Aditya Birla Fashion & Retail (ABFRL) 156

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1 Result Update Rating matrix Rating : Buy Target : 19 Target Period : 12 months Potential Upside : 2% What s changed? Target Changed from 210 to 19 EPS FY18E Changed from 1.4 to 0.4 EPS FY19E Changed from 2.6 to 1. Rating Unchanged Quarterly performance Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%) Revenue 1, ,877.0 (3.9) 1, EBITDA (28.2) EBITDA (%) bps bps PAT (10.0) 64.8 (11.4) (20.0) (0.0) Key financials ( Crore) FY 16 FY 17 FY 18E FY 19E Revenues 6,03 6,633 7,426 8,392 EBITDA Net Profit* EPS* ( ) Valuation Summary FY 16 FY 17 FY 18E FY 19E EV/Sales Target EV/Sales EV / EBITDA P/BV RoNW (%) RoCE (%) Stock Data Particular Amount Market Capitalisation ( Crore) 12,020.3 Total Debt (Mar-17) ( Crore) 2,160.6 Cash and Investment (Mar-17) ( Crore) 44. EV ( Crore) 14, week H/L (adjusted) 189 / 127 Equity Capital ( Crore) 770. Face Value ( ) 10.0 Price performance 1M 3M 6M 12M Arvind Ltd Raymond Indian Terrain Aditya Bir. Fas Research Analysts Bharat Chhoda bharat.chhoda@icicisecurities.com Ankit Panchmatia ankit.panchmatia@icicisecurities.com Cheragh Sidhwa cheragh.sidhwa@icicisecurities.com November 1, 2017 Aditya Birla Fashion & Retail (ABFRL) 16 Subdued quarter; earnings to normalise in H2 Revenues for the quarter de-grew 4% YoY to 1804 crore (I-direct estimate: 2166 crore). Revenues of Lifestyle brands (Allen Solly, Van Heusen, Louis Philippe, Peter England) de-grew 7% YoY to 977 crore (vs. 104 crore in Q2FY17). Revenues from Fast Fashion, which includes Forever 21 & People, grew 10% YoY to 97 crore vs. 88 crore in Q2FY17. Other business that includes innerwear & other brands (Collective, Ted Baker) grew 2% YoY to 4 crore vs. 29 crore in Q2FY17. Pantaloons revenues for the quarter grew 2% to 740 crore vs. 727 crore in Q2FY17 EBITDA for the quarter was impacted by higher RM costs, which grew 140 bps YoY to 48% as a percentage to sales vs. 46.6% in Q2FY17. In addition to the same, operating expenses were up 7% on account of one-time impact of GST of 26 crore. Subsequently, reported EBITDA margins declined 362 bps YoY to.2% (I-direct estimate: 6.8%) with EBITDA de-growth of 44% YoY to 93 crore. However, adjusted EBITDA margins declined 218 bps YoY with an EBITDA de-growth of 28% YoY to 119 crore (I-direct estimate: crore) The impact of lower interest expenses (down 8.7% YoY) was completely offset by higher depreciation expenses (up 11.8% YoY). Subsequently, losses at the PAT level were at 10 crore vs. profit of 64.9 crore in Q2FY17. Adjusted PAT came in at a profit of 16 crore (I-direct estimate: 46. crore) Array of brands to provide cohesive growth to Madura Madura s revenues (dominated by men s portfolio) grew at a strong 24% CAGR in FY10-1. However, in FY16-FY17, the revenue (excluding Forever-21) CAGR recorded modest growth of 2%. Moreover, to preserve long-term inherent strength of brands Madura refrained from giving aggressive discounts, which further impacted growth rates. The management is aggressively addressing this deceleration. It is shunning low growth/yield stores and replacing the same with stores in new high growth territories. Subsequently, number of EBOs as on Q2FY18 was at 1893 stores vs store in FY17. In addition to the same, the management intends to shore up growth in Madura by creating brand extensions like innerwear, athleisure and introducing new international brands like Collective, Ted Baker (launch in Q3FY18) and American Eagle (launch in Q4FY18). Despite near term numbness, we believe these efforts would provide cohesive growth and position Madura on a strong footing in FY19 and FY20. Pantaloons, Fast Fashion to turn the corner; maintain BUY The number of store added in Q2FY18 under Pantaloons was 30 (~70 in H1FY18), taking the total count to 243. The expansion impacted the EBITDA margins for Pantaloons, which declined 242 bps YoY to 4.7%. In addition to the same, EBITDA for fast fashion in H1FY18 stood at a loss of 26 crore as compared to 1 crore in H1FY17. The management has affirmed its guidance of achieving breakeven in fast fashion by Q4FY18. We believe that positive operating leverage on account of store resizing, improved assortment could recoup recent losses and drastically improve the future profits. We expect profit to nearly double to 114 crore in FY19E as compared to 4 crore FY17. Given the recent subdued performance we taper our revenue estimates whilst maintaining EV/Sales multiple of 2x and BUY rating on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY18 Q2FY18E Q2FY17 YoY (%) Q1FY18 QoQ (%) Comments Revenue Revenues for Lifestyle brands (Allen Solly, Van Heusen, Louis Philippe and Peter England) de-grew by 7% YoY to 977 crore. Revenues from fast fashion which includes Forever 21 & People grew by 10% YoY to 97 crore. Other business which includes innerwear and other brands (Collective and Ted baker) grew by 2% YoY to 4 crore as compared to 29 crore in Q2FY17. Raw Material Expense , Employee Expenses Rent Other Expenses EBITDA EBITDA Margin (%) bps bps EBITDA for the quarter was impacted by higher RM costs Depreciation Interest Other Income PBT before Exceptional item Exceptional Item PBT Tax Outgo PAT Key Metrics Madura Fashion & Lifestyle Revenues ( Crore) Segment EBITDA Margin (%) bps 4. 4 bps Pantaloons Revenues ( Crore) Segment EBITDA Margin (%) bps bps Impacted by 30 stores opened during the quarter Change in estimates FY 18E FY 19E Comments ( Crore) Old New % Change Old New % Change Revenue 7, , , , Post subdued H1FY18, we have revised our estimates EBITDA EBITDA Margin (%) bps bps Margins would take some time to stabilize as new brands introduced PAT EPS ( ) Resultant change in EPS ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call and other takeaways For Madura, Pantaloons, like to like (LTL) was impacted by advancement of end of season sales (EOSS) to June (Q1FY18). Subsequently, LTL for Madura de-grew 16% and 1% in July and August, respectively. LTL for Pantaloons for the same period (July, August) recorded de-growth of 32%, 8%, respectively. However, on the back of festive buying, LTL for September revived to 21% and 23% for Madura and Pantaloons, respectively During the quarter, the company added a total space of 0.3 million square feet (msf). Majority of the stores were added in Pantaloons of which store count was at 217 (191 Pantaloons, 17 Pantaloons Women, nine Pantaloons Kids) vs. 209 stores (184 Pantaloons, 16 Pantaloons Women and nine Pantaloons Kids) in FY17. The total number of stores (EBOs) under brands was at 1893 exclusive brand outlets (EBOs) vs EBOs in FY17. However, value stores under brands was at 210 value stores vs. 174 value stores in FY17 ABFRL may acquire ABOF (Birla group fashion brand) label for 10-1 crore. The ABOF label would be made available at the company s existing coverage (departmental stores), shop-in-shops and thirdparty online platforms For the current quarter, no stores of Forever 21 were added. Total stores store count for Forever 12 was at 18 stores, spread across 2.38 lakh sq ft. The management is now focusing on profitable growth for Forever 21 by undertaking measures like renegotiation of lease rentals, improving the merchandise and store resizing. Losses in fast fashion are expected to be contained at existing levels of 26 crore Madura witnessed strong double digit SSSG of 11.1% in H1FY18. Wholesale channel business continues to remain under pressure. GST related issues impacted the channel business Loyalty base for Lifestyle brands reached a milestone 10 million members for the first time. Approximately 3% of Madura sales are generated from this loyalty base. Loyalty base for Pantaloons was at 87 lakh members, which contributes 91% of Pantaloons revenues The innerwear segment under Lifestyle brands is now positioned as No. 2 in men s premium innerwear segment. The point of sales (PoS) expanded to 3400 within 12 months of operations ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Aditya Birla Fashion & 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 ABFRL inherited brands like Louis Philippe, Van Heusen, Allen Solly and Peter England. Pantaloons was acquired by Aditya Birla Nuvo in 2013 for a consideration of 1600 crore (0% debenture + 0% debt). This enabled ABFRL s foray into fast fashion retail, inheriting 6 stores and 21 factory outlets across 3 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 and active wear) and non-apparel (footwear, handbags, cosmetics, perfumes, fashion jewellery and 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. 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. Phenomenal growth surpasses the branded apparel industry growth rate, which was at 14% CAGR in FY The management s rigorous efforts across branding & marketing (~% 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 crore for the second largest player (Arvind Ltd) in the industry. Moreover, Madura owns majority of its brands (Louis Philippe, Allen Solly, 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 salvaging of royalty expenses. For FY17, share of revenues from EBOs, MBOs, fast fashion & other brands were at 38%, 2% & 10%, respectively. However, with addition of revenues from newer brands, we expect Madura s revenue mix to change to 37%, 1% and 12% for EBOs, MBOs and fast fashion and newer brands, respectively. Subsequently, we believe Madura s revenues (including fast fashion and other brands) will grow at 9% CAGR to 4809 crore by FY19 vs crore in FY17. ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 1: Lifestyle brands: Revenue growth and LTL trend Revenue Growth (%) Q1FY Q2FY1 Q3FY1 Q4FY1 Q1FY16 Q2FY16 Q3FY Q4FY16-3 Q1FY17 Q2FY17-7 Q3FY17 Q4FY Q1FY18 Revenue growth (YoY %) LTL (%) Source: Company, ICICIdirect.com, Research LTL growth (%) Exhibit 2: Revenue mix crore FY16 FY17 FY18E FY19E MBO's EBO's Fast Fashion Other brands Source: Company, ICICIdirect.com, Research CAG 2% 23% 6% 8% 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 18% CAGR to crore by FY19E vs. 22 crore in FY17. Subsequently, the contribution of Pantaloons to total revenues is expected to increase 300 bps to 43% vs. current 38%. Exhibit 3: Pantaloons revenue trend cr FY16 FY17 FY18E FY19E Pantaloons revenues One of the largest loyalty bases Further aiding LTL growth... The refreshed merchandise coupled with store optimisation has led the customer base of Pantaloons to grow at 16% CAGR from 3.8 million customers in FY13 to 8.7 million customers as on Q2FY18. The loyalty programme enables Pantaloons client stickiness, which contributes ~80% of total revenues for Pantaloons. LTL in FY17, FY18 was impacted by demonetisation/gst coupled with renovations and temporary closure of certain stores. We expect newer brands offered to existing customers to improve LTL across existing stores. We believe LTL would improve 00 bps in FY17-19E to % (vs. current 3.3%). ICICI Securities Ltd Retail Equity Research Page

6 Exhibit 4: Like to Like sales growth-pantaloons Q1FY16 Q2FY Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY Q4FY17 Q1FY18 LTL growth Consolidated revenues likely to grow at 1% CAGR in FY17-19E ABFRL s consolidated revenues are expected to grow at a CAGR of 1% to ~ 8392 crore by FY19E vs 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 2% 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. Exhibit : Consolidated revenues to grow at CAGR of 1% over FY17-19E cr FY16 FY17 FY18E FY19E 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 be maintained in the range of 6-6.% in FY17-19E. Likewise, consolidated EBITDA is expected to grow at a CAGR of 11% CAGR in FY17-19E to 3 crore in FY19E from 438 crore in FY17. ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 6: EBITDA and EBITDA margin trend cr FY16 FY17 FY18E FY19E EBITDA EBITDA Margin % % to sales PAT growth driven by better operating performance Inclusive growth across all segments is expected to bring in robust revenue growth. However, with investments in additional brands, the near-term profitability is expected to remain subdued. With the margin expected to remain flattish, expansion based on franchisee model coupled with lower interest expenses (decline in working capital requirement), PAT is expected to nearly double to 114 crore by FY19E compared to 3. crore in FY17. PAT for FY16 was impacted by onetime depreciation adjustment of 100 crore, resulting in a loss of 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 7: Net profit trend cr FY16* FY17 FY18E FY19E PAT PAT margin (%) ICICI Securities Ltd Retail Equity Research Page 7

8 Valuation Though fast fashion is expected to hamper profitability in the near term, which has led to revision in our current estimates, we would closely monitor the profitability of the same. The management expects to achieve breakeven at the EBITDA level by Q4FY18. Newer brands (Forever 21) coupled with strong existing portfolios would provide cohesive growth to ABFRL s revenues. We expect revenues to grow at a CAGR of 11% to 8392 crore in FY17-19E. We maintain our BUY rating on the stock with a revised target price of 19, valuing it at 2x FY19E EV/sales. Exhibit 8: Valuation Figures ( crore) FY17 EV/Sales Company Price Sales EBIDTA OPM PAT PAT % FY18E FY19E ABFRL 1.0 6, Arvind , Trent , Raymond 890.0, Average EV/Sales Valuation metrics Target EV/Sales multiple E Sales 8, E EV 16, E Debt 1, E Cash E Market Cap. 1,026.2 No. of shares 77.1 Target Price 19.0 CMP 16.0 Upside/(Downside) 2.0 ICICI Securities Ltd Retail Equity Research Page 8

9 Recommendation history vs. consensus estimate ( ) Oct-1 Jan-16 Mar-16 Jun-16 Aug-16 Oct-16 Jan-17 Mar-17 Jun-17 Aug Nov-17 (%) Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Apr-16 Jul-17 Event ABFRL acquires Forever 21 in India for $26 million Madura launched men's innerwear and athleisure range under Van Heusen brand in South India ABFRL signs partnership agreement with Ted Baker Demonetisation impacted Pantaloons growth, which led to a decline LTL sales by 2% in November Pantaloon launches first 'Women Store' in Lucknow Pantaloons opens its first exclusive kids store in Kolkata ABFRL eyes nationwide rollout of innerwear and athleisure segment Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Aditya Birla Group 30-Jun IGH Holdings Pvt. Ltd. 30-Jun Franklin Templeton Asset Management (India) Pvt. Ltd. 30-Jun Umang Commercial Co., Ltd. 30-Jun Trapti Trading & Investments Pvt. Ltd. 30-Jun Life Insurance Corporation of India 30-Jun Franklin Advisers, Inc. 31-Aug Birla Group Holdings Pvt. Ltd. 30-Jun Reliance Nippon Life Asset Management Limited 30-Jun Tata Asset Management Limited 31-Dec Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Promoter FII DII Others Recent Activity Buys Sells Investor name Value (Mn) Shares(Mn) Investor name Value (Mn) Shares (Mn) Columbia Threadneedle Investments (US) BOI AXA Investment Managers Private Limited Sundaram Asset Management Company Limited ICICI Prudential Asset Management Co. Ltd UTI Asset Management Co. Ltd Franklin Templeton Asset Management (India) Pvt. Ltd BNP Paribas Asset Management Asia Limited Reliance Nippon Life Asset Management Limited State Street Global Advisors (US) Escorts Asset Management Ltd Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore (Year-end March) FY 16 FY 17 FY 18E FY 19E Gross Revenue 6, , ,42.9 8,391.9 Growth (%) Excise Duty Cost of Sales 2,71.8 3, , ,97.6 Employee Costs Administration Expense 1, , ,623. 1,801.2 Selling & Distribution expenses Other Operating Expenses EBITDA Growth (%) Depreciation EBIT Interest Other Income PBT (109.8) Growth (%) (1.9) (148.7) Tax Reported PAT (109.8) Exceptional Items (26.0) - Adjusted PAT Growth (%) (46.2) EPS Cash flow statement Crore (Year-end March) FY 16 FY 17 FY 18E FY 19E Profit after Tax Add: Interest Expense Add: Depreciation Add: Others Increase/(Decrease) in CL 1, (Increase)/Decrease in CA (1,662.) (264.7) (301.1) (290.) CF from Operating Activities (Add) / Dec in Fixed Assets (468.) (304.6) (103.) (117.9) Goodwill (63.1) (101.3) - - (Inc)/Dec in Investments CF from Investing Activities (1,103.6) (406.0) (103.) (117.9) Inc/(Dec) in Loan Funds (286.7) (219.3) Inc/(Dec) in Sh. Cap. & Res Others (236.0) (149.4) (1.8) (137.6) CF from financing activities (442.) (36.9) Change in cash Eq Op. Cash and cash Eq Cl. Cash and cash Eq es Balance sheet Crore (Year-end March) FY 16 FY 17 FY 18E FY 19E Source of Funds Equity Capital Reserves & Surplus Shareholder's Fund ,101.3 Secured Loan , , ,271.0 Unsecured Loan 1, Total Loan Funds 1, , , ,64.6 Deferred Tax Liability Minority Interest Source of Funds 2, , , ,910.0 Application of Funds Gross Block ,002.0 Less: Acc. Depreciation (164.8) (24.4) (18.0) (824.9) Net Block Capital WIP Total Fixed Assets Goodwill 1,839. 1, , ,940.8 Investments Inventories 1,410. 1, ,2.9 1,609.4 Debtors Cash Loan & Advance, Other CA Total Current assets 2, ,23.8 2, ,169. Creditors 1, ,1.1 1, ,168. Other Current Liabilities Provisions Total CL and Provisions 1,70.8 1, , ,413.3 Net Working Capital Miscellaneous expense Application of Funds 2, , , ,910.0 Key ratios (Year-end March) FY 16 FY 17 FY 18E FY 19E Per share data ( ) Book Value EPS* Cash EPS DPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Fixed Asset Turnover (x) Inventory Turnover (Days) Debtor (Days) Current Liabilities (Days) Return Ratios (%) RoE* RoCE RoIC Valuation Ratios (x) PE NM NM Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) Debt to EBITDA (x) Current Ratio Quick ratio ICICI Securities Ltd Retail Equity Research Page 10

11 ICICIdirect.com coverage universe (Retail) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Bata India Buy 10, Shoppers Stop Buy 4, NA Titan Company (TITIND) Hold 4, Trent Buy 9, ABFRL Buy 11, RoE (%) ICICI Securities Ltd Retail Equity Research Page 11

12 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: >1%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/1% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

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