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Aditya Birla Fashion & Retail Ltd
India’s Premier Fashion House
August, 2016
Kshitij Kaji
Research Analyst
+91 (22) 4272 2515
1 Edel Invest Research
- India’s Premier Fashion House CMP: 165 Target Price: 215
Edel Invest Research BUY
Coverage Stocks: Aditya Birla Fashion & Retail Ltd.
Aditya Birla Fashion & Retail (ABFRL)—formed by merger of Madura and Pantaloons Fashion & Retail (Pantaloons)—is India’s largest branded apparels player with a turnover of INR 6,060 crore in FY16. Ability to surpass industry growth anchored by a large base, anticipated margin improvement from Pantaloons’ turnaround, an asset light model, presence across all categories & price points in apparel and a massive unparalleled distribution network reinforce our optimism in the company’s robust growth prospects. Moreover, it is best poised, underpinned by sheer quality & size of Madura's 4 brands and presence in fastest growing segments such as fast fashion through Pantaloons & Forever 21, amongst branded apparel players to take advantage of the improving macroeconomic milieu. Improving financial metrics—robust free cash flow generation, 39% EBITDA CAGR over FY16-18E and 20% RoCE by FY19E (4% currently)—are expected to sustain for many years, rendering the company a potential multi-bagger. We initiate with ‘BUY’ with a TP of INR 215. Presence across value pyramid, diversified market channels, pan-India presence burnish prospects
Madura is predominantly a premium men’s wear player, housing India’s largest brands (Louis Philippe, Van Heusen, Allen Solly and Peter England) with 2.3 mn sq ft retail space and revenue of ~INR 4,000 crore in FY16. Acquisition of retail franchisees such as Pantaloons and Forever 21 gives it access to mid-premium fast fashion for women across additional 2.5 mn sq ft. Cumulatively, Madura and Pantaloons boast of a portfolio of 40 brands, retailed through 2,150 EBOs and additional 7,000 points of sale across India with a combined 5.4 mn sq ft area. We perceive wide offerings across price points (mass to luxury), broad categories (men’s wear, women’s wear, kid’s wear, accessories) and diversified market channels (MBOs, EBOs, LRS) to be key catalysts of ABFRL’s success.
Pantaloons long-term game changer; expansion in white spaces, deeper penetration to spur Madura
Pantaloons’ aggressive expansion plans are bound to spur ABFRL’s top line as new stores in cities sans branded apparel presence provide humungous growth opportunity. Also, targeting the currently fragmented women’s wear segment and the fast growing fast fashion segment entails significant long-term benefits. Moreover, higher sales throughput in each store along with improved designs, new vendor network, refurbished IT systems and addition & rationalization of own brands should meaningfully spur its margins. Successful franchisee model in conjunction with economies of scale will aid superior return ratios. Madura is anticipated to far outstrip industry growth underpinned by expansion in white spaces, product extensions through its wide distribution network.
Improving macros, rising brand consciousness entail humungous growth opportunity
Domestic branded apparel segment is set to catapult manifold riding: 1) shift from fabrics to readymade garments;
2) favourable demographics; 3) higher discretionary spends; 4) low GDP per capita spend on apparel; 5) increasing
spends on branded products due to growing fashion consciousness & aspirations, among others. Sales of branded
apparels are estimated to grow at 15-20% CAGR over FY16-19E, driven by volumes as well as superior realizations.
Therefore, the share of branded garments is expected to rise to 48-50% in FY19E compared to ~35% in FY14.
Outlook and valuations: Burnished prospects; initiate with ‘BUY’
We believe ABFRL is best placed among branded apparel peers to reap significant benefits of the improving macroeconomic milieu due to the sheer quality & size of Madura's 4 brands, presence in fastest growing segments such as fast fashion and an unparalleled distribution network. The company’s pole position, ability to generate free cash flow, 39% EBITDA CAGR over FY16-18E and RoCE expansion from 4% currently to 20% by FY19E will yield target multiple of 3x sales for Madura and 15x EV/EBITDA for Pantaloons, leading to a target price of INR 215.
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
Year to March (INR Cr) FY14 FY15 FY16 FY17E FY18E
Net revenues 1,661 1,851 6,060 6,911 8,069
Rev growth (%) 29% 11% NA 14% 17%
EBITDA margin (%) 2.8 4.7 6.6 8.8 9.5
Adjusted PAT (187) (228) (104) 179 319
Adj. EPS (INR) (4) (5) (1) 2 4
EPS growth (%) NA NA NA NA 78%
P/E (x) NA NA NA 71.0 40.0
P/B (x) 13.2 22.2 13.5 11.4 8.8
RoACE (%) NA NA 3 13 18
RoAE (%) NA NA NA 17 25
EV/EBITDA (x) 193 102.5 36.6 23.9 19.0
Kshitij Kaji Research Analyst +91 (22) 4272 2515 [email protected]
Bloomberg: ABFRL:IN
52-week range (INR): 263 / 123
Share in issue (Cr): 77.2
M cap (INR Cr): 12,674
Avg. Daily Vol. BSE/NSE :(‘000): 300/800
SHARE HOLDING PATTERN (%)
(in %) Jun-16
Promoter 59.46
Public 40.54
Others –
Date: 22nd
August 2016
40
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ABFRL Sensex
Aditya Birla Fashion & Retail Ltd
2 Edel Invest Research
ABFRL: Sales Growth + Margin Improvement + Improving Return Ratios
ABFRL is best poised, underpinned by sheer quality & size of Madura's 4 brands and presence in fastestgrowing segments such as fast fashion through Pantaloons & Forever 21, amongst branded apparelplayers to take advantage of the improving macroeconomic milieu. Improving financial metrics—robustfree cash flow generation, 39% EBITDA CAGR over FY16-18E and 20% RoCE by FY19E (4% currently)—are expected to sustain for many years, rendering the company a potential multi-bagger
Wide offerings across price points (mass to luxury), broad
categories (men’s wear, women’s wear, kid’s wear, accessories) and diversified
market channels (MBOs, EBOs, LRS) to be key catalysts of
ABFRL’s success.
Pantaloons’ aggressive expansion plans in cities sans
branded apparel presence, targeting the currently
fragmented women’s wear segment and the fast growing fast fashion segment entails
significant long-term benefits.
Improving macros, rising brand consciousness entail humungous growth
opportunity. The share of branded garments is expected
to rise to 48-50% in FY19E compared to ~35% in FY14.
FY16 FY17E FY18E FY19E
Revenue 6060 6911 8069 9483
EBITDA 397 608 767 948
EBITDA Margin
7% 9% 10% 10%
PAT -104 179 319 476
FY16 FY17E FY18E FY19E
RoACE (%) 3% 13% 18% 21%
Debt to Equity (x)
2.0 1.7 1.2 0.8
Multiple Price Target
Madura 3x Market Cap to Sales215
Pantaloons 13x EV/EBITDA
Entry = INR 165
EBITDA CAGR of 39% to lead to blended exit multiple of 24x
FY18E EV/EBITDA
Total Return of
32%
Aditya Birla Fashion & Retail Ltd
3 Edel Invest Research
Focus Charts
ABFRL Portfolio mix – FY16 Presence across all segments
Expected size of ABFRL brands by FY20E ABFRL has a massive retail presence
*2011 and 2012 is only Madura. 2013 onwards includes Pantaloons
Expect robust topline growth alongwith margin increase Return ratios to improve
Source: Company, Edel Invest Research
39%
32%
12%
8%
5% 4%
Men's Casuals
Men's Formals
Women's Western wear
Women's Ethnic wear
Kids
Accessories
4500
1000 500
150 50 50 0
1000
2000
3000
4000
5000
Pan
talo
on
s
Lou
is P
hili
pp
e
Pet
er E
ngl
and
Van
Heu
sen
Alle
n S
olly
Fore
ver
21
Peo
ple
The
Co
llect
ive
Hac
kett
Sim
on
Car
ter
Size (INR Cr) - FY20E
1500-2000 cr each
895 1129 1367 1648 1865 2200
1.3 1.6
3.6
4.2 4.8
5.5
0
1
2
3
4
5
6
0
500
1000
1500
2000
2500
FY11 FY12 FY13 FY14 FY15 FY16
EBOS (LFS) Carpet Area (mn Sq ft) (RHS)
6060 6911 8069 9483
6.6%
8.8%
9.5%
10.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
3000
4000
5000
6000
7000
8000
9000
10000
FY16 FY17E FY18E FY19E
Revenue (INR Cr) EBITDA Margin(%)
3%
13% 18%
21%
-16%
17%
25% 28%
FY16 FY17E FY18E FY19E
ROCE (%) ROE (%)
Mass
Value
Sub-premium
Premium
Super-Premium
Luxury
Aditya Birla Fashion & Retail Ltd
4 Edel Invest Research
Embarking on growth phase after gradually building a fashion house
Source: Company, Edel Invest Research.
ABFRL is present across all segments of the USD 10 bn Indian branded apparel market with 10% market share
Segment Market Size
(USD bn)
Men Women Kids Accessories
Casual Formal Western Ethnic
Luxury and Super Premium
0.44 0.01 0.22 0.04 0.04 0.13 0.01
Premium and Mid Premium
4.54 0.71 1.58 0.33 0.46 1.36 0.11
Value & Mass 5.21 0.64 1.77 0.37 1.16 1.18 0.08
Total 10.19 1.36 3.57 0.74 1.66 2.67 0.21
Source: Company, Edel Invest Research.
ABFRL accounts for 10% (USD 1 bn) of India’s branded apparel market (USD 10 bn)
Source: Company, Edel Invest Research.
Entry Phase
Establish presence
1999 - Takeover of Madura
2004 - Transition from wholesale to retail
2006 - Rapid expansion of Madura brands (4 premium menswear brands)
Expansion Phase
Fill gaps in offering
2007 - Launch of "The Collective" (super premium) and "The People"(mass)
2013 - JV with Hackett
2013 & 2016 - Acquisition of PFRL & Forever 21 (fast fashion and women's wear retailers)
Growth Phase
Economies of scale
2017 onwards - Consolidate apparel business under one umbrella with product portfolio across all categories. Next leg to focus on growth
Indian Branded Apparel Size (USD bn), 9
ABFRL FY16 revenues
(USD bn), 1
Aditya Birla Fashion & Retail Ltd
5 Edel Invest Research
ABFRL has steadily added brands to its kitty aiding its presence across all price categories and product segments
Portfolio mix – FY16 Expected size of brands by FY20E
Source: Company, Edel Invest Research
ABFRL Brand positioning – Madura Brands present across every price point with Pantaloons as a Fast Fashion Value Retailer
Brand Segment Positioning
Louis Philippe Premium Formal wear brand with superior quality and craftsmanship
Van Heusen Premium Lifestyle brand encouraging trendy power dressing
Allen Solly Mid-premium Friday dressing brand promoting casual, semi formal wear through colors
Peter England Value Formal and casual brand with strong presence in denim
The Collective Super Premium Transition from multi brand super premium to premium and bridge to luxury
People Value Recently launched mass brand set for expansion mode
Forever 21 Value Mid Premium Fast Fashion womens wear retail brand
Simon Carter Super Premium Formal and casual menswear brand with big variety of accessories
Hackett Super Premium Formal and casual menswear brand
Pantaloons Value Fast Fashion retailer with higher focus on womens wear
Revenue breakup between Madura and Pantaloon (FY17E) EBITDA breakup between Madura and Pantaloon (FY17E)
Source: Company, Edel Invest Research
39%
32%
12%
8%
5% 4%
Men's Casuals
Men's Formals
Women's Western wear
Women's Ethnic wear
Kids
Accessories
4500
1000
500 150 50 50
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Pan
talo
on
s
Lou
is P
hili
pp
e
Pet
er E
ngl
and
Van
Heu
sen
Alle
n S
olly
Fore
ver
21
Peo
ple
The
Co
llect
ive
Hac
kett
Sim
on
Car
ter
(IN
R C
r)
Size (INR Cr) - FY20E
1500-2000 cr each
Madura 64%
Pantaloons 36%
Madura 75%
Pantaloons 25%
Madura
Pantaloons
Aditya Birla Fashion & Retail Ltd
6 Edel Invest Research
ABFRL: Boasts of largest distribution reach among apparel players
ABFRL’s 5.4 mn sq ft retail space is currently split almost evenly between Madura and Pantaloon. While Madura’s 4— Louis Philippe, Allen Solly, Peter England and Van Heusen—brands are present across 2,000 EBOs, 4,000 MBOs and 3,000 department stores, Pantaloon has 135 stores and is planning to add 30 -35 new stores every year.
ABFRL has a massive retail presence
*2011 and 2012 is only Madura EBOs. 2013 onwards includes Pantaloons
Source: CRISIL, Company, Edel Invest Research.
ABFRL EBOs present across pan-India
Source: Company, Edel Invest Research
895 1129 1367 1648 1865 2200
1.3 1.6
3.6
4.2 4.8
5.5
0
1
2
3
4
5
6
0
500
1000
1500
2000
2500
FY11 FY12 FY13 FY14 FY15 FY16
EBOS (LFS) Carpet Area (mn Sq ft) (RHS)
Aditya Birla Fashion & Retail Ltd
7 Edel Invest Research
ABFRL to benefit from underpenetrated segments (casualwear, womenswear)/ distribution channels (e-
commerce, omni-channel) and adaptability to major trends:
Major Trends ABFRL Presence
Changing trends and preferences
Readymade garments replacing demand for fabrics/stitched clothes
Preference for western and casual wear combined with preference for brands with western positioning
Higher demand for accessories/white spaces/product extensions
All Madura brands have a western positioning and have gradually moved away from formal menswear brands by launching casual wear sub-brands Madura has launched sub-brands in white spaces such as LP watches, Solly kids, LP shoes
Fast fashion women’s wear
Women’s wear market is mostly fragmented and unorganized
Diminishing dominance of ethnic wear due to shift to casual wear and formal wear for women as more women join the workforce
Preference for fast fashion (latest designs available at cheap prices – products have shorter shelf life and product life with high turnover)
Allen Solly and Van Heusen have launched women’s wear sub-brands in the premium category Pantaloons to focus primarily on being a fast fashion women’s wear player in the value segment Recent Forever 21 acquisition in the fast fashion mid premium category
E-Commerce
Presence across e-commerce apparel portals
Omni-channel distribution to provide seamless transition between e-commerce and brick and mortar players
ABFRL has its own e-commerce portal Trend-In which currently contributes 4-5% to total revenue. It is also present across major e-commerce platforms Omni-channel distribution to roll out later this year
Source: Company, Edel Invest Research.
Aditya Birla Fashion & Retail Ltd
8 Edel Invest Research
Madura: Creator and owner of India’s biggest brands
Creator of India’s biggest brands
While in India there is no single brand bigger than INR 500 crore, Madura has managed to create 4 such
brands. Moreover, the 4 brands combined render Madura 2.5x bigger than its closest competitor Arvind.
Madura’s brands are far bigger than any of the other brands in India
Source: Company, Edel Invest Research
Total brand ownership unlike peers
Aditya Birla Nuvo acquired Madura Fashion & Lifestyle (established as Madura Coats in 1988) from Coats
Viyella (Europe’s largest clothing supplier) in 1999 and became the owner of Louis Philippe, Allen Solly and
Peter England. Van Heusen, however, is not owned by Madura, though it holds exclusive rights for the brand
in India, Middle East and SAARC.
Benefits of owning Louis Philippe, Allen Solly and Peter England
Source: Company, Edel Invest Research
0
200
400
600
800
1000
1200
Lou
is P
hili
pp
e
Van
Heu
sen
Alle
n S
olly
Pet
er E
ngl
and
Kill
er
Inte
grit
i
Law
man
Ind
ian
Ter
rain
Par
k A
ven
ue
Ray
mo
nd
Co
lor
Plu
s
Par
x
Arr
ow
USP
A
Flyi
ng
Mac
hin
e
Tom
my
Hilf
iger
(IN
R C
r)
Madura - 4000 cr
KKCL - 450 Cr Indian Terrain 350 Cr
Raymond - 1150 Cr Arvind - 1600 Cr
Flexibility in expansion of the
brand as continuous investments in
brands is possible
Freedom in designing,
distribution
Save royalty expenses and
other JV related
overhangs
Aditya Birla Fashion & Retail Ltd
9 Edel Invest Research
Diversifying into other categories
Though predominantly a premium men’s wear brand, Madura gradually shifted away from its primary line of
formal men’s wear into other categories such as casual wear, women’s wear and accessories due to limited
competition and faster growth in latter categories.
Reducing share of premium menswear is a positive due to faster growth in other segments
Source: Company, Edel Invest Research.
Continuous brand evolution via brand extension/sub-brands to spur growth
This extension and sub-branding has already been successful—Louis Philippe shoes clocked revenue of INR 150 crore (with its own EBOs), Louis Philippe Jeans hit INR 100 crore revenue, womens wear posted INR 250 crore (predominantly through Van Heusen) and kid’s wear registered INR 150 crore (predominantly through Allen Solly). Peter England sells the highest number of denims in India by volume.
Brand Core Brand Extensions
Formal Wear (Men)
Casual Wear, Colored Jeans and other denims, Luggage
Formal Wear (Men) Casual Wear, Women’s wear
Formal Wear (Men)
Casual Wear, Women’s wear, Friday wear, Shoes, Kids Wear
Formal Wear (Men) Casual Wear, Shoes, Bags, Jeans, Belts
Source: Company, Edel Invest Research.
New brands in kitty
Simon Cater: Super premium brand to add to The Collective and Hackett
Simon Cater is a men’s wear London brand known for apparel and accessories such as watches, cuff links,
jewellery and luggage. ABFRL has inked a long-term licensing arrangement with rights to design &
manufacture. However, this is expected to be a small brand for ABFRL going forward.
Forever 21: One of the best global fast fashion retail brands
Forever 21 is an American fast fashion retailer chain known for its trendy offerings of women’s, men’s and
girls’ clothing, accessories and its economical pricing. It is present across America, Asia, Middle East and UK.
Women’s fast fashion is the fastest growing segment globally and in India, which prompted ABFRL to join
hands with Forever 21 as it further entrenches the former’s leadership position in the women’s fast fashion
business in India. ABFRL has acquired Forever 21’s online and offline rights for the Indian market and the
existing store network (12) from Diana Retail and DLF Brands for INR 175 crore. Forever 21 reported revenue
of INR 262 crore in FY16 (INR 105 crore and INR 213 crore revenue in FY14 and FY15, respectively) and ABFRL
plans to scale it up aggressively and is targeting revenue of INR 1,000 crore by FY20E.
72%
4% 3% 7%
14%
55%
16%
5% 7%
17%
Mainline Sports Women Jeans Luxury/Elite
2010 2015
Aditya Birla Fashion & Retail Ltd
10 Edel Invest Research
Multi-channel, asset light distribution strategy: Success lynchpin
As oganised retail has evolved in India, branded players have adopted a multi-channel distribution strategy
through various retail formats like multi-brand outlets (MBOs), large format stores (LFS)/ SIS (shop in shop)
and exclusive brand outlets (EBOs). These distribution channels and explosion in the number of retail outlets
provide branded apparel players plenty of options to reach out to consumers in a cost-effective way. Madura
has a distribution network comprising ~1,900 stores, covering 2.7 mn sq ft retail space. It is also present in
more than 4,000 premium MBOs and 3,000 departmental stores. The company’s swtich from a wholesale
distribution network to retail has helped spur growth as share of EBOs and LFS has catapulted to 49% and
14% in FY16 from 40% and 8% in FY10, at the expense of MBOs.
Madura has penetrated each distribution channel Madura’s revenue channel mix has shifted from wholesale to retail
Source: Company, Edel Invest Research.
Madura has been one of the most successful branded apparel companies anchored by its unwavering focus
on retail and department stores spearheaded by a “reach and penetration” strategy. Its retail network is far
superior to any of its competitors.
Madura has the largest distribution network
Source: Company, Edel Invest Research
1945
440 698
3896
2904
1850
MBOs SIS EBOs
FY 10 (number of stores) FY 15 (number of stores)
EBOs, 49%
Trade (MBOs), 20%
LFS, 14%
Others, 17%
1875
950
230 315
125
Madura Arvind Raymond KKCL Indian Terrain
Number of EBOs
Aditya Birla Fashion & Retail Ltd
11 Edel Invest Research
Although bulk of the current EBOs are company owned (entailed heavy investment for brand building)...
Type of EBO % of stores Location Capex Inventory Risk Lease and operations
COCO 30% Bigger sized stores in metros and
prime locations Madura Madura Madura
COFO 40% Tier 1 cities which have potential
but are under penetrated Madura Madura Franchisee Owner
FOFO 30% Smaller towns and cities as lower
expertise in the local market Franchisee Owner Madura Franchisee Owner
Source: Company, Edel Invest Research
200 new EBOs to be opened yearly will be through the asset light franchisee route Madura has a strong presence in South and West regions and Tier 1 and 2 cities of India. However they plan to expand in the North and East and Tier 3 and Tier 4 cities in a phased expansion of 200 new EBOS yearly with 85% of them being through the franchisee route. Also as 35% of the current EBOs are Peter England, it gives Madura a chance to scale up the EBO presence of the other brands.
Finger on fashion pulse: Planet Fashion helps gauge brand demand in underpenetrated areas Planet Fashion was launched in 2000 as a hybrid EBO-MBO experience housing all 4 brands under one roof. Currently, Planet Fashion has a chain of 200 stores across 164 towns in India garnering INR 330 crore revenues as of FY16. Madura is planning to increase the store count to 500 by 2018 and double its revenue by penetrating further into Tier 3 and 4 towns. The company has launched Project Bharat wherein it will penetrate 500 new towns through the Planet Fashion model by displaying all brands under one roof. EBOs in these towns will be based on the response to individual brands.
Online platform: TrendIN set for metamorphosis Currently, ABFRL sells online via its portal TrendIN and has direct supply agreements with other e-commerce
portals with a strict policy of limiting discounts to protect brands. Going forward, along with these e-
commerce platforms, each brand will have its own website with TrendIN as a back-end portal to aid the
omni-channel experience. Currently, the company’s total online revenue is INR 200 crore, which is estimated
to jump to INR 1500 core by 2020 due to omni-channel and a 40% growth in e-commerce spending.
Aditya Birla Fashion & Retail Ltd
12 Edel Invest Research
The omni-channel experience
The omni channel provides the consumer with choice and convenience which most apparel companies
believe are key to enrich consumer experience to create brand loyalty. It enables the consumer to decide
when, where and how to shop. The consumer can order anything from anywhere, at any time using any
device. The customer can also see where the product is available, different sizes, colors & designs of
products and how much time will it take to be delieved. Omni channel retail integrates multiple distribution
channels to provide a seamless experience to customers through all possible channels, providing variety and
value as they can:
Buy online and pick up from a store or warehouse.
Take trial in the store and get it delivered at home if the color or size is out of stock.
Place an order on a mobile device and be assured that the item is not only available, but also be able to
choose how much to pay for shipping and know exactly when it will be delivered.
Order online, have it delivered at home and return to the store or warehouse if it does not fit.
Source: Company, Edel Invest Research
Madura is planning annual ~INR 40 crore IT spends, which includes INR 25 crore capex and INR 15 crore
opex to build an omni-channel distribution platform. On the anvil is plan to launch the omni-channel
expereince in 100 stores soon with a target of 500 stores by FY17 end. Due to the size and scale of its 4
brands, omni-channel will benefit Madura the most due to benefits listed below.
Benefits of omni channel
Source: Company, Edel Invest Research
Ensure better conversions and asset utilizations by curbing
sales lost due to limited SKUs in a store
Big Data Analytics will give good insights into
consumers’ buying behaviour
Eases additional distribution costs and increases penetration.
Also creates synergies in sourcing inventory and
retail space
Helps counter threat of e-commerce platforms
by providing more choice and a more fulfilling
experience
Aditya Birla Fashion & Retail Ltd
13 Edel Invest Research
Strong brands portfolio, switch to retail: Key growth catalysts
Initially, Madura’s brands struggled to grow due to lower per capita spend on branded apparel & brand
conciousness among consumers and poor visibility of brands . However, with the mushrooming of malls and
organised retail, the company switched from sales through trade channels (MBOs) to sales via retail (EBOs
and LFS) in FY10. Post the switch, its brands began clocking a commendable ~20-25% CAGR on a much
higher base (refer chart below).
Switch from wholesale to retail resulted in huge growth for Madura brands
Source: Company, Edel Invest Research.
FY16 margin miss to reverse: Strong brands, network and product extensions to yield 15% CAGR
FY16 revenue and margin were depressed due to many one offs—higher employee bonus expenses, merger
consolidation costs etc. Moreover, weak demand and competition from e-commerce led to heightened A&P
spends, which also weighed on margin. However, we expect demand to pick up going forward, especially as
e-commerce competition is waning (100% FDI in e-tail came with riders favoring brick-and-mortar players).
This growth will be complemented by a gradual increase in margin.
FY16 revenues and margin miss to reverse going ahead
Source: Company, Edel Invest Research.
Best-in-class return ratios due to lowest working capital cycle and high asset turnover
Madura’s working capital cycle of ~30 days is the shortest in the industry. This is largely driven by extremely
favourable terms from vendors (due to long standing relationships and strong brands) and short receivables
days (only Madura sales to LFS are receivables). As 50% of the company’s manufacturing is outsourced and
distribution expansion is via the franchisee model, capex is low, leading to high asset turnover ratios and
best-in-class RoCE of 50% plus.
392 473 621 830 1026 1116 1251 1811
2239 2523 3226
3735 4000
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
(IN
R C
r)
Madura Revenues (INR Cr)
28% CAGR
8% 9% 10%
12% 12%
10%
10% 11% 11%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
0
1000
2000
3000
4000
5000
6000
7000
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(IN
R C
r)
Revenues (INR Cr) EBITDA Margin (%)
Aditya Birla Fashion & Retail Ltd
14 Edel Invest Research
Madura Stores
Aditya Birla Fashion & Retail Ltd
15 Edel Invest Research
Pantaloon Fashion and Retail (Pantaloon): Fast fashion retailer Pantaloon was launched in 1997 by the Future Group and was acquired by Aditya Birla Nuvo in 2013. It has
seen several transitions, but its current format of a fast fashion retailer enables presence across the fastest
growing segment in branded apparel which will hold it in good stead.
Pantaloons to target 2 fastest growing segments—women’s wear (highly fragmented) and fast fashion
Source: Company, Edel Invest Research
Pantaloons acquisition to plug gaps in Madura’s portfolio and distribution network Pantaloon has positioned itself as an affordable fashion brand with a higher focus on women’s wear, women’s accessories/non-apparel and kids wear (65% of current revenues are non menswear - opposite of Madura). It is present on a pan-India with a big presence in tier 3 and tier 4 cities (uncluttered areas with minimal brand presence). The biggest contribution of revenues comes from the East and North regions which also account for the highest profitability due to low rental expenses (Madura has higher penetration in the south and West regions).
Revenue mix titled towards women’s and kids wear Presence in East and uncluttered areas accounts for higher profitability
Source: Company, Edel Invest Research
Launched as a discount
apparel store in 1997
Later positioned as a family store in
mid 2000s
Currently a fast fashion big box
retailer with higher focus on women's wear
35%
23%
19%
9%
14%
Men
Wo
men
W
este
rn
Wo
men
Et
hn
ic
Kid
s
No
n-
app
arel
60% is womens wear and kids wear North, 26%
South, 14%
East, 29%
West, 31%
Aditya Birla Fashion & Retail Ltd
16 Edel Invest Research
ABFRL’s 4 step roadmap to revive Pantaloon Post-acquisition by the Aditya Birla Group, significant investments were made focused on store upgradation, expansion, deeper pan-India penetration, portfolio enrichment, brand building and organization processes to lay the foundation for Pantaloon’s future growth.
Strategy set in FY14 is going according to plan
Source: Company, Edel Invest Research.
The journey up to FY16 has been relatively successful, setting the base to build scale in FY17. It posted gross margin jump of 3% plus and EBITDA margin of 6% plus in a few quarters, led by the following measures:
Issues Implementation
Stores upkeep, renovation & expansion Refurbishing the 30 most profitable Pantaloon stores, renewing rental leases at lower rates, adding 30 new stores yearly to its existing 104 stores annually with pilot franchisee model successful
Designs & Brands Hired 40 new designers and set up a new in-house Design Studio to deliver 5,000+ designs every season, add own new brands, increase number of seasons from 2 currently, optimized mix of exclusive brands and margin renegotiation for external brands
Vendor network & supply chain transformation
Replaced one-third of existing 250 vendors to improve quality & costs, will stick to outsourcing to be asset light, 4 regional distribution centers created and to be operational soon
Investment in IT and people Recruited ~280 at the Head Office level, rationalized business processes and KRAs for important positions. Built IT & CRM systems which will be rolled out in all stores and warehouses
Source: Company, Edel Invest Research.
FY14
Manage the transition
FY15
Lay the foundation
FY16
Commence growth journey
FY17
Build scale
Aditya Birla Fashion & Retail Ltd
17 Edel Invest Research
Fast fashion, women's wear focus, presence in uncluttered areas to boost ABFRL topline; higher throughput to aid margins
Source: Company, Edel Invest Research.
Higher contribution of own brands (now 63% of revenues) to also aid margins
Initially Pantaloons generated 52% revenue from own brands. However after the rationalization of brands,
they generate 63% of their revenues from their own brands which should aid margins due to higher
realizations, lower royalty payments and higher control on the brands.
Categories Own & In-Licensed brands New Own & In-Licensed
brands External brands
Men
Bare Denim, JM Sport, RIG, Byford, Alto Moda, SF Jeans John Miller, Celio, Spykar,
Ajile, Lombard, F-Factor Urban Eagle, Indus Route Lee Cooper, Levi's
Women – Western
Honey, Bare Denim, RIG Alto Moda, Candie's 109°F, AND
Anabelle, Ajile Izabel, SF Jealous 21, Kraus Jeans
Women – Ethnic
Rangmanch, Trishaa, Akkriti
Alto Moda, Jamini Biba, W, Global Desi
Kids Chalk, Bare Denim, Akkriti Chirpie Pie, Poppers Barbie, Gini & Jony
Source: Company, Edel Invest Research.
New Pantaloons strategy could be a
long term game changer for ABFRL
Number of seasons increasing from 2 to 6 along with attractive
pricing (fast fashion concept), will result in higher growth
Higher sales throughput (more sales from same stores) will aid margins due to high fixed cost
nature of the business
Pantaloons heavy presence in the traditionally more profitable womens wear segment will aid
margins
Presence in the East and Tier 3 and Tier 4 towns with minimal
branded apparel presence could spur growth
Aditya Birla Fashion & Retail Ltd
18 Edel Invest Research
Continuous aggressive expansion alongwith renewed strategy to yield a 20% plus CAGR growth The last 3 years have seen Pantaloons store count doubling from 65 to 135 stores and nearly all of the existing stores are new or renovated stores. Pantaloons plans to add 30-35 stores every year in new areas (South India and new towns/cities).
Pantaloons has doubled store its count in the last 3 years Pantaloons has a pan India presence
Source: Company, Edel Invest Research.
Higher throughput and scale will result in a margin uptick Pantaloons margins have been suppressed over the last 3 years as half of the stores are new and typically it
takes 2-3 years for stores to mature. New store addition in terms of percentage growth is expected to be
slower and the higher ratio of mature stores will result in a margin improvement. Increasing throughput
(higher same store sales growth) will also aid in margins due to high fixed cost nature of the business.
Margins to gradually inch up towards 8-9%
Source: Company, Edel Invest Research.
Franchisee store model to aid return ratios After the success of the Pantaloons pilot franchisee store, they have opened 4 more stores through this
route. In this model, the company retains the long-term lease while the franchise infuses the capital. Stores
of 10,000-15,000 sq.ft. without any capex infusion should significantly boost return ratios.
65 87
113 135
165
195
0
50
100
150
200
250
FY13 FY14 FY15 FY16 FY17E FY18E
Pantaloons Stores
1285
1661 1851
2060
2431
2917
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
0
500
1000
1500
2000
2500
3000
3500
FY13 FY14 FY15 FY16 FY17E FY18E
(IN
R C
r)
Revenue (INR Cr) EBITDA Margins (%)
Aditya Birla Fashion & Retail Ltd
19 Edel Invest Research
Indian branded apparel market estimated to clock 15-20% CAGR and anticipated to outpace domestic readymade garment market 1.5x
India’s GDP and GDP per capita to increase India’s per capita spending on apparel (USD) currently ¼ of China
Source: Company, Edel Invest Research
India’s average population age amongst the least India to soon have one of the largest working populations
Source: Company, Edel Invest Research
India’s discretionary spending has been rising India’s personal disposable income growing steadily
Source: Company, Edel Invest Research
1,522
2,672
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
0
500
1,000
1,500
2,000
2,500
3,000
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
India GDP Per Capita (USD) (LHS)
Real GDP Growth (%) (RHS)
680 647
52 19
690 701
119
30
US EU China India
2005 2010
50% 44%
34% 32% 30%
23%
8% 9%
18% 15%
21%
31%
Ind
ia
Ind
on
esia
Euro
pe
Ch
ina
USA
Jap
an
Aged 24 and under Aged 60+
35%
45%
55%
65%
75%
1950 1960 1970 1980 1990 2010 2020 2030 2040 2050
Non - Working Population (India)
Non - Working Population (China)
6%
12% 12%
4%
12% 10% 10%
14%
16%
2000-05 2005-10 2010-15
Total consumer spend Essential Consumer Spend
Discretionary Consumer Spend
424
787
1,939
3,045
2005 2010 2015 2020E
India Disposable Personal Income (USD bn)
Aditya Birla Fashion & Retail Ltd
20 Edel Invest Research
Rise in middle income and affluent class Rising urban population
Source: Company, Edel Invest Research
Lowest penetration of organized retail India spends only 4% of total consumption on clothing
Source: Company, Edel Invest Research
Indian e-commerce industry to clock 40% CAGR Apparel accounts for 31% of e-commerce spending
Source: Company, Edel Invest Research
86% 75%
46%
20%
13% 18%
42%
59%
1% 7% 12%
20%
1995 2005 2015 2025
Low Income Middle Income Affluent Class
27.5%
32.0%
35.0%
41.2%
2000 2010 2020E 2030E
Share of Urban Population
8%
20%
30%
40%
55%
81%
85%
India
China
Indonesia
Thailand
Malaysia
Taiwan
USA
40%
4% 10%
4%
6%
17%
2%
3% 14%
Food, Beverages, Tobacco
Clothing and Footwear
Gross Rent, Fuel & Power
Furniture & Appliances
Medical and Healthcare
Transport & Communications
Recreations
Education
Miscellaneous Goods and Services
4.4 5.9 7.9 8.9 13.6
16
22.4
31.4
43.9
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Online retailing market India (USD bn)
47%
31%
7%
2%
2%
11% Electronics
Apparel
Books
Baby products
Personal Care
Others
Aditya Birla Fashion & Retail Ltd
21 Edel Invest Research
Merger rationale for creation of ABFRL
AB Nuvo has decided to merge Madura with Pantaloons. Post the restructuring, Pantaloons will be renamed
Aditya Birla Fashion & Retail (ABFRL) and will be the biggest branded apparel company in India. The merger is
aimed at unlocking value for shareholders, as AB Nuvo is a holding company with interests in Telecom,
Financial Services and Textiles. The restructuring will also significantly simplify the structure by bringing the
entire fashion retail business under one entity. This will enhance clarity on capital allocation. Also, the
merger is likely to throw up some synergies on the procurement front and create economies of scale as it
can use the same supply chain channels, IT systems and vendor networks. The merger will also help Madura
shed its tag of being only a premium men’s wear brand, as Pantaloons has mostly mass and women-centric
brands.
Pre Transaction Post Transaction
Source: Company, Edel Invest Research.
ABG Public
ABNL
MGLRCL PFRL
58.3% 41.7%
100% 72.6% 27.4%
ABNL ABG Public
PFRL/ABFRL
9.06% 51.1% 39.84%
Transaction Steps Swap Ratio
Mirror Demerger of Madura Fashion division into PFRL
Mirror Demerger of Madura Lifestyle division into PFRL
The transaction is subject to corporate & regulatory approvals and is expected
to take further 3-4 months
26 equity shares of PFRL for every 5 equity shares of ABNL
7 equity shares of PFRL for every 500 equity shares of MGLRCL
1 equity share of PFRL for all o/s preference shares of MGLRCL
1
2
1
2
Aditya Birla Fashion & Retail Ltd
22 Edel Invest Research
Outlook and valuations
Factoring base case assumptions, one may argue that current valuations limit huge upside in the near term,
but they also limit any downside. Over the long term, in our view, given the sheer quality and size of
Madura's 4 brands, presence in fastest growing segments such as fast fashion through Pantaloons & Forever
21, and an unparalleled distribution network, ABFRL is best poised amongst branded apparel players to take
advantage of the changing macroeconomic scenario. Improving financial metrics of robust free cash flow
generation, 39% EBITDA CAGR over FY16-18E and 20% RoCE jump by FY19E from 4% currently are expected
to sustain for many years, rendering ABFRL a potential multi-bagger.
We value Madura at 3x sales at par with peers like Kewal Kiran Clothing Ltd. (KKCL), who have identical
growth and return ratios. We value Pantaloons at 13x EV/EBITDA, akin to other retail players such as
Shopper’s Stop and Trent, as we expect a similar margin and RoCE profile.
SOTP Valuation
Valuations – Madura Valuations - Pantaloons
Market Cap to Sales (FY18E)
Madura (FY18E Sales) INR 5,150 Cr
Market Cap to Sales 3.0x
Madura Market Cap INR 15,450 Cr
Peers Comparison
Page 5.0x
Indian Terrain 1.2x
KKCL 3.8x
Expected ABFRL (Madura + Pantaloons) Market Cap - FY18E INR 16,800 Cr
Current ABFRL Market Cap INR 12,700 Cr
Potential Upside 32%
DCF analysis
In our DCF calculation, we have forecasted ABFRL’s business until FY26. We have assumed 24% EBIT CAGR, a
terminal growth rate of 5.5% and calculated a weighted average cost of capital of 10.5%. Based on our DCF
calculations and various assumptions, we have arrived at net present value (NPV) of Rs 212 per share.
Comparative Valuations – FY18E
Company Name CMP EPS P/E (x) ROCE (%) Market Cap (INR Cr)
Arvind 313 25.7 12 18% 8,000
KKCL 1,850 73.7 25 26% 2,250
Indian Terrain 155 10.5 14 21% 550
ABFRL 165 4.1 39 18% 12,700
Source: Company, Edel Invest Research.
EV/EBITDA (FY18E)
Pantaloons (FY18E EBITDA) INR 204 Cr
EV/EBITDA 13.0x
Pantaloons EV INR 2,650 Cr
Less: Pantaloons Debt INR 1,300 Cr
Pantaloons Market Cap INR 1,350 Cr
Peers Comparison
Shopper Stop 13.0x
Trent 11.0x
Aditya Birla Fashion & Retail Ltd
23 Edel Invest Research
Poor consumer demand and competition from e-commerce resulted in a subdued 8% growth in FY16.
However, we believe growth will pick up from FY17 as the e-commerce threat is waning and demand is
picking up, as reflected in our End of Sale Season (EOSS) channel checks.
Revenue growth expected to improve from 8% in FY16 to 15-18% over the next few years
FY16 margin was depressed due to many one-offs—higher employee bonus expenses, merger consolidation
costs, weak demand, etc. The resultant 7% margin was a one off and we estimate a sharp jump in margin to
8.8% in FY17, 9.5% in FY18 and 10% from FY19 due to strong growth and high operating leverage nature of
the business.
One-offs and poor growth impacted EBITDA margins in FY16; Operating leverage to kick in from FY17
Suppressed margins and renovation of Pantaloons, expensed as depreciation, led to a loss in FY16. However,
EBITDA margin improvement and reduction in depreciation & finance costs should result in robust
bottomline growth in the coming few years.
Operating and financial leverage to boost bottomline
Source: Company, Edel Invest Research.
6060
6911
8069
9483
5%
9%
13%
17%
21%
5000
6000
7000
8000
9000
10000
FY16 FY17E FY18E FY19E
(IN
R C
r)
Revenue (INR Cr) Revenue growth(%)
7%
9%
10% 10%
5%
6%
7%
8%
9%
10%
11%
200
300
400
500
600
700
800
900
1000
FY16 FY17E FY18E FY19E
(IN
R C
r)
EBITDA EBITDA Margin(%)
-2%
3%
4% 5%
-4%
-2%
0%
2%
4%
6%
-200
0
200
400
600
FY16 FY17E FY18E FY19E
(IN
R C
r)
PAT (INR Cr) PAT Margin (%)
Financial Analysis – ABFRL
Aditya Birla Fashion & Retail Ltd
24 Edel Invest Research
ABFRL’s working capital cycle of ~20 days is the shortest in the industry. This is largely driven by extrmely
favorable terms from vendors (due to long standing relationships and strong brands) and short receivables
days (only Madura’s sales to LFS are receivables). As 50% of Madura’s and 100% of Pantaloons’
manufacturing is outsourced, asset turnover ratios are also high. Also, goodwill currently comprises 60% of
balance sheet. RoCE, post excluding goodwill, is close to 40%.
Best-in-class working capital cycle and high asset turnover—Goodwill denting return ratios
As 60% of the manufacturing is outsourced and with further expansion of distribution network through the
franchisee route (franchisee model turning out to be successful for Pantaloons too), ABFRL is bound to
witness high free cash flows every year.
With completion of bulk of expansion phase, high FCF generation is on the cards
With strong FCF generation, we expect ABFRL to start delveraging from FY18E, leading to lower debt to
equity ratio.
Debt to Equity ratio to reduce gradually
Source: Company, Edel Invest Research
3%
13% 18%
21%
-16%
17%
25% 28%
FY16 FY17E FY18E FY19E
ROCE (%) ROE (%)
180
510
620
748
-120
160
270
398
-200
0
200
400
600
800
FY16 FY17E FY18E FY19E
(IN
R C
r)
Operating CF (INR Cr) Free CF (INR Cr)
2.0 1.7
1.2
0.8
0.0
0.5
1.0
1.5
2.0
2.5
FY16 FY17E FY18E FY19E
(x)
Aditya Birla Fashion & Retail Ltd
25 Edel Invest Research
ABFRL Key Management:
Name Designation
Mr. Pranab Barua
Business Director, Apparel & Retail
40 years’ experience in the consumer and retail industry. He was the ex-CEO of
Trinethra Super Retail, acquired by the Aditya Birla Group in 2007. Mr. Barua has
previously worked in senior positions with Brooke Bond India, as Foods Director on
the Hindustan Unilever Board, as Chairman & Managing Director of Reckitt Benckiser
and as Regional Director, Reckitt Benckiser for South Asia. He holds a graduate degree
in B.A. (English Honours) from St. Stephens College, New Delhi.
Mr. Ashish Dikshit
Business Head, Madura
Joined Madura from Asian Paints in 1998 and has since headed its supply chain, marketing and sourcing functions. Mr. Dikshit has also worked as Principal Executive Assistant to the Chairman of ABG for more than 3 years. He is an Electronics & Electrical Engineer from IIT-Madras and holds a Post graduate Diploma in Management from IIM-Bangalore.
Mr. Shital Mehta
CEO, Pantaloons
Mr. Mehta has been with Aditya Birla Group for about 15 years. He was the ex-CEO of International Brands & Retail, Madura, after working as the brand manager for Godrej Foods (1996-2000). He is an MBA in marketing from SP Jain Institute of Management & Research and has attended advanced management programs at Wharton Business School.
Mr. S Visvanathan
CFO, Apparel & Retail
Mr. Visvanathan joined the Aditya Birla Group in 2007 in the Textile and Apparel business and 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 white goods, capital equipment, electrical equipment and auto components, having previously worked with the Tata Group in various capacities in auto components business, Voltas and Allwyn. He is a commerce graduate from Chennai University and a qualified Chartered Accountant and Cost Accountant.
Aditya Birla Fashion & Retail Ltd
26 Edel Invest Research
Key Risks
• Operational uncertainty over PFRL
The ABFRL management closed loss making Pantaloon stores and renovated exisiting ones. It is also in
the process of revamping vendor network, portfolio overhaul and launch of new stores. While negative
margins have improved to ~6%, it will be important to see if the margin can be scaled to 8%.
• Increasing competitive intensity from other western brands
Many western brands as well as several domestic apparel players are currently present in India and new
brands such as GAP and H&M have also recently entered the country. This will keep the competitive intensity high.
Semi-urban and urban slowdown
As target consumers are from Tier 1, 2 and 3 cities, any material economic slowdown in the these areas could result in lower discretionary spending, which could impact ABRFL’s sales growth.
E-commerce threat
As e-commerce provides variety and convenience at cheaper prices, consumers have partially shied away from premium apparel. However, ABFRL plans to counter this by providing variety and convenience through its omni-channel network and provide consumers with an alternative source of cheaper apparel through Pantaloon.
GST impact A tax rate of 18% on branded apparel could lead to a higher tax outgo of 5-7% for most branded apparel players as their current blended indirect tax rate is between 10% and 12%. However, this will be passed on to customers, which may lead to a sentimentally minor negative impact on branded apparel players in the short term.
Aditya Birla Fashion & Retail Ltd
27 Edel Invest Research
Indian macro enviornment provides massive growth opportunity Indian textile industry: An overview The textile industry is one of the key sectors of the Indian economy as it accounts for 14% of total industrial
production, 13% of export earnings and 4% of GDP. It provides employment to over 4.5 crore directly and 6
crore indirectly, rendering it the second largest job creator after agriculture. India is the second largest
textile producer in the world, the largest producer of jute, second largest producer of raw cotton, cotton
yarn, cellulosic fibre/yarn & silk, and the fourth largest producer of synthetic fibre. Also, its handloom
capacity is the highest in the world (63% of global pie). It is present across the entire textile value chain
(spinning, weaving, readymade garments and home textiles). The total market size of the Indian textile
industry currently stands at USD 108 bn.
Indian textile industry break-up
Source: CRISIL, Edel Invest Research
In spite of the size and global positioning, enterprises making up the Indian textile industry are minuscule
and fragmented. While the larger, de-centralised and unorganised sector is present in handloom,
handicrafts, sericulture, power looms, the organised sector is into capital-intensive spinning, apparel and
garmenting segments. But, the outlook for the textile sector is promising. Domestic consumption is expected
to be driven by Indian readymade garments (RMG) and branded garments as they are gaining prominence in
tier 2 and 3 cities due to rising incomes and growing aspirations for good quality and trendy fashion wear.
Going ahead, improvement in Europe’s economy, Latin America’s progress and easing of geopolitical
tensions in the Middle East are set to boost India’s exports.
Domestic textile consumption and textile exports are expected to clock ~10% CAGR each over the next 5
years. India’s share in the global textile market is set to rise from 5% in 2015 to 8.0% in 2020. China is
expected to vacate ~USD 100 bn of textile space over the next 5-6 years due to rising labour costs,
appreciating currency, high energy costs and renewed focus on the domestic market. Countries like India,
Vietnam, Bangladesh and Sri Lanka are likely to be key beneficiaries. While the total Indian textile exports
are estimated to touch USD 60 bn over the next 5 years, the textile market will grow to USD 221 bn by 2021
from USD 108 bn. This growth will be driven by readymade garments, within which branded apparel
segment is expected to grow at 10-12% annually and touch ~USD 65 bn by FY18E.
Indian Textile IndustryUSD 108 bn
Domestic USD 81 bn
Yarn/MMFUSD 20 bn
FabricUSD 34 bn
RMG/ ApparelUSD 27 bn
ExportsUSD 27 bn
Yarn/ MMFUSD 6 bn
FabricUSD 3 bn
RMG/ ApparelUSD 18 bn
Annexure
Aditya Birla Fashion & Retail Ltd
28 Edel Invest Research
Readymade Garments (RMG)
The total size of the Indian RMG segment currently is USD 45 bn; of this, while domestic market is estimated
at USD 27 bn, exports stand at USD 18 bn. In CY14, the RMG segment clocked robust growth on account of
orders shifting to India from Bangladesh due to labour safety concerns. Also, demand from major importing
countries saw an uptick, boosting exports by 19% in CY14.
RMG segment break-up
Source: CRISIL, Edel Invest Research.
In CY15, domestic volumes are expected to rise 6.5% versus 6.0% growth in CY14, but realisations are
expected to remain flat as apparel manufactures will pass on the decline in raw material costs to consumers.
This will lead to slower growth of 5.5% versus 7.0% in CY14. Exports are also expected to slacken in CY15
with 6-8% volume growth versus 14% in CY14 due to sluggish demand from Europe and the US, strong INR
and shifting back of orders to Bangladesh & Vietnam.
RMG: Long-term outlook
The long-term trend for the RMG segment looks promising. The domestic RMG segment is expected to post
robust growth over the next 5 years, primarily driven by volume growth and an improvement in realizations.
Favourable demographics, rising incomes and greater penetration in tier 2 & 3 cities will drive volumes.
Lower raw material costs (cotton and manmade fibres) and improved demand will boost margins. Exports
are expected to remain subdued at 6% CAGR due to the same reasons as CY15. However, exports can
improve going forward amidst a weaker INR, increase in imports from the US, shifting of orders from
Bangladesh and growth in non-traditional markets such as Australia, Japan and UAE (Others) that will
account for more than half of total exports, up from 21% in CY09.
RMGUSD 45 bn
DomesticUSD 27 bn
MenUSD 13 bn
WomenUSD 11 bn
KidsUSD 2 bn
ExportsUSD 18 bn
USUSD 4 bn
EUUSD 6 bn
OthersUSD 8 bn
Aditya Birla Fashion & Retail Ltd
29 Edel Invest Research
Branded apparel/RMG: Most profitable in textile value chain
Although the RMG segment’s growth is expected to moderate compared to the high growth clocked in 2014,
surge in the branded apparel market is expected to prevail. Sales of branded apparels have increased at 15%
CAGR over 2009-14. The branded apparel segment is expected to post 10-12% CAGR over 2014-19 in spite of
a slower growth anticipated in the RMG segment. This spurt is expected to be driven by volumes as well as
better realizations. Therefore, the share of branded garments is expected to rise to 46-48% in 2019
compared to ~35% in 2014.
RMG is the most lucrative model for any textile company due to low bargaining power of other stakeholders in the value chain, high entry barriers and minimal threat of substitutes due to strong brand recall. The threat of new entrants is real, as many international brands are entering India to cash in on the vast untapped potential. RMG business with strong brands, high growth and asset light models command the best margins and have the highest RoCEs in the textile value chain. Hence, branded apparels is the most profitable segment.
Branded Apparel/RMG – Most profitable
Yarn Fabric RMG Home Textiles
Bargaining power of buyers High Medium Low High
Rivalry amongst existing players High High Low High
Threat of new entrants High Medium Medium High
Bargaining power of sellers Low Medium Low Medium
Threat of substitutes High Medium Low High
Entry barriers Low Medium High Low
Financial Ratios Yarn Fabric RMG Home Textiles
Asset Turnover 0.8 - 1.8 x 1.0 - 2.4 x 1.2 - 2.8 x 1.2 - 2.2 x
EBIT Margins 9 - 20% 8 - 23% 8 - 25% 8 - 20%
ROCEs 7 - 22% 11 - 32% 11 - 60% 10 - 45%
Source: Company, Edel Invest Research.
Growth in the coming 5 years is more likely to be driven by urban consumption of branded apparel, spurred
by economic resurgence, growing urbanisation, higher discretionary spending, digital push and rise in
penetration of organised retail. Organised retail is estimated to post 18% CAGR, as brands expand reach to
tier 2 and 3 cities through exclusive and multi-brand retail outlets. Branded players in urban areas earn
higher per unit realisations, as they have the power to command double the rate of semi-urban areas given
their superior quality, latest trends and established brand equity. Therefore, branded players in the
organised retail segment have the highest margins and highest profitability.
Aditya Birla Fashion & Retail Ltd
30 Edel Invest Research
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
Financial Statements
Year to March (INR Cr) FY14 FY15 FY16 FY17E FY18E
Net revenue 1,661 1,851 6,060 6,911 8,069
Materia ls costs 953 1,000 2,755 3,110 3,591
Gross profi t 709 850 3,305 3,801 4,478
Employee costs 150 184 597 622 726
Other costs 403 463 1,663 1,866 2,179
EBITDA 46 87 397 608 767
Depreciation & Amortization 109 183 338 206 200
EBIT -63 -96 59 402 566
Other income 5 3 12 12 12
EBIT incl . other income -57 -93 71 414 578
Interest expenses 129 134 175 190 180
Profi t before tax -187 -228 -104 224 398
Provis ion for tax 0 0 0 45 80
Adjusted Profi t -187 -228 -104 179 319
Bas ic shares outstanding (Cr) 46.4 46.4 76.9 77.2 77.2
EPS (INR) -4.1 -4.9 -1.4 2.3 4.1
Dividend per share (INR) 0.0 0.0 0.0 0.0 0.0
Dividend payout (%) 0% 0% 0% 0% 0%
Common size metrics ‐ as % of net revenues
Year to March FY14 FY15 FY16 FY17E FY18E
COGS 57.3% 54.1% 45.5% 45.0% 44.5%
Employee Exp 9.0% 9.9% 9.9% 9.0% 9.0%
Other Exp 24.2% 25.0% 27.4% 27.0% 27.0%
Depreciation 6.6% 9.9% 5.6% 3.0% 2.5%
EBITDA margins 2.8% 4.7% 6.6% 8.8% 9.5%
EBIT margins -3.8% -5.2% 1.0% 5.8% 7.0%
Adj profi t margins -11.4% -12.3% -1.7% 2.6% 4.0%
Net profi t margins -11.2% -12.3% -1.7% 2.6% 4.0%
Growth ratios (%)
Year to March FY14 FY15 FY16 FY17E FY18E
Revenues 29.3% 11.4% NA 14.0% 16.8%
EBITDA NA NA NA 53.2% 26.0%
PBT NA NA NA NA 77.8%
Adj profi t NA NA NA NA 77.8%
Net profi t NA NA NA NA 77.8%
Financial Statements
Aditya Birla Fashion & Retail Ltd
31 Edel Invest Research
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
Balance sheet INR Cr
As on 31st March FY14 FY15 FY16 FY17E FY18E
Equity capita l 93 93 769 772 772
Reserves & surplus 486 252 174 350 669
Borrowings 1,051 1,311 1,858 1,900 1,800
Other long-term l iabi l i ties 48 61 100 100 100
Sources of funds 1,678 1,717 2,902 3,122 3,341
Gross Block 794 909 1,698 2,048 2,398
Accumulated Depreciation (350) (516) (1,126) (1,332) (1,532)
CWIP 25 4 - - -
Net Fixed Assets 469 396 572 716 866
Net intangible assets 1,189 1,187 1,775 1,775 1,775
Investments 6 - 272 272 272
Inventories 358 427 1,388 1,555 1,795
Sundry debtors 17 3 391 417 486
Cash and equiva lents 11 7 20 44 46
Loans and advances 26 36 200 200 200
Tota l current assets 412 474 1,999 2,216 2,528
Sundry creditors and others 465 406 1,437 1,576 1,820
Provis ions 10 16 280 280 280
Tota l current l iabi l i ties & provis ions 475 422 1,717 1,856 2,100
Net current assets (63) 52 283 359 428
Deferred tax assets - - - - -
Other long-term assets 77 82 - - -
Uses of funds 1,678 1,717 2,902 3,122 3,341
Book va lue per share (INR) 12.5 7.4 12.3 14.5 18.7
Free cash flow
Year to March FY14 FY15 FY16 FY17E FY18E
Net profi t -186.8 -227.6 -103.9 179.3 318.8
Add : Depreciation 109.0 183.5 338.0 206.0 200.1
Others 107.2 117.8 163.0 178.0 168.0
Gross cash flow 29.4 73.7 397.1 563.3 686.9
Changes in WC 40.8 -109.6 -217.3 -52.9 -66.5
Operating cash flow 70.1 -36.0 179.8 510.4 620.3
Capex -117.5 -116.3 -300.0 -350.0 -350.0
Free cash flow -47.3 -152.3 -120.3 160.4 270.3
Cash flow metrics
Year to March FY14 FY15 FY16 FY17E FY18E
Cash flow from operations 70.1 -36.0 179.8 510.4 620.3
Cash Flow from investing activi ties 681.3 -108.8 -185.4 -338.0 -338.0
Cash Flow from financing activi ties -765.9 141.1 299.4 -148.7 -280.0
Capex -117.5 -116.3 -785.4 -350.0 -350.0
Dividends - - - - -
Aditya Birla Fashion & Retail Ltd
32 Edel Invest Research
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
Profitability & efficiency ratios
Year to March FY14 FY15 FY16 FY17E FY18E
ROAE (%) NA NA NA 17% 25%
ROACE (%) NA NA 3% 13% 18%
ROIC (%) NA NA 3% 12% 16%
Inventory day 79 84 84 82 81
Debtors days 4 1 24 22 22
Payable days 102 80 87 83 82
Cash convers ion cycle (days) -16 9 16 17 17
Current ratio 0.8 1.1 1.2 1.2 1.2
Debt/Equity 1.8 3.8 2.0 1.7 1.2
Core ROACE (%) NA NA 7% 33% 40%
Operating ratios
Year to March FY14 FY15 FY16 FY17E FY18E
Total asset turnover 0.8 1.1 2.6 2.3 2.5
Fixed asset turnover 2.2 2.2 4.6 3.7 3.6
Equity turnover 6.6 4.0 9.4 6.7 6.3
Du pont analysis
Year to March FY14 FY15 FY16 FY17E FY18E
NP margin (%) -11.4% -12.3% -1.7% 2.6% 4.0%
Total assets turnover 0.8 1.1 2.6 2.3 2.5
Leverage multipl ier 6.7 3.7 3.6 2.9 2.5
ROAE (%) NA NA NA 17.4% 24.9%
Valuation parameters
Year to March FY14 FY15 FY16 FY17E FY18E
Di luted EPS (INR) -4.1 -4.9 -1.4 2.3 4.1
Y‐o‐Y growth (%) NA NA NA NA 77.8
Di luted PE (x) NA NA NA 71.0 40.0
Price/BV (x) 13.2 22.2 13.5 11.4 8.8
EV/Sales (x) 5.4 4.8 2.4 2.1 1.8
EV/EBITDA (x) 193.2 102.5 36.6 23.9 19.0
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Aditya Birla Fashion & Retail Ltd
33 Edel Invest Research
Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200
Vinay Khattar
Head Research
Rating Expected to
Buy appreciate more than 25% over a 12-month period
Hold appreciate up to 10% over a 12-month period
Reduce depreciate more than 10% over a 12-month period
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