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 |
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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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Disclaimer:
Disclaimer:
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
As a Disclosures I Confirm that :
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
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