july 7, 2017 aditya birla fashion & retail...
TRANSCRIPT
ICICI Securities Ltd | Retail Equity Research
July 7, 2017
Established supremacy in branded fashion…
ABFRL combines Madura’s portfolio of leading power brands with
Pantaloon’s forte of largest value fashion retailer. The combination
positions ABFRL as India’s fashion powerhouse offering 5000 styles and
200+ brands. A pan-India distribution network of 2261 exclusive brand
outlets (EBOs) spanning across 6.2 million sq ft covering 375 cities and
towns, ABFRL reaches out to over 13 million discerning customers. With
induction of brands like Ted Baker, Simon Carter and Forever 21, ABFRL
continues to provide greater choice to its consumers across formats and
channels. In-house design and product development capabilities remain
central to merchandising requirements of its widespread network. Strong
track record of organic & inorganic growth, restorative growth in Madura
through extensions and turnaround in Pantaloons position ABFRL at a
vantage point leading to five-fold increase in PAT to | 262 crore by FY19E.
Madura’s renewed focus, Forever 21 - Anchoring core portfolio…
A slew of newer brands entering the Indian fashion industry resulted in
flat LTL in the past two years for Madura. We believe moderation of prices
(~10%), coupled with a change in inventory cycle from two to four
season and launch of brand extensions (innerwear) would revive LTL
growth to 5-6% in Madura posting revenue CAGR of 12% in the lifestyle
category. Furthermore, fast fashion (Forever 21 + People) is expected to
grow at a CAGR 26% in FY17-19E. Cumulatively, Madura’s revenues are
expected to grow at a CAGR of 13% to | 5247 crore in FY17-19E.
Pantaloons turnaround – Enabling profitable growth…
The integration issues of Pantaloons, since its acquisition in FY13, have
largely been addressed. Refurbishment of store product mix by hiring a
core team of 280 people across design, merchandising and sourcing has
struck the right chord to Madura’s ideology, resulting in consistent LTL
growth for Pantaloons. Increased share of private labels (61% vs. earlier
45%) has resulted in a 300 bps expansion in EBITDA margins to 5% in
FY17. With the right model in place, we expect Pantaloons to accelerate
store openings to ~50 stores annually in FY17-19E (vs. sub-30 stores over
FY14-17), generating revenue CAGR of 19% to | 3594 crore.
Oneness to provide quality earnings to ABFRL; recommend BUY
ABFRL enjoys a vantage position in its men’s portfolio built over wide
offerings across price points (mass to luxury), broad categories (men’s,
women’s and kidswear & accessories) and diversified market channels
(MBO+EBO+SIS). Newer brands coupled with the existing portfolio
would provide cohesive growth to ABFRL’s revenues, which are expected
to grow at a CAGR of 15% to | 8841 crore and RoCE expansion to 14.6%
(vs. 2.4% currently). Ascribing 2x EV/sales (two-year trailing average) to
FY19E earnings (implied MCap/sales of 1.8x), we initiate coverage on
ABFRL with a BUY recommendation and a target price of | 210.
Exhibit 1: Financial Performance
(Year-end March) FY16 FY17E FY18E FY19E
Revenues (| crore) 6,034.6 6,633.0 7,782.7 8,840.5
EBITDA (| crore) 378.4 437.5 598.9 703.1
Adjusted Net Profit (| crore) 11.4 53.5 181.7 261.5
EPS (|) 0.1 0.7 2.4 3.4
P/E (x) NM NM 72.1 50.1
Price / Book (x) 14.4 13.7 11.5 9.3
EV/EBITDA (x) 39.4 34.8 24.9 20.8
RoCE (%) 2.4 7.5 12.3 14.6
RoNW (%) 1.3 5.6 15.9 18.7
Source: Company, ICICIdirect.com Research
Aditya Birla Fashion & Retail (ADIFAS)
| 170
Rating Matrix
Rating : Buy
Target : | 210
Target Period : 12-18 months
Potential Upside : 24%
YoY Growth (%)
(| Crore) FY16 FY17E FY18E FY19E
Net Sales 6,035 6,633 7,783 8,841
EBITDA 378 437 599 703
Net Profit* 11 53 182 262
EPS* (|) 0.1 0.7 2.4 3.4
*adjusted PAT and EPS
Valuation Summary
FY16 FY17E FY18E FY19E
EV/Sales 2.5 2.3 1.9 1.7
Target EV/Sales 3.1 2.9 2.4 2.1
EV / EBITDA 39.4 34.8 24.9 20.8
P/BV 14.4 13.7 11.5 9.3
RoNW (%) 1.3 5.6 15.9 18.7
RoCE (%) 2.4 7.5 12.3 14.6
Stock Data
Particular Amount
Market Capitalization (| Cr) 13,330.2
Total Debt (FY17) (| Cr) 2,160.6
Cash and Investments (FY17) (| Cr) 44.5
EV (| Cr) 15,446.3
52 week H/L 189 / 127
Equity capital (| Cr) 770.5
Face value (|) 10.0
FII Holding (%) 11.6
DII Holding (%) 15.0
Comparative return matrix (%)
Return % 1M 3M 6M 12M
Arvind Ltd (3.0) (7.6) 3.4 10.3
Raymond 12.4 26.8 60.4 78.0
ABFRL (4.8) 7.4 23.2 18.5
Price movement
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Jul-17Nov-16Apr-16Aug-15Jan-15Jun-14
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Price (R.H.S) Nifty (L.H.S)
Research Analysts
Bharat Chhoda
Ankit Panchmatia
Cheragh Sidhwa
Initiating Coverage
Page 2 ICICI Securities Ltd | Retail Equity Research
Company background
Madura - Powerhouse of India’s leading fashion brands
Aditya Birla Fashion and Retail (ABFRL) is India’s largest fashion hub.
ABFRL was formed by a merger of Madura Fashion & Lifestyle and
Pantaloons. Established in 1988 by Madura Coats Ltd, Madura Fashion &
Lifestyle has its origins in the erstwhile Coats Viyella Plc, Europe’s largest
clothing supplier. Aditya Birla Nuvo (one-time Indian Rayon) acquired
Madura Fashion & Lifestyle from Madura Coats in 2000. ABFRL inherited
brands like Louis Philippe, Van Heusen, Allen Solly and Peter England.
Total payout for the same was at | 187.8 crore. With a preliminary area of
0.21 million square foot (mn sq ft) across 52 retail outlets, Madura has
embarked upon its retail journey currently managing 3 mn sq ft across
2052 owned stores and 7800 retail touch points (MBOs + SISs).
Throughout its journey, Madura achieved a number of milestones. In
FY05, Louis Philippe and Peter England became the first Indian brands to
achieve a turnover of | 100 crore. As on date, these brands, in addition to
Van Heusen, gross an annual turnover of | 1000 crore each (Allen Solly at
| 700 crore). Madura remains an early implementer of enterprise resource
planning (ERP), which enabled management of rapid scale store level
inventory and accountability resulting in higher store level margins.
Exhibit 2: Madura - Bouquet of brands…
Source: Company, ICICIdirect.com Research
Establishing phenomenal growth of 20% CAGR over a decade, revenues
of Madura grew nearly 10x from | 473 crore in FY05 to | 4081 crore in
FY17. EBITDA growth, tackling the initial hiccups (loss of | 158 crore, | 4
crore in FY09, FY10, respectively), was much stronger at 25% CAGR in
FY11-17 at | 350 crore. Strong brand positioning enabled Madura to focus
on a franchisee based expansion model, which peculiarly commands
higher RoCEs (65% in FY14). Accounting for goodwill (| 638 crore), post
merger, resultant RoCE for Madura declined to 18% in FY17.
Exhibit 3: Madura revenue, EBITDA and RoCE trend…
13
54
28
16
10
29
64
25
18
12 12910109
20
65
0
5
10
15
20
25
30
FY12 FY13 FY14 FY15 FY16 FY17
%
0
10
20
30
40
50
60
70
Revenue growth EBITDA margins (%) RoCE
Source: Company, ICICIdirect.com Research
Shareholding pattern
(in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
Promoter 59.5 59.5 59.4 59.4 59.3
FII 12.2 12.2 12.8 12.4 11.6
DII 14.8 14.7 13.6 13.5 15.0
Others 13.5 13.6 14.2 14.7 14.1
FII & DII holding trend (%)
12.212.8
12.411.6
12.2
14.8 14.713.6
13.5
15.0
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
%
FII DII
Page 3 ICICI Securities Ltd | Retail Equity Research
Pantaloons - One of India’s largest big-box fashion retailer
Future Group launched Pantaloons in 1997. Pantaloons was acquired by
Aditya Birla Nuvo in 2013 for a consideration of | 1600 crore (50%
debenture + 50% debt). This enabled ABFRL’s foray into fast fashion
retail, inheriting 65 stores and 21 factory outlets across 35 cities and a
retail space of ~2 mn sq ft. Pantaloons offers one-stop shopping across
categories of men, women and kids offering a wide range of brands
across apparel (casual, ethnic, formal, party & active wear) and non-
apparel (footwear, handbags, cosmetics, perfumes, fashion jewellery &
watches). It retails over 200 licensed and international brands, including
14 exclusive in-house brands. Womenswear is the lead category
contributing to half of total apparel sales.
Pantaloons also houses Madura’s brands like Louis Philippe, Van Heusen,
Allen Solly, Peter England and People in menswear, Van Heusen and
Allen Solly in womenswear and Allen Solly Junior.
Pantaloons enjoys strong customer patronage handling ~7 million
customers as on FY17, which is considered to be one of the largest
among Indian apparel retailers. Since FY13, Pantaloons has exhibited
revenue growth of 19% CAGR to | 2552 crore in FY17. Given the
integration challenges and aggressive expansion of stores from 68 in
FY13 to 107 in FY14, EBITDA over the period declined from | 66 crore in
FY13 to | 33 crore in FY14. Post-acquisition, with a change in strategy, the
revival in Pantaloons remained robust reflecting an EBITDA CAGR of 56%
in FY14-17 to | 126 crore.
Exhibit 7: Pantaloons revenue and EBITDA trend…
1285
1661
1851
2157
2552
2.0
3.9
4.8
5.14.9
0
500
1000
1500
2000
2500
3000
FY13 FY14 FY15 FY16 FY17
|
0.0
1.0
2.0
3.0
4.0
5.0
6.0
%
Revenue EBITDA margins (%)
Source: Company, ICICIdirect.com Research
Exhibit 4: Pantaloon – Largest big box retailer…
209
54
8086
107
0
50
100
150
200
250
Pantaloons Westside Unlimited Shoppers
Stop
FBB
No. of
stores
No of Stores
Pantaloons - One of the largest
big box fashion retailer
Source: Company, ICICIdirect.com Research Exhibit 5: Pantaloons assemblage of private labels…
Source: Company, ICICIdirect.com Research
Exhibit 6: Geographical break-up (Revenue)…
26 27 28
31 29 29
29 28 26
14 16 17
0
20
40
60
80
100
120
FY15 FY16 FY17
North East West South
Source: Company, ICICIdirect.com Research
Page 4 ICICI Securities Ltd | Retail Equity Research
Madura & Pantaloons - Enabling wider coverage; winning strategy
ABFRL was formed by a combination of brands from Madura and value
fashion from Pantaloons. It has succeeded as one of the largest pure
fashion apparel players in the Indian market. The combined entity is
poised to be the first billion dollar pure fashion player in India. The merger
enabled operational efficiencies subsuming operational activities like
technology platforms, HR management, etc. under one entity. Moreover,
economies of scale have been achieved related to either raw material
sourcing, inventory management or while negotiating on retail space.
Exhibit 8: ABFRL FY17 revenue break-up…
Source: Company, ICICIdirect.com Research
With the merger, ABFRL has diversified its earlier men’s focused portfolio
to a more balanced mix of brands targeting customers across price points
and categories. Furthermore, the merger bestows ABFRL with a presence
in 375 cities and towns with 6.2 mn sq ft of retail network space and 7800
point of sales and 2261 EBOs.
Exhibit 9: Category wise revenue-break-up
39%
32%
12%
8%
5%4%
Men's Casuals
Men's Formals
Women's western wear
Women's ethnic wear
Kids
Accessories
Source: Company, ICICIdirect.com Research
Exhibit 10: ABFRL - Managing one of the largest footprints pan-India…
Source: Company, ICICIdirect.com Research
ABFRL
FY17 Revenue: |6633 crore
Madura Fashion & Lifestyle
~62% of the Sales (| 4081 crore)
Pantaloons Fashion & Retail
~38% of the Sales (| 2552 crore)
~| 1000
crore
External Brands
~39% of Panatallons
(| 995 crore)
~| 600 crore
Own Brands
~61% of Pantaloons
(| 1557 crore)
~| 1000
crore
~| 1000
crore
Other new
brands
| 170 crore
Lifestyle Brands
92% of the Madura (| 3770 crore)
Fast Fashion
8% of the Madura (| 345 crore)
Page 5 ICICI Securities Ltd | Retail Equity Research
Investment Rationale
Madura, largest brand player, to anchor future growth…
Revenues of Madura grew 10-fold (21% CAGR over the decade) to | 4081
crore vs. | 390 crore in FY04. The phenomenal growth surpasses the
branded apparel industry growth rate, which was at 14% CAGR in FY04-
17. The management’s astute efforts across branding & marketing (~5%
of total revenues) have provided ABFRL with India’s largest men’s wear
brand portfolio. The portfolio generates a turnover of ~| 4081 crore,
nearly 1.4x more vs. | 2898 crore for the second largest player (Arvind
Ltd.) in the industry. Moreover, Madura owns majority of its brands (Louis
Philippe, Allen Solly and Peter England), except Van Heusen of which it
holds exclusive distribution rights in India, Middle East and Saarc. Unlike
JVs, franchisee, licensed, the ownership model enables Madura to benefit
from brand designing, aggressive expansion and salvage of royalty
expenses. Madura remains crucial to ABFRL as it contributes 60%, 90% of
consolidated FY17 revenues, EBITDA, respectively.
Exhibit 12: Madura channel wise revenue break-up…
2188 21152420
2668
1546 1536
1719
1931149 345
439
545
1085
94
103
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
FY16 FY17 FY18E FY19E
| c
rore
MBO's EBO's Fast Fashion Other brands
CAGR
26%
12%
12%
10%
Source: Company, ICICIdirect.com Research
For FY17, share of revenues from EBOs, MBOs, fast fashion & other
brands were at 38%, 52% & 10%, respectively. However, with addition of
revenues from newer brands, we expect Madura’s revenue mix to change
to 37%, 51% and 12% for EBOs, MBOs and fast fashion and newer
brands, respectively. Subsequently we believe Madura’s revenues will
grow at 13% CAGR to | 5247 crore by FY19 vs. | 4081 crore in FY17.
Exhibit 13: Madura revenue to revive post internal restructuring…
2523.0
3226.0
3735.03878.0
4081.0
4670.1
5247.1
13%
28%
16%
4%
5%
14%
12%
0.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
FY13 FY14 FY15 FY16 FY17 FY18E FY19E
| c
r
0%
5%
10%
15%
20%
25%
30%
Madura revenues
% growth
13% CAGR Internal
restructuring
Source: Company, ICICIdirect.com Research
Exhibit 11: FY17 - Revenues for Brands
4081
2898 2826
488 403
0
1000
2000
3000
4000
5000
Madura
Garm
ents
Arvin
d
Raym
ond
KKC
L
India
n
Terria
n
| c
r
ABFRL brands - Biggest
grossers in the industry
Source: Company, ICICIdirect.com Research
Page 6 ICICI Securities Ltd | Retail Equity Research
Initiatives addressing recent deceleration in growth…
Over the past two years (FY15, FY16) Madura experienced flattish like to
like (LTL) growth resulting in slowest revenue growth of 7% CAGR in the
same period. Moreover, LTL growth for FY17 was at -5%, resulting in
revenue (ex-Forever 21 & People) de-growth of 2%. The impact of
demonetisation in the current year further impacted overall revenues.
Muted consumer sentiment was further blurred by a slew of other brands
(H&M, GAP, etc) available at lower prices. Moreover, e-commerce
companies resorting to deep discounting practices caused pricing
pressure in the price sensitive Indian market. An aggressive competitive
scenario led ABFRL to reduce its selling prices across products in the
range of 5-10% further impacting overall revenues. However, Madura
believes that aggressive discounts would dilute the image of its brands.
Following this, the company underwent a restructuring of its business to
preserve the long-term inherent strength of its brands.
Exhibit 14: Hiccups in Madura reflecting in quarterly financials…
10
16
-2
-7
5
24
6
9
26
-3
-1
2
0
5
-7
-4
-10
-7
0
0
2 2
-10
-5
0
5
10
15
20
25
30
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Revenue G
row
th (
%)
-12
-10
-8
-6
-4
-2
0
2
4
6
LTL g
row
th (
%)
Revenue growth (YoY %) LTL (%)
Source: Company, ICICIdirect.com Research, Revenue growth excluding fast fashion business
Lossmaking stores were phased out while older stores were recalibrated,
resulting in net addition of a mere one store in FY17. In the past year, the
management has embarked upon a number of strategies to revive growth
in Madura. These strategies are focused on making Madura agile by
building a healthy, sustainable, future ready business model. It involves:
a) avoiding heavy discounting maintaining ‘intrinsic value’ of premium
brands through calibrated price concession keeping prime costs intact
b) Continued investments directed towards brand building remains core
to maintain cult over other plethora of available brands
c) Providing seamless omni-channel experience currently fulfilled by
vast pan-India presence enabling digital transformation
d) Keeping a closer eye on profitability metrics and continuously
rationalising its cost structure
Exhibit 15: EBO addition through consolidation phase
1,877 1,878
1,895
1,841
1,856
1,810
1,820
1,830
1,840
1,850
1,860
1,870
1,880
1,890
1,900
Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17
No. of
stores
No. of EBO's
Net additions stood at mere 1 store
reflecting sluggish store additions
Source: Company, ICICIdirect.com Research
Page 7 ICICI Securities Ltd | Retail Equity Research
Consolidation through; Madura to be back on growth path…
We expect the LTL of Madura to gradually recover to 5-6% in FY18-19 on
the back of a number of following corrective measures adopted by the
company:
Exhibit 16: LTL growth to revive over FY18E and FY19E…
-5
5
67
0
1.5
4
-6
-4
-2
0
2
4
6
8
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
(%
)
LTL growth
Sharp revival in LTL growth
expected on the back of
corrective steps
Source: Company, ICICIdirect.com Research
A) Inventory shift - Adapting to changing fashion
The Indian fashion industry now demands faster trends, newer designs
and latest fashion. The earlier two inventory cycles (summer and winter)
resulted in increased production time ensuring the seasonal lines stick
around in stores for a longer period resulting in fashion that was passé.
This results in declining LTL sales growth, also impacting the brand
image. To cope with the changing trend, Madura has resorted to leaner
supply chain shifting to four cycles (summer, winter, spring and autumn)
from earlier two cycles. This would infuse fresh inventory to its selling
channels offering customers the latest and upcoming trends in fashion.
Exhibit 17: Benefits of improved inventory cycle…
Source: Company, ICICIdirect.com Research
Faster
Inventory turnover
Leading
Lower inventories
Lower
Working capital
requirement
Enabling
Fashion - Time to
market
Dynamics
Change in cycle
from two to
four
Page 8 ICICI Securities Ltd | Retail Equity Research
B) Brand extensions - Creating a fashion eco-system
Predominantly in the premium menswear brand, Madura has, over the
years, successfully leveraged its brands in newer consumer segments
and product categories. Madura has gradually shifted from mainline
formal wear of its core brands to sub brands under other categories like
casual wear, womenswear, kidswear, sports and accessories (belts and
wallets). The launch of these sub-brands de-risked its business model,
which derived ~72% of its overall revenues from mainline SKUs in FY10
to 55% of total revenues in FY17.
Madura intends to continuously evolve its brands with further extensions.
It launched men’s innerwear and athleisure SKUs in FY17 under Van
Heusen brand in South India (Chennai, Bengaluru & Hyderabad). The
launch was across 1000+ MBOs & an EBO in Chennai. These extensions
are expected to facilitate Madura brand’s dominance in the branded
industry. We believe brand extensions would continue to provide
customers with “more of the same" brand enabling incremental LTL.
C) Newer brands - Filling white spaces…
Madura continues to strengthen its brand portfolio adding newer brands
to its kitty. In FY16, the company added brands like Simon Carter and Ted
Baker to its luxury portfolio. Moreover, it bought the existing chain of 12
stores of Forever 21, which like Zara, specialises in women’s fast fashion
segment. With these acquisitions, Madura has strengthened its brand
offerings across the premium category. The company is also targeting
value customers by introducing shirts at lower price points under Allen
Solly and Peter England. Madura intends to address the white spaces and
enrich its portfolio across all product, price and consumer segments.
Exhibit 18: Product extensions enabling “More of same brand”…
FY05 FY06 FY08 FY10 FY11 FY13 FY16 FY17
Louis Philippe Suits and Coats -
Trendy Formals/
Office Casuals
Elite casuals Golf collection - LP
Accessories - Bags &
Footwear
Time wear -
Van Heusen Trendy Trousers
Women / Vdot
casuals
V casuals Vdot Denims Sporty collection
Lifestyle dressing /
Fashionable formals
- Innerwear & Athleisure
Peter England Innerwear - Elite Sport Party wear Accessories - Bags - Elite Sport / Travellers
Allen Solly - - Kids - - Women - -
Brands
Extensions over a period of time
Source: Company, ICICIdirect.com Research
Exhibit 19: Products across price-points…
Source: Company, ICICIdirect.com Research
Luxury
Super
premium
Premium
Sub-
Premium
Fast
Fashion
Mass
>| 5000
| 1500 to | 5000
| 500 to | 1500
Recently
added
Page 9 ICICI Securities Ltd | Retail Equity Research
Pantaloons redefined – FY19E revenues to multiply by 1.4x...
Post-acquisition, ABFRL has aggressively restructured Pantaloons making
several strategic investments. Appointment of a merchandise team, store
rationalisation and streamlining working capital were prerequisites. The
management has flagged completion of its restructuring and now intends
to aggressively open new stores across Tier-II and Tier-III cities. Revival of
LTL growth to 6% levels (vs. flattish earlier) also reflects it is nearing
resolution of integration issues. We expect revenues of Pantaloons to
grow at 19% CAGR to | 3594 crore by FY19E vs. | 2552 crore in FY17.
Subsequently, the contribution of Pantaloons to total revenues is
expected to increase 300 bps to 41% vs. current 38%.
One of the largest loyalty bases – Further aiding LTL growth...
The refreshed merchandise coupled with store optimisation has led the
customer base of Pantaloons grow at a CAGR of 16% from 3.8 million
customers in FY13 to 7 million customers as on FY17. The loyalty
programme enables Pantaloon’s client stickiness, which contributes
~80% of total revenues for Pantaloons. We expect newer brands offered
to existing customers to improve LTL across existing stores. We believe
the LTL would improve 500 bps in FY17-19E to 8% (vs. current 3.3%). LTL
in FY17 was impacted by demonetisation coupled with renovations and
temporary closure of certain stores.
Exhibit 22: LTL growth for Pantaloons - Revival on the cards…
7
8
-1.6
5.9
3.3
5.5
-4
-2
0
2
4
6
8
10
FY14 FY15 FY16 FY17 FY18E FY19E
(%
)
LTL growth
Gradual improvement in LTL
backed by loyal customers and
refreshed merchandise
Source: Company, ICICIdirect.com Research
Exhibit 20: Pantaloons expected revenue trend…
2157.0
2552.0
3112.6
3593.5
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0
4000.0
FY16 FY17 FY18E FY19E
| c
r
Pantaloons revenues
Source: Company, ICICIdirect.com Research
Exhibit 21: Loyalty members - Aiding the LTL
3.8
4.3 4.5
5.0
7.0
0
1
2
3
4
5
6
7
8
FY13 FY14 FY15 FY16 FY17
Members (in mn)
Source: Company, ICICIdirect.com Research
Page 10 ICICI Securities Ltd | Retail Equity Research
Integration strategy - Core to its revival
Pantaloons combined with Madura fortified ABFRL’s pole position in the
fashion retail industry. For Madura’s core menswear premium brands,
Pantaloon’s forte of women's centric value fashion was a strategic fit in its
portfolio. The integration strategy for Pantaloons involved a four-year
roadmap evolving around creating a sustainable business model.
Exhibit 23: Pantaloons - four year roadmap…
Source: Company, ICICIdirect.com Research
FY14 - Managing the Transition:
The year of acquisition allowed the assessment of existing business and
executing the changeover. The execution defined across four key tasks
included evaluating existing network, refurbishment and renovation of
existing profitable stores, setting up a merchandise team and building a
separate professional team for its management.
Exhibit 24: Course of action over FY13-14…
Source: Company, ICICIdirect.com Research
The consequence of the same was evident. This led to the slowest store
addition with the addition of a mere 12 stores, negative impact of 300 bps
on EBITDA margins to 2% and LTL of -2% in FY14.
Page 11 ICICI Securities Ltd | Retail Equity Research
FY15 & FY16 - Laying the foundation & journey of growth
Post the successful completion of the transition phase, in FY15-16,
Pantaloons experienced steady expansion. Higher emphasis on store
expansion resulted in addition of 114 stores in FY15-17. Moreover, 10
new brands (three each for men & women, two for kids and two for
Denim and Plus size) were launched over FY15 and FY16.
Exhibit 25: Transition of Pantaloons in phases…
•Launched ~30 store p.a; implied runrate of 1 store every two weeks
as compared to 1 store every two month prior to acquisitionStore expansion
•Cost effeciences, pricing improvement and change in product mix
resulting gross margin improvement of 300 bps Margin expansion
•Launched 10 new brands addressing the white spaces in the product
portfolio. Positioning Pantaloons as one stop shop for customersMerchandise creation
•Appointing new vendor network (~35% new). Defining quality,
availability and cost targets across 240+ vendor networkNew vendor network
•Recruited ~280 people at HO. Laid down key business processes all
well defined KRA's for key functional positionsBuilt the organisation
Source: Company, ICICIdirect.com Research
Subsequently, the share of private labels over the years increased from
52% in FY13 to 61% in FY17. A tight sourcing network coupled with
higher share of private labels resulted in a 300 bps revival in EBITDA
margins to 5% in FY17 vs. 2% in FY14. We expect the share of private
labels to further improve resulting in a margin expansion of 100 bps to
6% and EBITDA of | 215 crore by FY19E.
Exhibit 26: Transition of Pantaloons in numbers…
46
27 2729
12
5.1
2.0
3.9
4.84.9
0
5
10
15
20
25
30
35
40
45
50
FY13 FY14 FY15 FY16 FY17
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
No. of new stores EBITDA margins (%)
Laying the foundation &
Journey of growth
Managing the
transition
Source: Company, ICICIdirect.com Research
Page 12 ICICI Securities Ltd | Retail Equity Research
Ante up in store additions on back of sorted business model…
Madura: Continued focus on retail channel
ABFRL, post sorting out issues around Madura and Pantaloons, is
expected to ramp up store additions. We expect Madura to add 110
stores annually (100 stores & 10 value stores) over the next two years
(FY18, FY19). The additions would be directed towards higher penetration
in Tier 2, Tier 3 cities, aiming towards capitalising on higher discretionary
spending. With these additions, Madura’s exclusive brand outlets (EBOs)
are expected at 1959 stores with average store size of 1250 sq ft entailing
coverage of ~3 mn sq ft. For multi brand outlets (MBOs) and shop in
shops (SIS), we expect additions to continue to grow at existing CAGR of
7% to ~9000 touch points in FY19 vs. the current 7800.
Exhibit 27: Madura expected expansion…
No. of stores
1959
6800
7800
9009
17351759
0
2000
4000
6000
8000
10000
FY15 FY17 FY19E FY15 FY17 FY19E
EBO's MBO's & SIS
CAGR 5%
CAGR 7%
CAGR 1%
CAGR 7%
Source: Company, ICICIdirect.com Research
Given ABFRL’s aspiration to replicate the success of Zara in India, the
expansion plans of Fast Fashion (mainly Forever 21) are aggressive. We
expect addition of ~15 stores each in FY18 and FY19, respectively,
tallying to a total count of 46 stores by FY19 vs. current 16 stores.
Expansion under People would remain subdued at two stores each over
FY18 and FY19. Subsequently, there are expected to be 141 stores under
Fast Fashion by FY19E with a total estimated coverage of 0.6 mn sq ft
compared to the current 0.4 mn sq ft.
Exhibit 28: Fast Fashion expected expansion…
111 107 124 141
0.24
0.40
0.49
0.58
0
20
40
60
80
100
120
140
160
FY16 FY17 FY18E FY19E
No o
f stores
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
mn.
sq f
eet c
overage
Source: Company, ICICIdirect.com Research
Page 13 ICICI Securities Ltd | Retail Equity Research
The revenue mix is expected to be in favour of its fast fashion business,
which is expected to contribute 10% of total revenues by FY19E
compared to the current 8%. Moreover, introduction of brands like Simon
Carter and Ted Baker would continue to accrue core revenues from MBOs
and EBOs of 51% and 37%, respectively, by FY19E. As online orders are
fulfilled from nearest EBOs/MBOs, current contribution of 3.5% is
expected to double to 7% by FY19E. Clearance and other sales are
expected at 2% of FY19E revenues.
Exhibit 29: MBOs, EBOs to continue to remain core to Madura…
5652 52 51
40
38 37 37
48 9 10
0 2 2 2
0
20
40
60
80
100
120
FY16 FY17 FY18E FY19E
% c
ontrib
utio
n
MBO's EBO's Fast Fashion Other brands
Source: Company, ICICIdirect.com Research
Focus on brand building had led the majority of the current stores to
operate on the basis of company owned-company operated (COCO)
model. As these brands have already scaled up, ABFRL now plans to
scale up the newer stores on the franchisee route. The model facilitates
ABFRL to scale up swiftly with lower capex while managing only the
inventory risk. Approximately 80% of the phased expansion of 100 EBOs
is expected through the franchisee route.
Exhibit 30: Asset light franchisee model to form core for expansion…
% of stores Location Capex Inventory risk Lease & operations
Company Owned
Company Operated
30
Metros &
Prime locations
Madura Madura Madura
Company Owned
Franchisee Operated
40 Tier 1 cities Madura Madura
Franchisee
Owner
Franchisee Owned
Franchisee Operated
30
Smaller towns &
cities
Franchisee
Owner
Madura or
Franchisee
Franchisee
Owner
Source: Company, ICICIdirect.com Research
The southern and western regions of India across Tier I & II cities remain
the core coverage for ABFRL deriving ~60% of total revenues. Enhanced
coverage is expected across the northern and eastern region coupled
with higher focus within tier III & IV cities.
Store expansion under FOFO model to
result in lower capital expenditure for
newer stores
Page 14 ICICI Securities Ltd | Retail Equity Research
Pantaloons: Store count to grow 1.5x by FY19E
Pantaloons, post being repositioned as a value fashion store, is expected
to continue its aggressive store additions. Post acquisition in FY13,
Pantaloons nearly doubled its store count from 95 stores in FY13 to 209
stores in FY17. We expect the total store count at 300 stores by FY19E
(20% CAGR). Right sizing of stores to an average store size of 14000 sq ft
vs. 17000 sq ft per store earlier would result in lower expansion in
coverage (11% CAGR) to 4.2 mn sq ft vs. 3.4 mn sq ft.
Exhibit 31: Pantaloons expected expansion…
95 107 134 163 209 253 300
3.4
3.8
4.2
1.7
2.9
2.3
2.0
0
50
100
150
200
250
300
350
FY13 FY14 FY15 FY16 FY17 FY18E FY19E
No. of
stores
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
mn.
Sq.f
t
No of stores Coverage (mn sq.ft)
91 new stores to be
added by FY19E
114 new stores added over
FY13 to FY17
Source: Company, ICICIdirect.com Research
Realising that the kidswear market is adjacent to the women’s market,
Pantaloons has renewed its strategy to diversify its product mix and focus
on both these fast growing segments. The company launched speciality
small box format stores (<10000 sq ft) dedicated to women and kids. As
on FY17, Pantaloons has 16 women stores and nine kids’ speciality stores.
We believe this expansion will continue with the constant addition of five
stores every year in the women’s category and two or three stores under
kidswear segment. Total store count is expected at 300 stores, including
26, 12 women’s, kid’s stores, respectively. A slew of brands across all
categories would position Pantaloons as “one stop shop” for apparel
requirements of the family. The in-house merchandise team enables
Pantaloons to launch own brands and churn its new designs at faster rate
keeping store inventory afresh. This has led share of own brands increase
from 50% in FY13 (in acquisition) to 61% in FY17.
Exhibit 32: Increasing share of own labels…
50%48%
52%
62% 61%
0%
10%
20%
30%
40%
50%
60%
70%
FY13 FY14 FY15 FY16 FY17
% s
hare in r
evenues
Share of private labels
Gradual increase in share of private labels on
the back of new brands launched
Source: Company, ICICIdirect.com Research
Exhibit 33: Own brands to continue dominate the Pantaloons portfolio…
Source: Company, ICICIdirect.com Research
Pantaloons is present across 78 cities/towns and
retails over 200 licensed and international brands.
The launch of six new brands in FY15, Pantaloons
markets 24 exclusive brands.
Unlike the earlier COCO model, in FY17, ABFRL adopted
the franchisee based expansion model for Pantaloons.
Out of total expansion of 46 stores in FY17, Pantaloons’
franchisee network was at 28 stores
Page 15 ICICI Securities Ltd | Retail Equity Research
Consumption theme to benefit ABFRL…
We believe that ABFRL, with its strategies, commands a leading position
in the apparel business. The now combined entity is poised to take
advantage of the theme around higher disposable income and increased
discretionary spending. A steady rise in income levels, favourable
demographics and GST led penetration in organised retail bode well for
the branded apparel business. ABFRL, with its strong brands, a
distribution reach and product offering across various categories/price
points is poised to exploit these growth opportunities.
Exhibit 35: Maintain, consolidate leadership position as India’s leading apparel business…
Source: Company, ICICIdirect.com Research
Global apparel consumption is expected to increase from $1700 billion in
2015 to $2600 billion by 2025. Market addition of $900 billion over the
next decade provides a huge opportunity to players in the apparel sector.
Majority of the addition in market is expected to happen in China ($378
billion) and India ($121 billion). Growth in developed countries is likely to
be in single digits while the Indian domestic apparel market is expected to
register highest average growth rate of 12% in CY15-25 with Chinese
domestic apparel growing at an average rate of 10% over the period.
Apparel consumption in top eight economies (considering European
Union as single entity) constitutes ~70% of global consumption. Brazil,
Russia, India and China (BRIC countries) comprise ~23% with China
having a major share of 14% and India following with share of 3.5%. Over
the next decade, India’s share in apparel consumption is expected to
nearly double to 6.9% with China’s share expected to increase to 23.7%.
Exhibit 34: Largest network compared to peers…
132
331
10141080
2052
0
500
1000
1500
2000
2500
Madura Raymond Arvind KKCL Indian
TerrainNo. of Stores
Strong EBO network provides
a competitive edge to ABFRL
benefiting from consumption
theme
Source: Company, ICICIdirect.com Research
Exhibit 36: Global apparel consumption to grow at a CAGR of 4.4% over FY15 to FY25...
16851796
18711950
20312117
22062298
23952495
2600
0
500
1000
1500
2000
2500
3000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
US
$ B
n
Global Apparel Consumption
Source: Company, ICICIdirect.com Research
Page 16 ICICI Securities Ltd | Retail Equity Research
Consumer spending has a strong correlation with various product
categories and the economic status of the consumer. Initially, a consumer
is more focused on spending on basic necessities like food, clothing and
housing. As disposable income increases, the consumer tends to spend
more on discretionary items like consumer durables, entertainment,
recreation, travel, etc. Though absolute expenditure on clothing does not
go down its growth rate in comparison to increase in other expenses is
slower. Hence, apparel consumption is likely to increase at a faster pace
in developing countries like India, China, Brazil, etc while for the
developed nations it would be slower.
Though developed regions like EU, US have a population of ~11% of
world population, they still drive 40% of global apparel consumption,
which is mainly on account of high per capita expenditure on apparel
(PEAP). However, growth in PEAP for developed countries like US, EU is
expected to be flattish with marginal average annual growth of 1% in the
next decade. Contrary to developed nations, developing countries have
low per capita expenditure on apparel. However, the expected annual
growth in PEAP is likely to be higher.
India is expected to have the highest annual growth rate in PEAP of ~11%
over the next decade while China’s PEAP is expected to grow at an annual
growth rate of 10%. Even with expectations of registering the strongest
growth over the next decade, India’s PEAP would increase from $45 in
2015 to $123, which would be still be only 11% of US PEAP, which is
expected to be ~$1123 in 2025 while China’s PEAP would be around 3.5x
of India’s PEAP in 2025.
Exhibit 37: Indian apparel market to grow at CAGR of 12% in FY15-25…
Countrywise Apparel
Market Size (US$ Bn)
2015 2025 CAGR %
Absolute
increase in
market size
Percentage
of
incremental
market
Global
Market
Share 2015
Global
Market
Share 2025
EU-28* 350 390 1 40 4.4 20.8 15.0
USA 315 385 2 70 7.7 18.7 14.8
China 237 615 10 378 41.3 14.1 23.7
Japan 93 105 1 12 1.3 5.5 4.0
India 59 180 12 121 13.2 3.5 6.9
Brazil 56 90 5 34 3.7 3.3 3.5
Russia 40 59 4 19 2.1 2.4 2.3
Canada 25 30 2 5 0.5 1.5 1.2
Rest of World 510 746 4 236 25.8 30.3 28.7
Total 1685 2600 4 915 100
Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity
Exhibit 38: Global apparel consumption to grow at CAGR of 4.4% in FY15 to FY25...
Countrywise Per Capita expenditure
on Apparel (US$)
2015 2025 CAGR %
EU-28 693 766 1.0
USA 978 1116 1.3
China 172 435 9.7
Japan 736 835 1.3
India 45 123 10.6
Brazil 270 404 4.1
Russia 282 390 3.3
Canada 683 768 1.2
Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity
India’s share in the global market to nearly double
to 6.9% compared to 3.5%. This provides
enormous opportunity for apparel players like
ABFRL
Page 17 ICICI Securities Ltd | Retail Equity Research
Women’s category to outpace men’s category…
The Indian apparel market is expected to grow from $59 billion (bn) in
2015 to US$180 bn. The branded apparel market is expected to grow at a
faster annual average growth rate of 13.5% and is expected to touch $41
bn by 2025. On the other hand, the unbranded apparel market is expected
to grow at a comparatively slower pace with average growth of ~11%
over the period.
Segment wise, the women’s segment is expected to grow faster than the
men’s segment. The women’s apparel market is expected to grow at an
average annual growth rate of 16.4% in CY14-25 while men’s apparel is
expected to grow at an average annual growth rate of 14% over the same
period. Further, men’s casual wear is expected to grow at an average
annual growth of 22% in CY14-25, while men’s formal wear is expected to
grow at an average annual growth of 10% over the period. Among
womenswear, western wear is expected to grow at an average annual
growth of ~24% in CY14-25 while women’s ethnic wear is expected to
grow at an average annual growth rate of 11%.
Exhibit 39: Branded apparel to grow at CAGR of 13.5% in FY15-25...
6.5 11.519.9
41.028.5
47.5
83.1
139.0
-20
10
40
70
100
130
160
190
2010 2015 2020 2025
US
$ b
n
Branded Apparel Mkt Size Unbranded Apparel Mkt Size
Branded apparel market to become ~4
times to $41 billion as compared to current
market size of $ 11.5 billion
Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity
Exhibit 40: Global apparel consumption to grow at CAGR of 4.4% in FY15-25...
3.6
1.4
0.7
1.7
2.7
5 5
2.52.8
4.7
9
7.5
5.2
7
12.5
0
3
6
9
12
15
Mens Formals Mens Casuals Women's Western Women's Ethnic Kids
US
$ B
n
2014 2020 2025
CAGR 9% CAGR 22% CAGR 24% CAGR 11% CAGR 9%
Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity
With close to | 6633 crore (~$1 billion) of revenues,
ABFRL commands a significant share of 9-10% of the
organised branded apparel market share
Page 18 ICICI Securities Ltd | Retail Equity Research
Pantaloons – Leveraging on women’s product portfolio…
Pantaloon’s product portfolio targets primarily two segments -
womenswear and fast fashion. Unlike Madura, which derives majority of
the revenues from men’s wear, Pantaloons is targeting the fragmented
womenswear segment. Pantaloons is one of the largest retailers (by
revenue), selling women branded apparels. Approximately 44% (23%
western; 21% ethnic) i.e. ~| 1123 crore of Pantaloon’s total revenues is
derived from womenswear portfolio. On the back of higher throughput
coupled with client stickiness, womenswear is considered to be the more
profitable segment vs. menswear on gross profit per square foot basis.
The higher relevance and importance of designs in womenswear helps
increase the propensity of brand-owners to price up these apparels,
which also helps boost their margin profile. Subsequently, the
womenswear segment contributed ~50% of Pantaloon’s gross profit.
Successful transition from discount store to value fashion…
Experiencing a successful transition from a ‘discount store’ to ‘value
retailer’, Pantaloons uniquely leverages its own private brands labels. In
order to tap the underlying opportunities for men’s casual wear, the
company recently launched various brands like Byford, San Francisco and
Urban Eagle. Menswear contributes 35% of revenues. Kid’s apparel
contributes 10% of revenues whereas remaining 14% comes from non-
apparels.
Exhibit 41: Category wise Revenue-break-up (FY17)
Non-Apps,
10%
Men, 35%
Women
Western,
23%
Women
Ethnic, 21%
Kids, 11%
Source: Company, ICICIdirect.com Research
Exhibit 42: Changing image of Pantaloons – From discount store to value fashion…
No. of stores
2 2 2 4 6 610 10
1519
2834
38
47
6064
68
95
107
134
163
209
0
50
100
150
200
250
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 2015 2016 2017
Pre-acquisition Post-acquisition
Source: Company, ICICIdirect.com Research
Page 19 ICICI Securities Ltd | Retail Equity Research
Financials
Consolidated revenues likely to grow at 15% CAGR in FY16-19E
ABFRL’s consolidated revenues are expected to grow at a CAGR of 15%
to ~| 8840 crore by FY19E compared to | 6633 crore in FY17. While
majority of incremental growth is expected to be driven by Pantaloons,
network expansion and brand extensions coupled with newer brands like
Forever 21, Ted Baker and Simon Carter are expected to further
accelerate the incremental revenues.
EBOs are expected to contribute ~18% of incremental revenues. MBOs
are expected to contribute 25% of incremental revenues. Revenues from
fast fashion which includes People and Forever 21 are expected to
contribute 9% of incremental revenues. Pantaloons is expected to capture
the lion’s share of incremental growth, contributing ~48% to incremental
revenues.
Madura’s revenues are expected to be largely driven by a revival in LTL
growth. However, store/footprint expansion over EBO and MBO format
are expected to further add to the topline. Expansion of its presence
across Tier-II and Tier-III cities along with brand extensions would
expedite Madura’s revenues. Revenues from Madura – Lifestyle brands
(MBOs + EBOs) are expected to grow at a CAGR of 6% in FY17-19E to
| 4702 crore vs. | 3736 crore in FY17. Revenues from Madura fast fashion
business (People + Forever 21) are expected to grow 1.5x (25.7% CAGR)
to | 545 crore in FY19E compared to | 345 crore in FY17. Pantaloon’s
revenue is expected to grow at a CAGR of 18.7% in FY17-19E to | 3593
crore compared to | 2552 crore in FY17.
Exhibit 43: Consolidated revenues to realise inclusive growth…
1059553
395
200
8840
6633
FY17 EBO's MBO's Newer Brands Pantaloons FY19E
| c
rore
Core business to resume its
growth trajectory
Fast fashion to boost revenues
Source: Company, ICICIdirect.com Research
Exhibit 44: Consolidated revenues to grow at CAGR of 15% over FY17-19E…
3729 3736
4232
4702
2157
2552
3113
3593
149345
439545
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
FY16 FY17 FY18E FY19E
| c
r
Lifestyle Brands Pantaloons Newer brands - Forever 21/People
Source: Company, ICICIdirect.com Research
Page 20 ICICI Securities Ltd | Retail Equity Research
Brand extensions, Pantaloons turnaround to aid margin expansion
We believe brand extensions would yield higher realisation per sq ft
resulting in improved margins. In addition to the same, increased
contribution of private labels in Pantaloons portfolio would further
facilitate margin improvement. Stabilisation of fast fashion brands would
take some time. Subsequently, we expect EBITDA margins to expand 140
bps in FY17-19E to 8% from the current 6.6%. Likewise, consolidated
EBITDA is expected to grow at a CAGR of 27% CAGR in FY17-19E to
| 703 crore in FY19E from | 438 crore in FY17.
Exhibit 45: Consolidated EBITDA margins expected to improve 140 bps over FY17-19E
378.4 437.5 598.9 703.1
6.36.6
7.7
8.0
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
FY16 FY17 FY18E FY19E
| c
r
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
% t
o s
ale
s
EBITDA EBITDA Margin %
Source: Company, ICICIdirect.com Research
PAT growth driven by better operating performance
Inclusive growth across all segments is expected to bring in robust
revenue growth. Moreover, with margin expansion, PAT is expected to
more than quadruple to | 261.5 crore by FY19E compared to | 53.5 crore
in FY17. PAT for FY16 was impacted by one-time depreciation adjustment
of | 100 crore, resulting in a loss of | 109.7 crore. EBIT margins of
Pantaloons for FY17 were at -1% in FY17 compared to -7% in FY16,
indicating a turnaround. Higher emphasis on franchisee based store
openings would not result in a dent in P&L as the company only manages
inventory, which practically does not impact below the line expenses
(depreciation and interest).
Exhibit 46: PAT expected to quadruple over FY17 to FY19E
181.7 261.553.511.4
3.0
2.3
0.8
0.2
0.0
50.0
100.0
150.0
200.0
250.0
300.0
FY16* FY17 FY18E FY19E
| c
r
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
PAT PAT margin (%)
Source: Company, ICICIdirect.com Research, FY16 adjusted PAT
Page 21 ICICI Securities Ltd | Retail Equity Research
Return ratios to ramp up on improving financials…
The asset light expansion of Pantaloons and Madura would drastically
improve return ratios. However, return ratios would be moderated by
expansion of Forever 21. The RoE is expected to more than treble to
18.7% in FY19E compared to current 5.6%. The impact of inventory
would, to an extent, moderate RoCE expansion, which is expected to
double by FY19E to 14.6% vs. current 7.5%. Enhanced operational
performance coupled with profitable growth would drive the expansion
plans from internal accruals.
Exhibit 47: Return ratios trend
2.4
7.5
12.3
14.6
1.3
15.9
18.7
5.6
0.0
5.0
10.0
15.0
20.0
FY16 FY17 FY18E FY19E
(%)
RoE RoCE
Source: Company, ICICIdirect.com Research, FY16 adjusted RoE
Higher FCF to reduce debt, improve financial leverage…
Replicating Madura’s capital efficiency in Pantaloons, ABFRL’s
consolidated conversion cycle is expected to reduce from 110 days in
FY17P to 70 days in FY19E. The improvement in cash conversion cycle
coupled with accelerated revenue generation is expected to lead to an
improvement in cash flow from operation (CFO), which is expected to
grow 2.2x to ~| 605 crore in FY19E (vs. ~| 268 crore in FY17P). Improved
fundamentals with major thrust on franchisee model is expected to result
in lower capex and higher free cash flow (FCF) generation, which is
expected at | 240 crore in FY19E. Subsequently, net debt is expected to
reduce to | 1589 crore by FY19E compared to | 2116.2 crore in FY17
resulting in an improved financial leverage ratio (debt/equity) of 1.2x in
FY19E compared to 2.3x in FY17.
Exhibit 48: FCF generation to result lowering of debt…
1830.6 2116.2 1803.6 1559.8
2.04
2.25
1.64
1.18
0.0
500.0
1000.0
1500.0
2000.0
2500.0
FY16 FY17P FY18E FY19E
Debt
0.0
0.5
1.0
1.5
2.0
2.5
Debt t
o e
quit
y r
atio
(x)
Source: Company, ICICIdirect.com Research, FY16 adjusted RoE
Page 22 ICICI Securities Ltd | Retail Equity Research
Risk & Concerns
Increasing competitive intensity from other western brands
In any market globally there co-exists top three fast fashion brands. The
rationale of customers choosing these brands includes: Uniqlo for better
quality, Zara for better designs and H&M for better prices. These brands
have aggressive plans for India. Zara has continued to leverage the Indian
markets with better designs and better fits. However, GAP and Forever 21
have embarked on their growth strategy from FY17. The entry of H&M has
caught on well in the price conscious Indian market. This has resulted in
pricing pressure across the fast fashion industry within well established
brands like Zara slashing its prices to bring them closer to H&M. The body
shop and GAP also reduced their prices to the extent of 15-30% to stay
competitive.
ABFRL has also moderated prices of its key brands to the extent 5% in
FY17, impacting growth in Madura. Moreover, growth rates for
Pantaloons and Forever 21 could negatively surprise if the competitive
intensity widens with newer brands entering and disrupting the market.
Aggressive store expansion at invariably high rental expenses
Rent expenses currently forms 16% of overall revenues. With ~80% of
the presence in metro and mini-metro, our estimates include store
expansion in non-metros and smaller cities with major thrust on
franchisee based model. Any variation on above assumptions would
impact our margin estimates in accordance to sensitivity provided below:
Exhibit 49: Slew of fashion brands in Indian market…
Source: Company, ICICIdirect.com Research
Exhibit 50: Sensitivity of EBITDA margins to rent expenses…
0.0% 5.0% 10.0% 15.0% 20.0%
FY17E 9.0 8.4 7.7 7.0 6.4
FY18E 10.5 9.3 8.0 6.6 5.1
Change in Rent per sq.ft (varition to current estimates)
EBITDA
margins
Source: Company, ICICIdirect.com Research
Page 23 ICICI Securities Ltd | Retail Equity Research
Valuations
Considering the strong franchisee coupled with future growth prospects,
we believe ABFRL would continue to trade at a premium to its peers.
Keeping the structural story intact, which evolves around rising
disposable income and shift of consumer preferences, ABFRL is well-
poised to capture the Indian growth story. We believe the dynamics of
both segments are similar and, hence, value ABFRL on a consolidated
basis. ABFRL (post restructuring) has traded at a two-year historical
average of 2x EV/sales multiple. We ascribe the same to FY19E sales of
| 8840.5 crore and arrive at a target price | 210 with a BUY rating.
Exhibit 51: Historical price trend valuing ABFRL on EV/sales…
0
50
100
150
200
250
300
350
400
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
(|
)
Price 2.6x 2.4x 2.3x 2.1x 1.9x 1.7x 1.5x
Source: Company, ICICIdirect.com Research
Exhibit 52: Valuation compared to peers
Figures (| crore)
Company Price Sales EBIDTA OPM PAT PAT % FY18E FY19E
ABFRL 170.0 6,633.0 437.5 6.6 53.5 0.8 2.0 1.7
Arvind 370.0 9,236.5 943.4 10.2 320.1 3.5 1.2 1.0
Trent 255.0 3,140.5 250.5 8.0 141.9 4.5 2.2 1.9
Raymond 821.0 5,391.3 317.2 5.9 76.1 1.4 1.1 1.0
Average EV/Sales 1.6 1.4
Valuation metrics
Target EV/Sales multiple 2.0
2019E Sales 8,840.5
2019E EV 17,788.0
2019E Debt 1,654.6
2019E Cash 44.5
2019E Market Cap. 16,177.8
No. of shares 77.1
Target Price 210.0
CMP 170.0
Upside/(Downside) 23.5
FY17 EV/Sales
Source: Company, ICICIdirect.com Research
Page 24 ICICI Securities Ltd | Retail Equity Research
Retail & Textile Peer Comparison…
Exhibit 53: Retail peer valuations…
FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E
Coverage Companies
Aditya Birla Fashion 13378.3 2.0 1.7 1.5 34.8 24.9 20.8 2.3 1.9 1.7
Arvind 9558.7 1.0 0.9 0.8 13.0 10.8 8.8 1.3 1.2 1.0
Kewal Kiran 2163.0 4.5 3.9 3.4 21.7 18.5 15.5 4.4 3.9 3.3
Trent 8474.1 4.3 2.0 1.7 69.4 26.1 21.4 4.4 2.2 1.9
Shoppers Stop 2903.0 0.6 0.5 0.5 20.2 16.8 13.3 0.7 0.7 0.6
Siyaram Silk 2081.0 1.3 1.2 1.1 12.3 10.1 8.4 1.5 1.4 1.2
Rupa & Co. 4022.7 3.7 3.3 3.0 29.5 24.1 20.8 3.7 3.4 3.0
Page Industries 18992.6 9.2 7.2 5.8 47.8 38.2 32.6 9.3 7.2 5.8
2.8 1.9 1.6 25.6 21.3 18.1 3.0 2.1 1.8
3.3 2.6 2.2 31.1 21.2 17.7 3.5 2.7 2.3
Brands & Retail
Monte Carlo 1208.3 2.1 2.1 1.7 11.5 10.6 9.2 1.4 1.5 1.0
Raymond 5033.8 0.9 0.9 0.8 21.0 20.1 13.2 1.0 1.0 0.8
Indian Terrian 786.5 1.9 2.0 1.6 16.1 16.4 12.7 1.5 1.6 1.1
Future Lifestyle 5856.0 1.5 1.5 1.3 17.5 17.0 14.4 1.5 1.5 1.1
Future Retail 18662.6 1.1 1.1 0.9 33.7 38.6 27.2 0.8 0.8 0.7
1.5 1.5 1.3 17.5 17.0 13.2 1.4 1.5 1.0
1.5 1.5 1.3 20.0 20.6 15.3 1.2 1.3 0.9
FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E
USA
VF Corp 22.5 1.9 1.9 1.8 12.9 12.6 11.4 2.0 1.9 1.8
Lululemon Athletica Inc 7.9 3.4 3.1 2.8 14.2 13.0 11.8 2.7 2.3 2.1
PVH Corp 8.6 1.1 1.0 1.0 10.6 10.1 9.4 1.3 1.2 1.2
Gap Inc 9.0 0.6 0.6 0.6 4.5 4.6 4.5 0.7 0.6 0.6
Ralph Lauren 5.7 0.9 1.0 1.0 5.3 5.7 5.6 0.9 1.0 0.9
Carter's Inc 4.2 1.2 1.2 1.1 8.9 8.4 7.9 1.5 1.3 1.2
The Children's Place 1.9 1.0 1.0 1.0 7.9 7.1 6.6 1.0 1.0 0.9
Nike 94.4 2.8 2.6 2.4 17.1 16.2 14.5 2.5 2.2 2.0
Fossil 0.5 0.2 0.2 0.2 4.7 4.2 7.1 0.4 0.4 0.0
Abercrombie & Fitch 0.8 0.3 0.3 0.3 3.3 3.8 3.8 0.2 0.2 0.2
Hanesbrands Inc 8.2 1.3 1.3 1.2 11.1 10.6 10.3 1.9 1.7 1.6
1.1 1.0 1.0 8.9 8.4 7.9 1.3 1.2 1.2
1.3 1.3 1.2 9.1 8.7 8.5 1.4 1.3 1.2
Europe
LVMH 127.0 2.7 2.5 2.4 11.9 10.9 9.8 2.4 1.9 1.7
Inditex 119.3 4.5 4.0 3.6 19.2 16.9 15.1 4.4 3.5 3.1
H&M 41.8 1.7 1.6 1.4 10.4 9.4 8.6 1.8 1.4 1.3
Next PLC 7.2 1.3 1.4 1.4 6.8 7.5 7.6 1.5 1.6 1.5
2.2 2.0 1.9 11.1 10.2 9.2 2.1 1.7 1.6
2.5 2.4 2.2 12.1 11.2 10.3 2.5 2.1 1.9
Company
EV/EBITDA EV/Sales
Mkt Cap
(INR cr)
Mcap/Sales
Global brands & Speciatliy retail
Mcap/Sales EV/EBITDA EV/SalesMkt Cap
(USD bn)
Source: Company, ICICIdirect.com Research
Page 25 ICICI Securities Ltd | Retail Equity Research
Financial Summary (Consolidated)
Exhibit 54: Profit & Loss
(Year-end March) FY 16 FY 17P FY 18E FY 19E
Gross Revenue 6,034.6 6,633.0 7,782.7 8,840.5
Growth (%) 9.9 17.3 13.6
Net Revenue 6,034.6 6,633.0 7,782.7 8,840.5
Growth (%) 9.9 17.3 13.6
Cost of Sales 2,751.8 3,008.7 3,829.8 4,352.0
Employee Costs 620.5 705.8 773.1 850.4
Operating Expenses 903.2 1,087.1 1,128.0 1,320.7
Op. Expenditure 697.4 707.1 807.0 880.6
EBITDA 378.4 437.5 598.9 703.1
Growth (%) 420.5 15.6 36.9 17.4
Depreciation 338.1 242.5 271.3 304.0
EBIT 40.3 195.0 327.6 399.1
Interest 176.5 179.7 155.8 137.6
Other Income 26.4 38.2 42.0 46.2
PBT (109.7) 53.5 213.7 307.7
Growth (%) (51.9) (148.7) 299.5 44.0
Tax - - 32.1 46.2
Reported PAT (109.7) 53.5 181.7 261.5
Exceptional Items 121.1 - - -
Adjusted PAT 11.4 53.5 181.7 261.5
Growth (%) 371.3 239.5 44.0
EPS 0.1 0.7 2.4 3.4
Source: Company, ICICIdirect.com Research
Exhibit 55: Balance Sheet
(Year-end March) FY 16 FY 17P FY 18E FY 19E
Source of Funds
Equity Capital 768.8 770.5 770.5 770.5
Reserves & Surplus 132.9 184.9 366.5 628.1
Shareholder's Fund 905.5 958.2 1,139.8 1,401.3
Secured Loan 677.2 1,271.0 1,271.0 1,271.0
Unsecured Loan 1,172.7 889.6 602.9 383.6
Total Loan Funds 1,849.8 2,160.6 1,873.9 1,654.6
Deferred Tax Liability 14.8 20.0 20.0 20.0
Minority Interest - - - -
Source of Funds 2,876.6 3,272.9 3,167.8 3,210.1
Application of Funds
Gross Block 1,330.7 1,635.7 1,830.4 2,051.1
Less: Acc. Depreciation (847.0) (1,089.5) (1,360.8) (1,664.8)
Net Block 483.7 546.2 469.6 386.2
Capital WIP 25.4 25.0 30.0 36.0
Total Fixed Assets 509.1 571.2 499.6 422.2
Goodwill 1,839.5 1,940.8 1,940.8 1,940.8
Investments - - - -
Inventories 1,410.5 1,431.3 1,599.2 1,695.4
Debtors 312.4 453.9 383.8 436.0
Cash 19.2 44.5 70.3 94.8
Loan & Advance, Other CA 491.7 594.2 701.1 797.9
Total Current assets 2,233.8 2,523.8 2,754.4 3,024.1
Creditors 1,429.8 1,551.1 1,836.2 1,967.3
Other Current Liabilities 276.0 211.9 190.7 209.8
Provisions - - - -
Total CL and Provisions 1,705.8 1,763.0 2,026.9 2,177.1
Net Working Capital 528.0 760.8 727.4 847.0
Miscellaneous expense - - - -
Application of Funds 2,876.6 3,272.9 3,167.8 3,210.1
Source: Company, ICICIdirect.com Research
Page 26 ICICI Securities Ltd | Retail Equity Research
Exhibit 56: Cash Flow
(Year-end March) FY 16 FY 17P FY 18E FY 19E
Profit after Tax 11.4 53.5 181.7 261.5
Less: Dividend Paid (176.5) (179.7) (155.8) (137.6)
Add: Depreciation 338.1 242.5 271.3 304.0
Add: Others - - - -
Cash Profit 525.9 475.6 608.8 703.2
Increase/(Decrease) in CL 1,273.7 57.1 264.0 150.2
(Increase)/Decrease in CA (1,596.8) (260.5) (200.8) (241.0)
CF from Operating Activities 137.1 268.0 668.0 608.1
(Add) / Dec in Fixed Assets (468.5) (304.6) (199.7) (226.7)
Goodwill (635.1) (101.3) - -
(Inc)/Dec in Investments 81.9 16.6 - -
CF from Investing Activities (1,021.7) (389.4) (199.7) (226.7)
Inc/(Dec) in Loan Funds 539.0 310.8 (286.7) (219.3)
Inc/(Dec) in Sh. Cap. & Res. 675.5 1.7 - -
Others (318.0) (166.0) (155.8) (137.6)
CF from financing activities 896.6 146.5 (442.5) (356.9)
Change in cash Eq. 12.0 25.2 25.8 24.6
Op. Cash and cash Eq. 7.2 19.2 44.5 70.3
Cl. Cash and cash Eq. 19.2 44.5 70.3 94.8
Source: Company, ICICIdirect.com Research
Exhibit 57: Ratios
(Year-end March) FY 16 FY 17P FY 18E FY 19E
Per share data (|)
Book Value 11.8 12.4 14.8 18.2
EPS* 0.1 0.7 2.4 3.4
Cash EPS 0.3 0.6 0.9 1.2
DPS - - - -
Profitability & Operating Ratios
EBITDA Margin (%) 6.3 6.6 7.7 8.0
PAT Margin (%) 0.2 0.8 2.3 3.0
Fixed Asset Turnover (x) 2.2 2.1 2.6 2.9
Inventory Turnover (Days) 55.6 78.2 75.0 70.0
Debtor (Days) 9.7 21.1 18.0 18.0
Current Liabilities (Days) 115.5 180.8 175.0 165.0
Return Ratios (%)
RoE* 1.3 5.6 15.9 18.7
RoCE 2.4 7.5 12.3 14.6
RoIC 4.1 15.4 29.1 35.1
Valuation Ratios (x)
PE NM NM 72.1 50.1
Price to Book Value 14.4 13.7 11.5 9.3
EV/EBITDA 39.4 34.8 24.9 20.8
EV/Sales 2.5 2.3 1.9 1.7
Leverage & Solvency Ratios
Debt to equity (x) 2.0 2.3 1.6 1.2
Interest Coverage (x) 0.2 1.1 2.1 2.9
Debt to EBITDA (x) 4.9 4.9 3.1 2.4
Current Ratio 1.3 1.4 1.3 1.3
Quick ratio 0.5 0.6 0.5 0.6
Source: Company, ICICIdirect.com Research, * FY16 adjusted EPS & RoE
Page 27 ICICI Securities Ltd | Retail Equity Research
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey
Head – Research
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
Initiating Coverage
ICICI Securities Ltd | Retail Equity Research
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
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the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly
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