Brands are trying image makeovers, but fashion retail in India is still struggling
Moneylife Digital Team 09 August 2011

Will the group-and-grow strategy and private equity investments help this sector?

The fashion retail and apparel industry has been banking on young India for its success. But many of the fashion brands today are having trouble managing their business. July saw some important investments and deals in this sector. With cost of cotton and synthetic fibres soaring and volumes dropping, the sector is under a lot of pressure. At such a time, it remains to be seen how far these investments go in turning around the fortunes of these brands.

"Brands are trying to reinvent and stabilise themselves with their private equity (PE) deals and other moves. The question is not how much is being invested, but what is being done by the investors and the company to make the most of these investments," said a sector analyst, while commenting on Avigo Capital's bid for a majority stake in the brand Spykar, preferring anonymity. The youth-centric label saw a promising start, but following an over-ambitious expansion drive three years ago, ran into losses. Avigo, together with limited partner Metmin Investments, decided to take over the reins last month in order to resurrect the brand and cut losses.

Apart from Spykar, high-end women's fashion label Kimaya received an investment of Rs60 crore from Franklin Templeton India, as a part of its Rs630 crore investment deal. Kimaya plans to expand in tier-II cities. LVMH Group-backed L Capital Asia recently picked up 25.5% stake in Genesis Luxury Fashion, which owns labels like Satya Paul.

However, in the recent past, a lot of PE investors have quit these fashion brands after incurring losses. Sameer Sain, MD and CEO, Everstone Capital Partners, recently said, "Retail (clothing) is an exciting industry but one needs to be immensely disciplined in front-end expansion and managing inventories." Everstone, which was invested in Lilliput Kidswear, was one of the few investors who quit after making profit. One of the most famous brands, Koutons, saw its investor Ascent Capital, formerly UTI Ventures, sell its 8.3% stake and exit with losses.

What are the chances of the PE investors who are investing now, to make a profit? The fashion retail sector is under a lot of pressure. Sales have dropped, and with prices of cotton going up and logistics cost adding up, the brands are hoping that the festive season will come to their rescue. Aditya Birla group's Madura Fashion and Lifestyle shut many flagship stores of Espirit, a global lifestyle brand, following huge losses. Provogue is still saddled with unsold inventory. In such a situation, it looks unlikely that these brands will be able to bring a smile to their investors' faces.

What then is the way to arrange for funds in such a situation? "In many cases, we see that PE deals lead to an IPO (initial public offering), only time will tell how these companies will do after that," added the analyst. Kimaya Fashion MD Pradeep Hirani had hinted that the brand may go for an IPO after three years. Genesis had announced that it would go for an IPO about three years ago but that hasn't happened yet. The other way to raise money in this sector is to go through the group-and-grow strategy, which is essentially going for acquisitions. Future Group has acquired stakes in brands like Indigo Nation, Lee Cooper, Celio and Scullers by taking over their parent Indus League; where it holds more than 90% stake.

"If there are IPOs or acquisitions, one has to wait and watch as to how the companies manage their resources to resurrect themselves and get back on track. The sector is under tremendous pressure, and that is why many of these brands are reshuffling alliances and changing franchises," said a consultant, "for many brands, it is a bleak run. Smaller chains, who manage their costs and inventory well, are more likely to succeed in this sector."

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