In this article, we will discuss one such company which has aggressive expansion plans and taking steps accordingly to grow its business in the competitive market. Which company is this, which sector it belongs to, is the future of the company promising, and lastly, should you invest in this company?
Go Fashion – One small cap stock to watch
- A recently listed entity which is prominent player in the area of branded women’s bottom-wear.
- Incorporated in 2010, company is engaged in development, design, sourcing, marketing and retailing under the brand name ‘Go Colors’.
- Company operates through EBOs (Exclusive Business Outlets) and LFS (Large Format stores wherein large percentage of revenue primarily comes from EBOs.
- EBOs are small stores with an overall area of 200-500 sq.ft. which are present in malls or even on high streets whereas LFS includes products placed in retail chain outlets etc.
- EBOs acts a main profit centre which allows company to undertake full price sales (i.e., sales undertaken without any discount) and thereby enabling higher margins from EBO store sales. The EBITDA margins on sales undertaken through EBO business are ~33% (before corporate advertisement expenses).
- Apart from channel presence through EBOs, company has maintained channel diversification through presence in Large Format Stores wherein they are required to bear 40-45% in the form of channel margins and thus LFS earns lesser EBITDA margins of ~25% as compared to EBITDA margins on EBOs though equal pricing is maintained under both LFS and EBO channels.
- Though the EBITDA margins are lower from the LFS channel as compared to EBOs, but the strategy of LFS presence is helping them to bring product visibility, increase brand reach among customers and ultimately helps in attracting customer to them.
- As of Q1FY23, company have 533 EBOs and presence in 1,597 Large Format Stores.
- In its IPO, the company raised net ~ INR 119 crores of which ~INR 34 crores are allocated towards roll out of new EBOs and thereby aims to expand their EBO network.
- In terms of city wise presence, Company’s EBOs are primarily present in tier I cities whereas the LFS presence is largely in tier II cities and above. Whereas in terms of region wise presence, the number of LFS presence and EBO stores are larger in southern region.
- In the western region, the company has healthy store mix of 44% EBOs and 56% LFS stores where it is visible that the company has targeted the high spending cities for opening more EBOs and thereby gaining benefits.
EBO Expansion Strategy
- The company intends to focus on establishing additional EBOs across tier II & III cities
- Grow network by deepening penetration in existing geographies, especially southern and western regions
- Add additional stores in the northern and eastern regions with a focus on developing a presence in those regions
- Selectively expand presence across large format stores PAN India
- Follow Company Owned and Company Operated (COCO) Model to ensure better operational control.
- The company intends to maintain the same streak and plans to expand by 120-130 EBOs yearly.
- The investment required per EBO is INR 35 lakhs with store size 200-500 sq.ft with an indicative pay back period of 15-18 months.
OVERALL WOMEN BOTTOM WEAR MARKET
- The overall size of the market is INR 13,547 crores as of 2020 as compared to the total revenue of Go Fashion is ~ INR 400 crores thereby company having overall share of merely ~3%. Smaller share (%) indicates higher potential and larger headroom for growth in future.
- On an overall basis, the women’s bottom wear market is expected to grow by 12.4% and is expected to reach INR 24,315 crores by 2025.
- Out of overall market size of INR 13,547 crores as of 2020, INR 3,116 crores pertains to organized sector whereas INR 10,431 crores pertains to unorganized segment.
- The overall organized segment is expected to grow by 24.3% as compared to 7.6% expected CAGR under unorganized segment, thereby enabling the organized players to gain market share as organized players would snatch some market share from unorganized players by growing at higher rate.
The PE ratio of the company is 200x as of 03 Oct 2022 indicating premium valuations for the company on the back of higher growth expectations from the company in the future. One of the underlying risks of such high valuations is that the de-rating of PE multiple may lead to fall in the valuations significantly if expected growth from the company is not materialized.
As of June 2022, DII (23.68%) & FII (6.98%) in total hold ~ 30.66%. CONCERN:
Currently, as of October 2022, company has about 16.33% shares pledged.Reasons explained in May 2022 conference call:
What should investors do?
- The pledge is for personal reasons. The requirement as a promoter family is INR 150 crores and this pledge was specifically taken for personal requirements and commitment and this is short term in nature.
- Management has stated that they understand the sensitivity around this subject and this is short term in nature and are looking to close the pledge within 3 to 6 months.
Valuations of the company are expensive but backed by good growth potential driven by strong expansion plans in place which makes it worth to be kept on radar by investors.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell stocks or MF.
Originally Published On:https://blog.investyadnya.in/go-fashions-expansion-strategy-can-go-fashion-shower-colourful-returns/