july 7, 2017 aditya birla fashion & retail...

ICICI Securities Ltd | Retail Equity Research

July 7, 2017

Established supremacy in branded fashion…

ABFRL combines Madura’s portfolio of leading power brands with

Pantaloon’s forte of largest value fashion retailer. The combination

positions ABFRL as India’s fashion powerhouse offering 5000 styles and

200+ brands. A pan-India distribution network of 2261 exclusive brand

outlets (EBOs) spanning across 6.2 million sq ft covering 375 cities and

towns, ABFRL reaches out to over 13 million discerning customers. With

induction of brands like Ted Baker, Simon Carter and Forever 21, ABFRL

continues to provide greater choice to its consumers across formats and

channels. In-house design and product development capabilities remain

central to merchandising requirements of its widespread network. Strong

track record of organic & inorganic growth, restorative growth in Madura

through extensions and turnaround in Pantaloons position ABFRL at a

vantage point leading to five-fold increase in PAT to | 262 crore by FY19E.

Madura’s renewed focus, Forever 21 - Anchoring core portfolio…

A slew of newer brands entering the Indian fashion industry resulted in

flat LTL in the past two years for Madura. We believe moderation of prices

(~10%), coupled with a change in inventory cycle from two to four

season and launch of brand extensions (innerwear) would revive LTL

growth to 5-6% in Madura posting revenue CAGR of 12% in the lifestyle

category. Furthermore, fast fashion (Forever 21 + People) is expected to

grow at a CAGR 26% in FY17-19E. Cumulatively, Madura’s revenues are

expected to grow at a CAGR of 13% to | 5247 crore in FY17-19E.

Pantaloons turnaround – Enabling profitable growth…

The integration issues of Pantaloons, since its acquisition in FY13, have

largely been addressed. Refurbishment of store product mix by hiring a

core team of 280 people across design, merchandising and sourcing has

struck the right chord to Madura’s ideology, resulting in consistent LTL

growth for Pantaloons. Increased share of private labels (61% vs. earlier

45%) has resulted in a 300 bps expansion in EBITDA margins to 5% in

FY17. With the right model in place, we expect Pantaloons to accelerate

store openings to ~50 stores annually in FY17-19E (vs. sub-30 stores over

FY14-17), generating revenue CAGR of 19% to | 3594 crore.

Oneness to provide quality earnings to ABFRL; recommend BUY

ABFRL enjoys a vantage position in its men’s portfolio built over wide

offerings across price points (mass to luxury), broad categories (men’s,

women’s and kidswear & accessories) and diversified market channels

(MBO+EBO+SIS). Newer brands coupled with the existing portfolio

would provide cohesive growth to ABFRL’s revenues, which are expected

to grow at a CAGR of 15% to | 8841 crore and RoCE expansion to 14.6%

(vs. 2.4% currently). Ascribing 2x EV/sales (two-year trailing average) to

FY19E earnings (implied MCap/sales of 1.8x), we initiate coverage on

ABFRL with a BUY recommendation and a target price of | 210.

Exhibit 1: Financial Performance

(Year-end March) FY16 FY17E FY18E FY19E

Revenues (| crore) 6,034.6 6,633.0 7,782.7 8,840.5

EBITDA (| crore) 378.4 437.5 598.9 703.1

Adjusted Net Profit (| crore) 11.4 53.5 181.7 261.5

EPS (|) 0.1 0.7 2.4 3.4

P/E (x) NM NM 72.1 50.1

Price / Book (x) 14.4 13.7 11.5 9.3

EV/EBITDA (x) 39.4 34.8 24.9 20.8

RoCE (%) 2.4 7.5 12.3 14.6

RoNW (%) 1.3 5.6 15.9 18.7

Source: Company, ICICIdirect.com Research

Aditya Birla Fashion & Retail (ADIFAS)

| 170

Rating Matrix

Rating : Buy

Target : | 210

Target Period : 12-18 months

Potential Upside : 24%

YoY Growth (%)

(| Crore) FY16 FY17E FY18E FY19E

Net Sales 6,035 6,633 7,783 8,841

EBITDA 378 437 599 703

Net Profit* 11 53 182 262

EPS* (|) 0.1 0.7 2.4 3.4

*adjusted PAT and EPS

Valuation Summary

FY16 FY17E FY18E FY19E

EV/Sales 2.5 2.3 1.9 1.7

Target EV/Sales 3.1 2.9 2.4 2.1

EV / EBITDA 39.4 34.8 24.9 20.8

P/BV 14.4 13.7 11.5 9.3

RoNW (%) 1.3 5.6 15.9 18.7

RoCE (%) 2.4 7.5 12.3 14.6

Stock Data

Particular Amount

Market Capitalization (| Cr) 13,330.2

Total Debt (FY17) (| Cr) 2,160.6

Cash and Investments (FY17) (| Cr) 44.5

EV (| Cr) 15,446.3

52 week H/L 189 / 127

Equity capital (| Cr) 770.5

Face value (|) 10.0

FII Holding (%) 11.6

DII Holding (%) 15.0

Comparative return matrix (%)

Return % 1M 3M 6M 12M

Arvind Ltd (3.0) (7.6) 3.4 10.3

Raymond 12.4 26.8 60.4 78.0

ABFRL (4.8) 7.4 23.2 18.5

Price movement

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Price (R.H.S) Nifty (L.H.S)

Research Analysts

Bharat Chhoda

[email protected]

Ankit Panchmatia

[email protected]

Cheragh Sidhwa

[email protected]

Initiating Coverage


Company background

Madura - Powerhouse of India’s leading fashion brands

Aditya Birla Fashion and Retail (ABFRL) is India’s largest fashion hub.

ABFRL was formed by a merger of Madura Fashion & Lifestyle and

Pantaloons. Established in 1988 by Madura Coats Ltd, Madura Fashion &

Lifestyle has its origins in the erstwhile Coats Viyella Plc, Europe’s largest

clothing supplier. Aditya Birla Nuvo (one-time Indian Rayon) acquired

Madura Fashion & Lifestyle from Madura Coats in 2000. ABFRL inherited

brands like Louis Philippe, Van Heusen, Allen Solly and Peter England.

Total payout for the same was at | 187.8 crore. With a preliminary area of

0.21 million square foot (mn sq ft) across 52 retail outlets, Madura has

embarked upon its retail journey currently managing 3 mn sq ft across

2052 owned stores and 7800 retail touch points (MBOs + SISs).

Throughout its journey, Madura achieved a number of milestones. In

FY05, Louis Philippe and Peter England became the first Indian brands to

achieve a turnover of | 100 crore. As on date, these brands, in addition to

Van Heusen, gross an annual turnover of | 1000 crore each (Allen Solly at

| 700 crore). Madura remains an early implementer of enterprise resource

planning (ERP), which enabled management of rapid scale store level

inventory and accountability resulting in higher store level margins.

Exhibit 2: Madura - Bouquet of brands…


Establishing phenomenal growth of 20% CAGR over a decade, revenues

of Madura grew nearly 10x from | 473 crore in FY05 to | 4081 crore in

FY17. EBITDA growth, tackling the initial hiccups (loss of | 158 crore, | 4

crore in FY09, FY10, respectively), was much stronger at 25% CAGR in

FY11-17 at | 350 crore. Strong brand positioning enabled Madura to focus

on a franchisee based expansion model, which peculiarly commands

higher RoCEs (65% in FY14). Accounting for goodwill (| 638 crore), post

merger, resultant RoCE for Madura declined to 18% in FY17.

Exhibit 3: Madura revenue, EBITDA and RoCE trend…

13

54

28

16

10

29

64

25

18

12 12910109

20

65

0

5

10

15

20

25

30

FY12 FY13 FY14 FY15 FY16 FY17

%

0

10

20

30

40

50

60

70

Revenue growth EBITDA margins (%) RoCE


Shareholding pattern

(in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Promoter 59.5 59.5 59.4 59.4 59.3

FII 12.2 12.2 12.8 12.4 11.6

DII 14.8 14.7 13.6 13.5 15.0

Others 13.5 13.6 14.2 14.7 14.1

FII & DII holding trend (%)

12.212.8

12.411.6

12.2

14.8 14.713.6

13.5

15.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

%

FII DII


Pantaloons - One of India’s largest big-box fashion retailer

Future Group launched Pantaloons in 1997. Pantaloons was acquired by

Aditya Birla Nuvo in 2013 for a consideration of | 1600 crore (50%

debenture + 50% debt). This enabled ABFRL’s foray into fast fashion

retail, inheriting 65 stores and 21 factory outlets across 35 cities and a

retail space of ~2 mn sq ft. Pantaloons offers one-stop shopping across

categories of men, women and kids offering a wide range of brands

across apparel (casual, ethnic, formal, party & active wear) and non-

apparel (footwear, handbags, cosmetics, perfumes, fashion jewellery &

watches). It retails over 200 licensed and international brands, including

14 exclusive in-house brands. Womenswear is the lead category

contributing to half of total apparel sales.

Pantaloons also houses Madura’s brands like Louis Philippe, Van Heusen,

Allen Solly, Peter England and People in menswear, Van Heusen and

Allen Solly in womenswear and Allen Solly Junior.

Pantaloons enjoys strong customer patronage handling ~7 million

customers as on FY17, which is considered to be one of the largest

among Indian apparel retailers. Since FY13, Pantaloons has exhibited

revenue growth of 19% CAGR to | 2552 crore in FY17. Given the

integration challenges and aggressive expansion of stores from 68 in

FY13 to 107 in FY14, EBITDA over the period declined from | 66 crore in

FY13 to | 33 crore in FY14. Post-acquisition, with a change in strategy, the

revival in Pantaloons remained robust reflecting an EBITDA CAGR of 56%

in FY14-17 to | 126 crore.

Exhibit 7: Pantaloons revenue and EBITDA trend…

1285

1661

1851

2157

2552

2.0

3.9

4.8

5.14.9

0

500

1000

1500

2000

2500

3000

FY13 FY14 FY15 FY16 FY17

|

0.0

1.0

2.0

3.0

4.0

5.0

6.0

%

Revenue EBITDA margins (%)


Exhibit 4: Pantaloon – Largest big box retailer…

209

54

8086

107

0

50

100

150

200

250

Pantaloons Westside Unlimited Shoppers

Stop

FBB

No. of

stores

No of Stores

Pantaloons - One of the largest

big box fashion retailer

Source: Company, ICICIdirect.com Research Exhibit 5: Pantaloons assemblage of private labels…


Exhibit 6: Geographical break-up (Revenue)…

26 27 28

31 29 29

29 28 26

14 16 17

0

20

40

60

80

100

120

FY15 FY16 FY17

North East West South



Madura & Pantaloons - Enabling wider coverage; winning strategy

ABFRL was formed by a combination of brands from Madura and value

fashion from Pantaloons. It has succeeded as one of the largest pure

fashion apparel players in the Indian market. The combined entity is

poised to be the first billion dollar pure fashion player in India. The merger

enabled operational efficiencies subsuming operational activities like

technology platforms, HR management, etc. under one entity. Moreover,

economies of scale have been achieved related to either raw material

sourcing, inventory management or while negotiating on retail space.

Exhibit 8: ABFRL FY17 revenue break-up…


With the merger, ABFRL has diversified its earlier men’s focused portfolio

to a more balanced mix of brands targeting customers across price points

and categories. Furthermore, the merger bestows ABFRL with a presence

in 375 cities and towns with 6.2 mn sq ft of retail network space and 7800

point of sales and 2261 EBOs.

Exhibit 9: Category wise revenue-break-up

39%

32%

12%

8%

5%4%

Men's Casuals

Men's Formals

Women's western wear

Women's ethnic wear

Kids

Accessories


Exhibit 10: ABFRL - Managing one of the largest footprints pan-India…


ABFRL

FY17 Revenue: |6633 crore

Madura Fashion & Lifestyle

~62% of the Sales (| 4081 crore)

Pantaloons Fashion & Retail

~38% of the Sales (| 2552 crore)

~| 1000

crore

External Brands

~39% of Panatallons

(| 995 crore)

~| 600 crore

Own Brands

~61% of Pantaloons

(| 1557 crore)

~| 1000

crore

~| 1000

crore

Other new

brands

| 170 crore

Lifestyle Brands

92% of the Madura (| 3770 crore)

Fast Fashion

8% of the Madura (| 345 crore)


Investment Rationale

Madura, largest brand player, to anchor future growth…

Revenues of Madura grew 10-fold (21% CAGR over the decade) to | 4081

crore vs. | 390 crore in FY04. The phenomenal growth surpasses the

branded apparel industry growth rate, which was at 14% CAGR in FY04-

17. The management’s astute efforts across branding & marketing (~5%

of total revenues) have provided ABFRL with India’s largest men’s wear

brand portfolio. The portfolio generates a turnover of ~| 4081 crore,

nearly 1.4x more vs. | 2898 crore for the second largest player (Arvind

Ltd.) in the industry. Moreover, Madura owns majority of its brands (Louis

Philippe, Allen Solly and Peter England), except Van Heusen of which it

holds exclusive distribution rights in India, Middle East and Saarc. Unlike

JVs, franchisee, licensed, the ownership model enables Madura to benefit

from brand designing, aggressive expansion and salvage of royalty

expenses. Madura remains crucial to ABFRL as it contributes 60%, 90% of

consolidated FY17 revenues, EBITDA, respectively.

Exhibit 12: Madura channel wise revenue break-up…

2188 21152420

2668

1546 1536

1719

1931149 345

439

545

1085

94

103

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

FY16 FY17 FY18E FY19E

| c

rore

MBO's EBO's Fast Fashion Other brands

CAGR

26%

12%

12%

10%


For FY17, share of revenues from EBOs, MBOs, fast fashion & other

brands were at 38%, 52% & 10%, respectively. However, with addition of

revenues from newer brands, we expect Madura’s revenue mix to change

to 37%, 51% and 12% for EBOs, MBOs and fast fashion and newer

brands, respectively. Subsequently we believe Madura’s revenues will

grow at 13% CAGR to | 5247 crore by FY19 vs. | 4081 crore in FY17.

Exhibit 13: Madura revenue to revive post internal restructuring…

2523.0

3226.0

3735.03878.0

4081.0

4670.1

5247.1

13%

28%

16%

4%

5%

14%

12%

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

FY13 FY14 FY15 FY16 FY17 FY18E FY19E

| c

r

0%

5%

10%

15%

20%

25%

30%

Madura revenues

% growth

13% CAGR Internal

restructuring


Exhibit 11: FY17 - Revenues for Brands

4081

2898 2826

488 403

0

1000

2000

3000

4000

5000

Madura

Garm

ents

Arvin

d

Raym

ond

KKC

L

India

n

Terria

n

| c

r

ABFRL brands - Biggest

grossers in the industry



Initiatives addressing recent deceleration in growth…

Over the past two years (FY15, FY16) Madura experienced flattish like to

like (LTL) growth resulting in slowest revenue growth of 7% CAGR in the

same period. Moreover, LTL growth for FY17 was at -5%, resulting in

revenue (ex-Forever 21 & People) de-growth of 2%. The impact of

demonetisation in the current year further impacted overall revenues.

Muted consumer sentiment was further blurred by a slew of other brands

(H&M, GAP, etc) available at lower prices. Moreover, e-commerce

companies resorting to deep discounting practices caused pricing

pressure in the price sensitive Indian market. An aggressive competitive

scenario led ABFRL to reduce its selling prices across products in the

range of 5-10% further impacting overall revenues. However, Madura

believes that aggressive discounts would dilute the image of its brands.

Following this, the company underwent a restructuring of its business to

preserve the long-term inherent strength of its brands.

Exhibit 14: Hiccups in Madura reflecting in quarterly financials…

10

16

-2

-7

5

24

6

9

26

-3

-1

2

0

5

-7

-4

-10

-7

0

0

2 2

-10

-5

0

5

10

15

20

25

30

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

Revenue G

row

th (

%)

-12

-10

-8

-6

-4

-2

0

2

4

6

LTL g

row

th (

%)

Revenue growth (YoY %) LTL (%)

Source: Company, ICICIdirect.com Research, Revenue growth excluding fast fashion business

Lossmaking stores were phased out while older stores were recalibrated,

resulting in net addition of a mere one store in FY17. In the past year, the

management has embarked upon a number of strategies to revive growth

in Madura. These strategies are focused on making Madura agile by

building a healthy, sustainable, future ready business model. It involves:

a) avoiding heavy discounting maintaining ‘intrinsic value’ of premium

brands through calibrated price concession keeping prime costs intact

b) Continued investments directed towards brand building remains core

to maintain cult over other plethora of available brands

c) Providing seamless omni-channel experience currently fulfilled by

vast pan-India presence enabling digital transformation

d) Keeping a closer eye on profitability metrics and continuously

rationalising its cost structure

Exhibit 15: EBO addition through consolidation phase

1,877 1,878

1,895

1,841

1,856

1,810

1,820

1,830

1,840

1,850

1,860

1,870

1,880

1,890

1,900

Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17

No. of

stores

No. of EBO's

Net additions stood at mere 1 store

reflecting sluggish store additions



Consolidation through; Madura to be back on growth path…

We expect the LTL of Madura to gradually recover to 5-6% in FY18-19 on

the back of a number of following corrective measures adopted by the

company:

Exhibit 16: LTL growth to revive over FY18E and FY19E…

-5

5

67

0

1.5

4

-6

-4

-2

0

2

4

6

8

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

(%

)

LTL growth

Sharp revival in LTL growth

expected on the back of

corrective steps


A) Inventory shift - Adapting to changing fashion

The Indian fashion industry now demands faster trends, newer designs

and latest fashion. The earlier two inventory cycles (summer and winter)

resulted in increased production time ensuring the seasonal lines stick

around in stores for a longer period resulting in fashion that was passé.

This results in declining LTL sales growth, also impacting the brand

image. To cope with the changing trend, Madura has resorted to leaner

supply chain shifting to four cycles (summer, winter, spring and autumn)

from earlier two cycles. This would infuse fresh inventory to its selling

channels offering customers the latest and upcoming trends in fashion.

Exhibit 17: Benefits of improved inventory cycle…


Faster

Inventory turnover

Leading

Lower inventories

Lower

Working capital

requirement

Enabling

Fashion - Time to

market

Dynamics

Change in cycle

from two to

four


B) Brand extensions - Creating a fashion eco-system

Predominantly in the premium menswear brand, Madura has, over the

years, successfully leveraged its brands in newer consumer segments

and product categories. Madura has gradually shifted from mainline

formal wear of its core brands to sub brands under other categories like

casual wear, womenswear, kidswear, sports and accessories (belts and

wallets). The launch of these sub-brands de-risked its business model,

which derived ~72% of its overall revenues from mainline SKUs in FY10

to 55% of total revenues in FY17.

Madura intends to continuously evolve its brands with further extensions.

It launched men’s innerwear and athleisure SKUs in FY17 under Van

Heusen brand in South India (Chennai, Bengaluru & Hyderabad). The

launch was across 1000+ MBOs & an EBO in Chennai. These extensions

are expected to facilitate Madura brand’s dominance in the branded

industry. We believe brand extensions would continue to provide

customers with “more of the same" brand enabling incremental LTL.

C) Newer brands - Filling white spaces…

Madura continues to strengthen its brand portfolio adding newer brands

to its kitty. In FY16, the company added brands like Simon Carter and Ted

Baker to its luxury portfolio. Moreover, it bought the existing chain of 12

stores of Forever 21, which like Zara, specialises in women’s fast fashion

segment. With these acquisitions, Madura has strengthened its brand

offerings across the premium category. The company is also targeting

value customers by introducing shirts at lower price points under Allen

Solly and Peter England. Madura intends to address the white spaces and

enrich its portfolio across all product, price and consumer segments.

Exhibit 18: Product extensions enabling “More of same brand”…

FY05 FY06 FY08 FY10 FY11 FY13 FY16 FY17

Louis Philippe Suits and Coats -

Trendy Formals/

Office Casuals

Elite casuals Golf collection - LP

Accessories - Bags &

Footwear

Time wear -

Van Heusen Trendy Trousers

Women / Vdot

casuals

V casuals Vdot Denims Sporty collection

Lifestyle dressing /

Fashionable formals

- Innerwear & Athleisure

Peter England Innerwear - Elite Sport Party wear Accessories - Bags - Elite Sport / Travellers

Allen Solly - - Kids - - Women - -

Brands

Extensions over a period of time


Exhibit 19: Products across price-points…


Luxury

Super

premium

Premium

Sub-

Premium

Fast

Fashion

Mass

>| 5000

| 1500 to | 5000

| 500 to | 1500

Recently

added


Pantaloons redefined – FY19E revenues to multiply by 1.4x...

Post-acquisition, ABFRL has aggressively restructured Pantaloons making

several strategic investments. Appointment of a merchandise team, store

rationalisation and streamlining working capital were prerequisites. The

management has flagged completion of its restructuring and now intends

to aggressively open new stores across Tier-II and Tier-III cities. Revival of

LTL growth to 6% levels (vs. flattish earlier) also reflects it is nearing

resolution of integration issues. We expect revenues of Pantaloons to

grow at 19% CAGR to | 3594 crore by FY19E vs. | 2552 crore in FY17.

Subsequently, the contribution of Pantaloons to total revenues is

expected to increase 300 bps to 41% vs. current 38%.

One of the largest loyalty bases – Further aiding LTL growth...

The refreshed merchandise coupled with store optimisation has led the

customer base of Pantaloons grow at a CAGR of 16% from 3.8 million

customers in FY13 to 7 million customers as on FY17. The loyalty

programme enables Pantaloon’s client stickiness, which contributes

~80% of total revenues for Pantaloons. We expect newer brands offered

to existing customers to improve LTL across existing stores. We believe

the LTL would improve 500 bps in FY17-19E to 8% (vs. current 3.3%). LTL

in FY17 was impacted by demonetisation coupled with renovations and

temporary closure of certain stores.

Exhibit 22: LTL growth for Pantaloons - Revival on the cards…

7

8

-1.6

5.9

3.3

5.5

-4

-2

0

2

4

6

8

10

FY14 FY15 FY16 FY17 FY18E FY19E

(%

)

LTL growth

Gradual improvement in LTL

backed by loyal customers and

refreshed merchandise


Exhibit 20: Pantaloons expected revenue trend…

2157.0

2552.0

3112.6

3593.5

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

4000.0


| c

r

Pantaloons revenues


Exhibit 21: Loyalty members - Aiding the LTL

3.8

4.3 4.5

5.0

7.0

0

1

2

3

4

5

6

7

8


Members (in mn)



Integration strategy - Core to its revival

Pantaloons combined with Madura fortified ABFRL’s pole position in the

fashion retail industry. For Madura’s core menswear premium brands,

Pantaloon’s forte of women's centric value fashion was a strategic fit in its

portfolio. The integration strategy for Pantaloons involved a four-year

roadmap evolving around creating a sustainable business model.

Exhibit 23: Pantaloons - four year roadmap…


FY14 - Managing the Transition:

The year of acquisition allowed the assessment of existing business and

executing the changeover. The execution defined across four key tasks

included evaluating existing network, refurbishment and renovation of

existing profitable stores, setting up a merchandise team and building a

separate professional team for its management.

Exhibit 24: Course of action over FY13-14…


The consequence of the same was evident. This led to the slowest store

addition with the addition of a mere 12 stores, negative impact of 300 bps

on EBITDA margins to 2% and LTL of -2% in FY14.


FY15 & FY16 - Laying the foundation & journey of growth

Post the successful completion of the transition phase, in FY15-16,

Pantaloons experienced steady expansion. Higher emphasis on store

expansion resulted in addition of 114 stores in FY15-17. Moreover, 10

new brands (three each for men & women, two for kids and two for

Denim and Plus size) were launched over FY15 and FY16.

Exhibit 25: Transition of Pantaloons in phases…

•Launched ~30 store p.a; implied runrate of 1 store every two weeks

as compared to 1 store every two month prior to acquisitionStore expansion

•Cost effeciences, pricing improvement and change in product mix

resulting gross margin improvement of 300 bps Margin expansion

•Launched 10 new brands addressing the white spaces in the product

portfolio. Positioning Pantaloons as one stop shop for customersMerchandise creation

•Appointing new vendor network (~35% new). Defining quality,

availability and cost targets across 240+ vendor networkNew vendor network

•Recruited ~280 people at HO. Laid down key business processes all

well defined KRA's for key functional positionsBuilt the organisation


Subsequently, the share of private labels over the years increased from

52% in FY13 to 61% in FY17. A tight sourcing network coupled with

higher share of private labels resulted in a 300 bps revival in EBITDA

margins to 5% in FY17 vs. 2% in FY14. We expect the share of private

labels to further improve resulting in a margin expansion of 100 bps to

6% and EBITDA of | 215 crore by FY19E.

Exhibit 26: Transition of Pantaloons in numbers…

46

27 2729

12

5.1

2.0

3.9

4.84.9

0

5

10

15

20

25

30

35

40

45

50


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

No. of new stores EBITDA margins (%)

Laying the foundation &

Journey of growth

Managing the

transition



Ante up in store additions on back of sorted business model…

Madura: Continued focus on retail channel

ABFRL, post sorting out issues around Madura and Pantaloons, is

expected to ramp up store additions. We expect Madura to add 110

stores annually (100 stores & 10 value stores) over the next two years

(FY18, FY19). The additions would be directed towards higher penetration

in Tier 2, Tier 3 cities, aiming towards capitalising on higher discretionary

spending. With these additions, Madura’s exclusive brand outlets (EBOs)

are expected at 1959 stores with average store size of 1250 sq ft entailing

coverage of ~3 mn sq ft. For multi brand outlets (MBOs) and shop in

shops (SIS), we expect additions to continue to grow at existing CAGR of

7% to ~9000 touch points in FY19 vs. the current 7800.

Exhibit 27: Madura expected expansion…

No. of stores

1959

6800

7800

9009

17351759

0

2000

4000

6000

8000

10000

FY15 FY17 FY19E FY15 FY17 FY19E

EBO's MBO's & SIS

CAGR 5%

CAGR 7%

CAGR 1%

CAGR 7%


Given ABFRL’s aspiration to replicate the success of Zara in India, the

expansion plans of Fast Fashion (mainly Forever 21) are aggressive. We

expect addition of ~15 stores each in FY18 and FY19, respectively,

tallying to a total count of 46 stores by FY19 vs. current 16 stores.

Expansion under People would remain subdued at two stores each over

FY18 and FY19. Subsequently, there are expected to be 141 stores under

Fast Fashion by FY19E with a total estimated coverage of 0.6 mn sq ft

compared to the current 0.4 mn sq ft.

Exhibit 28: Fast Fashion expected expansion…

111 107 124 141

0.24

0.40

0.49

0.58

0

20

40

60

80

100

120

140

160


No o

f stores

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

mn.

sq f

eet c

overage



The revenue mix is expected to be in favour of its fast fashion business,

which is expected to contribute 10% of total revenues by FY19E

compared to the current 8%. Moreover, introduction of brands like Simon

Carter and Ted Baker would continue to accrue core revenues from MBOs

and EBOs of 51% and 37%, respectively, by FY19E. As online orders are

fulfilled from nearest EBOs/MBOs, current contribution of 3.5% is

expected to double to 7% by FY19E. Clearance and other sales are

expected at 2% of FY19E revenues.

Exhibit 29: MBOs, EBOs to continue to remain core to Madura…

5652 52 51

40

38 37 37

48 9 10

0 2 2 2

0

20

40

60

80

100

120


% c

ontrib

utio

n

MBO's EBO's Fast Fashion Other brands


Focus on brand building had led the majority of the current stores to

operate on the basis of company owned-company operated (COCO)

model. As these brands have already scaled up, ABFRL now plans to

scale up the newer stores on the franchisee route. The model facilitates

ABFRL to scale up swiftly with lower capex while managing only the

inventory risk. Approximately 80% of the phased expansion of 100 EBOs

is expected through the franchisee route.

Exhibit 30: Asset light franchisee model to form core for expansion…

% of stores Location Capex Inventory risk Lease & operations

Company Owned

Company Operated

30

Metros &

Prime locations

Madura Madura Madura

Company Owned

Franchisee Operated

40 Tier 1 cities Madura Madura

Franchisee

Owner

Franchisee Owned

Franchisee Operated

30

Smaller towns &

cities

Franchisee

Owner

Madura or

Franchisee

Franchisee

Owner


The southern and western regions of India across Tier I & II cities remain

the core coverage for ABFRL deriving ~60% of total revenues. Enhanced

coverage is expected across the northern and eastern region coupled

with higher focus within tier III & IV cities.

Store expansion under FOFO model to

result in lower capital expenditure for

newer stores


Pantaloons: Store count to grow 1.5x by FY19E

Pantaloons, post being repositioned as a value fashion store, is expected

to continue its aggressive store additions. Post acquisition in FY13,

Pantaloons nearly doubled its store count from 95 stores in FY13 to 209

stores in FY17. We expect the total store count at 300 stores by FY19E

(20% CAGR). Right sizing of stores to an average store size of 14000 sq ft

vs. 17000 sq ft per store earlier would result in lower expansion in

coverage (11% CAGR) to 4.2 mn sq ft vs. 3.4 mn sq ft.

Exhibit 31: Pantaloons expected expansion…

95 107 134 163 209 253 300

3.4

3.8

4.2

1.7

2.9

2.3

2.0

0

50

100

150

200

250

300

350

FY13 FY14 FY15 FY16 FY17 FY18E FY19E

No. of

stores

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

mn.

Sq.f

t

No of stores Coverage (mn sq.ft)

91 new stores to be

added by FY19E

114 new stores added over

FY13 to FY17


Realising that the kidswear market is adjacent to the women’s market,

Pantaloons has renewed its strategy to diversify its product mix and focus

on both these fast growing segments. The company launched speciality

small box format stores (<10000 sq ft) dedicated to women and kids. As

on FY17, Pantaloons has 16 women stores and nine kids’ speciality stores.

We believe this expansion will continue with the constant addition of five

stores every year in the women’s category and two or three stores under

kidswear segment. Total store count is expected at 300 stores, including

26, 12 women’s, kid’s stores, respectively. A slew of brands across all

categories would position Pantaloons as “one stop shop” for apparel

requirements of the family. The in-house merchandise team enables

Pantaloons to launch own brands and churn its new designs at faster rate

keeping store inventory afresh. This has led share of own brands increase

from 50% in FY13 (in acquisition) to 61% in FY17.

Exhibit 32: Increasing share of own labels…

50%48%

52%

62% 61%

0%

10%

20%

30%

40%

50%

60%

70%


% s

hare in r

evenues

Share of private labels

Gradual increase in share of private labels on

the back of new brands launched


Exhibit 33: Own brands to continue dominate the Pantaloons portfolio…


Pantaloons is present across 78 cities/towns and

retails over 200 licensed and international brands.

The launch of six new brands in FY15, Pantaloons

markets 24 exclusive brands.

Unlike the earlier COCO model, in FY17, ABFRL adopted

the franchisee based expansion model for Pantaloons.

Out of total expansion of 46 stores in FY17, Pantaloons’

franchisee network was at 28 stores


Consumption theme to benefit ABFRL…

We believe that ABFRL, with its strategies, commands a leading position

in the apparel business. The now combined entity is poised to take

advantage of the theme around higher disposable income and increased

discretionary spending. A steady rise in income levels, favourable

demographics and GST led penetration in organised retail bode well for

the branded apparel business. ABFRL, with its strong brands, a

distribution reach and product offering across various categories/price

points is poised to exploit these growth opportunities.

Exhibit 35: Maintain, consolidate leadership position as India’s leading apparel business…


Global apparel consumption is expected to increase from $1700 billion in

2015 to $2600 billion by 2025. Market addition of $900 billion over the

next decade provides a huge opportunity to players in the apparel sector.

Majority of the addition in market is expected to happen in China ($378

billion) and India ($121 billion). Growth in developed countries is likely to

be in single digits while the Indian domestic apparel market is expected to

register highest average growth rate of 12% in CY15-25 with Chinese

domestic apparel growing at an average rate of 10% over the period.

Apparel consumption in top eight economies (considering European

Union as single entity) constitutes ~70% of global consumption. Brazil,

Russia, India and China (BRIC countries) comprise ~23% with China

having a major share of 14% and India following with share of 3.5%. Over

the next decade, India’s share in apparel consumption is expected to

nearly double to 6.9% with China’s share expected to increase to 23.7%.

Exhibit 34: Largest network compared to peers…

132

331

10141080

2052

0

500

1000

1500

2000

2500

Madura Raymond Arvind KKCL Indian

TerrainNo. of Stores

Strong EBO network provides

a competitive edge to ABFRL

benefiting from consumption

theme


Exhibit 36: Global apparel consumption to grow at a CAGR of 4.4% over FY15 to FY25...

16851796

18711950

20312117

22062298

23952495

2600

0

500

1000

1500

2000

2500

3000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

US

$ B

n

Global Apparel Consumption



Consumer spending has a strong correlation with various product

categories and the economic status of the consumer. Initially, a consumer

is more focused on spending on basic necessities like food, clothing and

housing. As disposable income increases, the consumer tends to spend

more on discretionary items like consumer durables, entertainment,

recreation, travel, etc. Though absolute expenditure on clothing does not

go down its growth rate in comparison to increase in other expenses is

slower. Hence, apparel consumption is likely to increase at a faster pace

in developing countries like India, China, Brazil, etc while for the

developed nations it would be slower.

Though developed regions like EU, US have a population of ~11% of

world population, they still drive 40% of global apparel consumption,

which is mainly on account of high per capita expenditure on apparel

(PEAP). However, growth in PEAP for developed countries like US, EU is

expected to be flattish with marginal average annual growth of 1% in the

next decade. Contrary to developed nations, developing countries have

low per capita expenditure on apparel. However, the expected annual

growth in PEAP is likely to be higher.

India is expected to have the highest annual growth rate in PEAP of ~11%

over the next decade while China’s PEAP is expected to grow at an annual

growth rate of 10%. Even with expectations of registering the strongest

growth over the next decade, India’s PEAP would increase from $45 in

2015 to $123, which would be still be only 11% of US PEAP, which is

expected to be ~$1123 in 2025 while China’s PEAP would be around 3.5x

of India’s PEAP in 2025.

Exhibit 37: Indian apparel market to grow at CAGR of 12% in FY15-25…

Countrywise Apparel

Market Size (US$ Bn)

2015 2025 CAGR %

Absolute

increase in

market size

Percentage

of

incremental

market

Global

Market

Share 2015

Global

Market

Share 2025

EU-28* 350 390 1 40 4.4 20.8 15.0

USA 315 385 2 70 7.7 18.7 14.8

China 237 615 10 378 41.3 14.1 23.7

Japan 93 105 1 12 1.3 5.5 4.0

India 59 180 12 121 13.2 3.5 6.9

Brazil 56 90 5 34 3.7 3.3 3.5

Russia 40 59 4 19 2.1 2.4 2.3

Canada 25 30 2 5 0.5 1.5 1.2

Rest of World 510 746 4 236 25.8 30.3 28.7

Total 1685 2600 4 915 100

Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity

Exhibit 38: Global apparel consumption to grow at CAGR of 4.4% in FY15 to FY25...

Countrywise Per Capita expenditure

on Apparel (US$)

2015 2025 CAGR %

EU-28 693 766 1.0

USA 978 1116 1.3

China 172 435 9.7

Japan 736 835 1.3

India 45 123 10.6

Brazil 270 404 4.1

Russia 282 390 3.3

Canada 683 768 1.2


India’s share in the global market to nearly double

to 6.9% compared to 3.5%. This provides

enormous opportunity for apparel players like

ABFRL


Women’s category to outpace men’s category…

The Indian apparel market is expected to grow from $59 billion (bn) in

2015 to US$180 bn. The branded apparel market is expected to grow at a

faster annual average growth rate of 13.5% and is expected to touch $41

bn by 2025. On the other hand, the unbranded apparel market is expected

to grow at a comparatively slower pace with average growth of ~11%

over the period.

Segment wise, the women’s segment is expected to grow faster than the

men’s segment. The women’s apparel market is expected to grow at an

average annual growth rate of 16.4% in CY14-25 while men’s apparel is

expected to grow at an average annual growth rate of 14% over the same

period. Further, men’s casual wear is expected to grow at an average

annual growth of 22% in CY14-25, while men’s formal wear is expected to

grow at an average annual growth of 10% over the period. Among

womenswear, western wear is expected to grow at an average annual

growth of ~24% in CY14-25 while women’s ethnic wear is expected to

grow at an average annual growth rate of 11%.

Exhibit 39: Branded apparel to grow at CAGR of 13.5% in FY15-25...

6.5 11.519.9

41.028.5

47.5

83.1

139.0

-20

10

40

70

100

130

160

190

2010 2015 2020 2025

US

$ b

n

Branded Apparel Mkt Size Unbranded Apparel Mkt Size

Branded apparel market to become ~4

times to $41 billion as compared to current

market size of $ 11.5 billion


Exhibit 40: Global apparel consumption to grow at CAGR of 4.4% in FY15-25...

3.6

1.4

0.7

1.7

2.7

5 5

2.52.8

4.7

9

7.5

5.2

7

12.5

0

3

6

9

12

15

Mens Formals Mens Casuals Women's Western Women's Ethnic Kids

US

$ B

n

2014 2020 2025

CAGR 9% CAGR 22% CAGR 24% CAGR 11% CAGR 9%


With close to | 6633 crore (~$1 billion) of revenues,

ABFRL commands a significant share of 9-10% of the

organised branded apparel market share


Pantaloons – Leveraging on women’s product portfolio…

Pantaloon’s product portfolio targets primarily two segments -

womenswear and fast fashion. Unlike Madura, which derives majority of

the revenues from men’s wear, Pantaloons is targeting the fragmented

womenswear segment. Pantaloons is one of the largest retailers (by

revenue), selling women branded apparels. Approximately 44% (23%

western; 21% ethnic) i.e. ~| 1123 crore of Pantaloon’s total revenues is

derived from womenswear portfolio. On the back of higher throughput

coupled with client stickiness, womenswear is considered to be the more

profitable segment vs. menswear on gross profit per square foot basis.

The higher relevance and importance of designs in womenswear helps

increase the propensity of brand-owners to price up these apparels,

which also helps boost their margin profile. Subsequently, the

womenswear segment contributed ~50% of Pantaloon’s gross profit.

Successful transition from discount store to value fashion…

Experiencing a successful transition from a ‘discount store’ to ‘value

retailer’, Pantaloons uniquely leverages its own private brands labels. In

order to tap the underlying opportunities for men’s casual wear, the

company recently launched various brands like Byford, San Francisco and

Urban Eagle. Menswear contributes 35% of revenues. Kid’s apparel

contributes 10% of revenues whereas remaining 14% comes from non-

apparels.

Exhibit 41: Category wise Revenue-break-up (FY17)

Non-Apps,

10%

Men, 35%

Women

Western,

23%

Women

Ethnic, 21%

Kids, 11%


Exhibit 42: Changing image of Pantaloons – From discount store to value fashion…

No. of stores

2 2 2 4 6 610 10

1519

2834

38

47

6064

68

95

107

134

163

209

0

50

100

150

200

250

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 2015 2016 2017

Pre-acquisition Post-acquisition



Financials

Consolidated revenues likely to grow at 15% CAGR in FY16-19E

ABFRL’s consolidated revenues are expected to grow at a CAGR of 15%

to ~| 8840 crore by FY19E compared to | 6633 crore in FY17. While

majority of incremental growth is expected to be driven by Pantaloons,

network expansion and brand extensions coupled with newer brands like

Forever 21, Ted Baker and Simon Carter are expected to further

accelerate the incremental revenues.

EBOs are expected to contribute ~18% of incremental revenues. MBOs

are expected to contribute 25% of incremental revenues. Revenues from

fast fashion which includes People and Forever 21 are expected to

contribute 9% of incremental revenues. Pantaloons is expected to capture

the lion’s share of incremental growth, contributing ~48% to incremental

revenues.

Madura’s revenues are expected to be largely driven by a revival in LTL

growth. However, store/footprint expansion over EBO and MBO format

are expected to further add to the topline. Expansion of its presence

across Tier-II and Tier-III cities along with brand extensions would

expedite Madura’s revenues. Revenues from Madura – Lifestyle brands

(MBOs + EBOs) are expected to grow at a CAGR of 6% in FY17-19E to

| 4702 crore vs. | 3736 crore in FY17. Revenues from Madura fast fashion

business (People + Forever 21) are expected to grow 1.5x (25.7% CAGR)

to | 545 crore in FY19E compared to | 345 crore in FY17. Pantaloon’s

revenue is expected to grow at a CAGR of 18.7% in FY17-19E to | 3593

crore compared to | 2552 crore in FY17.

Exhibit 43: Consolidated revenues to realise inclusive growth…

1059553

395

200

8840

6633

FY17 EBO's MBO's Newer Brands Pantaloons FY19E

| c

rore

Core business to resume its

growth trajectory

Fast fashion to boost revenues


Exhibit 44: Consolidated revenues to grow at CAGR of 15% over FY17-19E…

3729 3736

4232

4702

2157

2552

3113

3593

149345

439545

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


| c

r

Lifestyle Brands Pantaloons Newer brands - Forever 21/People



Brand extensions, Pantaloons turnaround to aid margin expansion

We believe brand extensions would yield higher realisation per sq ft

resulting in improved margins. In addition to the same, increased

contribution of private labels in Pantaloons portfolio would further

facilitate margin improvement. Stabilisation of fast fashion brands would

take some time. Subsequently, we expect EBITDA margins to expand 140

bps in FY17-19E to 8% from the current 6.6%. Likewise, consolidated

EBITDA is expected to grow at a CAGR of 27% CAGR in FY17-19E to

| 703 crore in FY19E from | 438 crore in FY17.

Exhibit 45: Consolidated EBITDA margins expected to improve 140 bps over FY17-19E

378.4 437.5 598.9 703.1

6.36.6

7.7

8.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0


| c

r

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

% t

o s

ale

s

EBITDA EBITDA Margin %


PAT growth driven by better operating performance

Inclusive growth across all segments is expected to bring in robust

revenue growth. Moreover, with margin expansion, PAT is expected to

more than quadruple to | 261.5 crore by FY19E compared to | 53.5 crore

in FY17. PAT for FY16 was impacted by one-time depreciation adjustment

of | 100 crore, resulting in a loss of | 109.7 crore. EBIT margins of

Pantaloons for FY17 were at -1% in FY17 compared to -7% in FY16,

indicating a turnaround. Higher emphasis on franchisee based store

openings would not result in a dent in P&L as the company only manages

inventory, which practically does not impact below the line expenses

(depreciation and interest).

Exhibit 46: PAT expected to quadruple over FY17 to FY19E

181.7 261.553.511.4

3.0

2.3

0.8

0.2

0.0

50.0

100.0

150.0

200.0

250.0

300.0

FY16* FY17 FY18E FY19E

| c

r

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

PAT PAT margin (%)

Source: Company, ICICIdirect.com Research, FY16 adjusted PAT


Return ratios to ramp up on improving financials…

The asset light expansion of Pantaloons and Madura would drastically

improve return ratios. However, return ratios would be moderated by

expansion of Forever 21. The RoE is expected to more than treble to

18.7% in FY19E compared to current 5.6%. The impact of inventory

would, to an extent, moderate RoCE expansion, which is expected to

double by FY19E to 14.6% vs. current 7.5%. Enhanced operational

performance coupled with profitable growth would drive the expansion

plans from internal accruals.

Exhibit 47: Return ratios trend

2.4

7.5

12.3

14.6

1.3

15.9

18.7

5.6

0.0

5.0

10.0

15.0

20.0


(%)

RoE RoCE

Source: Company, ICICIdirect.com Research, FY16 adjusted RoE

Higher FCF to reduce debt, improve financial leverage…

Replicating Madura’s capital efficiency in Pantaloons, ABFRL’s

consolidated conversion cycle is expected to reduce from 110 days in

FY17P to 70 days in FY19E. The improvement in cash conversion cycle

coupled with accelerated revenue generation is expected to lead to an

improvement in cash flow from operation (CFO), which is expected to

grow 2.2x to ~| 605 crore in FY19E (vs. ~| 268 crore in FY17P). Improved

fundamentals with major thrust on franchisee model is expected to result

in lower capex and higher free cash flow (FCF) generation, which is

expected at | 240 crore in FY19E. Subsequently, net debt is expected to

reduce to | 1589 crore by FY19E compared to | 2116.2 crore in FY17

resulting in an improved financial leverage ratio (debt/equity) of 1.2x in

FY19E compared to 2.3x in FY17.

Exhibit 48: FCF generation to result lowering of debt…

1830.6 2116.2 1803.6 1559.8

2.04

2.25

1.64

1.18

0.0

500.0

1000.0

1500.0

2000.0

2500.0

FY16 FY17P FY18E FY19E

Debt

0.0

0.5

1.0

1.5

2.0

2.5

Debt t

o e

quit

y r

atio

(x)

Source: Company, ICICIdirect.com Research, FY16 adjusted RoE


Risk & Concerns

Increasing competitive intensity from other western brands

In any market globally there co-exists top three fast fashion brands. The

rationale of customers choosing these brands includes: Uniqlo for better

quality, Zara for better designs and H&M for better prices. These brands

have aggressive plans for India. Zara has continued to leverage the Indian

markets with better designs and better fits. However, GAP and Forever 21

have embarked on their growth strategy from FY17. The entry of H&M has

caught on well in the price conscious Indian market. This has resulted in

pricing pressure across the fast fashion industry within well established

brands like Zara slashing its prices to bring them closer to H&M. The body

shop and GAP also reduced their prices to the extent of 15-30% to stay

competitive.

ABFRL has also moderated prices of its key brands to the extent 5% in

FY17, impacting growth in Madura. Moreover, growth rates for

Pantaloons and Forever 21 could negatively surprise if the competitive

intensity widens with newer brands entering and disrupting the market.

Aggressive store expansion at invariably high rental expenses

Rent expenses currently forms 16% of overall revenues. With ~80% of

the presence in metro and mini-metro, our estimates include store

expansion in non-metros and smaller cities with major thrust on

franchisee based model. Any variation on above assumptions would

impact our margin estimates in accordance to sensitivity provided below:

Exhibit 49: Slew of fashion brands in Indian market…


Exhibit 50: Sensitivity of EBITDA margins to rent expenses…

0.0% 5.0% 10.0% 15.0% 20.0%

FY17E 9.0 8.4 7.7 7.0 6.4

FY18E 10.5 9.3 8.0 6.6 5.1

Change in Rent per sq.ft (varition to current estimates)

EBITDA

margins



Valuations

Considering the strong franchisee coupled with future growth prospects,

we believe ABFRL would continue to trade at a premium to its peers.

Keeping the structural story intact, which evolves around rising

disposable income and shift of consumer preferences, ABFRL is well-

poised to capture the Indian growth story. We believe the dynamics of

both segments are similar and, hence, value ABFRL on a consolidated

basis. ABFRL (post restructuring) has traded at a two-year historical

average of 2x EV/sales multiple. We ascribe the same to FY19E sales of

| 8840.5 crore and arrive at a target price | 210 with a BUY rating.

Exhibit 51: Historical price trend valuing ABFRL on EV/sales…

0

50

100

150

200

250

300

350

400

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

Aug-15

Oct-15

Dec-15

Feb-16

Apr-16

Jun-16

Aug-16

Oct-16

Dec-16

Feb-17

Apr-17

Jun-17

(|

)

Price 2.6x 2.4x 2.3x 2.1x 1.9x 1.7x 1.5x


Exhibit 52: Valuation compared to peers

Figures (| crore)

Company Price Sales EBIDTA OPM PAT PAT % FY18E FY19E

ABFRL 170.0 6,633.0 437.5 6.6 53.5 0.8 2.0 1.7

Arvind 370.0 9,236.5 943.4 10.2 320.1 3.5 1.2 1.0

Trent 255.0 3,140.5 250.5 8.0 141.9 4.5 2.2 1.9

Raymond 821.0 5,391.3 317.2 5.9 76.1 1.4 1.1 1.0

Average EV/Sales 1.6 1.4

Valuation metrics

Target EV/Sales multiple 2.0

2019E Sales 8,840.5

2019E EV 17,788.0

2019E Debt 1,654.6

2019E Cash 44.5

2019E Market Cap. 16,177.8

No. of shares 77.1

Target Price 210.0

CMP 170.0

Upside/(Downside) 23.5

FY17 EV/Sales



Retail & Textile Peer Comparison…

Exhibit 53: Retail peer valuations…

FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E

Coverage Companies

Aditya Birla Fashion 13378.3 2.0 1.7 1.5 34.8 24.9 20.8 2.3 1.9 1.7

Arvind 9558.7 1.0 0.9 0.8 13.0 10.8 8.8 1.3 1.2 1.0

Kewal Kiran 2163.0 4.5 3.9 3.4 21.7 18.5 15.5 4.4 3.9 3.3

Trent 8474.1 4.3 2.0 1.7 69.4 26.1 21.4 4.4 2.2 1.9

Shoppers Stop 2903.0 0.6 0.5 0.5 20.2 16.8 13.3 0.7 0.7 0.6

Siyaram Silk 2081.0 1.3 1.2 1.1 12.3 10.1 8.4 1.5 1.4 1.2

Rupa & Co. 4022.7 3.7 3.3 3.0 29.5 24.1 20.8 3.7 3.4 3.0

Page Industries 18992.6 9.2 7.2 5.8 47.8 38.2 32.6 9.3 7.2 5.8

2.8 1.9 1.6 25.6 21.3 18.1 3.0 2.1 1.8

3.3 2.6 2.2 31.1 21.2 17.7 3.5 2.7 2.3

Brands & Retail

Monte Carlo 1208.3 2.1 2.1 1.7 11.5 10.6 9.2 1.4 1.5 1.0

Raymond 5033.8 0.9 0.9 0.8 21.0 20.1 13.2 1.0 1.0 0.8

Indian Terrian 786.5 1.9 2.0 1.6 16.1 16.4 12.7 1.5 1.6 1.1

Future Lifestyle 5856.0 1.5 1.5 1.3 17.5 17.0 14.4 1.5 1.5 1.1

Future Retail 18662.6 1.1 1.1 0.9 33.7 38.6 27.2 0.8 0.8 0.7

1.5 1.5 1.3 17.5 17.0 13.2 1.4 1.5 1.0

1.5 1.5 1.3 20.0 20.6 15.3 1.2 1.3 0.9

FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E

USA

VF Corp 22.5 1.9 1.9 1.8 12.9 12.6 11.4 2.0 1.9 1.8

Lululemon Athletica Inc 7.9 3.4 3.1 2.8 14.2 13.0 11.8 2.7 2.3 2.1

PVH Corp 8.6 1.1 1.0 1.0 10.6 10.1 9.4 1.3 1.2 1.2

Gap Inc 9.0 0.6 0.6 0.6 4.5 4.6 4.5 0.7 0.6 0.6

Ralph Lauren 5.7 0.9 1.0 1.0 5.3 5.7 5.6 0.9 1.0 0.9

Carter's Inc 4.2 1.2 1.2 1.1 8.9 8.4 7.9 1.5 1.3 1.2

The Children's Place 1.9 1.0 1.0 1.0 7.9 7.1 6.6 1.0 1.0 0.9

Nike 94.4 2.8 2.6 2.4 17.1 16.2 14.5 2.5 2.2 2.0

Fossil 0.5 0.2 0.2 0.2 4.7 4.2 7.1 0.4 0.4 0.0

Abercrombie & Fitch 0.8 0.3 0.3 0.3 3.3 3.8 3.8 0.2 0.2 0.2

Hanesbrands Inc 8.2 1.3 1.3 1.2 11.1 10.6 10.3 1.9 1.7 1.6

1.1 1.0 1.0 8.9 8.4 7.9 1.3 1.2 1.2

1.3 1.3 1.2 9.1 8.7 8.5 1.4 1.3 1.2

Europe

LVMH 127.0 2.7 2.5 2.4 11.9 10.9 9.8 2.4 1.9 1.7

Inditex 119.3 4.5 4.0 3.6 19.2 16.9 15.1 4.4 3.5 3.1

H&M 41.8 1.7 1.6 1.4 10.4 9.4 8.6 1.8 1.4 1.3

Next PLC 7.2 1.3 1.4 1.4 6.8 7.5 7.6 1.5 1.6 1.5

2.2 2.0 1.9 11.1 10.2 9.2 2.1 1.7 1.6

2.5 2.4 2.2 12.1 11.2 10.3 2.5 2.1 1.9

Company

EV/EBITDA EV/Sales

Mkt Cap

(INR cr)

Mcap/Sales

Global brands & Speciatliy retail

Mcap/Sales EV/EBITDA EV/SalesMkt Cap

(USD bn)



Financial Summary (Consolidated)

Exhibit 54: Profit & Loss

(Year-end March) FY 16 FY 17P FY 18E FY 19E

Gross Revenue 6,034.6 6,633.0 7,782.7 8,840.5

Growth (%) 9.9 17.3 13.6

Net Revenue 6,034.6 6,633.0 7,782.7 8,840.5

Growth (%) 9.9 17.3 13.6

Cost of Sales 2,751.8 3,008.7 3,829.8 4,352.0

Employee Costs 620.5 705.8 773.1 850.4

Operating Expenses 903.2 1,087.1 1,128.0 1,320.7

Op. Expenditure 697.4 707.1 807.0 880.6

EBITDA 378.4 437.5 598.9 703.1

Growth (%) 420.5 15.6 36.9 17.4

Depreciation 338.1 242.5 271.3 304.0

EBIT 40.3 195.0 327.6 399.1

Interest 176.5 179.7 155.8 137.6

Other Income 26.4 38.2 42.0 46.2

PBT (109.7) 53.5 213.7 307.7

Growth (%) (51.9) (148.7) 299.5 44.0

Tax - - 32.1 46.2

Reported PAT (109.7) 53.5 181.7 261.5

Exceptional Items 121.1 - - -

Adjusted PAT 11.4 53.5 181.7 261.5

Growth (%) 371.3 239.5 44.0

EPS 0.1 0.7 2.4 3.4


Exhibit 55: Balance Sheet


Source of Funds

Equity Capital 768.8 770.5 770.5 770.5

Reserves & Surplus 132.9 184.9 366.5 628.1

Shareholder's Fund 905.5 958.2 1,139.8 1,401.3

Secured Loan 677.2 1,271.0 1,271.0 1,271.0

Unsecured Loan 1,172.7 889.6 602.9 383.6

Total Loan Funds 1,849.8 2,160.6 1,873.9 1,654.6

Deferred Tax Liability 14.8 20.0 20.0 20.0

Minority Interest - - - -

Source of Funds 2,876.6 3,272.9 3,167.8 3,210.1

Application of Funds

Gross Block 1,330.7 1,635.7 1,830.4 2,051.1

Less: Acc. Depreciation (847.0) (1,089.5) (1,360.8) (1,664.8)

Net Block 483.7 546.2 469.6 386.2

Capital WIP 25.4 25.0 30.0 36.0

Total Fixed Assets 509.1 571.2 499.6 422.2

Goodwill 1,839.5 1,940.8 1,940.8 1,940.8

Investments - - - -

Inventories 1,410.5 1,431.3 1,599.2 1,695.4

Debtors 312.4 453.9 383.8 436.0

Cash 19.2 44.5 70.3 94.8

Loan & Advance, Other CA 491.7 594.2 701.1 797.9

Total Current assets 2,233.8 2,523.8 2,754.4 3,024.1

Creditors 1,429.8 1,551.1 1,836.2 1,967.3

Other Current Liabilities 276.0 211.9 190.7 209.8

Provisions - - - -

Total CL and Provisions 1,705.8 1,763.0 2,026.9 2,177.1

Net Working Capital 528.0 760.8 727.4 847.0

Miscellaneous expense - - - -

Application of Funds 2,876.6 3,272.9 3,167.8 3,210.1



Exhibit 56: Cash Flow


Profit after Tax 11.4 53.5 181.7 261.5

Less: Dividend Paid (176.5) (179.7) (155.8) (137.6)

Add: Depreciation 338.1 242.5 271.3 304.0

Add: Others - - - -

Cash Profit 525.9 475.6 608.8 703.2

Increase/(Decrease) in CL 1,273.7 57.1 264.0 150.2

(Increase)/Decrease in CA (1,596.8) (260.5) (200.8) (241.0)

CF from Operating Activities 137.1 268.0 668.0 608.1

(Add) / Dec in Fixed Assets (468.5) (304.6) (199.7) (226.7)

Goodwill (635.1) (101.3) - -

(Inc)/Dec in Investments 81.9 16.6 - -

CF from Investing Activities (1,021.7) (389.4) (199.7) (226.7)

Inc/(Dec) in Loan Funds 539.0 310.8 (286.7) (219.3)

Inc/(Dec) in Sh. Cap. & Res. 675.5 1.7 - -

Others (318.0) (166.0) (155.8) (137.6)

CF from financing activities 896.6 146.5 (442.5) (356.9)

Change in cash Eq. 12.0 25.2 25.8 24.6

Op. Cash and cash Eq. 7.2 19.2 44.5 70.3

Cl. Cash and cash Eq. 19.2 44.5 70.3 94.8


Exhibit 57: Ratios


Per share data (|)

Book Value 11.8 12.4 14.8 18.2

EPS* 0.1 0.7 2.4 3.4

Cash EPS 0.3 0.6 0.9 1.2

DPS - - - -

Profitability & Operating Ratios

EBITDA Margin (%) 6.3 6.6 7.7 8.0

PAT Margin (%) 0.2 0.8 2.3 3.0

Fixed Asset Turnover (x) 2.2 2.1 2.6 2.9

Inventory Turnover (Days) 55.6 78.2 75.0 70.0

Debtor (Days) 9.7 21.1 18.0 18.0

Current Liabilities (Days) 115.5 180.8 175.0 165.0

Return Ratios (%)

RoE* 1.3 5.6 15.9 18.7

RoCE 2.4 7.5 12.3 14.6

RoIC 4.1 15.4 29.1 35.1

Valuation Ratios (x)

PE NM NM 72.1 50.1

Price to Book Value 14.4 13.7 11.5 9.3

EV/EBITDA 39.4 34.8 24.9 20.8

EV/Sales 2.5 2.3 1.9 1.7

Leverage & Solvency Ratios

Debt to equity (x) 2.0 2.3 1.6 1.2

Interest Coverage (x) 0.2 1.1 2.1 2.9

Debt to EBITDA (x) 4.9 4.9 3.1 2.4

Current Ratio 1.3 1.4 1.3 1.3

Quick ratio 0.5 0.6 0.5 0.6

Source: Company, ICICIdirect.com Research, * FY16 adjusted EPS & RoE


RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey

Head – Research

[email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

Initiating Coverage


RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION

We /I, Bharat Chhoda, MBA (Finance), Ankit Panchmatia, MBA (Finance) and Cheragh Sidhwa, MBA (Finance); Research Analysts, authors and the names subscribed to this report, hereby certify that all of

the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly

related to the specific recommendation(s) or view(s) in this report.

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