Jockey - How to make millions with underwear

On February 2007, HDFC’s star fund manager, Prashant Jain made a rather curious bet on a small, yet spirited underwear manufacturing company. He invested a modest sum of around 13 Crores during listing (IPO), when the company first opened its doors to outside investment and walked away with a cool 150+ Crores a few years later. This was by all accounts a bet on the Indian consumption story. For years now, the consumption story has been touted as the second coming of an economic revolution in India. Its the story of the proliferating middle class population and the rapid urbanization that was supposed to aid spending and turn India into the growth engine of the world. The story has been told multiple times but for this seemingly innocuous underwear manufacturer it marked the beginning of a grand adventure.

The premise was simple

1. Indian Men wear underwear and they will continue to wear underwear for the foreseeable future
2. More Indian Men are moving out of poor socio-economic conditions and moving into the middle class promise-land
3. When they reach the promise land and seek the branded underwear experience, they will turn to Jockey

Jockey International, Inc. is a manufacturer, distributor and retailer of underwear, sleepwear and sportswear for men, women, and children. However the foreign company does not sell its products in India. Instead a little known entity, Page Industries holds the exclusive rights to manufacture and distribute Jockey branded products in India. Page also happens to be the single largest licensee for Jockey International and one of their most successful brand partners. All this for a royalty fee of 5% on sales. Our story is aimed at unraveling the complicated dynamics at work that has made Page a darling within the investor community and the poster boy for the Indian Consumption story.

First Point of Purchase

To trace the company’s remarkable success story we will begin by analyzing the point of first purchase. The point of first purchase is the initiating experience an individual has with the Jockey brand. Bhanu, our co-founder made his first purchase when a certain retailer recommended it to him in an apparel store. I bought my first pair after my friend made a snarky comment about how I wore cheap underwear. In both cases, the decision was forced upon us by external change agents. Yet, despite our initial reluctance, both of us continue to persist with Jockey today.

I wish I could offer a more profound analysis on the subject matter but a rather simple explanation to why we stayed loyal to the brand lies in the fact that Page makes quality underwear. The smooth flow, the soft fabric, the elastic straps that don’t leave nasty stretch marks, the strategically placed vents that allow your vitals to breathe — Jockey oozes quality through and through. For the most part the underwear lasts a good year without much maintenance and there is very little incentive to switch.

Affordable or Premium ?

Apart from the obvious merits of quality, Jockey’s pricing and positioning aims to reduce cognitive dissonance. Cognitive dissonance occurs when your ideas, beliefs or behaviors contradict each other. This simple theory follows that if you have doubts about your purchase and its ability to provide maximum value for the best price, there is a high chance that you will avoid making a similar purchase again.

Imagine buying a VIP Frenchie and then finding out you could have had a Jockey by paying a premium of Rs. 50 — or sporting a Calvin Klein for ₹ 999 and then seeing a Jockey sell for as little as ₹ 200. Its this feeling of possible regret that the human brain tries to avoid whilst making a purchase and Jockey’s brand image is tailor-made to reduce the internal conflict within you. A VIP Frenchie is affordable, a Calvin Klein — Premium. Jockey, for the lack of a better term is both.

Management of Dissent

However success did not come easily to Page. Back in the early 2000’s, long before Jockey became the household name that it is today, the erstwhile champions of underwear, TTK Tantex and Associated Apparels ( revenues of ~100 Cr) ruled the roster until both companies, in a spate of unfortunate incidents fell prey to labor strikes — a complete chance event that happened to coincide with Jockey’s rise to prominence.

Facing a supply crisis, large underwear retailers/dealers in Northern and Western India turned to Jockey and the company promptly obliged. Soon after, the company’s revenues doubled. This experience would go on to shape Page’s future and its labor Management practices forever. Today, the company has a labor force amounting to a total of about 19000, (88% women). Page also invests a significant sum in keeping its workforce happy, partly because a labor strike of the kind that took down Associated Apparel could spell disaster for the company.

The company offers free lunch to its employees and workers. They also offer other fringe benefits, including transportation for shift workers,creche for workers’ children and free medicines- something which most textile industries don’t care about.

Page has never suffered any labor related issues but perhaps it is this fear of an impending labor unrest that has driven the company to expand its outsourcing operations.

Although the annual reports make no mention of outsourcing, multiple research firms point out how Page has been expanding its outsourcing operations over the last few years.

Motilal Oswal : From less than 20% in 2017 to 30% in 2018
ICICI Securities: 30% in 2018
Edelweiss : From less than 20 % in 2017 to 30% in 2018.

Reaching the Masses

Over the years Jockey has also built a reputation for reaching parts of India where most brands simply can’t reach. Its built a rich network of distributors

Jockey sells its underwear through :
1. Channel Sales — 53,000 retail outlets in 1800 cities and towns
2. Exclusive brand outlets (470) and exclusive women stores (26) — Operated through franchisee agreements
3. Large Format stores — Big Bazaar, lifestyle, shopper stop etc.: 1270 stores
4. Online- around 25 Cr sales in FY18: 1% of total sales

However retailers will continue to show faith in the brand if they find value in such an endeavor. Jockey for its part does not offer attractive profit margins . Instead it offers the power of volumes.

“Jockey gives me 25–30 per cent margin compared to around 35 per cent for some other brands. However, if I keep other brands and Jockey in front of new customers; out of ten customers, seven will walk out with Jockey. I can guarantee that”- Retailer

Jockey sells in bulk. While the retailer may not make enough on a single unit of Jockey, he makes more on absolute commissions because of the sheer volume of products he can sell

Greatness Beckons

There isn't another underwear brand in India that commands the same kind of loyalty as Jockey does and there is no stock more revered than Page. The company made revenues close to 2550 Crores in 2018.

They made profits close to 350 Crores. The company pays out half of its profits in dividends while it continues to expand and plough its capital back at places where it continues to generate exorbitant returns.

The company’s ROCE, Return on Capital Employed stands at about 40% i.e. on every hundred rupees it spends in growing the company it earns a return of 40 rupees per year

The company’s stock price continues to make all time high’s. From a modest ₹ 270 on listing day (2007) to ₹ 33000+ today, the stock price has multiplied over a 100 times making Page Industries the most successful underwear company in India.

The curious case of the P/E multiple

Unfortunately, this is where it gets tricky. Despite being a star brand, I remember looking at Page Industries last year whilst working on a college project. The stock price was hovering at about Rs.18,000 and I remember thinking how grossly overvalued it was. I offered this seemingly confident assessment after looking at one of the more popular investment metrics out there — the P/E multiple. To put simply P/E of a stock is the ratio of the stock price to the earnings per share. A high P/E simply means people are willing to pay a premium for every rupee they earn per share. When this number reaches disproportionately high levels , relative to industry standards, the stock is deemed to be overvalued.

I saw Page trading at a P/E of over 60 — a rather high multiple as per industry standards. However, after posting a string of exceptional results over subsequent quarters Page continued to rally and it now trades at a P/E of 88, a much higher valuation than last September. Just when you begin to think the stock price has peaked it continues to make new highs.

The unrelenting pursuit of growth

But the P/E multiple is of little concern to the optimist. He will continue to justify valuations by pointing to growth drivers and the consumption story. For the most part, the optimist is in fact accurate in his prognosis. Page continues to grow at above 20% and they have made significant forays into other product categories. However these are testing times. Take for example the story of Speedo, an american swimwear brand manufactured and sold in India through Page. The company has been betting big on swimwear to expand in India but despite a big ticket brand campaign and a niche value proposition, the company has little to show for in terms of sales numbers.

The company’s export numbers are also disappointing. Despite having initiated export operations back in 2010, the numbers continue to remain negligible at ~0.8% of total revenues.

But one thing is evident. Its that Page will continue to remain restless. It disrupted the inner-wear market at a time when branded underwear had no backers and I am sure the promoters are in no mood to let go of the seeming cult status its occupied in the minds of the Indian Consumer. The company has already begun making headway into women’s underwear and the athlesiure segment — a crossover between leisure and athletic wear. If research reports are to be believed revenue from these segments are beginning to form a significant chunk of Page’s revenue, although we have no way to corroborate the same through annual reports. The company is also making a renewed push into kids wear and by all accounts doubling down on its effort to keep growing.

The stock price continues to rally on this very promise of growth and all other metrics — the P/E multiple, labor, distribution and licensing agreements continue to remain sidelined so long as the company can keep sustaining the unprecedented growth levels its maintained over the years. Its that time of the year again. The great Indian consumption story reverberates in the annals of Dalal Street!

Fellow reader I ask you, Where is your bet?