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PE firms show interest in niche brands

PE firms show interest in niche brands
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First Published: Mon, May 17 2010. 09 21 PM IST
Updated: Mon, May 17 2010. 09 21 PM IST
The $86 million (Rs393 crore) that private equity (PE) firms Bain Capital Llc and TPG Growth bet on Lilliput Kidswear Pvt. Ltd last month may be a precursor to more deals in niche fashion retail, backed by accelerating economic growth and higher middle-class spending.
India’s market for children’s apparel is estimated at an annual Rs13,000 crore, with organized retailers making up just Rs3,500 crore, and growing at a yearly pace of 10%. The premium segment that includes brands such as Lilliput and Benetton may be vaulting at 20%.
“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,” said Sanjeev Mohanty, managing director of Benetton Group SpA’s South Asia business.
“I think consumer behaviour is changing rapidly in the top 30 towns at least, and it is changing rapidly in favour of brands,” he added.
This shift in buying behaviour is translating into happy tidings for children’s apparel retailers such as Lilliput, making them a potentially attractive investment for PE firms.
Lilliput, a manufacturer and exporter of children’s wear, is present in multi-brand outlets such as Shoppers Stop, Lifestyle, Central, Globus, and Pantaloons, besides having stand-alone stores.
Lilliput’s earnings before interest, tax, depreciation and amortization, or Ebitda, a key measure of operating profitability, increased to Rs43.64 crore in the year ended March 2009, from Rs37 crore in the year prior, according to an analysis by VCCEdge, the financial research platform of VCCircle. Sectors paced by consumer spending are seeing a lot of PE interest, said Pinakiranjan Mishra, national director of the retail practice at consultant Ernst and Young.
“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 (minimum retail price). The Ebitda is usually 25-30% for these businesses.”
The key to profitability lies in reining in costs. India’s fashion retail industry learnt some harsh lessons during the economic downturn when it struggled with heavy costs, beginning with high rentals.
PE investments in the fashion retail sector peaked during 2006-08, but many of the investments made then are in trouble. According to VCCEdge data, about nine deals worth $246 million were done in the sector in 2007-08; transactions dropped to four deals valued at $237 million in 2008-09.
Avigo Capital Partners, which invested in mid-market denim brand Spykar Lifestyles and now holds a 40% stake in it, has been plotting an exit.
Matrix Partners, which invested in Brand Marketing India Pvt. Ltd, the holding company for the Calvin Klein and French Connection businesses in India, has found the going tough in India’s super-premium-to-luxury fashion market.
Other PE deals in fashion retail include Future Capital Holdings’ investment in Biba Apparels Pvt. Ltd and Wolfensohn and Co. Llc’s infusion into FabIndia Overseas Pvt. Ltd.
Past experience aside, the sector holds promise and it needs capital to expand as it matures, said Ajay Mittal, director of Ascent Capital Advisors India Pvt. Ltd, an investor in Primus Retail Pvt. Ltd.
“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,” Mittal said, describing retail as a long-term growth story.
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First Published: Mon, May 17 2010. 09 21 PM IST
More Topics: Private Equity | Brands | Consumer | VCC | Marketing |