Attractive valuations, improving realization to drive Lovable Lingerie's re-rating

Recent price hikes across its key brands coupled with removal of excise duty on ready-made garments in the budget places Lovable Lingerie in a sweet spot. The company's realization and margins are likely to get a boost from these positives.

The stock has fallen 26% in the past three months and has under performed the Sensex which has inched up nearly a% over the same period. At today's closing price of Rs 272.5, the stock appears attractive.

The company impacted price hikes after 18 months across its Lovable (6% in December 2012) and Daisy Dee (up 7% in January 2013) brands. In the FY14 budget, government removed excise duty on ready-made garments which was earlier charged at 12% on the maximum retail price with 70% abatement net of cenvat credit.

Analysts believe, relief from excise duty will push up Lovable's FY14 net realization by 2.5-3%.

The company has improved its distribution network for both the brands significantly and plans to increase this reach going forward as well. It now has about 3,500 retail outlets for Lovable (up by 1,700 over FY11) and 10,000 for Daisy Dee (up by 3,000). Daisy Dee is launched on the national level and company has been able to maintain its 25% plus market share in premium lingerie.

"With its expanded distribution network and no further increase in competition, Lovable is expected to report a 19% earnings CAGR over FY13-15. We retain a Buy, with a target of Rs 366 at a target Price to earnings (P/E) multiple of 20 times FY14 estimated earnings. Since listing, it has traded at a mean P/E of 24 times", says Aniruddha Joshi, analyst at Anand Rathi Equities.

A relatively benign competitive environment over the past one year has also helped. Peers such as Marks and Spencer, La Senza, Enamor have not changed their strategies much. However, this could change post entry of Hanes and Fruit of the Loom brands in India, believe analysts.

Analysts expect cotton (its key raw material) prices to remain stable in FY14, which along with higher realization and reach could improve margins by 100 basis points to 18% in FY14. The company's plans to expand in relatively under-penetrated segments of home wear and sports wear (growing at about 40%) will drive further growth.