Understanding the moat of page industries (jockey)

NPage Industries which is the licensor of the jockey brand in India is a very successful and well recognised story in the Indian stock market. Stock price of page industries has grown at a phenomenal rate. Their revenue and profit have grown at a cagr of 35 and 37% respectively over the past 10 years. Over the same period their average return on equity is 55%. Which means that they definitely have a very strong moat. In this post my endevour is to try to explain the reason behind the strength of the moat. 

I believe that page's moat comes in large part from the specific attributes of their product - which is undergarments, predominantly men's undergarments. I would venture that they were quite lucky to get into this business which lends itself readily to formation of a moat. In fact, men's undergarments business fits quite nicely in the first category of moat which I have described in my post below - product moat. Let us explore various unique attributes of this product which help in the moat formation:

1. Strong demand plus replacement demand

I don't have to do any analysis to prove that there is a strong demand for undergarments. Everyone uses them and everyone buys more of them every year. Replacement demand is very important and in that sense it is not as strong as say Coca Cola for which all the demand is replacement demand. It is also not as strong as Colgate where you have to buy a new product once he existing one is finished. In that sense undergarments do not "perish", although they can develop holes and sometimes people continue using them because what the hell - no one is going to notice (I'm talking about people in general here and not about me). In college people are known to brag about wearing the same underwear for weeks on end as well, again not me. However the replacement demand is stronger than Hawkins where once you have bought the product you can continue to use it for 4,5,6 or more years. So it is definitely not one and done.

2. Standardised product

The beautiful thing about undergarments is that we don't care too much about their design as long as it's quality is good. From this perspective it is much more standardised product, when compared to other garments. So an arrow or a Louis Philippe or a levis has to make thousands of different designs while jockey has to make only a few. Of course the more standardised a product the less is the cost to manufacture it on a per unit basis. In more technical terms this is referred to as economies of scale. Of course the gold standard in terms of standardisation is Coca Cola. If there is a more standardised product, please do let me know. 

3. Unaffected by changes in technology or changes in consumer taste/ preferences

Let me take the change in technology first. While we have seen phenomenal changes in technology in the last 3-4 decades, however this has not really affected the garment industry in any meaningful way leave alone the undergarment industry. There have been a few products such as anti-odour, iron-free shirts etc but that's it. For the undergarment industry I can't even say that.

Let me turn now to change in consumer preferences. Consumer tastes have undergone a sea change in every conceivable product including garments. I laugh every time I see a movie from 70s or 80s or 90s. If this is what the movie stars were wearing in those days, I don't even want to think about the clothing preferences of the average guy. But even here, our mighty undergarments have stood the test of time. Apart from boxers, I don't think there has been any major change in consumer preferences here. And let's face it our ancestors have been wearing boxers since hundreds of years, maybe they called it by some other name. Doesn't change the fact that there have been almost no change in consumer preferences when it comes to men's undergarments.

If we put all the three factors together, they make quite a potent force. But these factors are applicable to all the companies in this industry, what is so special about page? It is quite simple really - page had the good fortune of being in the right place at the right time. The thing about the undergarments industry is that there will be a few big players - like the cola drink or the oral care industry because of the economics of the industry. Additionally it doesn't harm that page is the licensor of the jockey brand which was already a well established and respected brand globally. Additionally there is something unique about men's undergarments from a psychological perspective. I say men because I'm not sure the same thing applies to women's undergarments as well. Anyway, as we all know men are not in general terrifically excited by the prospect of shopping. When we do go for shopping, we want to spend most of the time on shopping for garments which other will be able to see. And when it comes to undergarments, we do not have any time for them. We go like zombies and pick up what is familiar in the least amount of time. If we have been wearing jockey, we are unlikely to change our brand anytime soon.

Page will continue to get bigger, the recurrent demand for their products will ensure that. However more importantly and this is where lollapalooza comes from - they will keep on becoming stronger as they get bigger. Why is that? Couple of points here - 1) due to economies of scale their bottom line will increase at a rate higher than the top line. They can invest a part of that money towards advertising to strengthen the brand. 2) as the brand becomes stronger their products will be ubiquitous. The distributors will want to stock jockey because it sells. The consumers come like zombies and pick it up without thinking. What better product to sell can there be!

So Page will continue to do well, well into the future. But in my view they should keep away from unnecessary diversification. I heard that page has also acquired licensing rights to the swimwear brand speedo and people were quite hung Ho about it expecting it to be another jockey. But if we compare speedo on the three parameters listed above, it will become clear that speedo is no jockey. It falls well short on the very first parameter of demand. 1) how many people are regular swimmers in India. 2) how many trunks do even regular swimmers buy? My guess is it is a "one and done" product and doesnt come close to jockey and all the enthusiasm of investors is probably misplaced.

Finally, Even though we have established that page is a great business, I'm not saying go and buy it. Valuation is as important as any other factor in investing. A good business can turn out to be a pretty bad investment if bought at the wrong price. As investors we will make outsized returns only if we can identify a story which is not known or underappreciated by the market. Page is a very well known story. But this post was to identify the factors behind this compelling story and to see if we can identify similar stories elsewhere which are waiting to be discovered. 

I want to make one more final point before I close. I think this three factor framework is a good tool to compare businesses which fall under the product moat category. We discussed this in the post as well and I hope it has become clear that Coca Cola is definitely a better business than even page. In my view they score above page in both demand and standardisation. What about Colgate? Again scores more on both demand and standardisation in my view. What about Hawkins? Page scores above Hawkins on all three I would think. 

So that's it for now folks. If you think we can make this model better by addin or deleting any factors, please let me know in the comments. I would appreciate any feedback.