INITIATING COVERAGE
ADITYA BIRLA FASHION AND RETAIL
Peerless brand brawn
India Equity Research| Retail
Aditya Birla Fashion and Retail (ABFRL) is one of the largest branded
clothing players with 5 brands clocking >INR10bn sales each. In 2014,
ABFRL acquired Pantaloons to get a foothold in the women’s wear
segment. Commendably, within 2 years, it turned around the
acquisition’s ailing operations, proving its expertise in managing branded
garments. ABFRL has now ventured into fast fashion via Forever 21and
innerwear under the Van Heusenbrand thereby now housing full bouquet
of segments in the apparel category. Anchored by these potent growth
boosters, we estimate ABFRL to post sales and EBITDA CAGR of 16.4%
and 29.2%, respectively, over FY16-19 and 24.1% RoE by FY19. Therefore
we initiate the stock under our iconic ‘Braveheart’ series with a 'BUY' and
a TP of INR202.
EDELWEISS 4D RATINGS
Absolute Rating
BUY
Rating Relative to Sector
Outperformer
Risk Rating Relative to Sector
Low
Sector Relative to Market
Overweight
MARKET DATA (R: PNTA.BO, B:ABFRL IN)
CMP
: INR 148
Target Price
: INR 202
52-week range (INR)
:263 / 124
Share in issue (mn)
:768.8
M cap (INR bn/USD mn)
:112 / 1,678
Avg. Daily Vol.BSE/NSE(‘000) :805.7
Ample catalysts to unlock humungous industry potential
Our proprietary model forecasts India’s organised apparel market to catapult to
INR2.3tn in FY25 from INR672bn in FY14, 11.8% CAGR. This impressive surge will be
fueled by GDP revival,favourable demographics, rising urbanisation, increasing brand
consciousness, etc. ABFRL is bound to be key beneficiary of these improving dynamics
by virtue of strong brands in its kitty, large retail network and omni-channel strategy.
Madura & Pantaloons: Potent brands in one scabbard
SHARE HOLDING PATTERN (%)
Current
Q1FY17
Q4FY16
Promoters *
59.5
59.5
59.5
MF's, FI's & BK’s
14.7
14.7
14.8
FII's
12.0
11.9
11.9
Others
13.8
13.9
13.8
:
* Promoters pledged shares
(% of share in issue)
Entry in high-growth segments—inner wear, women’s casual & formal wear, kid’s
wear—burnishes Madura’s prospects. Moreover, expansion in East &West India and
smaller markets will be next growth avenue. Hence, we estimate Madura’s RoCE to
jump to ~42% in FY19 with FCF of ~INR2.1bn in FY17 (consol RoCE is optically low due
to loss in Pantaloons).Pantaloons has successfully emerged as a strong value fashion
retailer. We forecast its margin to improve to 5.7% in FY19 (3.1% in FY16) propelled by
superior throughput, pruning of sale period and increase in share of private labels.
NIL
PRICE PERFORMANCE (%)
Sensex
Stock
Stock over
Sensex
1 month
(2.0)
(4.6)
(2.6)
3 months
0.9
0.5
(0.4)
12 months
2.5
(0.4)
(38.7)
Outlook and valuations: Primed for growth; initiate with ‘BUY’
Anchored by revival of Maduraand Pantaloons, we are confident of jump in ABFRL’s
return ratios (~1900bps RoE jump to 24.1% in FY19E over FY17E). We assign target of
20x FY19E EV/EBITDA and arrive at TP of INR202. Hence, we initiate with ‘BUY/SO’. The
stock is currently trading at 20.7x and 15.3x FY18E and FY19E EV/EBITDA, respectively.
Financials
Year to March
Revenues (INR mn)
EBITDA (INR mn)
Adjusted Profit (INR mn)
Adjusted Diluted EPS (INR)
Diluted P/E (x)
EV/EBITDA (x)
ROAE (%)
Abneesh Roy
+91 22 6620 3141
[email protected]
Click on image to view video
FY16
60,601
3,968
(1,041)
(1.4)
NM
33.3
NM
FY17E
70,720
4,913
497
0.6
229.4
27.4
5.1
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
FY18E
82,046
6,462
1,498
1.9
76.1
20.7
14.0
FY19E
95,552
8,551
3,134
4.1
36.4
15.3
24.1
Tanmay Sharma, CFA
+91 22 4040 7586
[email protected]
Alok Shah
+91 22 6620 3040
[email protected]
October 20, 2016
Edelweiss Securities Limited
Retail
At a Glance: ABFRL at Inflexion Point
Chart 1: Revenue and EBITDA to clock 16.4% & 29.2% CAGR over FY16-19E, respectively… Share of Pantaloons’ to increase
8.0
6.0
51.0
4.0
-
-
33
35
15.0
FY15
FY16
6
37
40
43
58
54
51
40.0
2.0
20.0
0.0
0.0
FY17E FY18E FY19E
Revenue
5
60.0
67
33.0
5
(%)
69.0
80.0
(INR bn)
87.0
(INR bn)
100.0
10.0
105.0
65
FY15
Madura
EBITDA
FY16
FY17E
Pantaloons
FY18E
FY19E
Forever21
300
15.0
2,100
250
9.0
1,950
200
3.0
1,800
150
1,650
100
(9.0)
50
(15.0)
1,500
FY15
FY16
(%)
2,250
(Nos.)
(Nos.)
Chart 2: Store expansion to see continued traction… resulting in operating leverage which will boost margins
(3.0)
FY17E FY18E FY19E
EBO's - Madura
FY15
Stores - Pantaloons
FY16
FY17E
EBITDA margins
FY18E
FY19E
NP margins
10,000
30.0
7,500
20.0
5,000
10.0
(%)
(INRmn)
Chart 3: Poised to generate free cash flows… Return ratios too see sharp increase making it a re-rating candidate
2,500
0.0
0
(10.0)
(2,500)
FY15
FY16
FY17E
Operating cash flow
FY18E
FY19E
Free cash flow
(20.0)
FY16
FY17E
RoE
FY18E
FY19E
RoCE
Source: Edelweiss research
Note: Revenue and EBITDA for ABFRL for FY16 shows a sharp jump owing to consolidation of Pantaloons results with Madura from FY16.
2
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Investment Rationale
Favourablemacrosburnish prospects of organised players
India’s apparel and organised retail industry at a relatively nascent stage with per capita
consumption and penetration at extremely low levels,portendinghumungous growth
opportunities.
Potent levers in India’s favour : (i) rising disposable incomes–37.6% jump in per capita
incomesover FY12-15; (ii) attractive demographics– median age of 27 with ~50% of
population in working age bracket and per capita consumption 1/5th China’s;
(iii) urbanisation–urban population up to 31.2% as per 2011 census from 28.5% in 2001;
and (iv) lower penetration of organised retail—8% against 85% in US.
Mr. PranabBarua,
Managing Director,
ABFRL
Our deep dive analysis pegs India’s organised apparel market to catapult to INR2.3tn by
FY25from INR672bn in FY14, >11% CAGR.
India’s apparel and organised retail industry is at a nascent stage with per capita
consumption and penetration at extremely low levels, entailing humungous
opportunitiesfor growth. The country’s demographics—world’s youngest nation with ~50%
population below 25 years—is an added advantage for the organised retail and apparel
sector. Other growth drivers include rising urbanisation and expanding overall job market.
Rising disposable incomes: Discretionary spending has high correlation with disposable
incomes. Disposable income is a function of economic growth, a lynchpin for new jobs
creation. Recovery in discretionary spending will help revive growth of India’sorganised
retail market.
The country’s per capita income has also been rising steadily (up 37.6% over FY12-15), which
will ultimately lead to higher discretionary spending. This is expected to further rise once
GDP recovery kicks in.
3
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Retail
Chart 4: India’s per capita income—Rising steadily
100,000
(INR)
80,000
60,000
40,000
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
0
FY01
20,000
Per capita income at current prices
Source: Industry, Edelweiss research
Attractive demographics: With a median age of 27, India’s demographics are today one of
the most enviable in the world. Further, 50% of the population is in the working age bracket
(20-60 years) and discretionary consumption is poised to grow rapidly.
Chart 5: Favourable demographics; per capita consumption still 1/5thof China’s
50
750
44
600
(USD)
32
450
300
26
150
Italy
France
UK
USA
China
Brazil
UAE
India
20
South Africa
(Years)
38
0
FY05
US
Median age
EU
FY10
China
FY15
India
Source: Industry, Edelweiss research
4
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 6: Proportion of population by different age groups
65 years and
above
6%
45-64 years
15%
0-24 years
50%
Mr. Ashish Dikshit
Business Head,
Apparel Business
25-44 years
29%
Source: Industry, Edelweiss research
Job market perking up: India’s job market is expected to pick up, as per various industry
sources, which bodes well for the apparel industry, particularly men’s wear segment (office
wear). Also, as more women enter the job market, women’s wear market growth will also
progressively get a leg up. HR experts forecast pay hikes of 12-15% across various sectors
with up to 30% jump for top talent.
Urbanisation: Apart from hiring and salary hikes, urbanisation will also improve the
standard of living. As per 2011 census, urban population share to total residents increased
to 31.2% from 28.5% in 2001. According to a UN report on World Population, 40.8% of
India's population is expected to reside in urban areas by 2030.
Chart 7: Proportion of urban income to increase as urbanisation rises...
100.0
80.0
(%)
60.0
40.0
20.0
0.0
1990
2001
Urbal Income
2008
Rural Income
2030E
Source: Industry, Edelweiss research
5
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Retail
Chart 8: Rate of urbanisation set to increase...
45.0
40.0
(%)
35.0
30.0
Mr. Vishak Kumar
Business Head,
Madura
25.0
20.0
1990
1991
2001
2005
2008
2011
2025E
2030E
Urbanisation Rate
Source: Industry, Edelweiss research
Chart 9: ...rising urbanisation to bolster growth of branded apparel
1,750
1,400
(mn)
1,050
700
350
0
1990
1991
2001
2005
Total Population(MN)
2008
2011
2025E
2030E
Urban Population
Source: Industry, Edelweiss research
Lower penetration and per capita consumption indicates strong opportunity: Penetration
of organised retail in India stands at a minuscule 8% versus other developed markets where
it is as high as 85% (US), indicating the high growth potential.
6
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 10: Penetration of organised retail at ~8%, one of the lowest
100.0
80.0
(%)
60.0
40.0
Mr. Shital Mehta
CEO,
Pantaloons
20.0
0.0
US
Taiwan
Malaysia Thailand Indonesia
China
India
Source: Industry, Edelweiss research
Chart 11: Apparel—Largest contributor to organised retail market
Home products
3%
Consumer
durables, IT
16%
Apparel
28%
Pharmacy
2%
Jewellery,
watches, etc
27%
Footwear
5%
Others
1%
Foods and
grocery
18%
Source: Industry, Edelweiss research
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Edelweiss Securities Limited
Retail
Chart 12: Apparel market—Organised, unorganised and online
50.0
(USD bn)
40.0
30.0
20.0
10.0
0.0
Organised
FY12
Unorganised
FY14
Online
FY20E
Source: Industry, Edelweiss research
Apparel market offers humongous growth opportunity
A.
8
Market size huge and attractive: India’s apparel market is fragmented and unorganised
with very few branded players boasting of national or even significant presence. As per
industry estimates, total size of the organised apparel market in FY14 stood at
INR672bn (~15% of Private Final Consumption Expenditure towardsclothing and
footwear). We have done a deep dive analysis of projected organised Indian apparel
market size by FY25. Our proprietary analysis indicates that India’s organised apparel
market is poised to grow from INR672bn in FY14 to INR2.3tn by FY25, >11% CAGR
over FY14-25E.
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Table1: Organised apparel market—Poised to clock >11% CAGR over FY14-25E
(INR mn)
Indian GDP by expenditure
Expenditure towards clothing & footwear
Clothing & Footwear exp as a % of GDP
% growth in exp towards clothing & footwear
2014
2015
2016
2017
2018
2019
112,727,640 124,882,050 135,760,860 147,300,533 159,084,576 171,811,342
4,600,750
5,378,640
5,915,068
6,491,499
7,090,361
7,743,496
4.08
4.31
4.36
4.41
4.46
4.51
30.0
16.9
10.0
9.7
9.2
9.2
Population of India (mn)
Per capita spend on clothing (INR)
Size of organised apparel market
Per capita spend on organised apparel (INR)
Spending on organised apparel, as % of total
spending on clothes
(INR mn)
Indian GDP by expenditure
Expenditure towards clothing & footwear
Clothing & Footwear exp as a % of GDP
% growth in exp towards clothing & footwear
1,311
4,103
1,327
4,457
1,340
4,843
1,354
5,238
1,367
5,664
672,000
518
14.6
812,514
620
15.1
923,124
696
15.6
1,045,541
780
16.1
1,177,448
870
16.6
1,324,627
969
17.1
2020
2021
2022
2023
2024
2025
185,556,249 199,472,968 214,433,440 230,515,948 246,652,065 263,917,709
8,455,754
9,139,804
9,878,897
10,677,444
11,461,862
12,303,780
4.56
4.58
4.61
4.63
4.65
4.66
9.2
8.1
8.1
8.1
7.3
7.3
Population of India (mn)
Per capita spend on clothing (INR)
Size of organised apparel market
Per capita spend on organised apparel (INR)
Spending on organised apparel, as % of total
spending on clothes
1,298
3,544
1,381
6,123
1,395
6,553
1,409
7,013
1,423
7,505
1,437
7,977
1,451
8,478
1,488,747
1,078
17.6
1,632,032
1,170
17.9
1,788,704
1,270
18.1
1,959,985
1,378
18.4
2,121,168
1,476
18.5
2,295,432
1,582
18.7
Source: CMIE, Industry, Edelweiss research
Assumptions and methodology used to determineIndia’s organised apparel market:
9

We expect India’s GDP by expenditure (herein referred to as India’s GDP) to grow
at 8.5% in FY17, 8% over FY18-20, 7.5% over FY21-23 and 7% each in FY24 and
FY25.

Whileexpenditure towards clothing & Footwear as % of GDP as at FY14 was 4.1%,
it rose to 4.3% in FY15 (up ~20bps). Going forward, we estimate a conservative
growth of 5bps over FY16-20, which will taper gradually to 2.5bps over FY21-23
and to 1.5bps in FY24 & FY25. While we remain confident of the proportion of
household expenditure rising over the coming decade, we are tapering the growth
rate to reflect a higher base.

Using our assumption of India’s GDP and percentage of expenditure towards
clothing, we estimate expenditure towards clothing and footwear over FY16-25 to
clock 9.4% CAGR.

Over the past 4-5 years, India’s population has been rising at a steady 1% p.a.
Going forward too we are assuming 1% population growth rate p.a. till FY25.

India’s organised apparel market, as per various industry sources, was estimated
at INR672bn as at FY14 (source: ABFRL’s corporate presentation). This industry size
indicates that the proportion of organised apparel spending as a % of overall
clothing spending is mere ~14.6%. Assuming India’s population at 1.3tn as at FY14,
the per capita spend on organised apparel comes to INR518 per head (~14.6% per
Edelweiss Securities Limited
Retail
capita spend towards organised apparel as % of overall expenditure towards
clothing). Following rising aspirations, overall economic growth, increasing
urbanisation, etc., we expect per capita spending towards organised retail to
increase 50bps p.a. over FY15-20. Post which, this growth will taper to 25bps p.a.
between FY21 and FY23, followed by 15bps p.a. growth in FY24 and FY25 each.
Considering these growth rates, we estimate per capita spending on organised
apparel market to rise at a modest 10.7% CAGR over FY14-25.

Based on the above calculations, weestimate the organised apparel market to
touch INR2.3tn by FY25, a CAGR of >11% over FY14-25E.
B.
Pillars of apparel industry’s growth
Robust momentum
The apparel industry is gaining palpable momentum fuelled by improving
economic conditions, rising disposable incomesand increasing awareness
&availability of brands. Rising penetration of branded offerings in the Indian
market was further aided by entry of international players and expansion by
existing players, expanding the overall industry pie. Proliferation of online retailing
has also deepened penetration of branded apparel in tier I and III cities. This apart,
impulse shopping has been another major growth driver, luring customers through
offers and promotions offline as well as online.
Fig. 1: India’s branded apparel industry – Key drivers
Favourable
demographics
Foray of
foreign
brands
Pick up of
Value fashion
format
Increasing
penetration
Traction in ecommerce
space
Source: Edelweiss research
10
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Imminent triggers
Economic revival to propel discretionary spending
Increase in discretionary spending is a natural corollary of economic turnaround.
Discretionary spendingrose in line with healthy jump in India’s GDP during FY04-07, FY09-11
and FY13-15.
Chart 13: Proportion of discretionary spends increasing steadily
20.0
16.0
(%)
12.0
8.0
4.0
0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Proportion of discretionary spends
Source: CMIE, Edelweiss research
Note: Calculated from PFCE taken from CMIE. Discretionary spends includes spends towards
alcoholic beverages, tobacco, clothing and footwear, communication, recreation, restaurants &
hotel
Even though the proportion has been consistently increasing from FY13, it is still below the
highs clocked in FY07 and FY11. That’s not all, we have further broken down Private Final
Consumption Expenditure (PFCE) into different segments. Our indepth analysis indicates
that even within PFCE, the proportion of clothing &footwear has improved at a steady pace
to 7.4% in FY15 from ~6.2% in FY13.
We have further broken down discretionary spend segment-wise. It emerges that
proportion of clothing and footwear too has been increasing within the overall discretionary
pie, i.e.,up to 49.1% in FY15from 43.9% in FY13.
11
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Retail
Chart 14: Proportion of clothing rising within overall consumption basket &also within discretionary spending
100.0
100.0
80.0
60.0
60.0
(%)
(%)
80.0
40.0
6.3
7.0
6.2
7.4
40.0
42.7
43.9
47.9
49.1
2011-12
2012-13
2013-14
2014-15
20.0
20.0
0.0
0.0
2011-12
2012-13
Food & beverages
Housing, water,etc
Health
Misc goods & services
2013-14
2014-15
Clothing & footwear
Furnishings, etc
Transport
Alcohol & tobacco
Communication
Restaurants & hotels
Clothing and footwear
Recreation & culture
Source: CMIE, Edelweiss research
Other triggers for increase in discretionary spending are government’s focus on
urbanisation, job creation, Seventh Pay Commission payout (effective January 1, 2016 and
will benefit 4.7mn central government employees and 5.2mn pensioners), One Rank One
Pension (OROP), interest rate cuts, etc. All these will not only put more money in the hands
of consumers, but will also encourage them to spend. Even on the job market front,
companies are expected to add more than 1mn employees on their payrolls and dole out
salary hikes. Similarly, Digital India and Make In India push are likely to spur manpower
demand in core technology and manufacturing sectors, further bolstered by e-commerce
and startups. IT sector is likely to create ~0.27mn jobs, e-commerce &digital marketing will
create ~0.15mn jobs each, while banking & finance ~0.3mn.
Rising discretionary spend reflects in Madura’s better growth
As seen in charts (refer Chart 15-16), there is a positive correlation between private
consumption, GDP by expenditure, discretionary spends, spend towards clothing &
footwear and Madura’s revenues. As seen during FY05-07, FY11 and FY14, the proportion of
uptick in Madura was ~2x the increase in discretionary spends and almost 3x GDP rise.
12
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 15: Mapping GDP, discretionary spends to Madura’s growth rates (old base)
50.0
40.0
(%)
30.0
20.0
PFCE
Discretionary spends
GDP by expenditure
Madura
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
0.0
2004-05
10.0
Clothing & Footwear
Chart 16: Mapping GDP, discretionary spends to Madura’s growth rates (new base)
40.0
32.0
(%)
24.0
16.0
8.0
0.0
2012-13
PFCE
Discretionary spends
2013-14
2014-15
GDP by expenditure
Madura
Clothing & Footwear
Source: CMIE, Edelweiss research
Similar pattern (i.e. positive correlation of GDP vis-a-vis discretionary spends by consumers)
is being recorded by other discretionary companies too.
13
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Retail
Chart 17: LTL growth across discretionary companies
20.0
15.0
(%)
10.0
5.0
0.0
-5.0
FY13
Jubilant Foodworks
Raymond retail SSG
GDP by expenditure
FY14
FY15
USL volume growth
Arvind
FY16
Madura
Shoppers stop
Source: CMIE, Companies, Edelweiss research
Above analysis clearly reflects that with a pick up in discretionary spending, well
established companies should clock ~2x growth compared to GDP. We believe players with
a strong parentage, established brands, best-in-class distribution network, among others,
will be first amongst the sector to benefit from the above growth drivers,burnishing
prospects of ABFRL.
14
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Madura: Worst likely behind; well placed to ride recovery
Madura is a leader in men’s wear with marquee brands like Louis Philippe, Van Heusen,
Allen Solly and Peter England, in its kitty, each with MRP sale of >INR10bn p.a.
The company is eyeing entry in adjacent high growth segments such as inner wear,
women’s casual & formal wear as well as kid’s wear. Each segment entails potential to
grow at a faster clip than men’s formal segment—Madura’s forte.
Despite over >2,000 stores across various formats, Madura’spresence is still low in East
and West India as well as Tier III and IVareas. These poorly tapped geographies will be the
next growth avenueand we estimate it to add 100 stores p.a. till FY19.
We forecast Madura to clock RoCE of 42% and generate free cash flow of ~INR4.4bn by
FY19.
Well poised to capitalise on burgeoning growth opportunities
Formidable player in mid- high-end apparel segments
Madura is a powerhouse of 4 strong brands—Louis Philippe, Van Heusen, Allen Solly and
Peter England. Each brand generates turnover of >INR10bn (at MRP level), amongst the
highest in the industry. While Louis Philippe and Van Heusen are positioned as premium
formal men’s wear, Allen Solly and Peter England are positioned as smart causal and subpremium brands, respectively. Thus, the company has strong portfolio of brands that
straddles price points ranging from mid to premium.
Chart 18: Madura—Market size of brands vis-à-vis competition
13 Madura: INR40bn
Arvind: INR30bn
(INR bn)
10
FLF:
INR14bn
Raymond: INR12bn
8
KKCL: INR4.2bn
5
Indigo Nation
John Miller
Tommy Hilfiger
Flying Machine
USPA
Arrow
Parx
Colour Plus
Raymond
Indian Terrain
Lawman
Integriti
Killer
Peter England
Allen Solly
Van Heusen
Louis Phillipe
0
Park Avenue
3
Net Sales
Source: Companies, Edelweiss research
Note: Above numbers are approximates
15
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Chart 19: Sales turnover of top brands—Madura’s brands outpacing competitors…
15.0
(INRbn)
12.0
9.0
6.0
3.0
Revenues
Killer
Zodiac
Park Avenue
Tommy Hilfiger
UCB
Zara
Arrow
US Polo
Peter England
Allen Solly
Van Heusen
Louis Philippe
0.0
Source: Companies, Edelweiss research
Note: Above numbers are approximates
Chart 20: … achieved by robust EBO network (>2x 2nd largest player)
2,050
(Nos.)
1,650
1,250
850
450
50
Madura
FY14
Arvind
Raymond
FY15
KKCL
Indian
Terrain
FY16
FLF
Source: Companies, Edelweiss research
16
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Fig. 2: Product repertoire across brands
Source: Newspaper articles
Diversification in adjacent categories: Potent growth catalyst
As per a Nielsen study, extensions of existing FMCG brands are 5x more successful than
launching a new brand in India. A study of top brands in 46 FMCG categories and 82 brand
extensions in food and non-food categories indicates that in addition to promoting brand
equity, brand extensions can add incremental sales of up to 38% and contribute 30% to
parent brand sales.
Realising the power of synergy and equipped with 4 brands that are pioneers in their
segments, Madura has now diversified into adjacent categories such as men’s casual wear,
women’s wear, children’s wearand inner wear,either as sub-categories of existing brands or
as new brands. This has been achieved via a conscious strategy wherein it intends to
transcend its image of being a mere men’s formal wear brand. This venture should also
augur well for the company since the new categories it is entering are poised to grow at a
faster clip than its bread-and-butter men’s formal segment—while women’s and kid’s wear
segments are poised to grow at >15%, overall men’s formals is poised to grow ~10% over
FY14-25E, according to industry estimates. Further, Madura’s entry in inner wear also
augurs well for overall growth since the overall inner wear industry in India is estimated to
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Retail
post 13-14% growth over the next couple of years. Madura’s strong brand equity in men’s
wear will not only ensure strong growth in adjacent categories, but also help the company
rapidly scale up in women’s and kid’s wear segments.
“We have identified
opportunities of luxury business,
lounge wear, inner wear, leisure
wear segments, casual wear for
men, and young women’s side of
business. So when the
opportunity came with Forever
21, we pursued them-this will be
one of the fastest growing
segments, growing at 30-40%
per annum. We can build a very
large business very quickly—
about INR10bn by 2020”
Table 2: Women’s and kid’s wear offer strong growth potential….
Size (USD bn)
2014
2020E
2025E
CAGR 2014-25E
Women's western wear
0.7
2.5
7.5
~20%
Women's ethnic
1.7
2.7
5.2
~15%
Total women's wear
2.4
5.2
12.7
~16.5%
Kids
2.7
4.7
7
~15%
Size (USD bn)
2014
2020E
2025E
CAGR 2014-25E
Men's Formal
3.6
5
9
~10%
Men's casual
1.4
5
12.5
~20%
5
10
21.5
~15%
Table 3: …versus formal menswear
Total Men's wear market
– Mr. Pranab Barua
Source: Industry, Edelweiss research
Apart from this, Madura has also launched accessories like belts, wallets, purses, watches,
etc., under its main 4 brands. Despite the diversification, we believe the men’s causal
segment will continue to be the company’s biggest growth driver.
Chart 21: Shifting revenue share ample proof of strong growth in new categories
FY10
FY15
Women Sports
4%
3%
Jeans
7%
Sports
16%
Women
5%
Luxury and
others
14%
Jeans
7%
Mainstrea
m segment
72%
Mainstrea
m segment
55%
Luxury and
others
17%
Source: Company, Edelweiss research
18
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Fig. 3: Madura’s core segments and diversification into allied segments via brand extension
Source: Company, Edelweiss research
Innerwear: To fuel next leg of growth (not factored in our numbers)
ABFRL recently entered men’s inner wear and athleisure (emerging segment of multipurpose wear from gym to street, etc) segments under the Van Heusenbrand. As per the
company, men’s innerwear and athleisure market in India was worth ~INR200bn in
2014,which is estimated to grow at 13-14% p.a. to INR680bn by 2024, thus implying
humungous size and growthpotential. Within the overall inner wear segment, the premium
segment is expected to grow at an even faster pace. Further, considering that ~90% of this
segment is unorganised, potential for growth in men’s and women’s segments is immense.
Madura has initially introduced the range in Bengaluru, Chennai and Hyderabad markets via
local distribution model. The brand has been launched in 4 collections:
•
Classic: It will offer features like all-day fresh and colour fresh.
•
Platinum: The range will offer sophisticated styling and elevated comfort with Pima
cotton.
•
Signature: Fashion innerwear with flexi stretch feature for body defining fit.
•
Active: True sports innerwear with swift-dry feature.
ABFRL has big plans in this segment and expects it to contribute a sizeable chunk to overall
portfolio in the long term. Currently, it is in the pilot phase—understanding the segment
19
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Retail
and gauging initial results. Depending on the success and initial feedback, Madura will plan a
pan-India launch over the next 9-12 months. It has hired a team with innerwear business
experience to gain insights into the technology, supply chain, new distribution channel
(targetting 10,000 distributors), etc.This reflects the company’s seriousness and optimism
in this segment. Currently, Madura is outsourcing the product and going
forwardmaycontemplatemanufacturingonce it achieves scale.
Case study: Page Industries
In order to give some colour on the potential and historical growth prospects of the inner
wear segment, we have analysed performance of Page industries (Page), which is the
leader within the organised inner wear segment.
Page is the leader in the premium inner wear market in India. Over FY11-16, the company
has clocked sales CAGR of ~30% and EBITDA CAGR of ~33%. EBITDA margin too has
remained upwards of 20% with RoE of ~60% in FY16. Considering the healthy margin and
accretive return ratios, we envisage Madura’s inner wear segment to clock similar margin
and return ratios once it reaches the stable phase.
Table 4: Page Industries—Financial snapshot
(INR mn)
FY11
FY12
Revenues
4,916
6,834
Revenue growth (%)
44.8
39.0
Gross profits
3,092
4,018
Gross margins (%)
62.9
58.8
EBITDA
899
1,330
EBITDA margins (%)
18.3
19.5
ROCE (%)
40
57
FY13
FY14
FY15
FY16
8,763
11,876
15,434
17,834
28.2
35.5
30.0
15.5
4,560
6,217
9,444
10,930
52.0
52.3
61.2
61.3
1,771
2,512
3,194
3,771
20.2
21.2
20.7
21.1
52
49
51
60
Source: Company, Edelweiss research
Madura’s game plan:Madura believes its Van Heusen brand has enough scope to emerge a
strong No. 2. In every market the company plans to enter,it is eyeing to mimic Page’s
distribution network over the long term. Madura is venturing into the inner wear segment
via its Van Heusenbrand, whichhasbetter product quality, function values and properties
and will offer some sense of fashion and design in inner wear. While Van HeusenClassic is
priced at same level as Page’s offering (Classic will constitute 65% of Madura’s portfolio),
Superior lines will be priced at a premium of ~7-10%. Thus, the company is banking on
brand strength, superior quality and similar pricing to wrest market share from Page.
Over the next 2-3 years, Madura will focus on building its distribution reach and spruce up
its supply chain in this segment. If successful and once the distribution &supply chain scale
up, we expect ABFRL to extend the innerwear segment to other established brands like
Peter England (mid premium range) as well. Post this, the company could even
contemplate entry in women’s innerwear segment.
We believe, while initially the segment’s gross margin will be lower than Page’s, once the
segment attains scale, margin will improve gradually. Overall, margin is expected to be
accretive for the company. Also, Madura will be investing in a phased manner,whichwill not
impact the company’s overall margin.
20
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Acquisiton of Forever 21: Right acquisition, right fit
Forever 21 Inc., headquartered in Los Angeles, California, is a fashion retailer of women’s,
men’s and kid’s clothing and accessories, known for offering the most current fashion trends
at great value to consumers. Forever 21 is ranked the 5th largest speciality retailer in the US.
In India, ABFRL entered into an MoU with Diana Retail to acquire exclusive online and offline
rights of the global brand for the Indian market and its existing store network in India from
the current franchisee. The proposed acquisition is in line with ABFRL’s strategic intent to
become the largest integrated branded fashion player in the country. With the acquisition of
Forever 21’s India business, ABFRL aims to gain a strong foothold in the womens’wear
business in the western wear segment. This also gives it entry in the fast fashion segment
which is growing at a faster clip (reflected in suceess of Zara)and entails better inventory
turns and superior return ratios. The acquisition will further strengthen ABFRL’s leadership
in the branded fashion space.
Till date, Zara had a strong brand recall in this segment and hence we have analysed its
performance over the past 4-5 years.
Case study:Zara India
During FY11-16, Zara India clocked revenue CAGR of ~41% with EBITDA margin of 18% and
RoCE of 43% in FY16. Zara (Inditex Group of Spain) entered India in 2010 via JV—Inditex
Trent Retail India, with Trent India. The shareholding pattern in this JV is 51% (Inditex):49%
(Trent). During FY10, the company invested INR317.5mn in the JV and started with 2
stores—1 each in Delhi and Mumbai. The JV has clocked revenue CAGR of ~41% over FY1116 with its store presence increasing from 3 in FY11 to 18 in FY16. Zara operates in the fast
fashion segment where the focus is on bringing apparels to stores just after they are
launched at fashion weeks. The strategy is to enhance inventory turn and bring in new
fashion which attracts higher footfalls, resulting in better store metrics. Zara brings in the intrend merchandise and keeps its stores full of latest fashion trends at attractive prices.
However,its growth rate is ebbing, which is not only a function of slowdown in discretionary
spending, but also fall in availability of the right real estate property at the right price at
malls or high streets. Zara’s revenue growth slipped from 24.1% YoY in FY15 to 16.9% YoY in
FY16. It could come under further pressure with the advent of increased competition in the
fast fashion space from the likes of Forever21 and H&M. The latter has recently entered
India (globally H&M and Zara are rivals) which is known for its fast fashion at high street
prices (generally it is ~20-30%cheaper than Zara). Forever21, which also operates in the fast
fashion space, will further increase the competitive intensity. Some of the other players in
the segment globally are Gap, Abercrombie & Fitch, American Eagle, Ralph Lauren, among
others.
21
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Retail
Chart 22: Zara—Revenue growth tapering led by slowdown
85.0
70.0
(%)
55.0
40.0
25.0
10.0
FY12
FY13
FY14
Revenue growth (%)
FY15
Table5: Zara (Inditex) India—Robust margin and return ratios
INR mn
FY11
FY12
FY13
FY14
Revenues
1,493
2,599
4,048
5,807
% growth
74.1
55.8
43.5
Gross profits
707
1,245
1,981
2,603
EBITDA
370
678
896
753
EBIT
317
558
761
507
Gross margins (%)
47.4
47.9
48.9
44.8
EBITDA margins (%)
24.8
26.1
22.1
13.0
Number of stores
3
8
9
13
Total net assets
856
1,239
1,691
1,991
RoCE (%)
42.6
53.2
52.0
27.5
FY16
FY15
7,206
24.1
3,198
1,265
948
44.4
17.6
16
2,787
39.7
FY16
8,426
16.9
3,899
1,560
1,206
46.3
18.5
18
2,756
43.5
Source: Trent Annual Report, Edelweiss research
Akin to Zara, we expect Forever 21 has the potential to improve ABFRL’s overall return
ratios over the long term—though margin in this business is expected to be in the mid single
digit range (Forever 21’s pricing is ~50-60% lower than Zara and ~30-40% lower than H&M).
However, lower pricing will help in better through put per outlet and better turns, which
burnishes return ratios.
22
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 23: Pricing of Forever 21 is lower compared to Zara and H&M
1.0
0.8
(x)
0.6
0.4
0.2
0.0
Zara
H&M
Forever 21
Chart 24: Forever21 to clock revenue CAGR of 38% over FY17-19E
Forever 21 revenues
7,000
(INR mn)
5,600
4,200
2,800
1,400
0
FY17E
FY18E
FY19E
Source: Edelweiss research
Robust distribution channelimpartscompetitive edge
Madura boasts of a strong distribution network of 1,877 EBOs spread over 2.6mn sq ft as of
FY16 (1,856 EBOs as at Q1FY17), clocking an impressive 30% CAGR over FY07-16 in terms of
store addition. A strong retail network acts as a strong entry barrier, making it difficult for
comeptitors to match Madura’s scale.
23
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Retail
3.0
1,700
2.4
1,300
1.8
900
1.2
500
0.6
100
(mn sq ft)
(Nos.)
Chart 25: Impressive EBO expansion –>30% CAGR over FY07-16
2,100
0.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Total EBOs
Area (mn sq ft)
Source: Company, Edelweiss research
Going ahead, we expect Madura’s retail expansion to be gradual as it has already achieved a
very high base of 1,850 plus EBOs. On an average, we forecast the company to add close to
100 EBOs per year. Also, with advent of the online channel, it is likely to shift focus to this
new channel of distribution—vast EBO network will serve as a means to execute the
company’s omni-channel strategy.
Chart 26: Madura—Far outpacing peers in number of EBOs and area sqft
3.0
2.4
1.8
1.2
0.6
0.0
FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16
Madura
Arvind
Total EBOs (in'000)
Raymond
FLF
Area (mn sq ft)
Source: Companies, Edelweiss research
In-step with times: Gradual makeover from wholesale to retail model
With emergence of organised retail, players have revamped their distribution channels to
incrementally mark their presence through multi brand outlets (MBO) or through large
format stores (LFS)/shop-in store (SIS). Keeping in step with times and gauging latent
potential, Madura also seamlessly converted its distribution model ~10 years ago—from
wholesale to retail. This has helped the company take its brands to the retail level, which in
turn has helped create better brand equity. Madura’s presence through MBOs and LFS/SIS
too has scaled up from 1,945 to 3,896 and 440 to 2,904, respectively, over FY10-15.
24
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 27: Strong expansion in MBO and SIS/LFS
4,500
(Nos.)
3,600
2,700
1,800
900
0
FY10
EBOs
Shop in Shop
FY15
MBOs
Source: Company, Edelweiss research
Fig. 4: Madura brands’ EBOs
Source: Company
25
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Retail
Chart 28: Shift from wholesale to retail amply reflected in revenue mix too
FY10
Others
16%
Others
26%
FY15
Retail
40%
Retail
44%
Trade
24%
Trade
26%
Departmen
t Stores
8%
Departmen
t Stores
16%
Source: Company, Edelweiss research
The next frontier
Huge expansion scope in poorly tapped East and West India
“We launched a project called
‘Project Bharat’ under our
planet retail format which will
open 400-500 stores in the next
3-4 years through franchises in
tier III and IV towns”
Although Madura is on top of the pyramid in terms of store presence, our analysis
indicatesimmense scope to further ramp up the company’s overall distribution in
India.There is huge scope for expansion, especially in the West and the East,where Madura’s
store presence is on the lower side.
Chart 29: Store presence by region
% of stores
– Mr. Pranab Barua, MD, ABFRL
North
34%
South
35%
East
12%
West
19%
Source: Company, Edelweiss research
26
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Fig. 5: ABFRL’s pan-India reach
Source: Company, Edelweiss research
Chart29 and the map clearly indicate that, comparatively, Madura has limited presence in
East and West, signifying immense scope for penetration. On an average, the company has
been adding ~150 EBOs per year and we expect it to add close to 100 stores per annum
going forward. Apart from ramping up in East and West, having had strong presence in Tier
I & II cities, the next leg of expansion should also happen in relatively unchartered Tier III
& IV territories. The company has mapped close to 600 towns and cities where it can
expand.
Apart from growth in EBOs, it will also ramp up other distribution formats viz., MBOs and SIS.
These 2 formats have been growing at a faster clip led by change in trends as more
consumers start visiting malls for outings and increased store addition by departmental
stores. We expect this format to grow ahead of the EBO format. Also, this growth will not
impact Madura’s RoE since ~85% of the expansion will be via the franchise route.
27
Edelweiss Securities Limited
Retail
Chart 30: MBOs spurt outpacing growth in EBOs
80.0
65.0
(%)
50.0
35.0
20.0
5.0
FY11
FY12
FY13
EBO Channel
FY14
FY15
MBOs and departmental stores
Source: Company, Edelweiss research
Inherently a higher return ratio and free cash flow generating business
Madura has inherently been a higher return ratio business led by the fact that ~65% of the
total expansion has been via the franchise model. Also, it clocked margin of 12.4%, RoCE of
72% and RoE of 42.7% in FY15. It also generated free cash flow of close to INR3.5bn in FY15,
~80% of total sales. However, the company’s return ratios may dip in FY17—RoCE may fall
to 32% in FY17E (72% in FY15) and free cash flow may dip to INR2.1bn in FY17E (~INR3.5bn
in FY15). Key reasons for the same are sharp rise in discounting by online players, increased
competition with the entry of new global players, slowdown in men’s formal market and
clutter of EBOs (refer company description section for details).
However, with overall changing dynamics, discounts offered by e-commerce companies are
waning, entry of foreign players is expanding overall organised apparel market, thereby
benefitting not only foreign players, but also other premium players present across
segments such as ABFRL.
Chart 31: Madura’s margins to improve led by recovery in SSG
15.0
13.0
(%)
11.0
9.0
7.0
5.0
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
Madura EBITDA margins (%)
Source: Edelweiss research
28
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 32: Madura’sreturn ratios to see improve
Madura ROCEs (%)
95.0
80.0
(%)
65.0
50.0
35.0
20.0
FY15
FY16
FY17E
Madura ROCEs (%)
FY18E
FY19E
Chart 33: Free cash flow to catapult for Madura
5,000
(INR mn)
4,300
3,600
2,900
2,200
1,500
FY17E
FY18E
Free cash flow (INR mn)
FY19E
Source: Edelweiss research
29
Edelweiss Securities Limited
Retail
Pantaloons: Turnaround story; margin set to recoup lost ground
Pantaloons has successfully transitioned from being tagged a discounted brand to a value
fashion retailer post ABFRL’s commendable initiatives to revaitalise the company.
Management’s target is to: (i) accelerate revenue growth (led by store expansion);
(ii) expand margin (more private labels, prune sale period); and (iii) achieve cash
independence (better return ratios—value fashion from discounted fashion).
We forecast Pantaloons’ margin to improve to 5.7% in FY19 from 3.1% in FY16 fuelled by
superior throughput, pruning of sale period, increase in proportion of private labels,
among others.
Transformation largely done; now time to grow
Pantaloons was started by the Future Group as a discount apparel store in 1997. Over the
years, it has gradually transitioned from being a discount store to a full, but reasonably
priced, value fashion player.
Fig.6: Pantaloons—Transformation over the years
Source: Company, Edelweiss research
In FY13-14, the Aditya Birla Group acquired Pantaloons and subsequently undertook a
scheme of arrangement, pursuant to which ABFRL was born. Pantaloons houses India’s
leading women’s wear brand. With this acquisiton, ABFRL via Madura and Pantaloons now
straddles the entire value chain—men’s, women’s and children’s wear.
30
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 34: Pantaloons—Revenue and gross profit mix by segment
40.0
Revenue mix (%)
40.0
33.0
26.0
26.0
(%)
(%)
33.0
Gross margin mix (%)
19.0
19.0
12.0
12.0
5.0
5.0
Kids
Non apps
Men
Women Women
Kids
Non apps
western ethnic
Gross margin mix (%)
Revenue mix (%)
Men
Source: Company, Edelweiss research
Post the Pantaloons acquisition, ABFRL has: (i) revamped Pantaloons’ business model; (ii)
undertaken some course correction primarily related to right and affordable pricing (cut
prices ~20%); (iii) reduced reliance on end of season sale (EOSS); (iv) refurbished existing
stores; (v) chalked out new strategy to enhance growth, among others.
Lay the
Foundation
Begin the
growth
jouney
FY17 onwards
Manage
the
Transition
FY15
FY14
Fig.7: Strategic steps to integrate Pantaloons into ABFRL’s business model
FY16
Women Women
western ethnic
Build scale
Source: Company, Edelweiss research
FY14: Manage the transition
31
•
Enhanced store network: 14 new stores, 22 store refreshes/renovation and 100% store
relayouts (1.8 mn sq ft).
•
Merchandise creation: (i) set up a new in-house “Design Studio”, recruited experts in
product design, brand aesthetics and fixture design, with >90% comprising a new team;
and (ii) in-house team delivered on 5,000 plus designs consistently every season.
•
New vendor network: (i) virtually created a new vendor network (>35% new); and (ii)
established relationships with 240 plus vendors to deliver on availability, quality and
cost targets.
•
Built the organisation: (i) recruited ~280 people at HO; and (ii) detailed key business
processes, defined job descriptions and KRAs for key functional positions.
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FY15: Lay the foundation
•
Store expansion: Launched 25 new stores, moved from run rate of a new store every 2
months prior to the acquisition to a new store every 2 weeks.
•
Margin expansion: Delivered an unprecedented >3% improvement in gross margin led
by cost efficiencies, pricing improvement, optimisation of mix of exclusive brands as
well as margin renegotiation for external brands.
•
Portfolio overhaul: Launched 6 new brands, filling key niches and gaps in brand
portfolio.
•
SAP transition: (i) rollout of new systems completed in all stores (120 plus)
&warehouses; and (ii) >10 lakh articles cutover from legacy system to new ABG systems,
with no business disruption.
FY16 and beyond:Phase 3 and 4
During Phase 1 and 2 things moved at a slow pace since only a few people joined ABFRL
from Pantaloons. Hence, ABFRL management’s time was expended on recruiting a new
team leaving little time to understand the business model and consumers. During Phase 2,
the company focused on improving performance at the store level and putting in place the
right business model. Focus was on creating a value fashion brand similar to H&M, Uniqlo
and Mr Price.
Post stabilisation and zeroing on the business model in the first 2 stages, Pantaloons
embarked on the growth path, which had come to a halt in the previous few years due to
transition. In Phase 3, the company is increasing store additions and it is targeting addition
of ~50 stores per annum. The new stores will be of smaller size (~10,000-15,000 sq ft)
compared to large stores earlier (25,000-30,000sq ft). This will take care of growth without
impacting margin as small size stores will focus on better throughput per outlet. Pantaloons
is also evaluating the franchise model and till date has opened 7 such stores on pilot basis.
Though finding a franchise is difficult as it entails investment of ~INR20-30mn per
Pantaloons store versus INR2-3mn for Madura, franchise stores will bring in savings for the
company in terms of capex (15-20%).
In Phase 4, focus is on achieving scale, which will benefit Pantaloons in various aspects of
supply chain—sourcing, transportation, warehousing, logistics, inventory management, etc.
Management, post completion of acquisition, has 3 focus areas for Pantaloons:
(i) revenue growth; (ii) margin expansion; and (iii) free cash flow generation.
Key levers to achieve the above:
32
•
Period of sale season is being curtailed from the current 2 months to 1 month. This is
being done by right pricing products on pilot basis—it cut prices of kid’s segment by
20% and volumes jumped 40%. This pilot was extended to other segments in FY16
through Project Wow, wherein most products were sold at full price.
•
Increasing the number of fashion seasons in India, i.e., increasing the number of times
a new collection comes to the store. In India, there are only 2 seasons compared to 6
globally. If the company is able to have 4 seasons, inventory turns will rise, which will
improve throughput; right pricing will also aid this.
•
Achieve low-single digit growth in EOSS and 17-18% LTL in non-sale seasons, which will
boost margin.
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
•
Proportion of private labels has been increased, which is the key reason for success of
retail players like Trent (~90% private labels). Proportion of Pantaloons’ private labels
hascatapulted 650bps to ~63%. Madura brands currently contribute 6-7% (8-9% earlier)
and the contribution is expected to remain in this range.
•
For Pantaloons, 65-70% of total sales come from women’s, kid’s and private footwear &
handbags. The company recently launched its own private label which earns ~50%
gross margin (earlier brands like Catwalk, etc., had gross margin of ~23%).
•
Converting its 25-30 factory outlets into women’s and kid’s outlets as these stores are
operating at negative 15-20% margin. This will help improve margin as footfalls in kid’s
and women’s stores are much higher than at factory outlets.
Margins poised for gradual uptrend as clean-up is complete
Post acquisition, ABFRL rationalised ramp up of stores and revamped Pantaloons’ business
strategy. As a logical corollary, Pantaloons’ EBITDA margin dipped in FY14on account of
sharp jump in staff costs (new management hired 200 executives at mid level in finance,
legal and other teams). However, this aberration now stands corrected as Pantaloons has
started gaining from the stores that have reached vintage and new store size has been
rationalised. This is already evident in the jump in EBITDA margin from 2% in FY14 to 4.5%
in Q1FY17.Anchored by the company’s new business strategy, we estimate Pantaloons’
overall margin to improve gradually from 3.1% in FY16 to 5.7% in FY19.
“We are working on the whole
of assortment planning,
replenishment planning, how to
get better throughput right,
customer engagement and
keeping costs under check. We
will sell more of high-margin
products such as apparel,
general merchandise in our
stores”
Chart 35: Teething problems—EBITDA margin’stook a hit post acquisition
7.0
– Mr. Pranab Barua, MD, ABFRL
5.6
(%)
4.2
2.8
1.4
0.0
FY13
FY14
FY15
FY16
Q1FY17
Pantaloons EBITDA margins(%)
Source: Company, Edelweiss research
Store additions to accelerate
Histrorically, Pantaloons has been a strong brand, especially in East India. However, during
FY10-13, the company started losing ground due to lack of store additions (only 21 were
added), which hurt growth. However, one year after ABFRL took over Pantaloons, there was
strong ramp up in store additions, as was delineated in management’s growth map. Total
number of Pantaloons stores (excluding factory outlets) increased from 68 in FY13 to 146
by Q1FY17, a robust 26% CAGR over FY13-Q1FY17 (addition of 1 store per quarter prior to
acquisition vis-à-vis >5 stores per quarter under ABFRL). Going forward too, Pantaloons is
likely to add 40-50 stores annually.
33
Edelweiss Securities Limited
Retail
Chart 36: Ramp up in Pantaloons outlets
300
9,500
(Nos.)
8,700
200
(INR)
9,100
250
8,300
150
7,900
100
FY15
FY16
FY17E
FY18E
Total number of stores (excluding factory outlet)
7,500
FY19E
Sales per sq ft (RHS)
Source: Company, Edelweiss research
Pantaloons is the market leader in East India. It is now targeting expansion to Southand
other regions of the country as well. It already has strong brand recall in other parts of the
country, which will make it easy for the retail store to attract footfalls in smaller cities where
aspiration levels remain high.
Strong branch ramp up will propel Pantaloons’ revenue trajectory. As stores mature,
operating leverage will kick in, which will also improve margin. Further, the company has
been steadily expanding its network of stores in East India—a high-margin geography owing
to lower rentals, etc. This is another reason why we envisage further jump in the company’s
margin.
Chart 37: Revenue and profitability by geography
Store profitability mix (%)
Revenue mix (%)
North
26%
West
29%
West
22%
North
23%
South
12%
South
14%
East
43%
East
31%
Source: Company, Edelweiss research
As Pantaloons rationalises its store size it will still house all key brands under one roof which
will help curtail rental expenses. Thus, we estimate sales per sq ft to increase from
INR7,899 to INR9,234 over FY15-19E.
34
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Proportion of own brands rising; better control on pricing, assortment
From FY14, Pantaloons decided to increase portfolio of own brands by: (i) setting up new inhouse “Design Studio”, recruiting experts in product design, brand aesthetics and fixture
design; and (ii) launching 6 new brands to fill gaps in overall portfolio. Consequently, there
was strong ramp up in proportion of own brand sales from 56% in Q1FY16 to 63% in
Q1FY17 (~40% during acquisition).It is also working on increasing the number of fashion
seasons. This will lead to fresh and latest design options resulting in higher off take by
consumers. With better cost control and higher pricing power, Pantaloons is expected to
clock better margin in private labels.
Chart 38: Private label mix improving
65.0
62.0
(%)
59.0
56.0
53.0
50.0
Q1FY16
Q1FY17
Private label mix (%)
Source: Company, Edelweiss research
Fig. 8: Portfolio of own and in-licensed brands
Source: Company
35
Edelweiss Securities Limited
Retail
Shifting to value fashion to drive throughput
The value fashion segment is the first step towards organised retail market for customers
moving up from unorganised/mom & pop retaliers. This space is less crowded with
Pantaloons, Max Fashion, Reliance Trends, among a few others. Since entering the segment
in 2007, Pantaloons has made a mark in this fast growing segment.
Value fashion means retailing products at lower prices and not selling at huge discounted
rates. This segment has helped Pantaloons keep its products in the affordable price range,
while maintaining brand value. The company is also paring non-moving inventory and
accessories and filling the space with new assortments and value focused brands, which will
drive footfalls. High-margin own brands are also being emphasised, which will further
improve return ratios and sales per sq ft.
“Fast fashion in women’s' wear
is new concept in India but
worldwide it is a huge market”
– Mr. Ashish Dikshit, Business
Head, Apparel Business
Table6: Sales per square feet across fashion retail chains
INR mn
FY13
FY14
Pantaloons
Sale of Traded Goods
12,567
16,286
Total area (mn sq ft)
1.7
2.0
Sales per sq ft
7,392
8,143
FY15
FY16
18,169
2.3
7,899
21,222
2.7
7,925
Shopper's Stop
Sales
Total area (mn sq ft)
Sales per sq ft
FY13
25,316
3.1
8,166
FY14
30,170
3.9
7,736
FY15
33,702
4.2
8,094
FY16
37,170
4.3
8,675
Max
Sales
Total area (mn sq ft)*
Sales per sq ft
FY13
8,000
0.8
9,697
FY14
10,000
1.0
10,101
FY15
14,000
1.3
10,606
FY16
18,000
1.7
10,909
Westside
Sales**
Total area (mn sq ft)*
Sales per sq ft
FY13
8,772
1.4
6,265
FY14
12,086
1.6
7,554
FY15
13,233
1.7
7,784
FY16
15,086
1.9
7,940
Source: Companies, Edelweiss research, Media articles
*Square feet area is computed based on estimated square feet per store times total number of
stores
**Total sales of Westside is computed considering the sales growth rate provided in Trent’s
annual report
Sales per square feet of value fashion players like Max is highest at ~INR10,900 (refer table
6). Currently, Pantaloons’ sales per sq ft is lower at sub-INR8,000 level. However, with
higher number of branches, vintage of existing stores and addition of lower size stores, we
anticipate the company’s sales per sq ft to increase from INR7,925 to ~INR9,234. This will
be achieved through implementation of its new strategy that targets higher throughput,
better assortment and focus on customer satisfaction. Our confidence in Pantaloons
emerges from the case study of South Africa based Mr Price Group (refer box below).
36
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
2.5
120
2.0
90
1.5
60
1.0
30
0.5
(Nos.)
150
0
(mn sq.ft)
Chart 39: Pantaloons—Expected ramp up in stores and sales per square feet
0.0
FY12
FY13
FY14
FY15
Total stores (including factory outlet)
Area (mn sq ft)
Source: Companies, Edelweiss research
Fig.9: Pantaloons advertisement positioned on fair price
Source: Company
37
Edelweiss Securities Limited
Retail
Fig. 10: Patanloons extending to fast growing kids segment
Source: Company
Case study: Mr Price Group
Mr Price of South Africa, positioned as a value fashion retailer, clocked EBITDA margin of
16.7% in 2015.
Mr Price Group is a fashion value retailer predominantly selling goods directly for cash. The
group, which retails apparel, homeware and sportwear is acknowledged as one of the
fastest growing retailers in South Africa. It is organised into business units based on
products and services and has 3 segments: (i) Apparel-retailing including clothing, sportwear,
footwear, sporting, equipment and accessories; (ii) Home-retailing including homeware; and
(iii) Central services-provides services to trading segments including information technology,
internal audit, human resources, group real estate and finance. The company is also a highgrowth omni-channel, fashion value retailer with its target audience being young customers
in the mid to upper LSM categories. Its business model runs on offering fashionable
merchandise at excellent value. Further, the value model is core to the group’s existence.
Thus, being a value retailer with lower markups and higher volumes, it offers ‘everyday
products at low prices’.
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Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Cash sales constitute 81% of total sales and the group is focused on remaining a cash driven
retailer. It is predominantly retailing own branded merchandise through 1,166 stores and
online portals. To meet customers’ fashion needs, the company has developed various
merchandise using techniques like involving specialist teams, frequent international travels,
active interactionsvia social&digital media, product testing and slow moving merchandise
clearance to make way for fresh merchandise.
Unwavering focus on quality and price leads to fashion at best price with lower markups to
offer everyday products at low prices with large order quantities and sales volume that keep
input prices low. The company, which started with the franchise model due to lack of funds,
currently has 1,000plus corporate-owned stores in South Africa.
Group’s strategy
 To expandearnings through local and international growth.

Delight customers with fashionable offerings at great value.

Developworld-class infrastructure to unfold its growth strategy.

Create energised environment with empowered and motivated employees.

High standards of ethical behaviour and sustainable business practices.
Table7: Mr Price’sKey financial variables
FY11
FY12
Gross margins (%)
41.9
41.8
Staff costs (% of sales)
11.9
11.9
Rental (% of sales)
8.0
7.5
EBITDA margins (%)
15.2
16.4
EBIT margins (%)
13.1
14.4
ROE (%)
46.0
47.3
ROCE (%)
67.6
68.7
Inventory turn
6.6
6.5
Net asset turn
4.5
4.2
Total stores
961
990
Apparel stores
578
588
Home stores
359
374
Franchise stores
24
28
“Our mandate is to make money
in year one for each store. To
bring costs down and achieve
scale, Pantaloons is piloting
specialist stores such as
Pantaloons Kids and Pantaloons
Women, and is looking at the
franchise and omnichannel
model”
– Mr. Shital Mehta, CEO,
Pantaloons
FY13
41.6
11.4
7.4
17.0
15.1
51.1
70.2
6.4
4.0
1,055
626
403
26
FY14
41.5
11.2
7.2
17.9
16.0
52.2
68.0
6.8
3.9
1,102
656
423
23
FY15
41.1
10.5
7.1
19.0
17.1
51.4
67.1
6.5
3.4
1,165
706
444
15
FY16
40.6
10.2
7.1
20.1
18.1
50.3
63.6
5.8
3.4
1,200
736
443
19
Source: Company, Edelweiss research
Pilot franchise model: High on promise
Post intial success of pilot franchise store, by Q1FY17 Pantaloons had opened 4 such stores
and has been seeing good traction. Under this model, the company retains long-term lease,
while the franchisee infuses capital. Pantaloons proposes to study viability of the franchise
model before embarking on it in full swing. If the model succeeds, it will improve return
ratios as this format will enable the company retain long-term lease while store capex will
be incurrred by the franchisee. Top line of the franchise store will be recorded as total sales,
while commission paid to the franchisee will be registered as expenses. Size of franchise
stores is in line with size of new Pantaloons stores at ~12,000-15,000 sq ft.
39
Edelweiss Securities Limited
Retail
E-commerce: Exploring new promising growth avenue
E-commerce portals were once the bane of brick-and-mortar players. But now, companies
with strong brands are themselves embarking on this bandwagon.
Till now, ABFRL has taken limited steps—tied up with Amazon (dedicated office in
Madura’s warehouse), Myntra, etc., has set up websites for each brand. However, the way
forward is moving to the omnichannel and use big data to analyse customers’ behaviour
patterns and garner more insights.
Until recently, e-commerce was the bane of brick-and-mortar players as they were greatly
impacted by the high discounts offered by online players. However, taking cognizance of the
fact that the platform is here to stay and instead of criticising it, players like ABFRL have
gone ahead and joined the online bandwagon. Overall, e-commerce is fast emerging as the
new growth opportunity for brick-and-mortar players to expand their reach. Shoppers Stop
and the Future Group are already in the process of strengthening their online presence. In
fact, these companies are moving towards setting up omni channels (mix of physical and
online platforms),whichfocus on improving online platform of companies and integrating
their physical and online presence.
A.
ABFRL:Eying top slot in online apparel brands
ABFRL has been quick to embrace the online platform. Earlier too, the company was
quick to adapt to emerging platforms like departmental stores, modern trade, among
others. Ergo, it is taking commendable initiatives to emerge as a leader in the ecommerce space, though it may take some time to learn the ropes of the game.
“In the next 18-24 months, all the
retail stores of the Company will
offer a rich, seamless and
integrated online – offline
experience to all its consumers”
ABFRL has chalked out firm plans for its online venture. The company believes it will be
the largest player on e-commerce sites led by its bouquet of strong
brands. Nevertheless, it is not going all out in online expansion as it is waiting for some
discipline to set in among online players. Currently, players are clawing to wrest market
share via deep discounts. Gauging the importance of ABFRL’s brands, Amazon—India’s
second largest e-commerce player—has set up its own dedicated office in Madura’s
warehouse. ABFRL has also effected strong technological integration with Amazon,
Myntra and Jabong.
– ABFRL Annual Report,
FY16
Some measures adopted by ABFRL to strengthen its omni-channel capability and online
prowess include:
40
•
A multi-pronged strategy has been chalked out to enhance investment in own ecommerce business, launchedanomnichannel initiative and build deeper
partnerships with e-commerce players. Madura and Pantaloonsbrands are being
offered on almost all the large e-commerce websites in India.
•
Omni-channel programme has been rolled out in ~400 stores. A strong network of
EBOs and large bouquet of brands gives the company an edge in implementing its
omnichannel strategy (logistics become easier) and negotiating with online
platforms. With omni channel, consumers can buy from any platform (online or
physical), choose from a large variety of products available at all the warehouses
&retail stores of the company and take delivery anywhere they want. To reduce
loss of sale due to limited number of offerings in a store, the company is building a
common platform on which a consumer can select from an entire range of
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
products. Thus, instead of having to choose from only ~2,000 products at a retail
store, a customer gets the option to choose from ~4mn pieces.
“We have started experimenting
with e-commerce sites in the past
six months and have been entering
into partnerships with a number of
sites- latest being Snapdeal. We
will put up our stores on this large
marketplace as we expect it to help
in garnering additional sales”
– Mr. Shital Mehta
B.
•
Management is trying to leverage the vast customer database of Madura (~4.7mn
members) and Pantaloons (8.6mn loyalty base). Big Data Analytics will offer good
insights into consumers’ buying behaviour. ABFRL is running a Mission Happiness
Programme wherein it takes feedback from ~0.3mn customers every month and
telephonic feedback from ~20,000 customers.
•
ABFRL already has its own brand wise online websites. Though contribution from
online platform is currently minuscule, the company is investing in this platform to
improve overall salience and to counter competition. Till date, it has spent close to
INR100mn on its omnichannel platform. Good execution of this channel entails IT
costs of ~INR80-120mn and then some investment in stores. Total investment of
INR220mn is required for execution of omni channel, which is not significant.
ABFRL is focusing on seamless operations between its online and offline platforms
so that it doesnot make a difference to customers whether they buyproducts
online or offline.
In-house online platform www.trendin.com extended to separate site
Apart from having a strong distribution network through EBOs, MBOs and SIS, ABFRL is
also targeting the next-generation consumer segment that is hooked on shopping
online, through its website trendin.com. However, recently the company has entered
the online segment with a separate online site for each of its brands.According to a
recent Bain-Google study on e-commerce, 650mn people will be online in India by 2020
with about 20% of retail sales happening on line. Individual brand sites offer richer
brand experience, consumer engagement and multi-channel commerce in line with the
company’s omnichannel strategy. Individual websites will also act as a back-end portal
to aid the omnichannel experience.
Fig. 11: ABFRL’s online website
Source: Company
41
Edelweiss Securities Limited
Retail
C.
Abof
Apart from brand wise websites, promoters of ABFRL own abof.com, albeit not under
ABFRL. Abof.com, launched in October 2015, targets a niche set of customers—
millennials. We believe it is not a bad idea, especially considering that the company is
competing with 800 startups, including the likes of Myntra-Jabong, Flipkart, etc. In the
10 months since launch, Abof has doubled gross merchandise value (value of goods
sold) to INR2bn with about 0.25mn daily visitors. Of course, GMV of Abofis not clubbed
with revenue of ABFRL, but sales of Madura and / or Pantaloons products on Abof
portal will yield incremental sales.
D. Focus on building brand than on disrupting them; consolidation inevitable
Online competition continues to disrupt the retail space. Having realised this, ABFRL is
not competing head on with other online players. The pain will only persist in the short
term as online players cannot afford to burn cash continuously. Disruption will
moderate, but not disappear completely. Also, though the online platform has helped
other companies gain scale, they are operating at very low margins. Hence,
consolidation is inevitable in the industry (recently Jabong was acquired by Flipkart’s
Myntra). Therefore, instead of burning money by discounting brands and diluting
brand value, ABFRL is focusing on building brands by investing in them and not
discounting them.
42
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
GST & other potent levers in kitty
Currently, the apparel industry enjoys a benevolent indirect tax on excise front and pays
VAT / sales tax at rates prescribed by different states, which hover between 5% and 7%.
Our back-of-the envelope calculations indicate that GST implementation will lead to the
industry’s tax outgo catapulting 11–13%, 2x the current rate. However, revenue neutral
rate for ABFRL is ~13.5-14.0% and hence the hit will not be as huge as anticipated.
Further, management is confident of passing on incremental cost to consumers by
increasing rates 4–5%.
ABFRL has also spruced up its back-end supply chain & technology, rolled out SAP at all its
stores & warehouses, sorted issues pertaining to inventory management, vendor
management, store layout and design, etc.
A.
GST: Apprehension high, but low actual impact and will be for all players
Lack of clarity on GST rates has led to a lot of speculation among industry players.
However, even after considering the much talked about tax neutral rate of 18%, the
actual negative impact on the retail sector does not seem to be as huge as it is made
out to be.
Currently, the apparel industry enjoys a benevolent indirect tax on excise front and
pays VAT / sales tax at rates prescribed in different states, which hover between 5%
and 7%. Our back-of-the-envelope calculations indicate that implementation of GST will
immediately lead to increase in tax outgo to the extent of 11–13%, i.e., double the
current rate.
However, we believe the revenue neutral rate for ABFRL is ~13.5-14.0% and hence the
hit will not be as hard as anticipated. Further, management is confident of passing on
the incremental cost to consumers by increasing rates by 4–5%.
This apart, we are yet not capturing the intangible benefit that organised apparel
segment will derive from shift from unorganised to organised sector. At this point, the
benefit is not quantifiable, but it is bound to be humungous. We are not factoring any
potential benefit from the shift in our financial model.
B.
Other levers
ABFRL has also spruced up its back-end supply chain and technology. The company has
rolled out SAP at all its stores and warehouses. Further, leveraging on its strong
presence in the women’s wear segment, it will be entering women’s footwear &
handbags categories. Thus, post acquisition, the company has been sorting out all
issues pertaining to inventory management, vendor management, store layout and
design and has put a new management team in place as well. Post completion of
operation clean up, ABFRL is now focusing on ramping up its growth trajectory.
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Edelweiss Securities Limited
Retail
Valuations
Anchored by strong growth visibility, gradual SSG pick up coupled with margin
improvement in Madura, turnaround in Pantaloons and entry inadjacent high-growth
segments, we assign target multiple of 20xFY19E EBITDA and arrive at a target price of
INR202. The stock is trading at 20.7xFY17E and 15.3x FY18E EBITDA.We initiate coverage
with ‘BUY’.
ABFRL is the No.1 player in the men’s wear market on account of Madura and No. 1 in the
women’s wear market on account of Pantaloons. The company will be key beneficiary of
recovery in discretionary spending and is better placed to gain from it compared to other
branded apparel players owing to its sheer scale and widespread network.
Madura’s growth and margin, which were impacted by heightened competition from ecommerce players, higher ad spends and lower operating leverage,havelikely bottomed
out.We envisage gradual recovery riding renewed focus on new &fast-growing segments to
aid growth and improve throughput per outlet. Entry in the online segment and focus on
becoming the largest brand therein is also bound to boost growth over the long term.
Pantaloons is a turnaround story and is expected to sustain its robust run and gradual
margin improvement. We expect the company to record double-digit SSG led by new
business model with focus on right pricing and fashion. It is looking at sharp addition in
stores and hence topline growth will be strong. The company’sinitiatives like increasing
private labels, enhancing inventory turns and reducing sale season period are bound to lead
to sustained margin improvement.
Primed for growth; initiate coverage with ‘BUY
RoCE and RoE of the consolidated entity may optically look depressed at 8.4% and 5.1% in
FY17E, respectively. However, Madura is inherently a high return ratio business—clocked
RoCE of ~72% and RoE of ~43% in FY15, which may though dipbut will still be healthy at
~32% and 27%, respectively, in FY17E (Page Industries clocked RoCE and RoE of 60% and
46%, respectively in FY16). We estimate Madura’s RoCE to improve from 32% in FY17 to
~42% in FY19 led by pick up in LTL growth and margin. Also, the free cash flow generated by
the company will help fundgrowth and expansion of the Pantaloons business (Pantaloons’
margin is estimated to improve from 3.1% in FY16 to 5.7% in FY19E). We estimate Madura
to clock free cash flow of ~INR2.1bn during FY17 and INR4.4bn in FY19. Ergo, ABFRL’sRoCE
and RoE will improve from 8.4% and 5.1% in FY17E to 17.5% and 24.1%, respectively, in
FY19E (an improvement of ~1900bps in RoE).
Anchored by robust growth potential, margin improvement and immense opportunity in
India for branded players, we assign a target of 20x FY19E EBITDA to arrive at a target price
of INR202. We remain positive on the stock from long-term perspective as we believe that
though disruption from online players will continue, it is largely factored in the stock price.
The risk-reward is thus favourable. We initiate coverage with ‘BUY/SO’. The stock is
currently trading at 20.7xFY18E and 15.3xFY19E EV/EBITDA.
Our target EV/EBITDA multiple may appear higher on standalone basis. But, when seen on
relative basis, i.e., compared to other stocks such as Page Industries, ABFRL with strong
brandsseems cheap. Further, Inditex (owner of Zara) in the developed geography and with
lower EPS CAGR also trades at ~20x. This further reaffirms our belief in ABFRL’s potential to
trade at 20x FY19E EV/EBITDA.
44
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Table 8: Comparable Indian players
Name of the Company
CMP
Arvind (consol.)
Raymond (consol.)
KKCL
Indian Terrain
PAGE Industries
Trent
Shoppers Stop
ABFRL
356
567
1,877
154
15,571
222
369
145
Mcap EBITDA margins
(INRbn)
(%) - FY16
92.1
12.6
35.2
9.7
23.8
24.5
5.7
14.2
177.0
21.9
73.7
5.8
30.9
4.2
111.9
6.5
EV/EBITDA EPS CAGR FY18E (x) FY16-18E (%)
9.5
22.9
8.2
50.4
15.2
20.5
8.9
6.3
31.1
26.0
21.8
88.3
12.7
259.1
19.6
153.2
P/E - FY18
(x)
16.8
17.0
23.8
14.5
48.3
33.1
116.7
35.8
(INRbn)
RoE - FY18
(%)
15.4
11.0
23.9
18.4
52.2
13.4
NM
24.0
*CMP and Mcap is as on Oct 4, 2016
Table 9: Comparable global players
Name of the Company
Inditex
H&M
Mr Price
TJX Companies
Fast Retailing
Currency
Euro
SEK
ZAR
USD
YEN
CMP
33
243
15,684
74
33,490
45
Mcap
(bn)
102
402
42
49
3,552
Enterprise
Value (bn)
98
397
41
47
3,211
EBITDA EV/EBITDA - EPS CAGR P/E RoE margins (%)
FY17 (x) FY16-18 (%) FY17 (x) FY17 (%)
22.5
18.7
12.7
32
26.4
16.3
10.9
3.8
19
34.2
19.9
11.0
4.6
1,583
41.7
14.0
10.8
7.0
21
53.0
9.2
14.6
51.8
32
14.5
*Data for H&M and Fast retailing is for CY
** CMP and Mcap is as on Oct 4, 2016
Source: Bloomberg, Edelweiss research
Edelweiss Securities Limited
Retail
Key Risks
Slow GDP revival leading to lower traction in discretionary spending
Currently, target customers of ABFRL are in Tier I&II geographies. Clothing and footwear
spending is discretionary and is correlated with increase in consumer confidence index, GDP
revival, etc. Any delay in revival of GDP, slowdown in these geographies can impact the
company’s growth. ABFRL is proposing to incrementally mark its presence in Tier III & IV
geographies too. Sales in these geographies are linked to pick up in rural growth, which is
again positively impacted during periods of GDP revival, better monsoon, etc. Thus, lack of
support from any of the mentioned factors may hamper ABFRL’s revenue growth.
Heightened competition
Many foreign brands are enhancing presence in India to cash in on the humongous growth
opportunity. While foreign brands such as Zara, Tommy Hilfiger, etc., have already
established themselves, other brands such as H&M, GAP, among others, are venturing inthe
Indian market. Entry of these foreign brands will keep the competitive intensity high.
Implementation of GST
The anticipated tax neutral rate of 18%could lead to higher tax outgo of 5-7% for branded
apparel players. However, retailers are confident of passing it on to customers, which
should only be sentimentally negative and may not dent margins of retail companies.
Turnaround of Pantaloons
ABFRL has chalked out a plan to integrate Pantaloons and turn around its operations, which
is envisaged to take about 2-3 years. Failure of these measuresto achievethe desired result
could further drag ABFRL’s earnings.
Threat from e-commerce channel
FY15 and FY16 have been marked by aggressive discounting and sale seasons by ecommerce companies,leading to shift in customers’ loyalty. However, with discounts now
waning, retailers who are less averse to discounting model should benefit. But, any action
taken by e-commerce companies to revert to the discounting model may hamper SSG of
ABFRL and hence its growth.
Increase in lease rentals
While ABFRLboasts of the largest store presence, it does result in huge lease rentals. Any
spike in rental cost may dampen margin. However, since incremental shops are being added
in malls and where size is also rationalised, lease rentals may not materially pinch the
company’s financials.
Integration of other group entities
Any consolidation of textile / food retail business of group entities such as Century Textile,
More, etc, with ABFRL is likely to be non-synergistic and dilutive and hence may compromise
ABFRL’s return ratios.
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Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Company Description
In May 2015, ABFRL came into being following consolidation of ABNL's branded apparel
business of Madura and Pantaloons. Post consolidation, Pantaloons was renamed Aditya
Birla Fashion and Retail (ABFRL).
ABFRL brings with it learnings and businesses of 2 renowned Indian fashion icons/brands,
PFRL and MF&L. This amalgamation has helped ABFRL emerge as India’s No. 1 fashion
lifestyle entity.
Madura Fashion & Lifestyle
Madura Fashion & Lifestyle (Madura), a division of ABFRL, was the first player operating on
national scale dedicated to the core business of fashion retail in India. Originally known as
Madura Garments, it was formed in 1988 amidst unshackling of the Indian economy. The
company has a vast retail network comprising exclusive outlets, premium multi-brand and
department stores – total presence of,1877 stores. Four of its brands are among India's top
fashion names, with MRP sales in excess of INR10bn each.
Brands
Louis Philippe led the aspiration of fashion excellence, and provides its customers access to
the finest in global fashion. Van Heusen is focused on empowering fashion ambitious
professionals by partnering their career ambitions with power dressing. Allen Solly is for
those looking for a smart fashion alternative. The brand pioneered the concept of Friday
Dressing. Peter England, with its promise of honest-to-goodness prices, has emerged the
favourite for a large mass of first time jobbers. Brand extensions to new categories,
including sportwear, footwear, bags and accessories, has been at the core of Madura’s
leadership position in its segments.
Madura’s brands have also established strong roots in womenswear, and are getting
popular in kidswear too. Recently, Madura brands ventured into innerwear segment with
the launch of Van Huesen range of innerwear. The company also houses a range of other
fashion formats – Planet Fashion, The Collective, Hackett London, Simon Charter and
TrendIN. The company also has websites for each brand providing online shopping
destination for the style conscious. It has been the company’s endeavour to proactively
partner with the ever-evolving Indian fashion consumers.
Portfolio of differnet brands/categories in kitty
47
•
PEOPLE: It was launched in 2008 as a fashion brand offering international and fusion
styles. Originally, a part of Peter England, PEOPLE was separated to develop its own
distinct identity in 2009. It has 110 stores across 60 cities.
•
The Collective: One of its kind store, TheCollective is a super-premium retail concept
known for its breadth of exclusive fashion. With over 100 of the world’s best fashion
brands under one roof, it covers all wardrobe needs from formal to semi formals, to
casuals and denim to active from iconic brands like Armani Jeans, Armani Collezioni,
Versace Collection, Versace Jeans, Hugo Boss, True Religion, Vivienne Westwood,
Lagerfeld to McQ Alexander McQueen and more. The extensive collection of
accessories includes fashion watches, cufflinks, shoes, ties, belts, leather products,
jewellery and sunglasses. The accessory brands repertoire includes marquee names
such as Love Moschino, Tateossian, Michael Kors,Lulu Guinness,among others.
Edelweiss Securities Limited
Retail
•
Hackett, London: Hackett is a luxury British men’swear and accessories brand. Itis now
represented in over 50 countries via a mix of own retail stores and concessions,
franchise stores and top-end wholesale accounts, and represents the best of British
men’s style worldwide. It ventured into India market via a joint venture with MF&L.
•
Simon Carter, London: Simon Cater is a London men’s wear brand known for apparel
and accessories such as watches, cuff links, jewellery and luggage. ABFRL has enterd
into a long-term licensing arrangement with the rights to design & manufacture.
Table10: Presence across segments
Brand
Segment
People
Fast Fashion
Forever 21
Mid value to sub premium segment
Peter England
High sub premium to lower premium
Allen Solly
Lower to mid premium
Van Heusen
Mid Premium
Louis Philippe
High premium to lower super premium
The Collective
Lower super premium
Hackett
Lower super premium
Simon Carter
Super premium
Price range (INR)
199-1299
299-1599
560-1899
750-3499
999-4999
999-5900
NM
NM
NM
Source: Company, Edelweiss research
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Aditya Birla Fashion and Retail
What went wrong with Madura?
Madura (the apparel business) was demerged from Aditya Birla Nuvo (AB Nuvo) into the
company’s retail arm, PFRL (the retail business) to create a complete branded and retail play
called ABFRL, which is an opportune bet on pure branded retail.
Pre-merger, Madura registered impressive double-digit margin of ~12%. However, margin
slumped 500bps YoY in Q3FY16 when the company declared consolidated quarterly
numbers for the first time – owing to integration pangs, higher ad spends and slower
revenue growth. Growth too slowed down to mere 7% YoY in FY16, slipping from the decent
23% YoY CAGR logged over FY05-15 primarily owing to overall slowdown in discretionary
spends and heavy discounting by e-commerce companies. Likewise, SSG was also impacted
moderately.
Chart 40: Margin dived impacted by high ad costs and sluggish sales
20.0
15.0
16.0
12.0
12.0
(%)
(%)
9.0
8.0
6.0
4.0
3.0
Q1FY17
Q4FY16
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
0.0
0.0
FY11
Madura margins (%)
FY12
FY13
FY14
FY15
FY16
Madura margins (%)
Source: Company, Edelweiss research
Chart 41: LTL sales growth fell significantly
Madura LTL growth
35.0
Madura LTL growth
6.0
3.2
21.0
0.4
(%)
(%)
28.0
(2.4)
14.0
Q1FY17
Q4FY16
Q3FY16
FY16
FY15
FY14
FY13
FY12
FY11
Q2FY16
(8.0)
0.0
Q1FY16
(5.2)
7.0
Source: Company, Edelweiss research
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Edelweiss Securities Limited
Retail
Apart from the general slowdown in discretionary spends, some of the key reasons
which could have led to sharp dip in Madura’s growth and margins were as follows:
A.
Sharp rise in discounting by online players
Competitive intensity from online players has been rising significantly, especially in
past 2 years. Discounts not only in apparels but in other segments too like mobile
phones, consumer durables, etc., impact wallet share - the share of wallet that the
consumer would have spent on apparel got spent on other discounted items. This
phenomenon is called snacking where shift of wallet share happens. This impacted
LTL growth of Madura. Besides, e-commerce has lifted the barrier of distribution
and consumers have many options at click of a mouse and at discounted prices.
During a tough discretionary environment, it is also possible that consumers would
have down traded from a high priced branded player to a lower priced brand. Since
Madura has decided to refrain from discounting and rather invest in brands, the
company’s margins have come under pressure which has not been matched by
commensurate increase in SSG.
B.
Slowdown in men’s formals market
Madura has largest presence in men’s formal market with its 4 brands, viz., Louis
Philippe, Van Heusen, Peter England and Allen Solly. These are strong brands in the
men’s market and that too in the formal segment. However, ABFRL has reduced its
reliance on the mainstream formal segment – down from 72% of total sales of
Madura in FY10 to 55% in FY15. Growth in overall men’s formal market is one of
the slowest when compared with other segments in apparel industry. As per
company data, men’s formal market is expected to grow in the 10-15% range over
next 10 years versus growth rates of 15% or 20% in other segments such as men’s
casual, women’s western and ethic, kids and innerwear.
Table11: Men’s formals, slowest growing segment in apparel
(%)
2014
2020E
2025E
Mens formals
3.6
5
9
Mens casuals
1.4
5
12.5
Womens western
0.7
2.5
7.5
Womens ethnic
1.7
2.7
5.2
Kids
2.7
4.7
7
Innerwear
1.6
4.1
8.3
CAGR 2014-25E
10-15
20
20
15
15
15
Source: Industry
C.
Clutter in EBOs
Another factor that could have resulted in softer LTL growth is the sharp expansion
and huge network of EBOs. EBOs are important from a branding perspective and
could be beneficial for the company once recovery kicks in. EBOs still have lot of
penetration left in Tier II and III cities where there are fewer malls. However, in the
metros and Tier 1 cities footfalls are present more in the MBOs and departmental
stores compared to EBOs. Madura shut down 76 stores in Q1FY17, which acted as
sub-brands. Total write off accounted on store closures was INR5-7mn. The
company expects to close 40-50 stores over next 2-3 quarters. Going forward,
growth of stores will also be calibrated (will add about 100 stores).
50
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Chart 42: Madura hampered by >1,850 EBOs under operation
Madura EBOs
2,000
(Nos.)
1,600
1,200
800
400
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Edelweiss research
D. Rising competition
Competition is not only being offered by the online players, but entry of several
international brands is also queering the pitch for ABFRL, along with increased
aggression by some of the brands already present in India. Foreign brands like Zara,
H&M, United Colors of Benetton, Tommy Hilfiger, U.S. Polo, etc., have also increased
their presence in India and the pricing differential with Madura brands is also not too
large – H&M, UCB, etc., are either at discount or only at a small premium to Louis
Philippe. Other brands like Arrow, Raymond (Park Avenue, Color Plus) and Indian
Terrain have also turned aggressive with pricing almost similar to or lower to Madura’s
pricing. Thus, competition is rife arising from both online as well as offline channels.
Pantaloons
Post acquisition by Aditya Birla Nuvo in 2013, Pantaloons is today the fastest growing large
format fast fashion retailer in India. The company’s rate of new store openings has
increased from 1 every 2 months to 1 every 2 weeks. The brand is now present in 78 plus
Indian cities/towns through 146 stores.
The company offers a wide range of brands across apparel and non-apparel categories and
price points. It operates across categories of casual wear, ethnic wear, formal wear, party
wear and active wear for men, women and kids. Womenswear is the lead category
contributing to approximately half of total apparel sales. Non-apparel products include
footwear, handbags, cosmetics, perfumes, fashion jewellery and watches.
Brands
Pantaloons today retails over 200 licensed and international brands, including 24 exclusive
brands. The Pantaloons exclusive brands bouquet includes Ajile, Akkriti, AltoModa,
Annabelle, Bare Denim, Byford, Candie’s New York, Chalk, Chirpie Pie, Honey, Izabel London,
Poppers, Rangmanch, Richard Parker SF Jeans, Trishaa and Urban Eagle. It also features
brands licensed on long- term basis, namely, Bare, Rig, SF Jeans, Byford, JM Sports, Lombard
and Candie’s New York.
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It also hosts MF&L's brands such as Louis Philippe, Van Heusen, Allen Solly, Peter England
and People in menswear; Van Heusen and Allen Solly in womenswear, and Allen Solly Junior.
It retails partner brands such as John Miller, Celio, Spykar, Levis and Lee Cooper in
menswear; Jealous 21, 109*F, AND, Chemistry and KRAUS in women's western wear; BIBA,
Global Desi and W in women's ethnic wear; Barbie and Ginny & Jony in kidswear.
Pantaloons also retails via TrendIN.com, the official online store launched by MF&L. The
company’s products are also available on all other leading e-commerce portals. Pantaloons
enjoys a loyal customer base of over 5mn (as of end-March 2016).
Forever 21
Forever 21 Inc., headquartered in Los Angeles, California, is a fashion retailer of women’s,
men’s and kids clothing and accessories and is known for offering the hottest, most current
fashion trends at great value to consumers. Forever 21 is ranked as the 5th largest speciality
retailer in the US.
In India, ABFRL has entered into an MoU with Diana Retail to acquire exclusive online and
offline rights to the global brand, Forever 21, for the Indian market and its existing store
network in India from the current franchisee. The proposed acquisition is in line with
ABFRL’s strategic intent to become the largest integrated branded fashion player in the
country. With the acquisition of Forever 21’s India business, the company aims to have
strong foothold in womenswear business in the western wear segment. The proposed
acquisition will further strengthen ABFRL’s leadership position in branded fashion space.
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Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Management Overview
Mr. PranabBarua, Managing Director: Mr.Barua, a 40 plus years veteran in the consumer
and retail industry, is the Managing Director of ABFRL. Prior to taking over as MD, he was
CEO of Trinethra Super Retail which was acquired by the AB Group in 2007. Previously, he
worked in senior positions with Brooke Bond India, as Foods Director on the Hindustan
Unilever Board, as Chairman and Managing Director of Reckitt Benckiser and as Regional
Director, Reckitt Benckiser for South Asia. Mr.Barua holds a graduate degree in B.A. (English
Honours) from St. Stephens College, New Delhi.
Mr. Ashish Dikshit, Business Head, Apparel business: Mr. Dikshit has been elevated as head
of the apparel business from the earlier role as head of the Madura business. Now having
joined Madura, he has been with Aditya Birla Group for over 15 years. Prior to Madura,
MrDikshit was employed with Asian Paints. He has worked across several functions in the
business and headed its supply chain, marketing and sourcing functions over this period. He
also worked as Principal Executive Assistant to the Chairman of the AB group for >3 years.
He is an Electronics and Electrical Engineer from IIT-Madras and holds a Postgraduate
Diploma in Management from IIM, Bangalore.
Mr. Vishak Kumar, Business Head, Madura: Mr. Kumar was recently appointed as Head of
Madura business. Earlier to this, Mr. Kumar was the CEO for Aditya Birla Retail and was
responsible for spearheading supermarkets and hypermarkets. He has also held office as the
COO of Louis Philippe at MF&L. He steered the brand towards becoming undisputed market
leader in the premium men’s apparel segment, a position that he continues to enjoy. Mr.
Kumar is an IIM, Bangalore alumnus and a computer engineer from BIT, Ranchi.
Mr. Shital Mehta, Chief Executive Officer, Pantaloons: Mr. Mehta has been with the AB
group since past 15 years. Earlier, he served as Chief Operating Officer of International
Brands and Retail, MF&L and before that was brand manager for Godrej Foods. Mr Mehta is
an MBA in marketing from SP Jain Institute of Management and Research and has attended
advanced management programs at Wharton Business School.
Mr. S. Visvanathan, Chief Financial Officer: Mr. Visvanathan joined the AB group in 2007
and since then has been with the Textile and Apparel business. He is also a member of the
Management Committee of the Textile and Apparel business of the Aditya Birla Group. He
has 26 years of experience across industries spanning white goods, capital equipment,
electrical equipment and auto components. Prior to joining the AB group, he worked with
the Tata Group in various capacities in the auto components business, Voltas and Allwyn
(CFO). He is a commerce graduate from Chennai University and a qualified Chartered
Accountant and Cost Accountant.
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Financial Outlook
We estimate ABFRL to clock revenue CAGR of ~16.4% YoY over FY16-19 riding strong growth
in Pantaloons (following sharp increase in store additions), recovery in Madura (aided by
entry in fast-growing segments like men’s casuals, women’s casual, etc) and integration of
Forever 21. EBITDA is expected to post ~29.2% CAGR over FY16-19E aided by recovery in
margin of Madura and turnaround of Pantaloons. Consequently, ABFRL’s return ratios are
expected to perk up—we estimate RoE to jump from 5.1% in FY16 to 24.1% in FY19.
Robust revenue trajectory
We forecast revenue to post 16% CAGR over FY16-19. Growth triggers include: 1)
Pantaloons sound business (sturdy SSG, sharp store additions with plans to open 40-50
stores p.a.); 2) growth revival at Madura; 3) scale up of online business; 4) entry in segments
beyond men’s formals like inner wear, men’s casuals, women’s casuals and accessories; and
5) integration of Forever 21.
Chart 43: Revenue and revenue growth for ABFRL
100,000
80,000
16.8
60,000
12.6
40,000
8.4
20,000
4.2
0
– Mr. Pranab Barua, MD, ABFRL
21.0
(%)
(INR mn)
“We are looking at improving
profitability and reducing debt in
the next three-four years. The
debt will reduce by increasing
profit and managing cash flows.
We are looking at how to manage
our cash better and use franchises
for expansion instead of own
capex and other things like
managing our inventory, stock
and capital better”
FY16
FY17E
Revenues
FY18E
FY19E
0.0
Revenue growth
Source: Company, Edelweiss research
EBITDA and margin on gradual uptrend
We estimate strong EBITDA CAGR of ~29% over FY16-19 driven by robust margin across
segments. We estimate Madura’s margin to improve to 11.8% in FY19 from 9.1% in FY16.
Spurt in ad spends and lower operating leverage had adversely impacted Madura’s margin
earlier. We forecast Pantaloons’ margin to improve to 5.3% in FY19from 3.1% in FY16 led
by operating leverage, better throughput and lower discounts by online compeition.
54
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
9,000
10.0
7,200
8.0
5,400
6.0
3,600
4.0
1,800
2.0
(%)
(INR mn)
Chart 44: Robust EBITDA growth and improving EBITDA margins trajectory
0
FY16
FY17E
EBITDA
FY18E
0.0
FY19E
EBITDA margins
Chart 45: Dissecting segment wise margins
15.0
12.0
(%)
9.0
6.0
3.0
0.0
FY16
FY17E
Pantaloons margins
FY18E
FY19E
Madura's margins
Source: Company, Edelweiss research
Return ratios set to improve
ABFRL, being a retail play, has high operating leverage. Steps to improve margin, throughput
per outlet, augment franchise stores, among others, will lend impetus to return ratios and
improve cash flows. Focus on increasing inventory turns by improving the value proposition
and higher number of fashion seasons will help improve the working capital cycle. Hence,
we forecast consolidated RoCE to catapult to 17.5% in FY19from 3.2% in FY16.
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Edelweiss Securities Limited
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Chart 46: Consolidated RoCE to improve from 3.2% in FY16 to 17.5% by FY19E
29.0
19.2
(%)
9.4
(0.4)
(10.2)
(20.0)
FY16
FY17E
RoCE
FY18E
FY19E
RoE
Source: Edelweiss research
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Aditya Birla Fashion and Retail
Annexure I
SWOT Analysis
Strengths
•
ABFRL enjoys leadership in the Indian apparel market with a portfolio of established
brands and large format fashion retail presence. The company caters to consumers
across all segments, from luxury to value, straddling men, women and kids in the formal
and casual space.
•
It is on track to achieve omni channel presence through rapid ramp up on e-commerce
platform.
•
Developed strong product portfolio based on high quality, constant innovation, strong
internal design setup, large deep distribution network and an agile & robust supply
chain system.
•
State-of-art manufacturing facilities ensure highest standards of product quality.
•
ABFRL has a strong system that nurtures talent ably supported by robust people
development processes, mentoring and employee engagement programmes.
Weaknesses
•
Relatively low presence in western women’s wear, casual wear, denims and kids-wear
segments.
Opportunities
•
Rising incomes, favourable demographics, increasing disposition towards fashion,
greater access and awareness about brands will enable a shift towards branded fashion
across the country.
•
Immense growth opportunties in Tier 2/3 cities which remain under-penetrated with
respect to. brands and organised retailers. Gauging such humungous opportunity,
ABFRL is strategically focussing on expanding in these geographies.
•
The emerging e-commerce channel also opens up opportunities for the branded
apparel business to reach out to a large base of consumers.
•
Rising opportunities in super-premium segment as more affluent consumers seek
international brands and global experiences.
Threats
57
•
Retail space in India is limited to key markets and few successful malls.
•
Share of online business is growing rapidly and traditional channels of distribution are
reeling under pressure.
•
There’s a threat to its talent pool from competition and increasingly from new
international players and e-commerce companies in the industry.
Edelweiss Securities Limited
Retail
Annexure II
Brand creation: Not a cake walk
Brand creation is an important factor in the success of any B2C company. As per Nielsen,
>99.9% of the brands that are launched in India fail. For instance, 16,914 products across 80
FMCG categories including food, personal care, household care, over-the counter products
and soft drinks have been launched in the FMCG category since 2012 and only 0.14% or 2223 launches were successful. Findings of this data related to the consumer goods segment
can also be extrapolated to other segments like retail, apparel, consumer durables, etc.
Table12: Successfulbrands
Brand
Kurkure Puffcorn
Fab!
Godrej Expert Rich Crm
Skore
Tresemme
Superia Silk
Lifebuoy Clini Care
Juzt Jelly
All Out Ultra
Pepsodent Triple Clean
Colgate Super Shine
Spicy 1
2 Choco Eclairs
Londonberry
Benadryl Congestion Relief)
Parachute Deep Nourish
Cerelac Shishu Aahar
Panasonic Special
Streax
Sensodyne
Pepsodent Expert Protection
Rin Ala Fabric Whitener
Mother Brand
Kurkure
Parle Hide & Seek
Godrej Expert Rich Crm
Skore
Tresemme
Superia
Lifebuoy
Alpenliebe
All Out
Pepsodent
Colgate
Alpenliebe
Alpenliebe
Parle
Benadryl
Parachute
Cerelac
Panasonic
Streax
Sensodyne
Pepsodent
Rin
Company
Frito Lay India
Parle
Godrej Consumer Goods
TTK- PDL
HUL
ITC
HUL
Perfetti Van Melle
SC Johnson
HUL
Colgate
Perfetti Van Melle
Perfetti Van Melle
Parle Prod
Johnson & Johnson
Marico Inds.
Nestle India
Panasonic Battery Ind.
Hygienic Research Institute
Glaxo SmithKline
HUL
HUL
Category
Salty Snacks
Biscuits
Hair Dyes
Condoms
Shampoos
Toilet Soap
Toilet Soaps
Toffee
Mosquito Repellant
Toothbrush
Toothbrush
Toffee
Eclairs
Toffee
Cough Syrup
Skin Creams
Baby Foods
Batteries
Fragrance
Tooth Brush
Tooth Pastes
Blues
Source: Nielsen
Thus, not only is the success of a brand important it is also crucial that it achieves some
scale. In the list of successful big brands drawn up by us from different sectors of consumer
goods and consumer durables, there is no brand that has become significantly big in the
past 5 years.
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Aditya Birla Fashion and Retail
Table13: Some big brands in FMCG sector
Brands
Brooke Bond (INR20bn+)
Dabur Amla (INR10bn+)
Parle G (INR50bn+)
Fair & Lovely (INR20bn+)
Maggi (INR20bn+)
Good Knight (INR15bn+)
GoodDay (INR 20bn+)
Bajaj Almond Drop
Parachute (INR20bn+)
Dabur Vatika (INR10bn+)
Real (INR10bn+)
Godrej No. 1 (INR10bn+) and Cinthol
(INR5bn+)
Lifebuoy (INR20bn+), Lux (INR10bn+),
Dove (INR10bn+), Clinic Plus
(INR10bn+) and Pears (INR5bn+)
Surf Excel (INR20bn+), Active Wheel
(INR20bn+) and Rin (INR20bn+)
Aashirvaad (INR20bn+)
Sunfeast (INR20bn+)
Classmate (INR10bn+)
Patanjali (INR40bn+)
Bingo (INR10bn+)
Year founded
1903
1940
1974
1975
1982
1984
1987
1989
1990
1995
1996
Cinthol 1952
No1 1922
Pears 1902
Lux 1905
Lifebuoy 1865
Dove 2004
Clinic 1971
Rin 1969
Surf Excel 1959
2002
2003
2003
2006
2007
Company
HUL
Dabur
Parle
HUL
Nestle
GCPL
Britannia
Bajaj Corp
Marico
Dabur
Dabur
GCPL
Category
Tea
Heavy amla hair oil
Biscuits
Fairness cream
Instant Noodles
Household Insecticide
Biscuits
Light hair oil
Branded Coconut Oil
Hair care
Fruit Juice
Soaps, facewash, deodorant
Market position
Market leader in the tea category
Market leader in heavy amla hair oil with 55-60% market share
Market leader in the glucose segment
Market leader in the fairness cream category
Market leader in instant noodle category
Market leader in household insecticides category
Market leader in the cookies segment
Market leader in light hair oil market with 60% market share
Market leader with ~57% market share (alongwith Nihar)
Presence in hair oil, shampoos, conditioner, creams, gels
Market leader in fruit juice and nector category with 60% market share
No.2 player in personal wash category after HUL
HUL
Soaps and shampoos
Market leader in the soaps and shampoos category
HUL
Detergents
Market leader in the detergent category
ITC
ITC
ITC
Patanjali
ITC
Wheat flour
Biscuits
Organised notebook
Various categories
Package snacks
Market leader in branded atta segment with ~75% share
No 3 player in biscuits (leader in the creams category)
Market leader in organised note book market with ~20% market share
Became 5th largest consumer goods company in India in a short span
No 2 player in package snack market with 15-16% market share
Source: Companies, Edelweiss research
Table 14: Some big brands in consumer durable sector
Brands
Year founded
Company
Category
Crompton
1878
Crompton
Manufacturing, and marketing of
Greaves
Greaves
products related to power generation,
transmission, and distribution
Blue Star
1943
Blue star
Various businesses ranging from
engineering, electronic to infotech
Voltas
1954
Voltas
Home appliances and engineering
Prestige
1955
TTK Prestige Kitchenware
Havell's
1958
Havells India Electrical equipment
Hawkins
1959
Bajaj
1960
Symphony
1988
Hawkins
cookers
Bajaj
Electricals
Symphony
Kitchenware
Electrical equipments
Residential and industrial coolers
Market position
Amongst the top consumer electrical
goods brand in India
Among the Top companies in AC and
refrigeration
No 1 player in air conditioning
Top kitchen ware brand
Amongst the top consumer electrical
goods brand in India
Top kitchen ware brand
Amongst the top consumer electrical
goods brand in India
No 1 air cooler brand in India
Source: Companies, Edelweiss research
From the above data, it is evident that brand evolution takes time. Only few brands in the
recent past have become significantly big. Some of them include Patanjali (started in 2006),
Bingo (from ITC, started in 2007), etc.However, if we look at e-commerce and startups space
there are a few brands that have gained significant scale in a short time. However, brand
creation gained immense support from substantial funding from the PE players, whose
funds were spent in disproportionate manner towards brand building and client acquisition.
This amply supports our thesis that gaining size and scale is not a cake walk. But ABFRL’s
Madura has through its prudent branding and branch presence achieved the same, the
benefit of which it is yet to be leveraged fully.
59
Edelweiss Securities Limited
Retail
Annexure III
Table 15: Financial snapshot of branded apparel companies
FY10
FY11
Power brands of Arvind
Revenues (INR mn)
2,970.0
4,770.0
EBITDA (INR mn)
220.0
460.0
EBITDA margins (%)
7.4
9.6
Indian Terrain
Revenues (INR mn)
NA
1,211.1
EBITDA (INR mn)
NA
124.1
EBITDA margins (%)
NA
10.2
Kewal Kiran
Revenues (INR mn)
1,863.1
2,449.6
EBITDA (INR mn)
569.2
686.9
EBITDA margins (%)
30.6
28.0
Zodiac Standalone business
Revenues (INR mn)
2,659.0
2,808.8
EBITDA (INR mn)
191.9
316.9
EBITDA margins (%)
7.2
11.3
Madura business
Revenues (INR mn)
12,510.0
18,110.0
EBITDA (INR mn)
(40.0)
1,360.0
EBITDA margins (%)
(0.3)
7.5
FY12
FY13
FY14
FY15
FY16
7,590.0
720.0
9.5
9,190.0
960.0
10.4
11,850.0
1,370.0
11.6
13,340.0
1,520.0
11.4
16,040.0
2085.2
13.0
1,415.6
130.5
9.2
1,567.8
157.7
10.1
2,320.6
244.6
10.5
2,904.1
343.0
11.8
3,251.0
462.3
14.2
3,136.8
3,151.6
3,665.7
4,083.2
4,573.5
733.6
23.4
736.6
23.4
934.1
25.5
965.1
23.6
1,040.8
22.8
3,080.8
124.1
4.0
3,076.3
173.8
5.6
3,485.1
258.9
7.4
3,250.1
221.0
6.8
22,430.0
1,960.0
8.7
25,230.0
2,450.0
9.7
32,260.0
3,880.0
12.0
37,350.0
4,630.0
12.4
3,027.6
69.3
2.3
39,964.1
3,650.3
9.1
Source: Companies, Edelweiss research
60
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Annexure IV
Online disruption to wane gradually
The government has taken note of the disruption that PE backed online players are creating
in the retail market. It recently issued new rules pertaining to FDI in the market place model,
which restricts discounting from the money given to online players by PE players. Some
other key points in the new guidelines on e-commerce (which allowed 100% FDI in
ecommerce (B2C) category) include:
•
No group company or seller in a marketplace can contribute >25% of the sales
generated.
•
Marketplaces cannot influence product prices of sellers listed on their portal.
•
Sellers listed on the platform of marketplace will now have to take responsibility of
quality of goods and after sales support.
•
Name of seller needs to be mentioned online on the marketplace on their portals.
Restricting e-commerce companies from directly or indirectly influencing sales prices of
goods on online marketplaces would mean no heavy discounting. This restriction will
prompt e-commerce platforms to broad base their seller base in real sense too. On-line
retailers are also now talking about profitability as they are facing cash crunch since new
infusion from PE players will happen only once these retailers start to show / focus on
bottom lines and returns on their investments. There have been various developments in
the e-commerce space, which shows discounting, valuations, employees count, etc., are
correcting in e-commerce companies, which justifies online discounts falling and
rationalising.
•
Fashion retailers like Myntra and Jabong have already started cutting discounts. As per
Myntra’s CEO, the company initially reduced its discount offerings by 6% in Q3FY16 and
going forward it plans to further cut it by 3-4%.
•
Myntra plans to enter the USD60bn online apparel and accessories market in the US
and has set up a subsidiary, MyntraInc, US to increase its presence.
•
According to Foodpanda CEO, the company will be profitable by FY18-19.
•
Morgan Stanley Fund, an investor in Flipkart, reduced Flipkart’s valuation from
USD15.2bn to USD11bn, marking down per share price from USD142.24 to USD103.97.
Similarly, Fidelity Strategic Advisors Growth and Valic Co, which also own Flipkart
shares, have marked down their holdings in the company by 27% and 13%, respectively.
To maintain its top market share in India versus the US based Amazon and domestic
rival, Snapdeal, it needs to shore up more capital. But, with such reduction in valuations
it will be difficult for the company to justify its high valuations.
Thus, it is evident that discipline in online platform is imperative. Now, with omni channel
presence and increasing focus on online space, ABFRL is poised to benefit from that
channel too.
61
Edelweiss Securities Limited
Retail
Financial Statements
Key assumptions
Year to March
FY16
GDP(Y-o-Y %)
7.4
Inflation (Avg)
4.8
Repo rate (exit rate)
6.8
USD/INR (Avg)
65.0
Company Assumptions
Revenue growth (Y-o-Y %)
Revenue growth Pantaloon
17.0
Revenue growth Madura
7.0
SSSG growth - Pantaloon (%)
5.9
SSSG growth EBOs - Madura (%)
Net Store addition - Pantaloon
28.0
Net Store addition - Madura
142.0
Forever 21 (revenue growth %)
23.0
EBITDA margin assumptions
Pantaloons - COGS as % of sales
55.9
Madura - COGS as % of sales
39.4
Pantaloons - EBITDA as % of sales
3.1
Madura - EBITDA as % of sales
9.1
Financial assumptions
Tax rate (%)
Debtor days
25
Inventory days
165
Payable days
86
Cash conv. cycle (days)
104
Depreciation as % of gross block
20.1
Capex (INR mn)
11,078
FY17E
7.9
5.0
6.0
67.5
FY18E
8.3
5.2
6.0
67.0
FY19E
8.5
5.5
6.0
67.0
22.3
2.7
12.0
(2.0)
38.0
80.0
22.1
25.3
8.3
15.0
3.5
43.0
120.0
37.5
22.8
9.6
15.0
5.0
43.0
100.0
37.7
55.0
38.5
4.3
9.1
54.9
38.3
4.8
10.7
54.5
37.8
5.7
12.2
20.0
22
171
85
108
14.1
4,316
20.0
21
167
84
104
13.2
3,123
20.0
19
164
83
99
12.6
3,173
Income statement
Year to March
Total operating income
Cost of materials
Gross profit
Employee costs
Rental costs
Other expenses
EBITDA
Depreciation
EBIT
Add: Other income
EBIT incl. other income
Less: Interest Expense
Profit before tax
Reported Profit
Adjusted Profit
No. of Shares outstanding (mn)
Adjusted Basic EPS
No. of Dil. shares outstand. (mn)
Adjusted Diluted EPS
Adjusted Cash EPS
Tax rate
Common size metrics (%)
Year to March
Cost of materials
Employee costs
Rental costs
Other expenses
Depreciation
Net interest expenditure
EBITDA margins
EBIT margin
Net profit margin
Growth metrics (%)
Year to March
Revenues
EBITDA
PBT
Adjusted Profit
EPS
62
FY16
60,601
27,549
33,051
5,969
6,479
16,635
3,968
3,380
588
120
707
1,749
(1,041)
(1,041)
(1,041)
769
(1.4)
769
(1.4)
3.0
-
FY17E
70,720
32,000
38,720
6,704
8,055
19,047
4,913
2,490
2,423
43
2,466
1,844
621
497
497
769
0.6
769
0.6
3.9
20.0
FY18E
82,046
37,452
44,594
7,728
9,293
21,111
6,462
2,820
3,642
20
3,662
1,790
1,872
1,498
1,498
769
1.9
769
1.9
5.6
20.0
(INR mn)
FY19E
95,552
43,755
51,797
8,715
10,638
23,893
8,551
3,097
5,454
15
5,469
1,551
3,918
3,134
3,134
769
4.1
769
4.1
8.1
20.0
FY16
45.5
9.8
10.7
27.5
5.6
2.9
6.5
1.0
(1.7)
FY17E
45.2
9.5
11.4
26.9
3.5
2.6
6.9
3.4
0.7
FY18E
45.6
9.4
11.3
25.7
3.4
2.2
7.9
4.4
1.8
FY19E
45.8
9.1
11.1
25.0
3.2
1.6
8.9
5.7
3.3
FY16
227.4
445.8
NM
NM
NM
FY17E
16.7
23.8
NM
NM
NM
FY18E
16.0
31.5
201.3
201.3
201.3
FY19E
16.5
32.3
109.3
109.3
109.3
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
Balance sheet
As on 31st March
Share capital
Reserves & surplus
Shareholders funds
Long term borrowings
Short term borrowings
Total Borrowings
Long term liabilities & prov.
Sources of funds
Gross Block
Net Block
Capital work in progress
Intangible Assets
Total Fixed Assets
Cash and cash equivalents
Inventories
Sundry debtors
Loans & advances
Other Current Assets
Total Current Assets (ex cash)
Trade payable
Other Current Liab. & ST Prov.
Total Current Liabilities & Prov.
Net current assets (ex cash)
Uses of funds
Book value per share
FY16
7,731
1,706
9,437
6,766
11,727
18,493
82
28,012
15,550
4,822
254
18,395
23,471
203
13,881
3,909
4,464
257
22,511
14,367
3,805
18,172
4,339
28,012
12.3
Free cash flow
As on 31st March
Reported Profit
Add: Depreciation
Interest (Net of Tax)
Others
Less:Changes in WC
Operating cash flow
Less: Capex
Free cash flow
FY16
(1,041)
3,380
1,749
(94)
3,482
511
11,078
(10,566)
FY17E
7,728
2,203
9,931
8,500
12,060
20,560
82
30,573
19,866
6,647
254
18,395
25,296
12
16,068
4,592
4,481
259
25,400
16,331
3,805
20,136
5,264
30,573
12.9
FY18E
7,728
3,700
11,428
8,250
11,500
19,750
82
31,261
22,989
6,950
254
18,395
25,598
191
18,246
4,820
4,499
262
27,827
18,551
3,805
22,356
5,471
31,261
14.9
(INR mn)
FY19E
7,728
6,835
14,563
7,000
9,935
16,935
82
31,580
26,161
7,026
254
18,395
25,674
6
20,978
5,121
4,517
264
30,880
21,175
3,805
24,980
5,900
31,580
18.9
FY17E
497
2,490
1,475
326
926
3,863
4,316
(453)
FY18E
1,498
2,820
1,432
338
207
5,881
3,123
2,759
FY19E
3,134
3,097
1,241
296
429
7,339
3,173
4,166
Cash flow metrics
As on 31st March
Operating cash flow
Financing cash flow
Investing cash flow
Change in cash
Capex
FY16
511
10,422
(10,991)
(57)
11,078
FY17E
3,863
219
(4,273)
(191)
4,316
FY18E
5,881
(2,600)
(3,102)
179
3,123
FY19E
7,339
(4,366)
(3,158)
(185)
3,173
Ratios
As on 31st March
ROAE (%)
ROCE (%)
Debtor days
Inventory days
Payable days
Cash conversion cycle (days)
Current ratio
Gross Debt/EBITDA
Gross Debt/Equity
Adjusted debt/equity
Net Debt/Equity
Interest coverage (x)
FY16
(16.2)
3.2
25
165
86
104
1.2
4.7
2.0
2.0
1.9
0.3
FY17E
5.1
8.4
22
171
85
108
1.3
4.2
2.1
2.1
2.1
1.3
FY18E
14.0
11.9
21
167
84
104
1.3
3.1
1.7
1.7
1.7
2.0
FY19E
24.1
17.5
19
164
83
99
1.2
2.0
1.2
1.2
1.2
3.5
Operating ratios
As on 31st March
Total asset turnover
Fixed asset turnover
Equity turnover
FY16
2.7
3.1
9.4
FY17E
2.4
2.9
7.3
FY18E
2.7
3.3
7.7
FY19E
3.0
3.8
7.4
FY16
(1.4)
NM
3.0
(109.5)
12.1
2.2
33.3
FY17E
0.6
(147.7)
3.9
229.4
11.5
1.9
27.4
FY18E
1.9
201.3
5.6
76.1
10.0
1.6
20.7
FY19E
4.1
109.3
8.1
36.4
7.8
1.4
15.3
Valuation parameters
As on 31st March
Adjusted Diluted EPS (INR)
Y-o-Y growth (%)
Adjusted Cash EPS (INR)
Diluted P/E (x)
Price to Book Ratio (P/B) (x)
Enterprise Value / Sales (x)
Enterprise Value / EBITDA (x)
Peer comparison valuation
Market cap
Name
EV / EBITDA (X)
EV / Sales (X)
ROAE (%)
(USD mn)
FY17E
FY18E
FY17E
FY18E
FY17E
1,678
27.4
20.7
1.9
1.6
5.1
14.0
462
16.2
12.7
0.8
0.7
(5.3)
(2.1)
Jubilant Foodworks
1,072
24.0
18.2
2.6
2.2
13.9
16.5
Titan Company
5,172
26.6
21.3
2.8
2.4
23.8
25.7
343
19.7
15.2
7.9
6.8
14.3
15.4
Aditya Birla Fashion and Retail
Shoppers Stop
Wonderla Holidays
FY18E
Median
-
21.9
16.7
2.7
2.3
14.1
16.0
AVERAGE
-
21.6
16.8
3.5
3.0
11.7
13.9
Source: Edelweiss research
63
Edelweiss Securities Limited
Retail
Additional Data
Directors Data
Mr. PranabBarua
Mr. Sushil Agarwal
Ms. SukanyaKripalu
Managing Director
Non-Executive Director
Non Executive - Independent Director
Mr. ArunThiagarajan
Mr. Bharat Patel
Non Executive - Independent Director
Non Executive - Independent Director
Auditors - M/s SRBC & Co LLP
*as per last annual report
Top 10 holdings
Perc. Holding
Life Insurance Corp Of India
Perc. Holding
4.11
Templeton Asset Mgmt
3.53
Reliance Capital Trustee Co Ltd
1.16
Franklin Resources
0.80
India Opportunities Growth
1.57
Tata Asset Management Ltd
1.34
Hsbc Holdings Plc
1.23
Dimensional Fund Advisors Lp
1.06
Bnp Paribas
0.68
Camden Industries Ltd
0.42
*as per last available data
Bulk Deals
Data
Acquired / Seller
B/S
Qty Traded
Price
No Data Available
*in last one year
Insider Trades
Reporting Data
Acquired / Seller
B/S
Qty Traded
No Data Available
*in last one year
64
Edelweiss Securities Limited
RATING & INTERPRETATION
Company
Absolute
Relative
Relative
reco
reco
risk
HOLD
SU
H
Jubilant Foodworks
Shoppers Stop
BUY
SP
L
Titan Company
Wonderla Holidays
BUY
SO
M
Future Retail
Company
Absolute
Relative
Relative
reco
reco
Risk
HOLD
SP
M
BUY
SP
L
ABSOLUTE RATING
Ratings
Expected absolute returns over 12 months
Buy
More than 15%
Hold
Between 15% and - 5%
Reduce
Less than -5%
RELATIVE RETURNS RATING
Ratings
Criteria
Sector Outperformer (SO)
Stock return > 1.25 x Sector return
Sector Performer (SP)
Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU)
Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings
Criteria
Low (L)
Bottom 1/3rd percentile in the sector
Medium (M)
Middle 1/3rd percentile in the sector
High (H)
Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings
Criteria
Overweight (OW)
Sector return > 1.25 x Nifty return
Equalweight (EW)
Sector return > 0.75 x Nifty return
Underweight (UW)
Sector return < 0.75 x Nifty return
Sector return < 1.25 x Nifty return
65
Edelweiss Securities Limited
Retail
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Manoj Bahety
Deputy Head Research
[email protected]
Coverage group(s) of stocks by primary analyst(s):Retail
Future Retail, Jubilant Foodworks, Shoppers Stop, Titan Company, Wonderla Holidays
Recent Research
Date
Company
Title
Price (INR)
06-Aug-16
Retail
Q3CY16: Lip smacking for
Yum; Sector Update
03-Oct-16
Retail
Launch Pad: Awaiting
innovation elixi;
Sector Update
30-May-16
Jubilant
Foodworks
Inline show amidst static
growth trajectory;
Result Update
1,023
Recos
Hold
Distribution of Ratings / Market Cap
Rating Interpretation
Edelweiss Research Coverage Universe
Rating Distribution*
* -stocks under review
Buy
Hold
158
59
> 50bn
Rating
Total
12
229
Between 10bn and 50 bn
< 10bn
156
62
11
Expected to
Buy
appreciate more than 15% over a 12-month period
Hold
appreciate up to 15% over a 12-month period
Reduce
depreciate more than 5% over a 12-month period
One year price chart
175
160
145
130
115
Oct 16
Oct 16
Sep 16
Sep 16
Aug 16
Aug 16
Jul 16
Jul 16
Jun 16
Jun 16
May 16
100
May 16
(INR)
Market Cap (INR)
Reduce
Aditya Birla Fashion & Retail
66
Edelweiss Securities Limited
Aditya Birla Fashion and Retail
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