The Hindu Business Line : Zodiac Clothing: Buy

INVESTMENTS can be considered in the Zodiac Clothing stock. As it is the only listed, pure-play garment company, investments in the company would provide exposure to the opportunities that would unfold for the garment sector, post-2005, when quotas on textiles and apparel would be removed.

Zodiac has reported a rather lacklustre performance in the first two quarters of this fiscal, which could slow the growth in earnings per share in FY-05. It, however, has good long-term growth prospects. With 60 per cent of its revenues generated from exports, Zodiac is gearing itself to take advantage of the potential on the export front.

On the domestic side as well, the company's initiatives to expand the number of its own retail outlets augurs well for revenues and earnings growth.

Financial performance

The company reported a 3 per cent growth in revenues, in the July-September quarter. It also witnessed a 17 per cent decline in profits.

The drop could, however, be attributed to the steep drop in `other income' by more than 85 per cent. Moreover, Zodiac's operating margins have improved by a significant 270 basis points to 9.3 per cent.

Though revenue growth has been sluggish, the total expenditure has remained stable, which has impact margins favourably. The stronger margins and the low debt component augur well for Zodiac's future profitability.

Exports, the main driver

Zodiac has a strong export focus. In FY-04, exports registered a sharp growth and contributed significantly to revenues. It is likely to be the main growth driver of revenues and earnings.

In keeping with the trend of most apparel companies, Zodiac has been ramping up capacity to prepare itself for the post-quota era, when garment exports, in terms of volume at least, are expected to expand significantly.

Zodiac, however, is likely to emerge as a preferred vendor, given its established presence in the export market.

The recent acquisition of a manufacturing facility in Dubai would enhance Zodiac's shirt manufacturing capacity by nearly 40 per cent. The unit would also help it deliver within shorter lead times, making it better-placed to cater to the needs of importers in the US and the EU.

Zodiac is also in the midst of setting up a formal trouser and suit manufacturing plant in Bangalore, which would serve to widen its portfolio, both in the export and domestic markets.

Strengthening domestic presence

Zodiac consolidated its operations in the domestic market in 2003, by merging Mayfair, its partly-owned subsidiary, with itself. With a direct exposure to the domestic market, Zodiac is well-placed to reap the gains from the domestic market as well.

Zodiac has been the first name in the "Men's Ties" category in India and enjoys a good market share for its accessories.

Its `Zodiac' in the premium segment and `Zod' in the casual segment are among the better-known brands in the men's apparel segment.

The domestic market for apparel is set to grow on the back of the take off in organised retailing.

Even as more formats are now available to distribute garments, garment outfits continue to open their own outlets to further their distribution network and, more importantly, to lend visibility to their brand.

Zodiac still derives more than 50 per cent of its revenues from distributors, and is less visible when compared to other top brands.

Zodiac's decision to add another 60 retail outlets over the next three years would, thus, strengthen its presence in the domestic market.

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