “Until then, we used to sell for ₹20-25 crore every year.” The company’s first store opened in Bhubaneswar, and over the next year, opened 12 stores. The early ones were opened by the company before it moved to a franchise-led model. “By that time, I was clear that the way forward for any fashion apparel business in India is EBO,” says Modi.
Modi believed multi-brand outlets were becoming more of a hindrance than being facilitators. “They never used to work on data,” he says. “It was difficult to make them understand anything. And because I had spent nine years with consumers, we used to always think of the customers first.”

That means an obsession with data, and efficiency, something Modi spends a considerable amount of time on. “Anything and everything we do, we want to bring efficiency,” he says. “We have one of the highest productivities in retail. We haven’t sold a single garment at discount. Even then, the dead stock in Manyavar is less than 3 percent. We make 30 percent PAT (profit after tax). We don’t make that by charging more to the consumer. That’s an outcome of efficiency. We keep pricing reasonable and despite that, we have the highest margin. Efficiency is a key pillar in our entire organisation.”

Business Model -

Today, the company operates mostly on a franchise-owned-franchise-operated model. “When we started, we had a COCO (company-owned-company-operated), COFO (company-owned-franchise operated), FOFO (franchise-owned-franchise-operated), and all kinds of models. By 2016-17, we converted all our stores into the FOFO model. People were doing backward integration, and we felt doing forward integration was the way to go. We will do the marketing, designing and supply chain, and not do anything else.” Over the past few years, Modi claims several young customers have become franchise owners, including doctors and consultants, who see massive potential in the brand.

Category creation is tough but that’s what makes most of the money for business and investors -

“While most Indian companies were looking at western wear, Modi moved into the category, while others missed the bus. That has helped it create a strong impact with Indian customers. Now it is also able to capture the women’s wedding wear market as a result.”

Franchise Model:

• The company follows a franchise model where the franchise bears the rent cost in tier 3 cities, while the company bears the lease cost in 60% of its revenue-generating stores.

• The franchise model has payback periods of about three to three-and-a-half years, and almost no franchise has left them of their own will.

• Vedant Fashions Limited has a strong supply chain technology that allows them to manage stock efficiently and avoid discounts, leading to good margins.

The success- ( why they make 40% margins way higher than its peers)

Today, Manyavar operates some 1.3 million sq ft of retail stores in the country, choosing not to chase the number of stores. Every year, Modi wants to add between 1.5 lakh sq ft and 2 lakh sq ft of retail space. “The whole business is on a variable, asset-light model,” he says. “There is no capex, there is no fixed expense other than corporate head office salary. Every rupee of working capital can generate an equal rupee of PAT, with 90-95 percent free cash flow. Only Unilever will have a ROCE (return on capital employed) of 100 percent, and we might be the second, and within a year or two, we will be at more than 100 percent.”

The company operates in 230 cities, and is busy firming up plans to open stores in 150 new cities. A significant portion of its customers are spread across Southern India, with Bengaluru and Hyderabad emerging as the two big centers. “We have a cluster approach where we believe in 50 or 60 markets, where we have numerous stores,” Modi says. “This is just the beginning of a multi-decade growth opportunity for the category.”

Along the way, in 2017, as business expanded rapidly, Modi decided to turn to private equity, not because he needed money for expanding the business. “We always thought that there is a limit for wisdom and knowledge,” says Modi. “We had been meeting private equity players since 2008 and we thought why not get a good partner. We liked Kedaara Capital and its approach. Money was not the intent, but to have a wise board and to understand whether we were missing on anything.” Kedaara Capital acquired 7.5 percent stake in the company.

“They’ve ridden well on the sector’s growth and consolidation into modern trade, as the desire for brands has grown among buyers of Indian traditional clothing,” says Devangshu Dutta, chief executive of Third Eyesight, a management consulting firm, and managing partner of PVC Partners, an early-stage investment & advisory firm. “Also, the wedding market is more recession-proof than many other segments, which has been a favourable factor during the pandemic.”

Last year, despite the pandemic, Modi says Vedant Fashions closed the year with better profit margins, despite most states putting a ban on weddings and other social gatherings. “The beauty of our business is that while business had reduced, our margins were 30 percent PAT,” Modi says. “The entire business is on the variable model and even franchises didn’t lose money.”

In India, the men’s wedding and celebration wear market was estimated to be worth approximately ₹13,300 crore as of FY20, according to brokerage firm HDFC Securities. It is projected to increase to between ₹17,000 crore and ₹18,000 crore by 2025. In comparison, the women’s wedding and celebration wear market is significantly larger, estimated to be worth approximately ₹75,000 crore as of 2020. It is expected to grow to ₹95,000 crore and ₹100,000 crore by 2025.

“Seventy-three percent of Vedant Fashions Limited’s (VFL) franchisees have operated its stores for three or more years and 65 percent of the sales of its customers from its franchisee-owned EBOs are derived from franchisees having two or more stores is testament to the success of EBO distribution model,” HDFC Securities said in a report in February. “Through a network of over 300 franchisees as of September 2021, VFL has demonstrated a track record of commanding a high initial capital commitment and, in return, providing all necessary support in connection with identifying potential locations for new stores, managing multi-channel advertising on a national and regional basis, assisting in-store development and inventory management, directly managing the supply chain and providing detailed training programmes for store staff and franchisees.”

Today, 90 percent of the company’s business comes from EBO with about 8 percent from online models, a segment that Modi’s son, Vedant, and his team are extensively looking to build. “We might be the only brand with such a high percentage from EBOs,” Modi says. “The segment is unorganised, fragmented, and understanding this is a journey. Because we were data-focussed, we could work it out.” Along the way, Modi says his biggest advantage has been in reducing the inconvenience of wedding purchases.

“Pre-Manyavar, the wedding shopping experience was a problem,” Modi says. “You had to go a few times to the store for measurements or alterations. Now people don’t have the time. We are a one-stop solution where work can be done in one hour.”

Now, as the company looks at avenues for its next phase of growth, Modi has forayed into categories within the wedding market that can drive sales. The company recently launched Twamev, a premium collection of men’s wedding wear, and Manthan, a cheaper option to its popular Manyavar wear. “When you look at the Indian pyramid, there are five consumer layers. Manyavar and Mohey are in the third layer which is the sweet spot, comprising the typical aspirational middle class,” Modi says. “In India, one crore weddings take place, and 30 lakh to 35 lakh marriages happen in that category, which is about 50 percent in terms of value. We believe that is the largest segment, but now we have a strategy where we are going one level up and down.”
While Manyavar caters to the ₹5 lakh to ₹50 lakh wedding market, the ₹50 lakh to ₹5crore market is being catered to by Twamev, while the less than ₹5 lakh is being addressed by the Manthan range. “We believe once the category grows, we should be there in all these three layers. So, there is clear demarcation and no overlap,” Modi says.

All that means that the reclusive billionaire, who started out two decades ago after his tryst with destiny, is getting ready for a long period of growth. It also helps that he has more time to plot his strategy for it. “People talk about wealth, I believe the real wealth I have earned is time for myself,” Modi says. “The mission is to be a dominant player in the celebration space. We have cracked an unorganised market and we’ve been able to organise it and scale it. Now, the vision is to instill pride in Indian wear.”

Some interesting slides -

Why it could be trading cheap?

Manyavar is market leader in men’s wear and only enjoy 10% marketshare in it, there is room to gain marketshare from unorganized players as through schuttlebutt i can say they offer way higher value and similar prices Vs unorganized so, its inevitable.

if they be able to crack women’s (Mohey) wear which could easily be 10x larger market then today’s valuations aren’t capturing it at all.

Growth plans -

Company plans to grow retail footprint at a CAGR of 16% over the next 2-3 years, and planning to double in 4 to 5 odd years.

What is the scope to grow the Men’s wear market?

Another leg of growth will come from SSG -

1. Due to gaining marketshare.

2. They will be able to raise price with inflation.

Good single digit SSSG growth in a sustainable

Most of the sales comes from Manyavar (Revenue FY22 = 1500 Crores)

Mohey -

Notes from Conference calls on Mohey Brand:

• The company launched the brand Mohey in early 2016, and it has been EBITDA positive ever since, with a focus on lehengas and sarees for the brand.

• The company has decided to open about 6 to 7 exclusive brand outlet doors followed by the first EBO, which it had opened in the new market area of Kolkata for Mohey.

• Mohey products are only available in flagship stores with more than 3000 square feet of retail space.

• Mohey brand will scale up aggressively once exclusive brand outlets reach a productivity of Rs. 10,000 per square feet.

• Mohey's SSSG growth was higher than company average in Q3 Fy23

• Merchandising mix is continuously evolving for better conversion rates and inventory turnover

• Inventory turnover ratio is slower than Manyavar, but goal is to improve efficiency over long-term period

• Aims to provide an aspirational yet value-for-money experience for consumers through Mohey, which offers wedding wear at an average selling price of INR 22,000 for a lehenga

• Dead stock percentage for Mohey is higher than Manyavar, but aims to bring it to a very decent dead stock number and eventually to the company average

The company has demonstrated excellent marketing skills through its #TaiyaarHokarAaiye campaign, which aimed to increase the share of wedding attendees shopping for Manyavar. The campaign resulted in a significant behavioral shift in Indian men, leading to increased per capita consumption of Indian wear at weddings.

In terms of valuation, I believe there is a good chance that the company will achieve net profits of Rs 800 Cr in three years while still having a decent growth runway ahead of it. Currently, it is trading at 37x FY26 earnings, which may seem expensive when viewed through conservative glasses. However, missing out on Dmart and Titan has taught me that Vedant Fashion Ltd belongs to the same league, and as long as it continues to sustain this position, it will continue to trade at a higher PE. The market will perceive high growth rates far into the future, which the company will continue to prove correct.

Ideally I would prefer to buy this company at current fy24 pe of 37 , but if market see business doubling revenue in 3 years from now with long runway for growth it will hardly sell you at mid 30s PE valuation (it just never happens)