Credo Brands Marketing Ltd.               

18 October 2024

By Majid Ahamed

About the Company

The company was founded by first-generation entrepreneur Kamal Khushlani in 1998, Credo Brands Marketing Limited’s flagship brand “Mufti”, was launched with the vision of redefining menswear in India as a non-uniform, casually fashionable alternative to the then more formally inclined Indian market. A game-changer from the beginning, Mufti has throughout its illustrious 25-year journey, emerged as one of the largest and most well-loved homegrown brands; driven for years by its commitment to deliver expressive and elegant menswear for the contemporary Indian man.

The company operates primarily in Four segments:

• EBOs (Exclusive Brand Outlets)
• MBO (Multi-Brand Outlets)
• LFS (Large Format Stores)
• Online 

The company sells men’s clothing under the following segments:

• Shirts
• T-Shirts
• Bottomwear
• Outerwear
• Others

Investment Rationale:

• Strong brand recall with a PAN-India presence, supported by a robust industry tailwind for menswear over the next 3 to 5 years.
• Strategic Focus on Tier-2 and Tier-3 Cities which are key levers for growth along with a focus on expanding the e-commerce segment
• Healthy Financials with Reasonable Valuation with Strong Growth Prospects

History of the Company:

 Source: Investor Presentation

Business Segments:

The segments based on the store segmentation:

EBO

The EBO Segment is where the company earns most of the revenue, and where the company is focused on building strong brand equity across the nation, currently, the EBO Segment alone contributed 56% of the total revenue in FY24, with 425 EBOs across 237 cities, including both metropolitan and Tier 2 locations, MUFTI has built a robust presence. This widespread network not only boosts sales but also strengthens brand loyalty by delivering a consistent and immersive shopping experience to experience

MBO  

The MBO (Multi Brand Outlets) where the company gives out its products to multi-brand stores allows MUFTI to reach a diverse customer base that frequents such stores for variety. InFY24, MBOs contributed approximately 26% to the Company’s total revenue. By being present in over 1,300 MBOs across the country, it ensures that its products are available in locations where customers prefer multi-brand shopping environments.

LFS

The LFS (Large Format Store) includes big retail chains and department stores (i.e. Dmart, Reliance Retail) that stock a wide range of products. While LFS contributes a smaller percentage of MUFTI’s overall revenue (around 2.7% in FY24), its importance lies in the visibility and accessibility it offers. With 77 LFS locations, Credo ensures that its products are available in major shopping destinations, thus attracting foot traffic that might not specifically seek out MUFTI stores. 

Online 

The Online Segment, is a rapidly growing part of Credo’s distribution strategy, reflecting the global shift towards e-commerce. FY24, online sales accounted for nearly 11.8% of the total revenue. By leveraging online platforms, MUFTI reaches a tech-savvy, younger demographic that prefers shopping online. The brand’s online presence includes its own e-commerce site as well as partnerships with major online retailers (i.e. Flipkart, Amazon)

Management

The company’s management is led by Mr. Kamal Khushlani (Chairman & MD), who has over 30 years of experience in the apparel industry. 

Mrs. Poonam K., the Whole-Time Director, has been with the company since its inception and plays a key role in administration, human resource development, strategic transformations, business management, and employee engagement.

The promoters currently hold a 54.53% stake in the business, which is reasonable given the company’s size.

The company’s board comprises experienced members with strong backgrounds, primarily in the retail sector. Additionally, the board includes an independent director who is a qualified Chartered Accountant, ensuring a solid understanding of finance and the nuances of the apparel industry.

Deep-Dive on the Investment Rationale

Strong brand recall with a PAN-India presence, supported by a robust industry tailwind for menswear over the next 3 to 5 years.

The company is well-positioned to leverage the strong brand equity of “Mufti” in the mid-premium to premium segment, with products priced in the ₹2,500 to ₹5,000 range. Its presence spans across the country, with North and West India contributing 55% of total revenue. The company has also established a footprint in South and East India, giving it a strong pan-India presence.

The menswear segment, in which the company is solely focused, is expected to grow at a 15-18% CAGR from FY24 to FY27, driven by several key tailwinds. These include a shift in market trends toward western casual wear, rising disposable incomes, and increasing social media influence. The company’s strategy to capitalize on this growth involves significantly increasing its advertising investments, both through digital platforms like social media and through traditional channels such as billboards, theaters, and malls.

With a focus on reinforcing brand visibility and staying aligned with consumer trends, the company is strategically positioned to tap into the growing menswear market. Its dedicated focus on menswear gives it an advantage in brand specialization, allowing it to better navigate and capitalize on the opportunities presented by these industry tailwinds.

Strategic focus on Tier 2-3 Cities with an increased focus on E-commerce segment

The company currently focuses on Tier2 and Tier 3 Cities primarily where the contribution of those segments has been contributing nearly 60-65% of the total revenue of the company, with the strategy to focus more on increasing the penetration via e-commerce and MBOs (Multi Branded Outlets).

The company in the recent conference call mention on how they are looking to leverage the e-commerce demand its primarily investing in IT infrastruction both in incresing their Online Sales contribution through their website and through third-party e-commerce retail. The company till has used e-commerce as a platform to sell the unsold inventory in EBOs and MBOs through those channels at a discount to their rate, but they are ensure with increasing IT infrastructure their to have a strong omni chanel presence for the company going forward.

Healthy Financials with Reasonable Valuation with Strong Growth Prospects

The company is in a very healthy financial position, being debt-free, which makes it a compelling investment opportunity. With strong demand on the horizon, a P/E ratio of 20, and a PEG ratio of 0.7, the company appears attractively valued despite a market slowdown. In the recent quarter, the company achieved 7% revenue growth and margin expansion, which further strengthens its investment prospects. Additionally, the company’s focus on increasing its marketing expenses to 5% will ensure greater brand recognition across India, enabling it to scale effectively in the future.

Risk/Threats

High Working Capital Requirements:
The company faces significantly high working capital requirements due to elevated inventory and debtor days. This is largely because many of their sales are conducted through franchisees, making it challenging to collect receivables promptly. Additionally, the company maintains full control over its inventory, allowing it to sell unsold stock at its own pace, which leads to high inventory levels. As a result, the working capital cycle stands at 281 days, indicating a lengthy process to convert inventory into cash.

Competitive Intensity:
The company operates in a highly competitive market, facing stiff competition from both the organized and unorganized sectors. Positioned as a mid-premium brand, it competes with regional players like “OTTO” and numerous unorganized stores that offer similar designs at lower prices. To remain competitive, it is essential for the company to strengthen its brand presence and maintain consistent quality. Moreover, the company must continuously innovate to stay relevant in this intensely competitive market.

Exposure to a Single Brand:
One of the major risks the company faces is its reliance on a single brand, “Mufti.” Any shift in market trends, disruptions by competitors, or problems affecting the brand could have a significant impact on the entire business. In contrast, competitors like ABFRL (Aditya Birla Fashion and Retail Ltd.) have multiple brands, such as Pantaloons, Louis Philippe, and Allen Solly, to diversify risk. In the case of Credo Marketing, its dependence on “Mufti” makes it vulnerable—any failure to scale or adapt could severely affect the business.

Prone to Macroeconomic Situations & Market Trends:
The company is highly susceptible to macroeconomic conditions and shifting market trends. For instance, during periods of high inflation, consumer demand for apparel tends to be negatively impacted, especially in non-essential categories like fashion. In Q3FY24, the company faced a lull in consumer demand and growth across the board. In such scenarios, it becomes difficult for the company to maintain or improve its margins, which have already declined. If the company fails to keep up with evolving market trends, it will struggle to sustain its market share.

Financial Analysis & Valuation

If we look at the company’s Return on Equity (ROE), it has steadily grown from 8% in FY21 to 28% in FY23. This growth was primarily driven by increased spending during the post-COVID recovery period, which helped the company significantly grow its profits, with operational efficiencies in sync. However, after the company went public at the start of 2024, FY24 saw a lull in consumer demand and consumption, which led to a decline in ROE to 19%.

The sluggish demand also resulted in higher receivables from distributors, with Days Receivables increasing significantly from 101 days in FY23 to 137 days in FY24. During the most recent conference call, management informed stakeholders that they had received these payments in Q1FY25, improving the company’s cash flow position. Additionally, there was operational improvement in Q1FY25, with the company increasing its EBITDA margin by 150 basis points. Notably, Q1 is typically a sluggish quarter for the apparel business, yet the company still managed to achieve positive operational growth.

Valuation

As of October 18th, the company’s market capitalization stands at ₹1,232 crores, with a trailing twelve-month (TTM) P/E ratio of 20.4. The company recently held its IPO in December 2023, which was entirely an Offer for Sale (OFS), meaning the public issue proceeds went to the existing shareholders of the company. Following the IPO, the company’s growth was sluggish, and it failed to meet the management’s guidance in the subsequent quarter, which has led to a valuation that appears cheap compared to peers like Kewal Kiran Clothing, which is trading at a valuation of 27 times earnings.

However, the company showed significant operational improvement in Q1FY25 and is optimistic about Q2FY25, anticipating strong demand during the festive season. The company is well-positioned to capitalize on this demand, providing a strong case for a stock re-rating after the Q2 results, expected by the end of October or the start of November. In the mid-to-long term, the company’s goal is to double its revenue over the next 4-5 years, with a focus on leveraging its digital presence and increasing e-commerce sales. The men’s clothing segment is projected to grow at a 15-18% CAGR, and with the company’s strong brand equity, it is poised to grow faster than the industry average.

That being said, investors should remain cautious about the macroeconomic conditions that could affect the company’s growth. Factors such as economic slowdowns and inflationary pressures could significantly impact the business in the short to medium term. Additionally, the company faces intense competition from established brands like U.S. Polo and Tommy Hilfiger, making it crucial for the company to focus on strengthening its brand presence and capturing market share.