Superficial comparisons are very easy to spot, but rarely work well in equity research. Sell side might still get away with it once in a while but not buy side.
When Lovable Lingerie came out with an IPO in 2011, it debuted at a 100% premium to its offer price and stayed at that valuation for some months. It was touted as the next Page Industries, as silly and as frivolous a comparison as it can get. Other than the fact that both of them are innerwear players, there really wasn’t much in common.
Men’s segment is more homogenous, can work with lower number of SKU’s and is more profitable. Women’s segment even today has just one national level brand that makes more than 500 Cr annual revenue. And the women’s segment is 2x the men’s segment. Within men’s vest as a sub category, you need just 4 sizes and one single color to address the entire market. Now try to do the same exercise for the other gender, do you see the challenge?
The inventory you need to carry in a store to make one sale makes this a very difficult economic model to crack and scale. On a side note, this is one of the reasons a new age business like Zivame has struggled to scale even after a decade of being in existence and being well funded.
The road less traveled is less travelled for a reason.
Like when some random business would add a .com its name and the valuation would go up 3x in a matter of days during the heady days of the dot com boom in the US.
Like when a half-cooked business model thinks it can become the Amazon of its particular segment, without taking into consideration that the Amazon story might have been different if not for AWS.
Like how some upcoming bank gets touted as the next HDFC Bank. Hell, Aditya Puri himself would probably struggle to build the next HDFC Bank even if he starts with the same team today.
What the human mind fails to take into consideration is that success can have unique patterns while most failures can have eerily similar patterns.
This asymmetry is understood by few.
Superficial analysis can be particularly dangerous for investors. Even more so for entrepreneurs.
In research and investing a wrong hypothesis will eventually be proven wrong by data. In qualitative fields like selling, marketing and entrepreneurship one can go many years before realizing that it is the wrong track. There are few quantitative feedback loops in qualitative domains.
Sometimes comparison across players operating in the same industry is meaningless and superficial. Like comparing a new age broker to ICICI Securities. It will be a decade before a new age broker gets to the level of trust that ICICI Securities commands, even if they have superior technology and better “hustle marketing”.
Anyone who has spent even a week speaking to wealth managers in a highly evolved market like Singapore will tell you that custody of assets is a very sensitive topic for any HNI. They may work with boutique advisors but custody of their assets will always sit with a DBS or a BNY Mellon. A rich family prioritizes balance sheet over P&L, holding onto what they have is more important than how much more they can make. A 0.1% lower annual expense will not make them shift their assets to a new player who is yet to be proven as a safe store of assets. The Indian market is headed that way soon with the leading private banks and their subsidiaries scoring very high on the trust and survivability parameters. For all the market share that new age brokers claim, in terms of assets under custody they cannot yet lay a finger on the larger bank backed brokers.
Another point being that ICICI Securities has relationships in place while a new age broker is still largely operating on a transaction model. When the shit hits the roof in the equity market, ICICI Securities is more likely to hold onto their most profitable customers since they have a relationship model in place. And these customers are more seasoned too.
All of these should impact valuation. And they will, when the real test comes.
In branded consumer businesses even at a similar scale of revenue two businesses can be accorded markedly different valuation. A real time example is the upcoming listing of Go Colors Fashion – a branded play in the women’s bottom wear segment. The business operates at a similar scale as does the Lyra brand of Lux Industries. Does this mean the valuation at which Go Colors lists should rub off on what Lux Industries trades at? It might, but the answer should be a bit more nuanced.
Go Colors has 450 EBO’s while Lux started its EBO foray only in FY21. They became the second largest innerwear maker without focusing on the EBO channel at all, in comparison the industry leader Page Industries has always focused on the EBO channel. Selling through distributors, online and MBO channel has different kind of product positioning, managing EBO channel well calls for higher operational complexity.
As Mirza International proved when they bit off more than they could chew in their aggressive EBO expansion in 2018 and 2019. The management decided to go the company owned, company operated large store EBO expansion route and ended up with excess inventory, a bloated balance sheet and lower gross margins when they were forced to liquidate old inventory at lower prices.
Lux Industries is expanding its EBO channel on the franchise owned and franchise operated model, this has lower balance sheet risk but the price to pay is slightly lower margins.
Sheela Foam, the largest branded mattress player in India runs its EBO on a franchise model. To them launching a product for the online channel was relatively easy.
TCNS Clothing, the largest branded non saree ethnic wear player in the women’s market runs a combination of company owned and franchise owned EBOs.
Relaxo Footwear has 450+ EBOs but gets < 10% of the revenue from this channel. They view their EBO channel as a tool to understand consumer behavior and as a brand visibility exercise rather than as a volume channel.
You see the difference in approaches when you think as an operating manager? While armchair investors just track the EBO count, revenue per EBO and other superficial stuff, the operating manager is thinking much deeper.
Without a finer understanding of these points, commenting on relative valuation based solely off revenue and profits is superficial at best and silly at worst. This is why a simple PE multiple driven approach to valuation doesn’t work reliably even within the same industry.
Understanding these nuances and scoping this into the investment thesis and valuation framework is what keeps serious investors busy. Sometimes the real work begins where the superficial comparisons end.
And this is why I am starting to develop a dislike for the concept of relative valuation unless one understands the points of difference across the businesses well enough.