Scrip Code: 535755 / ABFRL

CMP: Rs. 139.70; Market Cap: Rs. 10,744.23 Cr; 52 Week High/Low: Rs. 246.90 / Rs. 122.90

Total Shares: 76,90,93,684 shares; Promoters : 45,71,64,117 shares – 59.44 %; Total Public holding : 31,19,29,567 shares – 40.56 %; Book Value: Rs. 12.22; Face Value: Rs. 10.00; EPS: Rs. -0.76; Dividend: 00.00 %; P/E: --- times; Ind. P/E: 88.25; EV/EBITDA: 28.19x

Total Debt: Rs. 1,849.31; Enterprise Value: Rs. 12,573.21 Cr.

ADITYA BIRLA FASHION AND RETAIL LIMITED: The Company was incorporated in April 19,2007, as Peter England Fashion and Retail Ltd and changed its name to Pantaloons Fashion & Retail Limited on April 23, 2013. Then it changed its name to Aditya Birla Fashion and Retail Limited. ABFRL is a fashion and lifestyle company. The Company is engaged in providing branded fashion apparels and accessories, and the retail sale of clothing, footwear and leather articles in stores. It operates through two segments: Madura Fashion & Lifestyle, and Pantaloons. Its Madura Fashion & Lifestyle segment is engaged in manufacturing and distribution of branded fashion apparel and accessories, and comprises over 1,800 exclusive brand outlets (EBOs) and approximately 150 value stores. Its Pantaloons segment is engaged in retailing of apparel and accessories, and comprises over 160 stores, including one Pantaloons Kids store and approximately 30 Factory Outlets. The Pantaloons segment has a diversified customer base with men, women, kids and non-apparels. The Company's brands include Louis Philippe, Van Heusen, Allen Solly and Peter England. ABFRL is locally compared with Brandhouse Retail Ltd, Trent Ltd, V-Mart Retail Ltd, Thomas Scott India Ltd, Bombay Swadeshi Stores Ltd, Future Enterprise, V2Retail Ltd, Himatsingka Seide Ltd, and globally compared with Christian Dior of France, Nike of USA, Inditex (ZARA) of Spain, Cheil Industries of Korea, TJX Cos of USA, H&M Sweden, Kering (GUCCI) of France, Adidas of USA, VF (VANS) of USA, L Brands (Victoria secrets) of USA, Ross Stores of USA, Fast Retailing Japan, GAP of USA, Hermes International of France, Nordstrom of USA, PVH (Tommy Hilfiger) of USA, Burberry Group of UK.

Investment Rationale:

Aditya Birla Fashion and Retail Limited (ABFRL) have evolved from the amalgamation of the branded apparel and retail business of the Aditya Birla Group namely Madura Fashion (Madura) division (from Aditya Birla Nuvo, ABNL) and Pantaloons Fashion and Retail (PFRL). The consolidated entity is the largest pure fashion player in India with leading menswear brands (from Madura) and one of India’s largest big-box fashion retailers in the form of Pantaloons. In 1999 Aditya Birla group took over Madura Garments, in 2004 it translated itself from wholesale to retail, in 2006 it expanded its retail network for the brands, in 2007 it launched The Collective and People brand, in 2013 it acquired Pantaloons in 2015 it consolidated its apparel business. Madura is the owner and perpetual licensee of prominent brands such as Van Heusen, Louis Philippe, Allen Solly and Peter England with over 2000 retail stores and over 7000 points of sale, encompassing a retail footprint of 2.6 mn sq ft. ABFRL also houses The Collective, a super-premium retail concept offering high end brands such as Armani Jeans, Versace Collection, Hugo Boss, McQ Alexander McQueen etc. Pantaloon’s focuses on value fashion and is now a leading player in women’s wear with 163 stores covering 2.9 mn sq ft over 78 cities across the country. The merger of Pantaloons with Madura was completed in an all-stock transaction on Jan 9, 2016, with an effective date of 1st April 2015. The merger transaction was structured through the following route: Mirror demerger of Madura Fashion division into Pantaloons, Mirror demerger of Madura Lifestyle division (100 % subsidiary of ABNL) into Pantaloons The subsequent swap ratios were: 26 equity shares of Pantaloons for every 5 equity shares of ABNL, 7 equity shares of Pantaloons for every 500 equity shares of Madura Lifestyle, 1 equity share of Pantaloons for all outstanding preference shares of Madura Lifestyle Post the merger, Pantaloons was re-named ABFRL and the holding of ABNL in ABFRL declined from 72.6 %. However, the holding company Aditya Birla Group (ABG) which holds 57.2 % in ABNL retained majority ownership in ABFRL with a 51.1 % stake in the company. The total size of the Indian retail market is estimated to be USD 600 billion and has been growing at a CAGR of 7 % over FY10-15. Apparel retail market constitutes 8 % of India’s retail market and is pegged at USD 45 billion, of which, only 19 % is organised apparel retail. As per industry estimates, the entire retail sector is slated to grow at a CAGR of 11 % to USD 1 trillion by 2020, with modern retail outpacing the sector growing at 26 % CAGR to USD 150 billion. Organised apparel market is slated to grow at 15 % over the next five years. The key growth drivers for modern retail include favourable demographics, rising brand awareness leading to a shift to organised, improved infrastructure, increased penetration of e-commerce. India’s strong demographic profile is one of the key drivers to accelerated growth in organised formats. Factors like rising disposable income, increasing urbanisation, changing lifestyle with greater exposure to global fashion/trends and rise in discretionary spends are essential for a sustained growth of the organised sector. The urban population, which accounted for 30 % of the total population in 2010, is expected to increase to 40 % by 2030. Industry estimates expect higher per capita spend a + 25 % to 50 % with over 20 Cr nuclear family households. With growing urban population and increase in number of dual income nuclear families are expected to result in average annual household income tripling from US$ 6,393 in 2010 to US$ 18,448 in 2020. The penetration of modern retail via exclusive brand outlets, multi-brand outlets, departmental stores and cash & carry formats have exposed Indian consumers to the latest fashion trends and helped in building brand awareness. It is estimated that organised retail would contribute 40 % to total apparel retail market by 2020. The rise of e-commerce has been a boon to retailers allowing them to sell across the country without incurring the cost of setting up stores. The size of online retail is pegged at US$ 3.5 billion, with fashion contributing 35 % to the sales volume mix. By 2020, Indian online retail is expected to grow 13 times to US$ 45 billion, with proportion of online shoppers amongst internet users doubling to 40 %. The menswear segment contributes 42 % to the Indian apparel market and is expected to grow at a CAGR of 9 % to US$ 40 billion by 2023. While it is currently dominated by categories such as shirts and trousers, western wear, especially denim market is expected to grow at an astounding 14 % CAGR fuelling growth in the segment. By comparison, womens wear is relatively smaller in size contributing 38 %, but is expected to grow at a faster pace of 10 % CAGR to US$ 39 billion by 2023. The growth in this segment is expected to be driven by a shift to branded apparel and an increased share of western wear. The kids wear segment is the fastest growing category, estimated to grow at 11 % CAGR to US$ 22 billion by 2023, driven largely by the luxury and premium categories. ABFRL has strengthened its portfolio with acquisition of Pantaloons diversifying from men to women’s and kids wear. It has wide range of merchandise across all price segments, thereby expanding customer base and affordability in branded apparel segment. The Company has expanded to boost portfolio through organic and in-organic route into super premium segments like Simon Carter and Forever 21. ABFRL has established a global supply chain for raw materials, strong in-house design and product development capabilities to cater to the changing perception and taste of the consumers. It has an extensive reach through multi-channel distribution network of 2,100 retail stores and >7,000 additional points of sale operating in more than 375 cities/towns and own e-commerce venture to cater for online sales. ABFRL has presence in 375 cities with over 7000 points of sale and more than 2000 Exclusive Brand Outlets (EBOs) and Value Stores, with an overall retail footprint of 5.6 mn sq. ft. The company is the owner/perpetual brand licensor of leading brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England. Pantaloons has a strong portfolio of exclusive brands, contributing to 60 % of total revenues and is one of the largest value fashion retailers in the country. The consolidation of these two entities has created a formidable player in the brand and fashion retail space, encompassing offerings across the value chain with an unparalleled network. Madura is expected to benefit from the stable cash flow generation of its mature brands and grow through new brand acquisition and increased penetration. Pantaloons is currently in the final phase of restructuring and stands to gain from profitable store expansion and uptick in urban demand. Madura, the brand business of ABFRL traces its origins from Madura Coats Limited, a readymade garments division of Coats Viyella PLC, UK. Madura Coats was acquired by the Aditya Birla Group (Indian Rayon Industries) in the year 2000. ABG also acquired the exclusive brand right/ownership of premium brands such as Louis Philippe, Van Heusen, Allen Solly, and Peter England. Since the acquisition of Madura Coats and the ownership/licensee of the brands, the company has grown the premium brands namely Van Heusen, Allen Solly, Louis Philippe and Peter England to an enviable position. Currently, the four brands report revenues in excess of Rs 10bn (at MRP) each, far ahead of its competitors in the brand space. Over the years, the company has acquired brands across the value chain to provide a diverse offering to its customers. The Collective is super-premium apparel and accessories retail outfit housing brands such as Armani Jeans, Versace Collection, Hugo Boss, Vivienne Westwood, McQ Alexander McQueen, etc. Louis Philippe is a premium menswear brand that specialises in formals, semi-formals, custom made clothing and accessories, while Van Heusen offers formal wear, party wear and casual wear ranges for both men and women. Allen Solly has created a niche for itself by introducing the concept of “Friday Dressing” to menswear in India and Peter England remains the largest mid-segment menswear brand in the country. PEOPLE is a fast fashion brand focusing on international and fusion styles with presence in menswear, womenswear and kidswear. ABFRL has recently acquired Forever21’s franchise from DLF brands for a consideration of Rs 1.75bn. This acquisition will help the company to take advantage of the fast growing women’s apparel segment. Madura’s menswear brands encompass the “premium” and “bridge to- luxury” categories in both - formal and casual clothing. Pantaloons has successfully captured the fast growing value and fast fashion segment providing ABFRL a portfolio of brands across the entire fashion pyramid. While Madura has a superior store network with over 1800 EBOs and 150 value stores covering over 2.8mn sq ft, the merger with Pantaloons gives it access to a further 146 big box retail stores and 22 factory outlets. The combined entity has a retail footprint of 5.6 mn sq ft, with presence in big box format, EBOs and MBOs. With its origins in Kolkata, Pantaloons has remained strong in the east region of the country, and the contribution from North and East was 56 % as of Q1FY17. Madura, on the other hand, has over 58 % of its stores located in the South, Central and Western regions of the country, giving ABFRL a strong pan-India presence. Pantaloons has over 5.5 mn members in their loyalty programme contributing to 75 % of sales while Madura runs various loyalty programmes for their brands and has a base of 8.6 mn members contributing to 55 % of sales. The combination of the loyalty programmes will enhance the user base and can be used by the company to provide a better service to its customers using big data analytics etc. In a bid to improve the diversity of offerings from a predominantly menswear brand portfolio, the company has launched new categories such as kids wear, women’s western wear, party-wear and accessories. This category extension not only helps de-risk the brand portfolio, repositioning the division from menswear to a family outlet, but also provides access to high growth categories such as womens wear and kids wear. In-line with their category expansion strategy, the company recently launched innerwear and athleisure wear (clothing designed for workouts and other athletic activities) in Bangalore, Chennai and Hyderabad markets, entering the Rs 710 bn innerwear market under their brand Van Heusen. While mainline brands have grown at a steady 17 %+ CAGR over the past 5 years, the category has seen some challenges over the past 12 months. Overall growth has been boosted by associated categories, which have reported a stronger growth at 37 % CAGR over the past 5 years. Increasing per capita income, and increasing discretionary spending, and a portfolio of brands across the entire fashion pyramid makes ABFRL the best in the retail sector also with its complemented presence across the traditional and new distribution platforms will have huge revenue positive. During the past several years, the company has invested heavily to further enrich its brands. With a strong foothold in Indian retail space, possession of some of the well-known brands, ABFRL is an eminent in Indian Retail sector.

Outlook and Valuation:

Aditya Birla Fashion & Retail has extensive reach with a footprint of 5.5 mn square feet in India and is considered to be India’s No.1 pure fashion Lifestyle Company having five largest and most admired brands i.e. Louis Philippe, Van Heusen, Allen Solly, and Peter England & Pantaloons. ABFRL is building an agile design & supply chain by shifting from 2 seasons to 4 seasons and the company has worked with internal and external consultants for this transition. The main aim of this strategy is to stay ahead of the peers in introducing the latest trends in the market and to aid correction in the inventory levels. With expectations of a stable macro-economic environment over the next 6-9 months, FY2018 is expected to be better for the branded apparel players. With a strong presence in the Men’s and Women’s apparel space, ABFRL to be one of the key beneficiaries of improving discretionary consumption trend. ABFRL has acquired brand ‘Forever 21’during July 2016, and also acquired the online and offline rights of this contemporary women’s fast fashion brand. With ‘Forever 21’ acquisition, ABFRL has created a strong play in one of the fastest growing segments in the Indian Branded Apparel market. Also, in early September 2016, ABFRL entered into the men’s innerwear and athleisure market under the Van Heusen brand in Chennai, Hyderabad and Bengaluru. The Van Heusen branded men’s innerwear and athleisure products are available across 400 Multi Brand Outlets (MBO) and ABFRL plans to launch it pan-India next year. H1FY2017 results include the financials of ‘Forever 21’ which was acquired in Q2FY2017 and also the newly launched Van Heusen innerwear business. During November 2016, ABFRL signed an exclusive deal with the UK’s most successful fashion brand, Ted Baker to offer men’s wear, women’s wear and accessories in India. Ted Baker has more than 500 stores across Europe, the US, Canada, Australia, China, South Africa and the Middle-East. ABFRL’s portfolio of brands spans luxury, premium, sub-premium and fast fashion segments. The addition of Ted Baker will further augment ABRFL’s position in the affordable luxury space. The company is planning its first Ted Baker store by the end of FY2017. ABFRL runs three separate models for their Exclusive Brand Outlet’s, namely, Company-Owned-Company-Operated (COCO), Company-Owned-Franchise-Operated (COFO) and Franchise-Owned-Franchise- Operated (FOFO). The COCO model forms 30 % of EBOs, in here the company owns the inventory and also invests in rent and other capital expenditure to set up the store. Madura prefers using the COFO model which is 30 % of EBOs, where inventory is owned by the company but the franchise invests in store fittings, rent and operations. This is a preferred model, since the company is able to manage inventory at an aggregate level with better IT system with minimal capital investment in the store. In smaller markets, where the company feels that it lacks the experience and expertise to understand local trends, they prefer a FOFO model which constitutes 40 % of EBOs. In this model, the inventory is sold outright and is owned by the franchise. All sales made to MBOs are on an outright sale basis. Madura uses distribution agents, who are mapped to MBOs depending on the locality they service. The company has its average store size is of 1500 to 2000 sq. ft., and capex required is Rs. 3,000 per sq. ft., and has inventory of Rs. 20 lakhs which attains break even in 12-15 months with payback period in 48 – 50 months. The company has rationalized its store network over the past few quarters by closing down unprofitable stores to improve overall network health. Madura reported capital employed turn and ROCE of 7.7 x and 55 % respectively after adjusting goodwill. Since the acquisition of Pantaloons by ABG, the retailer is undergoing a massive restructuring programme in phase manner. In the first phase, the company managed the transition, whereby 22 stores were renovated and 14 new stores added. Additionally, to boost their private labels Pantaloons set up an in-house design studio to design their merchandise and also created a new vendor network. In second phase, gaps in the portfolio were filled with new brands. Pantaloons launched six new brands and also rolled out a new SAP system. Cost efficiencies, price improvement and optimising product mix led to 3.00 % improvement in gross margin. In the third phase which is in FY16, Pantaloons reported a revenue growth of 17 %, and an SSG of 5.9 % embarking on its growth journey. Pantaloons reported an EBIT loss of Rs 1.6 billion with EBIT loss of Rs 1.1 billion excluding one-offs of Rs 48.5 Cr, and is well on its way to achieve its profitability target in the near term. In its fourth phase company intends to build scale via store and brand expansion, currently, Pantaloons is in the process of adding 40 to 50 stores a year and adding new brands/categories wherever they find white spaces in their overall portfolio. This will help sustain the growth trajectory the company embarked upon. The company has now entered the final phase of restructuring of Pantaloons, where the focus would remain on driving profitable growth with a focus on private labels, new brand additions especially in the fast fashion space and category expansion in kidswear. Pantaloons has also been spearheading the shift to a 4 season model (versus a 2 season model that currently exists) to ensure freshness in stock and improve overall turns. Additionally, the company has managed to reduce their price points in Pantaloons by 7 % to 8 %, while improving their gross margins by increasing the contribution from more profitable private labels and by controlling the markdowns. On financial side in Q2FY2017, Aditya Birla Fashion & Retail’s (ABFRL) overall revenue grew by 13 % YoY, mainly led by a 22 % YoY growth in Pantaloons and 5 % YoY growth in Madura Fashion & Lifestyle (MFL). But, MFL witnessed a 10 % YoY decline in revenue on a like-to-like basis due to inventory correction. The branded readymade garments & fashion industry witnessed a prolonged End of Season Sale (EOSS) with deep discounting across segments. However, the Operating Profit Margin (OPM) of 8.8 % was down by only 0.70 %, led by lower discounting in the Madura business and reduced operating leverage in the Pantaloons business. Profit after Tax (PAT) stood at Rs. 64.9 crore, which was up by 7 % YoY. The demonetisation has had an adverse effect on ABFRL’s operations, particularly the wholesale business of Madura. The wholesale channel, as in most distribution businesses, has significant dealings in cash, which will impede the company’s ability to absorb incremental inventory. Also, footfalls in the Pantaloons business would be affected in Q3FY2017 and early part of Q4FY2017 due to a slowdown in overall discretionary consumption. Since 45 % of the company’s business happens in cash, H2FY2017 performance is expected to be much lower in comparison to H1FY2017. It is expected that ABFRL’s EBITDA margins to improve by 1.40 % over FY16-19E to 7.9 % on the back of completion of restructuring process in Pantaloons, improved consumer demand driving SSG and operating leverage in both Madura and Pantaloons, and improving mix in favour of private labels in the retail business. ABFRL can have EBITDA growth of 23.6 % CAGR over FY16-19E to Rs 7.5 billion. Decreasing interest burden coupled with strong operating level profitability is expected to drive PAT to Rs 2.4 billion in FY19E against a loss of Rs 1 billion in FY16. Operating leverage and mix improvement should drive margin profile. In addition, lower interest outgo will further aid profit growth. Improved profitability and controlled working capital to drive return ratios and free cash flow. The ROCE is expected to expand from 12.45 % to 15 % in FY19E. ABFRL can report positive free cash flow from FY18E. Given the varied margin and growth profiles of both the divisions, Madura & Pantaloons are valued separately. Madura on an EV/EBITDA valuation methodology assigning a 10 % discount to Page Industries (Page has a superior return ratio profile). Pantaloons will turn profitable in the near term with robust EBITDA growth. Pantaloons on an EV/EBITDA valuation methodology given 20 % premium to SOTP Value in multiple of Shoppers Stop (SHOP) due to higher private label mix. Based on our SoTP valuation, ABFRL comes around Rs. 200 per share. ABFRL is expected to have better financial performance in FY2018 and FY2019. Expected recovery in the macro-economic environment, better Pantaloons performance and an improved performance by some of recent acquisitions would be the key triggers for ABFRL in the near term. The stock has already corrected by 15 % in the last six weeks and could be seen as a good entry point in view of its long-term growth prospects. Maintaining a Positive view on ABFRL a upside of 15-20 % from the current level is expected. The current market price of stock is Rs. 139.70, can post Earnings per share (EPS) of Rs. (0.10) in FY17E and Rs. 1.80 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. ABFRL is the best amongst the retail sector stocks.

SOTP VALUATIONS :

Business Subsidiary	Value Per Share (₹)
Madura	179.47
Pantaloons	46.04
Enterprise Value (Rs.)	255.51
less Net Debt (Rs.)	24.66
Market Capital (Rs.)	200.85
Shares Outstanding (cr)	76.90
Value Per Share	200.85

KEY FINANCIALS	FY16	FY17E	FY18E	FY19E
SALES (₹ Crs)	6,060.00	5,994.00	7,119.00	8,683.00
NET PROFIT (₹ Cr)	(104.10)	(5.40)	75.90	137.50
EPS (₹)	(1.40)	(0.1)	1.00	1.80
PE (x)	(102.60)	(786.0)	147.70	48.90
P/BV (x)	11.30	11.50	10.70	8.80
EV/EBITDA (x)	30.80	30.10	21.50	17.60
ROE (%)	(16.20)	(0.6)	7.80	12.70
ROCE (%)	3.50	7.60	10.60	12.30

As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase. (Why Strict stop loss of 8 % ?) -

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*As the author of this blog I disclose that I do not hold ADITYA BIRLA FASHION AND RETAIL LTD in my any of the portfolios.

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