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  • Aditya Birla Fashion & Retail

    Initiating Coverage

    August 2016

    Find Spark Research on Bloomberg (SPAK ),

    Thomson First Call, Reuters Knowledge and Factset

    TEJASH SHAH Tejash@sparkcapital.in +91 22 4228 8155

    MADHAV PVR madhav@sparkcapital.in +91 44 4344 0061

    GNANA SUNDAR gnanasundar@sparkcapital.in +91 44 4344 0062

  • Aditya Birla Fashion & Retail CMP

    Rs.164

    Target

    Rs.191

    Rating

    BUY

    Stock performance (%)

    1m 3m 12m

    ABFRL 17% 11% -16%

    Sensex -1% 8% 7%

    BSE CONSDIS 2% 12% 19%

    Date 26th Aug 2016

    Market Data

    Bloomberg ABFRL IN

    Shares o/s 769mn

    Market Cap Rs. 125bn

    52-wk High-Low Rs. 263-123

    3m Avg. Daily Vol Rs. 161mn

    Index member BSE 200

    Latest shareholding (%)

    Promoters 59.5

    Institutions 26.8

    Public 13.8

    Initiating Coverage

    Leader, by design

    Apparel Brands in India (home-grown and foreign, alike) have struggled to overcome the trilemma of growth,

    profitability & capital efficiency despite the immense growth potential for branded apparel. Scale and profitability

    have largely remained mutually exclusive as evidenced by the high mortality rate of brands chasing scale alone.

    Against this backdrop, the phenomenal success of the home-grown brands of Aditya Birla Fashion & Retail

    (ABFRL), under its Madura Fashion & Lifestyle (MFL) division, elicit respect for the products, processes and people

    engaged in this rare success story. With scale, ABFRL has managed to build leadership in almost all the facets of

    this business distribution network, terms of trade, capital efficiency, sourcing, etc. The addition of the Pantaloon

    (retail format) provides ABFRL a new range of opportunities with execution being the key given that sustainable

    value creation has largely been elusive in the Indian large format apparel retail space. Near-term headwinds aside

    (tepid consumption demand, GST, INDAS), considering ABFRLs execution history, access to stable large cash

    flows from the MFL business and the current efforts of its management team, we believe ABFRL is rightly placed to

    capitalise on the overall lucrative growth opportunity in Indias branded apparel space. We initiate coverage on

    ABFRL with a BUY rating and TP of Rs.191 (~22x FY18E EV/EBIDTA).

    Market leader in apparel space in India with legacy of creating the biggest brands (ALL home-grown): MFLs success

    in creating large, home-grown brands is without any precedence in India. MFLs four mainstream brands (which cumulatively

    generated only ~Rs. 3bn when the company took them over) are each now Rs.6bn+ to Rs.10bn brands; three of the four

    are amongst the top five brands in India and the other amongst the top 10 by revenue terms.

    Incessant investment in growth drivers: As with every category, brands in apparel category too tend to reach a sweet

    spot revenue milestone where majority of the brands stagnate at, while only a few graduate to the next level by creating

    new growth drivers and profitability levers. MFL milked its robust brand equity in the menswear segment by extending

    (starting as early as a decade back) into womenswear, kidswear, shoes, accessories, etc. This has fuelled MFL to deliver a

    22% CAGR in revenues over the last 10 years, way ahead of the category, resulting in MFLs BIG 4 brands shining both in

    terms of revenues and brand recall. We believe MFL would continue its healthy growth trajectory.

    The clever grow with own money, while the wise grow on OPM (Other Peoples Money): MFL has delivered robust

    growth over the years with the same steady capital leading to stupendous ROACE in the range of ~50% to ~70%,

    something peers will need to replicate to thrive. The not so secret sauce (but difficult to concoct) is MFLs franchisee led

    model in addition to the prominent Buy and sell operating arrangement. ABFRL is now implementing the franchisee model

    in the Pantaloons division helping increase operating leverage faster.

    Filling the gaps to ensure no blind spots: ABFRL has bridged all possible price and aspiration point gaps in its portfolio

    by tying up with western brands like Simon carter, Forever 21 and also The Collective & Hackett London etc. on the upper

    end. Further, ABFRL is also well positioned to gain from the first step conversion game in the unbranded to branded play

    through its Pantaloons division which has a first mover advantage in the fast growing value fashion segment (where

    majority of merchandise offering is below the Rs.1,000 price point). Numerous initiatives [cost efficiencies, pricing

    improvement, optimization of exclusive brands mix etc] taken by the management since takeover in 2013 are now paving

    the way for Pantaloons to turn into a bright spot from previously perceived blind spot.

    Page 2

    Financial Snapshot

    FY16 FY17 FY18

    Sales 60,601 70,366 82,330

    EBITDA (%) 6.5% 8.0% 8.7%

    Adj.PAT 269 1,282 2,204

    Adj.EPS 0.3 1.7 2.9

    EV/EBITDA 34.8 24.5 19.1

  • Aditya Birla Fashion & Retail CMP

    Rs.164

    Target

    Rs.191

    Rating

    BUY

    Corporate Factsheet

    Company Background

    Aditya Birla Fashion & Retail (ABFRL) is part of the Aditya Birla Group, a US$ 40 billion multinational operating in 36 countries across

    six continents. The company has two major divisions - Pantaloons Fashion and Retail (PFRL) & Madura Fashion & Lifestyle (MFL).

    MFL (until recently part of Aditya Birla Nuvo Ltd [ABNL]) was acquired by ABNL in 2000 and since then, the company has grown into

    one of the largest apparel companies in the country led by healthy growth of their flagship brands viz. Louis Philippe, Van Heusen, Allen

    Solly and Peter England. PFRL was part of the Future group owned by Mr. Kishore Biyani and was acquired by the Aditya Birla group in

    2012-13.

    Distribution Network

    The company has more than 7000 points of sale with a footprint of 5.5mn square feet across 375 towns and cities including 2,100

    exclusive brand outlets (EBOs) and 3000 Shop in Shops (SISs). In addition, the companys merchandise are sold through the its

    exclusive online portal trendin.com and other third party websites including its associate company ecommerce portal ABOF.IN.

    Brands

    MFL Brands: The Collective, Hackett London, Louis Philippe, Van Heusen, Allen Solly, Peter England, Forever 21 & Simon Carter

    Major Pantaloons Private label & Licensed brands: Byford, alto MODA, Factor, BARE Denim, RIG, LOMBARD, Akkriti, Trishaa,

    annabelle, Chalk, Poppers, Candies, Jamnini

    Top Management & Board of

    Directors

    Mr. Pranab Barua [Managing Director]

    Mr. Ashish Dikshit [Business head MFL]

    Mr. Shital Mehta [ CEO- Pantaloons]

    Mr. S.Visvanathan [CFO]

    Ms. Sukanya Kripalu [Independent Director]

    Mr. Bharat Patel [Independent Director]

    Mr. Arun Thiagarajan [Independent Director]

    Mr. Sushil Agarwal [Non-executive Director]

    Revenue Contribution (FY16) MFL: ~65% of revenues & PFRL: ~35% of revenues

    Revenues by region (FY15) Pantaloons: North: ~26%, East: ~16%, West: ~33% & South: ~25%

    Product wise revenues (FY16) Mens Casuals: ~39%, Mens Formals: ~32%, Women western: ~12%, Women Ethinic: 8%, Kidswear: ~5% & Accessories: ~4%

    Pantaloons brands Pantaloons retails over 200 brands which includes over ~35 own and licensed brands.

    Credit Rating CRISIL AA/Stable/CRISIL A1+

    Corporate Banking Axis Bank Ltd., HDFC Bank Ltd., State Bank of India, Mizuho Bank Ltd., The Bank of Tokyo Mitsubishi UFJ Ltd., IDBI Bank Ltd.,

    Auditors M/S S R B C & CO LLP

    Company Factsheet

    Page 3

  • Aditya Birla Fashion & Retail CMP

    Rs.164

    Target

    Rs.191

    Rating

    BUY

    Notable sequence of events in merger of MFL& PFRL

    Source: Company filings, Spark Capital Research

    Timeline: ABFRLs journey since 2000

    Source: Company filings, Spark Capital Research

    ABFRL Legacy of having created one of Indias largest apparel companies

    Change in MFLs operational model: transitions from a

    wholesale to retail format

    Rapid retail networks expansion of Louis Philippe, Van

    Heusen, Allen Solly and Peter England

    MFL launches The Collective - positioned in super-

    premium retail space and People clothing line in the

    Value segment

    Aditya Birla group acquires Pantaloons Fashion and

    Retail & forms a Joint Venture with Hackett

    Aditya Birla group announces hiving off MFL into

    acquired Pantaloons fashion & retail

    MFL demerger becomes effective from January 2016;

    company renamed as Aditya Birla Fashion & Retail

    Aditya Birla Nuvo acquires Madura Garments [referred

    as MFL now]

    2016

    2015

    2012-13

    2007

    2006

    2004

    2000 S. No. Event/Activity Date

    1 Board Meeting for approval of the Composite Scheme May 03, 2015

    2 Receipt of Stock Exchange No-Observation Letters Jun 26, 2015

    3 Hon'ble Gujarat High Court approved the Scheme

    (ABNL & MGLRCL) Oct 23, 2015

    4 Hon'ble Bombay High Court approved the Scheme

    (AFRL) Dec 05, 2015

    5 Receipt of SEBI & BSE approval Jan 05, 2016

    6 Board Meeting to declare scheme effective (w.e.f.

    Appointed Date i.e. April 1, 2015) Jan 09, 2016

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