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TPG, Bain Investment In Lilliput Brings Spotlight Back On Niche Retail

18 May, 2010

It was clearly a sign of coming of age for the premium kidswear sector when private equity majors TPG Growth and Bain Capital placed their bets and $86-million capital in Lilliput Kidswear. 

Though not a bulge-bracket transaction, this investment could be seen as a signal for deals to come in fashion retail niches backed by a recovering economy and booming middle-class spending.  

Kidswear, dominated by the unorganised sector and often a tedious play for brands, may be witnessing an evolution in conventional buying wisdom –that Indian parents do not buy into brands as kids outgrow their clothes rather quickly–with brands like Lilliput, Benetton and Mothercare unleashing a major play in the Indian market. 

The overall kidswear market is estimated at Rs 13,000 crore with the organised sector pegged at Rs 3,500 crore, growing at 10% annually, while premium brands where a Lilliput and Benetton find place, may be vaulting at 20%. Industry numbers suggest that specialist brands like LIliiput and Gini & Johny may have over 250 point of sales and growing.

“We think kidswear will see 25% plus CAGR in the next five years and the sectoral growth could be intact in the next 10 years,” Sanjeev Mohanty, Benetton MD (South Asia), said. “With double incomes and single child families, parents tend to spend a lot on their children and they have started buying brands taking pride in dressing up their kids as well. I think consumer behaviour is changing rapidly in the top 30 towns at least and it is changing rapidly in favour of brands,” Mohanty explained further. 

This shift in buying behaviour is translating into happy tidings for kidswear retail firms as well. TPG Growth Asia’s Vish Narain says, “The kidswear segment is a highly profitable one. Indians tend to spend more on kids. As kids outgrow clothes faster, there is a huge demand for repeat clothes. The EBITDA margins and the ROCE of these companies are higher than their organized peers in the retail space. There are only a few organized players in the kids wear space with such distribution network and an offering at affordable prices.”

Pinaki Rajan Mishra, National Director, retail practise, Ernst & Young said, “There is a lot of private equity activity being seen on the sectors depending on consumer spending. These businesses, if run with controlled costs, have a good potential. The kidswear segment can make a gross margin of about 50-60% on manufacturing vs the MRP. The EBITDA is usually 25-30% for these businesses.” 

The key to profitability lies in reining costs. During the last year or so, India’s fashion retail industry has learnt some pretty harsh lessons when it suffered heavy cost structures beginning with high rentals. “Whether it is kidswear or menswear, the cost overheads remain the same and challenging. Add to this the heavily fragmented and competitive nature of kidswear retail,” Darshan Mehta, CEO, Reliance Brands, said.

“Lilliput is one of the few companies which has sub-20% of its revenues towards rent – a key factor in keeping costs under control,” adds Narain of TPG, which is looking at retail opportunities both in big-box category and specialised retail. Companies which know how to keep their costs under control and apply the “four wall economics” into retail will make huge returns, he adds. 

Lilliput, a manufacturer and exporter of kidswear, has clients such as Gap, Next, Carter’s and Old. It is present in multi-brand outlets such as Shopper’s Stop, Lifestyle, Central, Globus, and Pantaloon besides having standalone outlets. A VCCEdge data analysis shows that Lilliput Kidswear’s EBITDA increased from Rs 370.7 million in March 08 to about Rs 436.4 million in March 09. 

Now, brands like Lilliput may be only skimming the surface of the market potential and the challenge is in managing the growth, more so in fashion retail, an industry observer says. Fashion industry poses huge challenges in understanding the consumer behaviour especially in a complex market like India. Take, for instance, inventory management. “One needs to be careful about sizing. There are 16 sizes in the 0 – 12 age group. Kidswear business is very complicated and involves very deep understanding of consumers but the rewards are good once you are able to hit critical mass,” Benetton’s Mohanty argues.

Sectoral stakeholders express reservations on the profitability margins of kidswear where there are serious challenges to going premium. “Even affluent parents prefer to buy export surplus for everyday usage while buying brands for special occasions,” Mohanty said. Fully verticalized operations – from manufacturing to retail without too many margin sharing interventions – may be key for brands that play in a fragmented market, Darshan Mehta of Reliance Brands says. Agrees V Balaji Bhat, CEO of Primus Retail, which owns brands like Weekender Kids: “The margins are much higher when you build your own brand and have a greater control on operational efficiencies.”

Private equity investments in the sector peaked during 2006-08 but many of them now see their investments under the water. According to VCCEdge data, there have been about nine deals in 2007-08 with values of $246 million compared to about 4 deals in 2008-09 valuing $237 million.

Avigo Capital, which invested in mid-market denim brand Spykar Lifestyle and now holds 40% stake, has been plotting an exit taking the company into a possible sale. Similarly, Matrix Partners’ high profile investment in Brand Marketing India Pvt Ltd has found the going tough in India’s super-premium-to-luxury fashion market, which hogged the fashion retail hype before the recession set in. Some of the other PE deals in fashion retail include Times Private Treaties’ investment in Gini & Johny, Future Capital Holding’s investment in BIBA Apparels and Wolfensohn’s infusion into FabIndia Overseas Pvt. Ltd.

But, this sector still holds bright propects as Ajay Mittal, Director, Ascent capital Advisors, an investor in Primus Retail, counts positives of a maturing sector. “When a sector moves from an unorganized space to a more organized play, there is a growing need of capital, to expand and achieve economies of scale. A few past experiences like Vishal Mega Mart did shake the confidence of the industry but it was mainly due to high rentals. But there has been a fair assessment in the industry and retail shows a sustainable advantage and is a long term growth story,” he says.

Perhaps the recessionary woes, which snapped the first high-tide of growth for India’s fashion retail, have only helped it mature faster.


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TPG, Bain Investment In Lilliput Brings Spotlight Back On Niche Retail

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