All About the Fabindia IPO

The IPO frenzy may have taken the overall market by storm but it is making particular headlines in the apparel industry.

First, there was Nykaa, one of the most successful IPOs of 2021 whose omnichannel beauty and apparel business charmed the wits and purses out of retail as well as capital markets last year.

Next in line was Go Fashion, India’s largest bottomwear maker, which opened up to a bumper public debut as well.

Then, on January 10th 2022, Biba Apparels, backed by heavyweight investors like Warburg Pincus and Faering Capital, disclosed its own plans for an IPO.

There’s also growing market buzz gathering towards the proposed IPOs of big fashion brands like Manyavar and Vedant Fashions.

Today, we focus on Fabindia, a brand so iconic and so synonymous with ethnic attire in India, that even its advertising taglines bear enough weight to spur national controversies (say, what?)

Here’s the down-low on its proposed IPO.

IPO Facts

• Issue Size: ₹4,000cr ($534.7m) (Fresh Issue: ₹500cr ($66.8m) + OFS: Up to 25,050,543 equity shares).
• Issue Break-up: QIBs (75%), NIIs (15%) and Retail (10%).

Fabindia is seeking a valuation close to $2bn. Out of the net proceeds from the fresh issue, ₹250cr ($33.4m) will be used for voluntary redemption of NCDs (Non-Convertible Debentures) issued by the company and ₹125cr ($16.7m) will be used towards repayment of loans.

The company is backed by investments from biggies like PremjiInvest and Nandan Nilekani. The selling shareholders include the promoters — Bimla Nanda Bissell and Madhukar Khera — along with PremjiInvest, Bajaj Holdings and Kotak Advantage Fund, among others.

Oh and here’s the most exceptional feature about this issue. The company’s promoters have declared that they plan to gift more than 7 lakh shares to artisans and farmers as a “reward to express gratitude for their engagement with the company and its subsidiaries”.

A public issue made in public interest?

Company Profile

The founder of Fabindia was an American, John Bissell, a former executive at Macy’s who came to Benaras in 1956 to source fabrics. The story goes like this. He was told by the local weavers that since each handloom in the city could produce only three sarees at the time, they could guarantee consistent colours in only those three and not across the 70–80 pieces he needed.

Thus began Mr. Bissell’s meditation to realise the untapped potential of standardised Indian textiles in the global market. It led to the first Fabindia store opening in 1976 in Greater Kailash, New Delhi.

Fun Fact: Fabindia was first incorporated in Canton, Connecticut. The company later restructured its equity by offering stakes to multiple Indian entities including the Khera family, its second promoter group.

Today, the company has 309 stores across 123 cities in the country and 11 outside it (pg. 58, DRHP). What started with garments has now expanded into a product portfolio spanning across home furnishing, furniture, gifts, jewellery, organic food and personal care products — a full-fledged lifestyle brand in business.

Fabindia is one of those trendsetting establishments that has come to shape the way in which a quintessential section of the urban middle class dresses and furnishes its homes. There could be hardly many professionals in Indian cities who, at some point in the last 40-odd years, haven’t donned a Fabindia shirt, kurta, bed cover, cutlery, furniture or napkin. It is the ubiquity of this brand that makes it tick as a fan favourite and therein lies its value.

Business and Financials

The company sources its products directly from the villages of India. According to its website, it connects more than 55,000 rural producers to the urban and international markets.

What sets it apart is the fact that even though Fabindia began exclusively as an exporter of fabrics, it never went into direct assembly-line manufacture. The company works closely with artisans and craftsmen providing them valuable inputs in design, quality control, access to finance and raw materials, albeit strictly in a coordinating and not creative capacity.

It is due to this absence of draining infrastructure costs that the company’s prices have stayed low and profit margins have remained tight.

Its second impressive feat lies in the successful adaptation of handloom fabrics to urban tastes in a commercialised manner. This is something that even Government-owned and -aided players like Khadi and Village Industries Commission (KVIC) and state emporiums have failed to do despite being endowed with large subsidies and grants.

Third, marketing finesse with minimal advertising. Fabindia is a company that has spun its handloom magic without spending anything substantial on advertising, and thus covering up another revenue drain upon its finances. The brand’s identity has been carefully centred around utility and contemporariness, the two vital components of Indian consumer tastes, which has been instrumental in maintaining its sustainable demand.

But the tryst with COVID has been hard. Declining store footfalls on account of lockdowns have led to declining revenues along with permanent closure of some stores and FabCafes, the brand’s organic food retail outlets.

However, Fabindia’s expansion into multiple business verticals has positioned it ideally to address the growing demand for high quality lifestyle and organic products in India. Plus, the engagement of 50,000+ artisans all over India via contract manufacturing has created a firmly-established supply chain infrastructure and aided in making the business capital efficient. Also, the company, despite its six-decade legacy, hasn’t been immune to embracing digitisation and has successfully complemented its traditional retail experience with an increasing online presence.

Industry Outlook and Growth Prospects

Seeing as the lifestyle and fashion industry in India is on a rapid growth trajectory (private final expenditure on apparel and footwear grew by 4.4% CAGR between 2012–2020), the brand’s scaled presence in the sector offers an abundance of opportunities.

Fabindia, being a legacy brand, focusing on handcrafted, indegenous products, has built a reputable profile across different product categories. Moreover, due to its identity of being built on artisanal heritage and tradition, it also expected to be more shielded from the fast-changing trends that define the fashion landscape today. Its product premiumisation coupled with affordable pricing in the home decor, wellness and organic food segments also derives an edge over competitors.

Having said that, offline retail stores still contribute over 80% to its revenues while online sales account for only 17.75% (as of September 30th 2021). Given the heavy tailwinds for e-commerce growth in India, expansion in online sales remains crucial for further growth of the brand.

Although the company prides itself on diversification, the apparel business accounts for 46.48% of its revenues, marginalising other emerging business verticals (like organic food) which show great promise.

Reduced costs on account of muted manufacturing activity is good for profit margins. But it does present challenges from an operational perspective. Most of its stores are run by independent franchises which means limited autonomy for Fabindia when it comes to retail cooperation in business.

But, given the six-decade-long enterprising success, perhaps the company’s ability to handle third-party engagements is more-or-less assured. In addition, its massive expansion plans in the offing could also promote better retail experiences, particularly through online means.

Fabindia is also one of the few brands which stand out in their espoused commitment to ESG (Environment and Social Governance) initiatives by “aspiring to be ethical in their conduct and create long and lasting positive impact”. This quality is emblematic of their origin and growth story through a colossal association with rural artisans in India who now refer to the brand as “the kurta people from Dilli”.

Let’s see if the Fabindia IPO finds a similar success in the market as did its founder John Bissell — “a spiritual child of Thoreau’s New England who discovered himself in a Gandhian setting”.

(Originally published January 28th 2022 in transfin.in)