Zodiac Clothing: Hold

Recommendation: Hold

Reshma Krishnan

ZODIAC Clothing makes readymade garments such as shirts and ties.

Its share price has fallen steadily since March 1999, when it touched a high of Rs 313.20, to Rs 79 now. A major disadvantage for the company could be that the textile industry is not in favour with the market now. But on account of its solid financials and the potential of the ready-mades segment, shareholders may consider staying invested in the stock. Fresh exposures may be avoided until the company puts in place measures to take advantage of the domestic market.

The bulk of Zodiac's revenue comes from exports. In 1999-2000 exports accounted for 90 per cent of the income from sales, which was Rs 58 crore. A large percentage of the exports are marketed under foreign brand names while the rest are sold under the Zodiac brand. In India, too, the company has quite a strong presence, with over 78 exclusive retail outlets.

Zodiac Clothing's financials are strong but growth has been inconsistent, having come in spurts over the last five years. Sales (including other income) fell 2.5 per cent in 1999-00 to Rs 63.16 crore, from Rs 64.10 crore in 1998-99. This was a steep fall from the 34 per cent growth rate of 1996-97.

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The company attributed this to subdued sales in Europe and a depressed market. Exports remained relatively flat in volume terms, and performance was affected by the adverse exchange rate conditions.

Margins did, however, improve -- rising 15.64 per cent in 1999-2000 from 14.9 per cent in 1998-99. The company upgraded systems, and consistently increased its efficiency, as the better margins reveal. But the key factor in future growth will be the sales volumes.

The company is financially strong, with good liquidity, and has no debts. There is no need for loans as it works on a pre-sell basis, thereby having major working capital requirements.

Zodiac faces a number of challenges in the coming year, in the form of both opportunities in the domestic market and competition internationally. The major opportunity is the growing domestic market, worth around Rs 185 crore.

Competition is intense, with such players as Color Plus, Free Look and Indigo Nation stealing the limelight in the casuals market, and such Madura Garments brands as Peter England and Van Heusen in formals. While Zodiac has taken advantage of the growing casuals market by launching its label ZOD, the move was reactive rather than proactive, and came a bit too late.

Zodiac's strength in the international market lies in its ability to balance the price-value relationship. It has been able to leverage labour to provide quality shirts at a fair price. To survive the onslaught of the WTO agreement and the phasing out of export exemptions it has to maintain this and adapt it to the domestic market to become a significant player.

Because it sells under foreign private labels, unless the company consistently provides value for money by increasing productivity it runs the risk of losing its market to competition from China and Indonesia.

Another major weakness is the fact that it does not own its brand name. The Zodiac brand is owned by another company. This is significant to domestic market operations as the brand is a major selling point here. Valuations may improve if it addresses these concerns, as several other companies have done in the last couple of years.