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Aditya Birla Fashion & Retail Ltd India’s Premier Fashion House August, 2016 Kshitij Kaji Research Analyst +91 (22) 4272 2515 [email protected]

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Page 1: Aditya Birla Fashion & Retail Ltd - Edelweiss Birla Fashion & Retail Ltd ... Aditya Birla Fashion & Retail Ltd. Aditya Birla Fashion & Retail ... Revenue breakup between Madura and

Aditya Birla Fashion & Retail Ltd

India’s Premier Fashion House

August, 2016

Kshitij Kaji

Research Analyst

+91 (22) 4272 2515

[email protected]

Page 2: Aditya Birla Fashion & Retail Ltd - Edelweiss Birla Fashion & Retail Ltd ... Aditya Birla Fashion & Retail Ltd. Aditya Birla Fashion & Retail ... Revenue breakup between Madura and

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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120

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220

Jan

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-15

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-15

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v-1

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-16

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-16

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-16

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ABFRL Sensex

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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%

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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

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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

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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

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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)

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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.

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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

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(IN

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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

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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

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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

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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.

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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

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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 (%)

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Aditya Birla Fashion & Retail Ltd

14 Edel Invest Research

Madura Stores

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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%

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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

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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

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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 (%)

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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)

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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

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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

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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

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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

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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)

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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.

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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.

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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

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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

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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.

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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

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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 - - - - -

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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

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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

[email protected]

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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ABFRL Price Chart

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Disclaimer

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