Stocks from the South

“South Indians spend a lot of money on weddings. Even though we’re present in only 4 states of the South, we’ve managed a turnover of more than Rs. 1,300 crores, that too with only a few stores in Tamil Nadu. We’re going to invest heavily in Tamil Nadu”

This is a paraphrase of a conversation we had with Bharadwaj Balaji Rachamadugu (Link), Senior Vice President at Sai Silks, a prominent South India-based saree player that houses the popular brand Kalamandir. Incorporated in 2005, the promoters chose South India as a base to start a business when they moved back from the US. Their decision stands validated as the company has smartly scaled up, premiumized its offerings, and introduced innovative formats that have been well accepted by the market. Bharadwaj’s interview echoed many a positive sentiment around the South Indian market which he’s acting on, as the company sets its eyes on Tamil Nadu, the country’s largest consumer of sarees.

A similar story replicates in the case of Indian Terrain, a menswear brand launched in 2000. Venky Rajgopal founded the brand with the vision of catering to the vibrant colours of South India and the evolving tastes of modern India. The clothing brand has capitalised on the government’s ‘vocal for local’ initiative.

This made us ponder over the peculiarities of the markets and companies from the Southern peninsula in India. Stocks from the South can be set apart for three reasons:

1. Most South Indian businesses have operated conservatively. They are fundamentally sound, their balance sheets are not over-leveraged. Take the case of the TVS group, Murugappa group and TTK group.
2. Businesses in the south typically demonstrate consistent growth, dividends, and performance, resulting in increased earnings predictability. They could serve as a reliable anchor in one’s portfolio, offering defensive stability.
3. The South Indian market has its own idiosyncrasies. As Bharadwaj told us, South Indians spend big on occasions like weddings. So much so that the saying goes, borrow or steal to get your daughter or a son married in as flamboyant a way as possible. A saying that also offers business and consequently, investment opportunities for textile companies based in the South

South India’s Textile Market

 The southern belt of India is becoming increasingly attractive for investments, with Karnataka, Andhra Pradesh, Telangana, Tamil Nadu, and Kerala leading the way in textiles. It is not unknown that threads from South India travel all across India starting from the northern belt to southern. It’s no wonder then that Coimbatore is often referred to as the Manchester of the South of India. Even before the silk saree major Nalli expanded its footprint to the east and made more people aware of its heritage, travelling all the way south for saree shopping from various parts of the country was not unusual. A study by Technopak indicated that the South India saree market is expected to touch ₹30,800 crore by FY25 growing at a CAGR of 6%.

((Source:https://www.thehindu.com/business/Industry/south-india-saree-market-likely-to-touch-30800-crore-by-fy25/article65883228.ece))

Textile mills in a quandary

However, it’s not all smooth sailing. The last couple of months have seen many mills and factories across the textile value chain shut down. Where the industry used to export 30% of the yarn produced, now it is less than 5% as per The Hindu. Exacerbating the issue is the fluctuation in cotton prices caused by high import duties and increased input costs like electricity charges which has disrupted supply of yarn, needless to say, a crucial raw material for garment production

Expansion plans

Despite the issues emanating from the cotton mills, companies like Sai Silks have massive growth plans. Sai Silks is now expanding deep into Tamil Nadu with its premium segment as well. With nine stores in the state already,  their goal is to expand to about 15 to 18 more. Sai Silks also envisions expanding more into Kerala, Karnataka, Telangana and other parts of India.

What sets apart the stocks of the south?

However, South Indian companies are known for their resilience and strong fundamentals that have historically helped them beat challenges. Companies in the south are not only strong with numbers and in assessing the need of the hour but they also believe in maintaining substantial cash reserves which aid in overcoming difficult periods. But businesses are not just susceptible to financial and operational difficulties. Legacies have ended due to familial and internal disputes. The structure of South Indian companies closely resembles that of multinational corporations that don’t draw a wall of professionalism that shields operations from the corporate drama.

Take the case of Chennai-based Murugappa Group that saw tensions boil when within Valli Arunachalam sought representation on Ambadi Investments, the holding company of the ₹74,220-crore Murugappa Group following her father’s passing. The members managed to resolve the dispute without it spilling over and affecting operations or financials.

The TVS group, one of India’s oldest and most prominent family business groups with over 110 years of history, began its journey with a unified approach. However, in late 2020, the family decided to divide the group’s businesses among its different streams formally. By early 2022, this division was legally finalised, enabling each stream of the TVS family to independently operate its businesses as separate entities. The split was executed peacefully with the businesses continuing on the path to prosperity.

But here’s the most interesting characteristic of the South Indian market – its people and their tastes. A report drafted from the summit held by the author stated how “south Indians prefer south indian brands” and that brands must not offend the audience here (https://www.exchange4media.com/marketing-news/south-indians-prefer-south-indian-brands-132138.html) This customer peculiarity gives brands emanating from the region a leg-up over others attempting to enter.

The South Indian companies offer stability and growth potential to investors, supported by their solid financial footing and strategic expansion plans and even external factors like customer loyalty which are in their favour. For these reasons we find these companies well-positioned to capitalise on growth opportunities, consumer demand and overcome challenges of varied nature thus making them compelling considerations for investment portfolios.