Transcript

Aditya Birla Fashion & Retail –

Initiating Coverage

August 2016

Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

TEJASH SHAH [email protected] +91 22 4228 8155

MADHAV PVR [email protected] +91 44 4344 0061

GNANA SUNDAR [email protected] +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 ABFRL’s 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 India’s 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): MFL’s success

in creating large, home-grown brands is without any precedence in India. MFL’s 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 MFL’s 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 People’s 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 MFL’s 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 (EBO’s) and 3000 Shop in Shops (SIS’s). In addition, the company’s 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, Candie’s, 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 Formal’s: ~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: ABFRL’s journey since 2000

Source: Company filings, Spark Capital Research

ABFRL – Legacy of having created one of India’s largest apparel companies

Change in MFL’s 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

7 RoC Filing(s) of Court Order, name Change application Jan 09, 2016

8 Record Date fixed by ABNL and MGLRCL Jan 21, 2016

9 Allotment of Shares Jan 27, 2016

10 Listing & Trading of Shares Feb 04, 2016

Page 4

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Steady yet robust growth with added benefits of a diversified revenue profile

ABFRL’s revenues have grown at a healthy ~17% CAGR over last 3 years…

Source: Company filings, Spark Capital Research; Revenues till FY12 pertain only to MFL

…with MFL division accounting for approx. two-thirds of total revenues.

Source: Company filings, Spark Capital Research

Historical EBITDA growth though healthy witnessed slip up in FY16 majorly

on account of change in MFL’s EBITDA trajectory…

Source: Company filings, Spark Capital Research ; *FY16 EBITDA is on a comparable

basis and not actual; FY10, FY11 & FY12 refer to MFL EBITDA only

Menswear segment accounts for more than ~71% of ABFRL revenues

Source: Company filings, Spark Capital Research

12.51 18.11 22.43

38.02 47.59

54.50 60.60

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16

In R

s.b

n

Consolidated Revenues

Aditya Birla

group acquires

Pantaloons

Fashion & Retail

Mens Casuals,

39%

Mens Formal’s,

32%

Women western,

12%

Women Ethinic,

8%

Kidswear, 5% Accessories, 4%

Madura Fashion

& Lifestyle, 65%

Pantaloons

Fashion & Retail, 35%

Page 5

-40 1.36

1.96

3.12 4.01

5.32 4.82

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16*

In R

s.b

n

Consolidated EBITDA

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY ABFRL – Business Profile Snapshot

Description The division houses the four flagship

brands viz. Louis Philippe, Van

Heusen, Allen Solly and Peter

England which are retailed across

9,000 points of sale including its

2000+ EBO’s. Segment revenues

also include sales from its JV with

Hackettt London in addition to People

& ‘The Collective’ brands sales.

% of Consol.

revenues (FY16)

India’s largest value fashion retailer

with ~55% of revenues derived from

private label brands. Positioned as a

family store with offerings across

segments with ‘value fashion tag’ has

over ~160 stores in 78 cities in the

country.

ABFRL has formed two joint

ventures in 2016 with Simon

Carter & Forever 21. While

Simon Carter is a London based

designer brand, Forever 21 is

one of worlds largest ‘cheap’ fast

fashion brand.

FY16 Consolidated

revenues Rs.39.9bn Rs.21.6bn

5 Year Revenue

CAGR (FY11-16)

Consolidated EBITDA

& Share (FY16)

Target Segment

Forever 21 clocked revenues of

Rs.2.23bn in FY16.

~65% ~35% ~3% to ~4% by FY18

~17% ~11% NA

Rs.3.65bn & ~78% Rs.1.01 & ~22% NA

Louis Philippe: Men

Van Heusen: Men & Women

Allen Solly: Men, Women & Kids

Peter England: Men

Portfolio offering spans menswear,

womenswear (ethic & western) and

kidswear

Simon Carter – Men

Forever 21 – Women/teenagers

Madura Fashion & Lifestyle [MFL] Pantaloons Fashion & Retail [PFRL] New brands

Page 6

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Investment Thesis

Huge per capita apparel

consumption gap to be

bridged with

matured/developing

economies

Dual benefit of increasing

disposable income and

aspiring Indian consumer

Changing landscape

constraint home-grown

brands to achieve scale

Healthy growth trajectory

despite achieving

massive scale aided by

‘best in class’ financial

metrics

Robust brand equity

with all four brands

featuring in Top 10

brands in the country

by revenue size

Brand extensions drive

incremental growth

Astute distribution

model aids robust

capital efficiency

Healthy mix of

own/licensed & third

party brands

Margin levers: room for

Operating margin

improvement

Revamped management

strategy aids Pantaloons

transform into a margin

accretive business

Robust portfolio

straddled across price

points and segments

MFL’s healthy cash

flows to aid Pantaloon

growth till it achieves

self-sustainability

Highest distribution

footprint with omni

channel edge to enhance

brand recall

New growth drivers –

Forever 21 & Simon

Carter

#1 Immense

growth

potential

coupled with

robust

execution

history

#2 Madura

Fashion &

Lifestyle (MFL) -

‘Steady growth

begets steady

future’

#3 ‘Blind spot

to Bright spot’ –

Improving

Pantaloons

business

#5 ‘Blistering

synergy’ to

catapult

performance

Forever 21 & Simon

Carter expected to be

additional growth drivers

for the company

Licensing of foreign

brands to aid in playing

the ‘westernization trend’

in the country

#4 New growth

drivers to

bridge the

vacuum of

western brands

in the portfolio

Scope for

margin

expansion in

both MFL &

Pantaloons –

Multiple levers

for margin

expansion

available

Risks &

Concerns –

Economic,

business and

regulatory in

nature

Page 7 Source: Spark Capital Research

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY

Given India’s low per capita apparel consumption and the pace of

growth witnessed over last decade…

Source: Technopak, Spark Capital Research;

680 690 727

52 119

209

19 30 46

0

100

200

300

400

500

600

700

800

2005 2010 2015

US China India

#1 Immense growth potential coupled with robust execution history

As we have been stating over the LAST TWO YEARS (refer to our November 2014 note) on how discretionary categories like apparel would

witness non-linear growth once India crosses the threshold income level like in China, we reiterate our stance.

China’s apparel GDP multiplier has been in range of 1.1x -2.1x…

Source: Bloomberg business intelligence & world bank, Spark Capital Research

…as against matured economies like USA where it is moderate

Source: Bloomberg business intelligence & world bank, Spark Capital Research

…we believe it would continue to be among the fastest growing

apparel consuming economies and reach the top 5 over next decade

Source: Media Reports, Spark Capital Research

USD Per Capita apparel consumption

45

68

71

73

260

267

61

66

70

72

267

333

0 50 100 150 200 250 300 350

India

UK

Japan

Germany

USA

China

Billion $

2019 2014

44,308

1,740

729

48,374

4,515

1,388

55,837

7,925

1,582

Page 8

Per

Capita $

0%

5%

10%

15%

20%

25%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

China Apparel Sector Growth (%) China GDP Growth (%)

Total Apparel sector Market Size

– Current & Estimates

-6%

-4%

-2%

0%

2%

4%

6%

8%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

USA Apparel Sector Growth (%) USA GDP Growth (%)

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #1 Immense growth potential coupled with robust execution history

Share of Organized Retail in India 2005: ~5%-6% 2015: ~8% 2020: ~24%

With the Indian consumer evolving and the

shift towards EBO’s and departmental stores

from multi brand outlets being witnessed

across consumer categories, we believe to

incorporate and build a ‘home-grown’ brand

and to make it attain reasonable scale in the

crowded apparel sector would be very

challenging. Further, factors like ‘fight for

shelf space’, huge capital for ‘A&P outlay’

and creation of recall required for a ‘brand’

constrain a company from achieving scale.

Internationally renowned brands or

companies with access to immense capital

may be the only exceptions.

With the share of

organised retail growing

at a non-linear pace in

India, the first

beneficiaries of the

structural change are

value retailers

(Pantaloons & Megamart

etc) and mass brands,

who benefit from the

Indian consumer

migrating from

‘unbranded’ to branded

apparel players. Further,

with increasing

disposable income at

the ‘middle income

segment’ we would

continue to witness

greater traction of ‘up

trading’ by the

consumer at every price

point.

With increasing prominence of organized retail, Multi brand outlets have

started losing out share to Exclusive brand outlets (EBO) & Large

format stores (LFS) as witnessed below across leading apparel players

Source: Company, Spark Capital Research;*including e-commerce

EBO & LFS share as a % of total revenues

Company 2010-11 2015-16

ABFRL (MFL Segment) 48% 60%

Arvind Ltd. N.A 66%

Kewal Kiran Clothing 38% 41%*

----Unorganised Segment------

Luxury

Bridge To

Luxury

Mass

Market

Entry Level

Premium/

Semi-

Premium

Page 9 Source: Spark Capital Research & Company filings

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #1 Immense growth potential coupled with robust execution history

Page 10

While numerous apparel brands have ‘failed’/re-structured//been divested over the years, ABFRL’s flagship brands have not only ‘survived’

without concerns but also ‘thrived’ growing at a robust base even on a ‘high base’…

1989 1993 1990 1997

Brands

whose

revenues*

crossed the

Rs.5bn

threshold

1989

1993 2011

2009

*Domestic apparel branded company revenues

1984

2001

1995

1997

1986

1991

Brands

which had

to be

restructured/

taken over/

divested/

failed

(3)…But have

continued to

grow

consistently at

a robust pace

even after

crossing the

‘sweet spot’

level

(2) Not only

have ABFRL

brands

survived and

beaten peers…

(1) In a sector

where

‘survival’ is

crucial with

history of

numerous

companies

going downhill

Brands

whose

revenues* at

sub Rs.5bn

level

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #1 Immense growth potential coupled with robust execution history

Page 11

The company also enjoys among the best fixed asset turnover…

Source: Company, Spark Capital Research

…in addition to a healthy capital efficiency (ROCE)

Source: Company, Spark Capital Research; ABFRL ROCE refers to that of MFL.

ABFRL has among the lowest working capital days in the sector…

Source: Company, Spark Capital Research

…aided by lower credit period extended

Source: Company, Spark Capital Research

Healthy trade terms, efficient working capital management and best in the industry asset turnover have aided ABFRL brands thrive through time

21

97

82

138

101

0

20

40

60

80

100

120

140

160

ABFRL ALBL KKCL Indian Terrain Raymonds

24

129

74

132

68

0

20

40

60

80

100

120

140

ABFRL ALBL KKCL Indian Terrain Raymonds

1.6

5.2

0.2 0.1

0.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

ABFRL ALBL KKCL Indian Terrain Raymonds

57%

8%

21% 20%

5%

0%

10%

20%

30%

40%

50%

60%

ABFRL ALBL KKCL Indian Terrain Raymonds

ALBL – Arvind Lifestyle Brands Limited; KKCL – Kewal Kiran Clothing

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #2 MFL: Steady growth begets steady future – Segment snapshot

Year of

Incorporation 1989

Licensed/Own

brand Own brand

% Contribution to

MFL’s revenues ~35%

Sub-brands Luxure, LP Sport & LP

Jeans

Positioning

Louis Philippe is positioned

as epitomizing the

quintessential style of a

gentleman.

Categories

Present in

Shirts, T. Shirts, Suits,

Trousers, Denim &

accessories

FY16 Revenue* Rs.~14bn

1993

Own brand

~15%

Allen Solly Juniors

‘Friday dressing/work

casuals’

Shirts, T. Shirts, Suits,

Trousers, Denim, women

swear & accessories

Rs.~6bn

1990

Perpetual license in

India, middle east &

SAARC countries.

~23%

VH Sport, Van Heusen

woman/V.DOT

‘smart and stylish fashion

for workplace’

Shirts, T. Shirts, Suits,

Trousers, Denim,

Jackets, winter clothing

Rs.~9bn

1997

Own brand

~24%

Elite

‘Mid –priced international

quality brand mainly

targeted as work wear’

Shirts, T. Shirts, Suits,

Trousers, Denim &

accessories

Rs.~9.7bn

Pricing Rs.504 – Rs.29,900^ Rs.480 – Rs.9,999 Rs.600 – Rs.14,000^ Rs.420- Rs.7,000^

Source: Company, Spark Capital Research;;*Channel checks/industry reports;^Upper band indicates MRP of Suits Page 12

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #2 MFL: ‘Steady growth begets steady future’ – Robust brand equity aids company

achieve massive scale

Source: Bloomberg business intelligence & Company filings, Spark Capital Research;

- Listed peers market share among Top 10- Doesn’t include Lux Industries

- Arvind, Raymond, Rupa etc revenues of brands and retail segment only and excludes other segments

Backed by their vintage and positioning, all four MFL brands are

among the top 10 brands by revenue in India…

Page 13

…Even among listed peers ABFRL is ranked no.1 by revenues in the

brands and retail category with revenue share of ~40% among top 10

1

2

3

4

5

6

7

8

9

10

0.7%

0.7%

0.6%

0.5%

0.5%

0.5%

0.5%

0.4%

0.4%

0.4%

1

2

3

4

5

6

7

8

9

10

40%

18%

11%

12%

7%

4%

3%

2%

2%

1%

Brand Market Share Company Revenue Share

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY

MFL’s revenues have grown at a robust ~21% over the last 6 years…

Source: Company, Spark Capital Research

…aided by incremental revenues from brand & product extensions...

Source: Company, Spark Capital Research

12.51 18.11

22.39 25.23 32.26

37.35 39.96

0

5

10

15

20

25

30

35

40

45

FY10 FY11 FY12 FY13 FY14 FY15 FY16

In R

s.b

n

Revenues

#2 MFL: ‘Steady growth begets steady future’ – Brand extensions drive incremental

growth

…resulting in its product mix changing significantly…

Source: Company, Spark Capital Research; Mainline refers to core product: menswear

…supported by a robust in-house designing team

MFL has an adept in-house designing team which introduces ~20,000

designs every year

The team is supported by a Knowledge management centre and a

technology management centre which focuses on Women

The company makes significant investments into product lifecycle

management, sampling infrastructure and people to ensure

merchandise is of best quality and in-line with fashion trends

MFL in addition to the expertise it commands given its vintage in the

sector also has various collaborations which help the design team.

Source: Company, Spark Capital Research

Despite crossing the sweet spot revenue threshold, MFL’s brands continue to grow at a robust pace as reflected in their six year revenue CAGR

of ~21%. The robust growth we understand was majorly led by the company’s brand and product extensions into other segments which we

believe would continue aiding MFL segment deliver ‘steady state growth’ at the least if not surpassing the broad industry growth rate.

Mainline

, 72%

Luxury/

Elite, 14%

Jeans,

7%

Women,

3%

Sports,

4%

Mainli

ne, 55%

Luxury

/Elite, 17%

Jeans,

7%

Wome

n, 5%

Sports

, 16% FY10 FY15

Louis Philippe

Luxure – Luxury men's formals

(2010)

LP Sport

LP Jeans (2013)

Allen Solly

Allen Solly Junior – kids

wear

(2010)

Van Heusen

VDOT – Men casual wear

(2006)

Van Heusen Women (2006)

Peter England

Peter England Elite (2007)

MFL Brand Extensions

Van Heusen Sport (2011)

6 Year

CAGR : 21%

Page 14

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY

…at a pace in line with peers in the industry…

Source: Company, Spark Capital Research

568

838 864 951 1,049

1.02

1.34 1.46

1.59 1.68

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

200

400

600

800

1000

1200

FY12 FY13 FY14 FY15 FY16

Arvind EBO's Arvind Retail Space

Despite MFL expanding its distribution network…

Source: Company, Spark Capital Research

342 698

895 1,129 1,272

1,541 1,735

2,025 0.71

1.00

1.30

1.60

1.90

2.20

2.50 2.60

0.00

0.50

1.00

1.50

2.00

2.50

3.00

0

500

1000

1500

2000

2500

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

EBO (No. Of Stores) Retail Space (Mn. Sq.ft)

…given the fact that the expansion has been majorly FOFO led…

Source: Company, Spark Capital Research

56% 63%

44% 37%

0%

20%

40%

60%

80%

100%

120%

FY10 FY15

Consignment EBO Buy-n-Sell EBO

#2 MFL: ‘Steady growth begets steady future’ – Astute distribution model

leveraging India’s entrepreneurship zeal

…its capital efficiency has only got healthier y-o-y

Source: Company, Spark Capital Research

The ‘secret sauce’ behind MFL’s robust capital efficiency is its steady yet healthy growth in profits, while its capital employed continuing to

remain stagnant. The ‘static’ capital employed figure is on account of MFL’s strategy of expanding majorly through the franchisee model of

expansion which now account for ~70% of total EBO’s alongside healthy proportion of buy and sell EBO’s.

-32%

-13%

11% 20%

29%

64% 72%

57%

-40%

-20%

0%

20%

40%

60%

80%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16

ROACE %

Though

MFL’s EBO’s

stores have

grown at a

CAGR of

~20%, only

~15% of the

expansion

has been

funded by the

business

CAGR: ~

16% & 13%

CAGR:

~17% & 13%

Page 15

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #2 MFL: ‘Steady growth begets steady future’ – Brand extension opportunities still

galore

Existing

offerings &

brand

extensions

Possible

brand

extensions

ONLY MEN:

Shirts, T-shirts, Suits

& Blazers, Jackets,

Sweaters, Trousers,

Jeans, Shorts,

Accessories,

Footwear & Watches

MEN:

Shirts, T-shirts, Suits

& Blazers, Jackets,

Sweaters, Trousers &

Chinos, Jeans,

Shorts, Accessories,

Footwear

WOMEN:

Tees & Tops, Shirts

& Blouses, Dresses,

Sweaters &

Cardigans, Suits &

Blazers, Jackets &

Overcoats,

Jumpsuit, Trousers

& Leggings, Jeans &

Jeggings, Skirts,

Footwear & Fashion

accessories

MEN:

Shirts, T-shirts, Suits

& Blazers, Jackets,

Sweaters, Ethic,

Trousers & Chinos,

Jeans, Shorts, Active

wear, Innerwear,

Accessories

MEN:

Shirts, T-shirts, Suits &

Blazers, Jackets,

Sweaters, Trousers &

Chinos, Jeans, Shorts,

Accessories, Footwear,

Active wear, innerwear

WOMEN:

Tees & Tops, Shirts &

Blouses, Dresses,

Sweaters & Cardigans,

Suits & Blazers, Jackets

& Tunics, Jumpsuit,

Trousers & Leggings,

Jeans & Jeggings, Skirts,

Footwear & Fashion

accessories

KIDS:

Shirts & Tees, Shorts &

Bermudas, Bottoms,

Winter wear, Frocks, Top,

tees & blouses,

Capris,Skirts

Range of Women's

wear

Range of Kidswear

Innerwear

Range of Kidswear

Innerwear

Sportswear

Range of Women's

wear

Range of Kidswear

Footwear

Kids Footwear

Innerwear for Women

& Kids

Sportswear

Given the

entrenched

brand equity of

all four brands of

MFL, any

extension into a

said category

can easily create

a Rs.1bn brand in

the respective

category. For

instance

footwear

segment of Louis

Philippe alone

generates Rs.1 to

Rs.1.5bn sales

annually.

Currently only

close to half of

MFL’s total

revenues are

derived from

menswear while

the rest are

contributed from

product and

brand

extensions.

Page 16

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY

…however have come under pressure in recent times.

Source: Company, Spark Capital Research; *From management commentary

#2 MFL: ‘Steady growth begets steady future’ – Risks & Concerns

MFL’s operating margins historically have been healthy…

Source: Company, Spark Capital Research

Management’s response in Q4FY16 Conference Call on MFL’s

operating margin profile:

“that number is definitely achievable, but when will it come and the

timeframe involved will be one function of the state of the market at this

point of time the way market is perhaps it could be anybody's guess

when the market picks-up and start looking better. Second, it's also a

function of -- level of investment that we will do and the number of

initiatives that we have. So it's always a combination of being able to

achieve opportunities that Indian market offers in terms of growth and

new segments and combination of therefore overall underlying

sentiments in the market, it is not when it will be achieved. It's actually

functional what other opportunities we are chasing and how much

investment we'll have. Having said that, we have set ourselves that we

will keep looking at marginally increasing it. But as and when the

opportunity of the kind that we -- for example have announced today,

they come -- we will make sure that we are not losing out on the long-

term growth potential.”

Risks & Concerns in MFL

Since three of the four brands generate revenues upwards of

~Rs.10bn, possibility of modest growth trajectory cannot be ruled out

if company doesn’t invest in additional growth drivers like brand and

product extensions and keep competition at bay.

Despite the major four brands of the company being amongst the top

10 brands in the country with massive scale and brand equity, the

same is not reflected in its operating margin profile on a sustainable

basis. Absence of improvement in operating margin profile from FY16

levels can be a concern.

Sustainability of healthy capital efficiency can be a threat if growth

trajectory diminishes as the same questions new franchisees interest

in the brand which might force company to increase COCO proportion

leading to higher capital outlay and consequently lower capital

efficiency.

Higher A&P outlay

during the year with

high discounting in

addition to merger

related costs and

one time bonus

provision led to

below par EBITDA

profile for the year.

Page 17

-14.2%

-0.3%

7.5% 8.8% 9.7%

12.0% 12.4% 10.2%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16

MFL EBITDA %

7.7%

12.3%

6.2%

10.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1QFY16 2QFY16 3QFY16 4QFY16*

MFL EBITDA %

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #3 ‘Blind spot to Bright spot’ – Improving Pantaloons business: Segment snapshot

PFRL’s growth trajectory has been healthy since the takeover…

Source: Company, Spark Capital Research

…driven by aggressive store expansion

Source: Company, Spark Capital Research

Womenswear accounts for more than ~40% of its revenue profile

Source: Company, Spark Capital Research

12.85 16.29

18.17 21.64

0

5

10

15

20

25

FY13 FY14 FY15 FY16

In R

s.b

n

PFRL Revenues

Financials since June 2012

from the time PFRL was taken

over by Aditya Birla group

PFRL – Takeover snapshot

ABNL acquired a controlling stake in Future Group’s ‘Pantaloons

Fashion’ business post its demerger from Pantaloon Retail (India)

Ltd. (PRIL). The demerged Pantaloons Fashion business got

transferred to Peter England Fashions & Retail Limited [renamed as

Pantaloons Fashion & Retail Limited (PFRL)], now part of ABFRL.

Post the demerger, the holding of ABNL, through its wholly

owned subsidiary Indigold Trade and Services Ltd. (ITSL), in

PFRL became 50.09%. An open offer, at a predetermined price

of Rs.175 per share was made by ITSL to the public

shareholders of PFRL. Post receipt of necessary approvals, the

equity shares of PFRL were listed on the National Stock

Exchange of India and the Stock Exchange, Bombay.

90 95 107

134

163

1.60 1.70

2.00

2.30

2.90

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0

20

40

60

80

100

120

140

160

180

Jun-12 FY13 FY14 FY15 FY16

Number of Stores (Million Sq.Ft)

Average of ~1.6 stores per

month opened under new

management over the last 45

months Menswear, 35%

Womens

Western, 23%

Womens Ethnic,

19%

Kidswear, 9%

Non Apparel,

14%

Panatloons bridged

the addressable gap

of ‘womenswear’ in

MFL portfolio with

both ethnic and

western wear

offerings.

Page 18

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #3 ‘Blind spot to Bright spot’ – Improving Pantaloons business – Healthy mix of own/

Licensed brands & third party brands

MEN WOMEN - Western

KIDS WOMEN - Ethnic

Own & in-

Licensed

brands

New Own /

in-Licensed

brands

External

Brands

Own & in-

Licensed

brands

New Own /

in-Licensed

brands

External

Brands

Own & in-

Licensed

brands

New Own /

in-Licensed

brands

External

Brands

Own & in-

Licensed

brands

New Own /

in-Licensed

brands

External

Brands

Page 19 Source: Company, Spark Capital Research; Does not include MFL brands which are also sold in Pantaloon outlets

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #3 ‘Blind spot to Bright spot’ – Improving Pantaloons business – Changes after AB

group takeover

Revamped Product

Portfolio

Vendor & Channel

Integration Other Initiatives

Enhanced Distribution

Network

Change in PFRL strategy/workings

since FY13

In FY14, 14 new stores were

opened while 22 stores

were renovated. Further,

100% of the store layouts

(~1.8mn sq.ft) were re-laid.

In FY15 & FY16, ~30 stores

were opened every year

respectively, transitioning

from a run rate of a new

store every two months vis-

à-vis opening a new store

every two weeks under the

new management.

Source: Company, Spark Capital Research

The division launched 10

new brands bridging gaps

in the branded portfolio in

addition to addressing key

niches not targeted before.

PFRL set up an in-house

design studio with more

than ~90% of the team

consisting of new members.

The team delivered on 5,000

designs consistently every

season.

PFRL built relationships

with 240+ vendors to deliver

on various parameters and

virtually created a new

vendor network (more than

~35% being new vendors).

The division transitioned

into SAP rolling out new

systems in all its ~130

stores and warehouses.

The company recruited

~280 people at its head

office and detailed all key

business processes

defining all job descriptions

and KRA’s for all functional

positions.

Company also transformed

its bank end implementing

WMS and first RDC IN 2015.

Page 20

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #3 ‘Blind spot to Bright spot’ – Improving Pantaloons business: Peer comparison &

margin levers

PFRL’s revenue per square feet is in line with industry standards…

Source: Company, Spark Capital Research

…with improved gross margin profile among the best in the industry

Source: Company, Spark Capital Research;* PFRL gross margins refer to FY15

PFRL’s gross revenue/square feet is broadly in line with

industry standards and is expected to further improve with

continuation of the revamped expansion strategy.

Increasing organized retail penetration, growing consumption

in tier3 & Tier4 towns alongside management’s policy of

opening a new store every two weeks to further keep the

revenue per square feet metric healthy.

7,464

6,493

7,227

6000

6200

6400

6600

6800

7000

7200

7400

7600

PFRL Shoppers Stop (C) FLFL

44.9%

33.5%

44.9% 38.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

PFRL* Shoppers Stop Trent FLFL

Post the takeover of the new management, the company

witnessed a healthy ~300bps+ improvement in gross margins,

led by cost efficiencies, pricing improvement, optimization of

the mix of exclusive brands as well as margin re-negotiation

for external brands.

Higher proportion of own/licensed brand sales and

continuing cost efficiencies to keep gross margins at strong

levels.

Page 21

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #3 ‘Blind spot to Bright spot’ – Improving Pantaloons business: Peer comparison &

margin levers

4.7% 5.9% 5.7%

9.9%

0%

2%

4%

6%

8%

10%

12%

PFRL Shoppers Stop Trent FLFL

Significant room for improvement in EBITDA margin exists…

Source: Company, Spark Capital Research

…which we believe will steadily be bridged in the medium to long term

Source: Company, Spark Capital Research

PFRL’s margin trajectory which though has doubled from

~2.3% in FY14 to ~4.7% in FY16 still has room for margin

improvement comparing it with peers in the industry.

Operating leverage in addition to higher proportion sale of

own/licensed brands with increasing proportion of pilot FOFO

stores can enhance EBITDA margins of the division to above

industry average.

Way Forward:

With the current management changing the ‘stencil for

growth’ by having smaller stores aimed at higher throughput,

the expected capex of 50 stores in FY17 is expected to give a

significant fill up to revenues over the medium term aiding

ABFRL post robust growth.

Since the time Aditya Birla group took over Pantaloons, we

have witnessed significant margin expansion in its

operations. Higher proportion sale of own/licensed brands

with increasing proportion of pilot FOFO stores supported by

cost efficiencies can enhance EBITDA margins of the

division to above industry average

Page 22

4.7%

4.8%

5.0%

4.4%

4.5%

4.6%

4.7%

4.8%

4.9%

5.0%

5.1%

FY16 FY17 FY18

Pantaloons EBITDA

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #4 New growth drivers to bridge the vacuum of western brands in the portfolio:

Indians’ affinity for ‘West’ – Target segment has grown in era of Globalisation

1970 ……………... 1980……………...1991…………………………………………………2015……………………...............

Rs.

4462

Rs.

75000

Per household Private Final

Consumption Exp

Number of outbound tourists

% of population between 20-40

Literacy Rate

FDI in India

~2mn ~19mn

39% 42%

52% 66%

2 900

$236

mn $35bn

Urbanisation proportion

Population covered by television relays

Number of television channels

26%

70% 96%

32%

Services sector contribution to GDP 40% 52%

Sec A/B/C population 20% 45%

Source: Spark Capital Research

Key target consumer group with ever increasing disposable income has grown aspiring western/premium offerings

Page 23

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #4 New growth drivers to bridge the vacuum of western brands in the portfolio –

Indians’affinity for ‘West’ – Influenced by ‘Western World’ habits and media

Source: IMDB and media sources, Spark Capital Research Page 24

Movie Total India GBO (INR Mn.)

Amazing Spider Man 2 875

Transformers 4: Age of extinction 630

X-MEN: Days of future past 566

Interstellar 432

300: Rise of an empire 401

Godzilla 340

Captain America: The Winter Soldier 310

Hercules 290

Dawn of the planet of the Apes 224

Exodus: Gods and Kings 189

...While English movies are beginning to find heightened acceptance English GEC’s command ~5% of advertisement share…

English Entertainment,

4.6%

English News, 5.0%

Others, 6.4%

GEC, 43.4%

Movies, 9.5%

News, 18.7%

Kids, 3.8%

Music, 4.4%

Sports, 4.3%

International QSR’s have found superior traction than Indian brands

Source: FICCI, Spark Capital Research

Dominos, 20%

KFC, 9%

Pizza Hut, 8%

McDonalds, 11% Subway,

12%

Others, 40%

Foreign Brands,

63%

Indian Brands,

37%

Also that, global sports claim more than 2/3rd of Indian viewership

2012 2013 2014

Cricket 21.2% 29.7% 20.0%

Football 14.2% 16.9% 18.0%

Wrestling 16.3% 14.4% 11.5%

Kabaddi 0.0% 0.0% 4.7%

Tennis 12.3% 9.0% 8.8%

Hockey 8.1% 7.0% 6.6%

Racing 10.0% 7.7% 6.8%

Boxing 0.0% 4.8% 6.6%

Basketball 6.7% 4.4% 6.3%

Badminton 4.4% 2.5% 6.3%

Source: FICCI, Spark Capital Research Source: FICCI, Spark Capital Research

Source: FICCI, Spark Capital Research

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #4 New growth drivers to bridge the vacuum of western brands in the portfolio - Tie

up with Forever 21 & Simon carter to act as new growth drivers

We believe both the above tie ups would not only act as new growth drivers, but also bridge the absence of western brands in ABFRL’s

portfolio. While Forever 21 can possibly grow into a $100mn brand given its global legacy and the ‘need gap’ for its offering in the country ,

Simon Carter on the other hand is expected to remain a niche and aspirational brand in India.

Forever 21, entered India around 2010-11 and changed two partners till date (Saraf retail & DLF

brands) before signing up with ABFRL recently.

Forever 21 has a long term arrangement with Aditya Birla fashion with royalty to be paid. The

company currently has 12 stores in India with revenues around Rs.2bn.

The company’s products in India range from Rs.800 to Rs.7,000.

Forever 21, Inc., headquartered in Los Angeles, California, is a fashion retailer of women’s, men’s

and kids clothing and accessories and is known for offering the hottest, most current fashion

trends at a great value to consumers. This model operates by keeping the store exciting with

new merchandise brought in daily.

Founded in 1984, Forever 21 operates more than 730 stores in 48 countries with retailers across

the world. In addition to Forever 21 apparel, Forever 21 also has 21MEN, Love 21, Forever 21+

Forever 21 Girls and Love & Beauty. In 2015, Forever 21 global revenues amounted to $4.4bn.

Target Segment of Forever 21: “Forever 21 is targeting a girl who is not yet interested in

purchasing quality clothes. She just wants to look good. And when that girl moves on, another

crop of girls will enter Forever 21's throes.”

USP of Forever 21: “The company keeps its prices low. It lives up to its motto, “Shop Chic Styles

for Less,” by continually updating its merchandise to remain fashion forward”; “Forever has

mastered the art of producing of-the-moment pieces with strikingly fast turnaround. This trend-

focused, rather than brand-focused, strategy has made the company a go-to for customers who

want a little bit of everything”.

ABFRL has signed a Long term licensing

arrangement with rights to design &

manufacturing

The company plans to launch Simon Carter

exclusive stores across the three top metros of

Mumbai, Delhi and Bangalore. The brand

would offer complete ensemble solutions

ranging from formal wear to casual wear.

Simon Carter is a British Menswear brand

known for apparel and accessories such as

watches, cufflinks, jewellery & luggage.

From humble beginnings selling pewter

brooches up and down "The Kings Rd", Simon

Carter today has Flagship stores in both

London and Toronto. The brand is stocked

around the world in forty countries in leading

stores that include Liberty, Bloomingdales

USA, Seibu Japan, Brown Thomas Ireland,

and David Jones Australia. Simon’s collections

continue to buck the economic trend,

spearheading fashions that appeal to those

with a taste for inventive understated chic.

Page 25

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #5 ‘Blistering synergy’ to catapult performance – Robust portfolio straddled across

price points and segments

Source: Spark Capital Research

Luxury

Bridge To

Luxury

Unorganised

Entry Level

Premium

ABFRL Brands

Luxury Apparel

brands

synonymous

with

Multinational

brands

ABFRL has a diversified set of brands spread across price points ranging from Mass brands to luxury offering

Premium

Apparel brands

space has a mix

of Indian and

Multinational

brands

Brands can be

Indian but to be

positioned and

advertised as a

‘multinational’

brand

Page 26

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #5 ‘Blistering synergy’ to catapult performance – MFL’s healthy cash flows to aid

Pantaloons growth

Despite PFRL’s revenues growing at a healthy pace…

Source: Company, Spark Capital Research

…it continues to generate EBIT losses…

Source: Company, Spark Capital Research

…making it impossible for it to meet its debt obligations…

Source: Company, Spark Capital Research

…which would be met from MFL’s healthy cash flows

Source: Company, Spark Capital Research

12.85 16.29

18.17 21.64

0

5

10

15

20

25

FY13 FY14 FY15 FY16

In R

s.b

n

PFRL Revenues

749

-705 -1,080

-1,583

-2000

-1500

-1000

-500

0

500

1000

FY13 FY14 FY15 FY16

In R

s.M

n

PFRL EBIT

1,230 1,570

2,990

3,770

2,862

0

500

1000

1500

2000

2500

3000

3500

4000

FY12 FY13 FY14 FY15 FY16

In R

s.M

n

Madura EBIT

2,470

350 750

0

500

1000

1500

2000

2500

3000

FY14 FY15 FY16

In R

s.M

n

PFRL Standalone Debt Repayment

Page 27

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #5 ‘Blistering synergy’ to catapult performance – Entrenched distribution network

with omni channel edge

ABFRL has one of the widest footprints in the industry…

Source: Company, Spark Capital Research

…significantly higher than peers in the industry

Source: Company, Spark Capital Research

895 1,129

1,367 1,648

1,869 2,040 1.30

1.60

3.60

4.20

4.80

5.50

0.00

1.00

2.00

3.00

4.00

5.00

6.00

0

500

1000

1500

2000

2500

FY11 FY12 FY13 FY14 FY15 FY16

Number of Stores (Million Sq.Ft)

2,040

1,049 1,051

327 135

0

500

1000

1500

2000

2500

ABFRL Arvind Raymonds KKCL Indian Terrain

ABFRL’s store network is almost double its

closest peer giving it undue distribution

leverage vis-a-vis peers which also double up

as branding channels.

Online EBO – Trendin.com: the Omni Channel edge

As per sources, Trendin’s annual revenues are in the range of $15

million and growing at 100 percent and acts as a omni channel interface

integrating all the stores of ABFRL (Majorly MFL’s stores)

On ordering through Trendin.com, the company ships the required

merchandise from the nearest ABFRL at the fastest possible time

mitigating the need for any central or regional warehouses unlike the

conventional e-commerce model.

Trendin.com’s aim is to be MFL consumers' first choice online. We

understand that the portal has the widest range of merchandise available

compared to online marketplaces and even its stores.

Page 28

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY #5 ‘Blistering synergy’ to catapult performance – Strong bargaining power given its

footprint in the country

Given its footprint and expansive distribution network, mall owners in the country cannot ignore ABFRL and have to rope them as anchor clients

which gives them the upper hand in dictating pricing and other conditions

Phoneix Market City

4mn sq.ft ~350 stores 5 ABFRL stores

Allen Solly, Van Heusen, People, Louis Philippe, Peter

England,

Lulu International Mall

3.9 mn sq.ft ~215 stores 7 ABFRL stores

Vdot, LP Sport, Louis Philippe, Van Heusen, Peter

England, People, Allen Solly,

Mumbai

Kochi

Pune

Phoneix Market City

3.4 mn sq.ft NA 2 ABFRL stores

Allen Solly, Peter England, Chennai

Mantri Square Mall

2.4 mn sq.ft ~250 stores 5 ABFRL stores

Allen Solly, Louis Philippe, Pantaloons, Peter England,

Van Heusen,

Phoneix Market City

2.4 mn sq.ft ~250 stores 5 ABFRL stores

Allen Solly, Louis Philippe, Pantaloons, Peter England,

Van Heusen,

Bangalore

Noida

Great India Place

1.5 mn sq.ft ~200 stores 5 ABFRL stores

Pantaloons, Louis Philippe, Van Heusen, Allen Solly,

Peter England.

Kanpur

Z Square Mall

1.5 mn sq.ft ~150 stores 6 ABFRL stores

Allen Solly, Van Heusen, Louis Philippe, Peter England,

Allen Solly Junior, Allen Solly Jeans

Bhopal DB City Malls

1.35 mn sq.ft ~145 stores 5 ABFRL stores

Pantaloons, Allen Solly, Peter England, Louis Philippe,

Allen Solly women.

New Delhi

Select City Walk

1.3 mn sq.ft ~175 stores 6 ABFRL stores

Allen Solly, Allen Solly women, Van Heusen, , Van

Heusen woman, Pantaloons, Louis Philippe

Alpha One Mall

1.2 mn sq.ft ~210 stores 5 ABFRL stores

Allen Solly, Van Heusen, Pantaloons, Peter England,

Louis Philippe

Ahmadabad

Page 29

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Corporate Governance

Page 30 Source: Company filings, Spark Capital Research;*Refers to PFRL Standalone till FY15 Page 30

Board of

Directors*

Contingent

Liabilities*

Succession

Planning

Cases against

management/

Company

2013 2014 2015 2016

Total No. of Directors 5 5 5 5

No. of Independent Directors 2 2 3 3

No. of changes in directors over last year - 4 -

The company is professionally managed without any interference from the promoter family in running the day to day

operations of the company. Given the group’s legacy and current management who have been with the company for

decades, we don't foresee any succession planning concerns in the company.

In September 2015, US-based Retail Royalty Company filed a trademark infringement case in the Delhi High Court

against PFRL, accusing that the company had a brand and logo that were deceptively similar to its American Eagle

Outfitters brand and the eagle logo. However, the Court recorded that "Urban Eagle" brand and its logo is not

deceptively similar to the American Eagle brand and its logo. Consequently, Pantaloons was allowed to continue

usage of its existing Brand name and Logo, except the usage of the words "Authentic Outfitters" in its products."

(In Rs.Mn) 2013 2014 2015 2016

Contingent Liabilities outstanding as on March 31st

0.5 61.8 110.2 381.2

Contingent Liabilities as a % of Networth - 1.1% ~3.2% ~4.0%

Mr. Pranab Barua Mr. Bharat Patel Ms.Sukhanya K Mr.Arun T Mr.Sushil Agarwal

Audit Committee Permanent Invitee Member Member Chairperson Member

Remuneration

Committee - Chairperson Member Member Member

Stakeholders Relation.

Committee - Chairperson Member - Member

CSR Committee Member Member -- -- Member

Risk Management

Committee - Chairperson - Member Member

Board of

Directors-

Committees

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Key Management Personnel

Source: Company Filings, Spark Capital Research

Page 31

Mr. Ashish has been with the Aditya Birla Group for over 15 years having joined MFL from Asian Paints in 1998. He has

worked across several functions in the business and headed its supply chain, marketing and sourcing functions over this

period. He has also worked as Principal Executive Assistant to the Chairman of ABG for more than 3 years. Mr.Ashish is an

Electronics and Electrical Engineer from IIT-Madras and holds a Postgraduate Diploma in Management from IIM-Bangalore

Mr. Shital has been with Aditya Birla Group for about 15 years. Previously, he served as the Chief Operating Officer of the

International division of MFL. Prior to MFL, Mr.Shital worked as brand manager for Godrej Foods (1996-2000). He is an

MBA in marketing from SP Jain Institute of Management and Research and has attended advanced management programs

at Wharton Business School

Mr. S. Visvanathan joined the Aditya Birla Group in 2007 and has been with the Textile and Apparel business since then.

He 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 industries spanning white goods, capital equipment, electrical equipment and auto

components. Previously he has worked with the Tata Group in various capacities in auto components business, Voltas and

Allwyn (CFO). He is a commerce graduate from Chennai University and a qualified Chartered Accountant and Cost

Accountant

Mr.Ashish Dikshit,

Business Head, MFL

Mr.Shital Mehta,

CEO, Pantaloons

Mr. S. Visvanathan

CFO, ABFRL

Mr. Pranab, a 40+ year veteran in the consumer and retail industry was the CEO of Trinethra Super Retail which was

acquired by the ABG in 2007. He previously worked in senior positions with Brooke Bond India, as Foods Director on the

Hindustan Unilever Board, as Chairman and 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. Pranab Barua,

Business Director

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Financials (1/3)

Page 32

Strong growth trajectory expected to sustain…

Source: Company, Spark Capital Research

…with stable gross margins

Source: Company, Spark Capital Research

…leading to revival in net profit

Source: Company, Spark Capital Research

Operating margins expected to expand backed by operating

leverage…

Source: Company, Spark Capital Research

47.59 54.50

60.60 70.37

82.33

0

10

20

30

40

50

60

70

80

90

FY 14 FY 15 FY 16 FY 17E FY 18E

In R

s.b

n

Net Sales

26.12 30.51 33.05 38.70 45.28

54.9%

56.0%

54.5%

55.0% 55.0%

54%

54%

55%

55%

56%

56%

57%

0

5

10

15

20

25

30

35

40

45

50

FY 14 FY 15 FY 16 FY 17E FY 18E

In R

s.b

n

Gross Profit Gross Margin

3.93

5.22

3.97

5.61

7.14

8.3%

9.6%

6.5%

8.0% 8.7%

0%

2%

4%

6%

8%

10%

12%

0

1

2

3

4

5

6

7

8

FY 14 FY 15 FY 16 FY 17E FY 18E

In R

s.B

n

EBITDA EBITDA %

269

1,282

2,204

0%

2%

3%

0%

1%

1%

2%

2%

3%

3%

0

500

1000

1500

2000

2500

FY 16 FY 17E FY 18E

In R

s.m

n

PAT PAT Margin

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Financials (2/3)

Page 33

ABFRL has the best working capital management in the industry…

Source: Company, Spark Capital Research

…backed by lower credit period extended

Source: Company, Spark Capital Research

…even with steady annual addition (capex) of Rs.3 to Rs.3.5bn to

gross block

Source: Company, Spark Capital Research

Capital efficiency to normalize and improve from FY17…

Source: Company, Spark Capital Research

72

74 84 84 84

27 29 24 24

24

97

83 87 88 88

0

20

40

60

80

100

120

FY 14 FY 15 FY 16 FY 17E FY 18E

Inventory Days Debtor Days Creditor Days

3

20 21 20 20

0

5

10

15

20

25

FY 14 FY 15 FY 16 FY 17E FY 18E

Day

s

Working capital days

6%

12%

15%

5%

10%

12%

0%

2%

4%

6%

8%

10%

12%

14%

16%

FY 16 FY 17E FY 18E

ROE ROCE

18.2

15.6

18.8

21.8

0

5

10

15

20

25

FY 15 FY 16E FY 17E FY 18E

In R

s.B

n

Gross Block

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Financials (3/3)

Page 34

Higher profitability to enhance operating cash flows…

Source: Company, Spark Capital Research

…leading to positive free cash flows

Source: Company, Spark Capital Research

….also aiding in higher PAT with lower interest costs

Source: Company, Spark Capital Research

ABFRL’s leverage is expected to come down…

Source: Company, Spark Capital Research

511 4,952 5,970

0.01

0.07 0.07

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY 16 FY 17E FY 18E

In R

s.M

n

OCF OCF/Netsales

-10,566

1,952 2,970

-0.17

0.03 0.04

-0.20

-0.15

-0.10

-0.05

0.00

0.05

-12,000

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

FY 16 FY 17 FY 18E

In R

s.M

n

FCF FCF/Net Sales

14,759 14,763

14,013

1.56 1.38

1.11

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

13,600

13,800

14,000

14,200

14,400

14,600

14,800

15,000

FY 16E FY 17E FY 18E

In R

s.M

n

Total debt Debt equity ratio

1749 1624 1582

2.9%

2.3%

1.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1450

1500

1550

1600

1650

1700

1750

1800

FY 16 FY 17E FY 18E

In R

s.M

n

Interest Expense % of sales

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Peer Comparison

Sales

FY14: Rs.~47.6bn

FY15: Rs.~54.5bn

FY16:Rs.~60.6 bn

FY15: 20 days

FY16: 21 days

FY14:~8.3%

FY15: ~9.6%

FY16: ~6.5%

FY14: Rs.~19.2bn

FY15: Rs.~23.5bn

FY16: Rs.~27.3bn

FY14: 84 days

FY15: 94 days

FY16: days

FY14:~5.2%

FY15: ~5.2%

FY16: ~6.5%

FY14: Rs~3.5bn

FY15: Rs.~3.9bn

FY16: Rs.~4.1bn

FY14: 70 days

FY15: 115 days

FY16: 80 days

FY14: ~0.8%

FY15: ~6.5%

FY16: ~10.6%

FY14: Rs.~2.3bn

FY15: Rs.~2.9bn

FY16: Rs.~3.3bn

FY14: 163 days

FY15: 129 days

FY16: 138 days

FY14: ~10.4%

FY15: ~11.5%

FY16: ~12.6%

FY14: Rs.45.6bn

FY15: Rs.53.5bn

FY16: Rs.56.2bn

FY14: 108 days

FY15: 94 days

FY16: 101days

FY14:~11.3%

FY15: ~8.3%

FY16: ~8.2%

FY14: Rs.~3.66 bn

FY15: Rs.~4.08 bn

FY16: Rs.~4.60 bn

FY14: 71 days

FY15: 77 days

FY16: 82 days

FY14:~25.5%

FY15: ~23.6%

FY16: ~22.8%

ABFRL Arvind Brands &

Retail Zodiac Indian Terrain Raymonds Kewal Kiran

FY16: 6%

FY17: 9.9%

FY18: 11.9%

FY16: 34.8x

FY17: 24.5x

FY18: 19.1x

FY16: NA

FY17: 98.4x

FY18: 57.3x

FY14: ~4%

FY15: ~2%

FY16: NA

FY18: Trades at

implied ~18x

FY16: NA

FY17: NA

FY18: NA

FY14: 9%

FY15: 4%

FY16: NA

FY14: 10.4x

FY15: 28.5x

FY16: 160.9x

FY14: 20.1x

FY15: 61.2x

FY16: NA

FY14:19%

FY15: 19%

FY16: 20%

FY16: 9.7x

FY17: 8.4x

FY18: 6.5x

FY16: 16.7x

FY17: 19.8x

FY18: 14.7x

FY14:10%

FY15: 9%

FY16: 5%

FY16: 9.5x

FY17: 7.8x

FY18: 6.5x

FY16: 27.0x

FY17: 17.2x

FY18: 11.9x

FY14: 24%

FY15: 21%

FY16: 20%

FY16: 20.3x

FY17: 16.4x

FY18: 13.2x

FY16: 33.3x

FY17: 21.5x

FY18: 21.8x

Source: Bloomberg, Spark estimates & Company Filings, Spark Capital Research

EBITDA

Margin

Working

Capital Days

ROCE

EV/EBITDA

P/E

Page 35

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY Risks and concerns

Regulatory Changes

Business Concerns

Economic/

Macro concerns

Source: Spark Capital Research

Page 36

Regulatory Changes:

Ind AS effect on books: All

discounts and commissions are

expected to be netted of from

sales which optically would

reflect as lower revenue growth

With A&P outlay to be split in

three line items of revenue

knock off, cost of raw material

and other expenses to that

extent there would be under or

over statement of gross and

EBITDA margins possibly.

GST: Depending on the GST

rate imposed on the apparel

industry, the sector can be

adversely/favourably affected.

The revenue neutral rate

currently is around ~11% to

~12%.

Macro/Economic concerns:

Slowdown in Discretionary

spending: Since apparel forms

part of discretionary spend, any

slowdown in macro

environment can significantly

effect the revenues and the

profitability of ABFRL.

Business Concerns:

Incremental growth triggers not panning out: Since the four MFL brands (being among the top brands

entering into uncharted territories) have already breached the ‘sweet spot’ revenue level for the apparel

category, if incremental brand and product extensions don't contribute to growth, steady state growth could be

the way forward.

Pantaloon operations turnaround slipups: Any slip ups in continued improvements in Pantaloons business

and financial profile may impact the overall business profile of the company.

Aditya Birla Fashion & Retail CMP

Rs.164

Target

Rs.191

Rating

BUY

Abridged Financial Statements

Rs. mn FY16 FY17E FY18 FY16 FY17E FY18

Profit & Loss Growth Ratios (%)

Revenue 60,601 70,366 82,330 Revenues 11% 16% 17%

EBIDTA 3,968 5,613 7,142 EBIDTA NA 41% 27%

Other Income 120 151 173 PAT NA 377% 72%

Depreciation 3,380 2,577 3,046 Margins (%)

EBIT 707 3,187 4,270 Gross 54.5% 55.0% 55.0%

Interest 1,749 1,624 1,582 EBIDTA 6.5% 8.0% 8.7%

PBT -1,041 1,564 2,688 PAT 0.4% 1.8% 2.7%

Tax 0 281 484 Return Ratios (%)

Normalised PAT 269 1,282 2,204 RoCE 5.3% 9.9% 11.9%

EPS (Rs.) 0.3 1.7 2.9 RoE 5.7% 11.8% 14.6%

Balance Sheet Total Asset Turnover (x) 2.5 2.7 3.0

Net Worth 9,437 10,719 12,569 Leverage Ratios (x)

Loan Funds 14,759 14,763 14,013 Debt to Equity 1.56 1.38 1.11

Other Long Term Liabilities 1,004 1,004 1,004 Current Ratio 0.96 1.00 1.04

Long Term Provisions 82 82 82 Working Capital Ratios

Sources of Funds 25,283 26,569 27,669 Debtor Days 24 24 24

Net Block 5,075 5,499 5,453 Inventory days 84 84 84

Intangible Assets 18,395 18,395 18,395 Creditor Days 87 88 88

Investments 2,720 2,720 2,720 Per Share

Other Long Term Assets Face Value 10.0 10.0 10.0

Total Current Assets 19,993 23,450 27,480 Dividend 0.0 0.0 0.4

Total Current Liabilities 20,902 23,499 26,384 Valuation Metrics

Net Current Assets -908 -50 1,096 Shares Outstanding (mn) 769 769 769

Application of Funds 25,283 26,569 27,669 Market Cap. (Rs. mn) 1,26,173 1,26,173 1,26,173

Cash Flow Enterprise Value (Rs. mn) 1,38,009 1,37,534 1,36,327

Cash Flow from Operation 511 4,952 5,970 EV /Sales (x) 2.3 2.0 1.7

Capex 11,104 3,000 3,000 Price/Earnings (x) NA 98.4 57.3

Cash Flow from Investments -10,991 -2,849 -2,827 Price/Book (x) 13.4 11.8 10.0

Free Cash Flow -10,566 1,952 2,970 EV/EBIDTA (x) 34.8 24.5 19.1

Cash Flow from Financing 10,422 -1,624 -2,686 FCF Yield (%) -7.7% 1.4% 2.2%

Closing Cash Balance 203 682 1,139 Dividend Yield 0.0% 0.0% 0.2%

Financials

Page 37

Disclaimer

Spark Disclaimer

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infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker.

We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We

have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of

time.

Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered

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advisory services.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

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be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of

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Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies

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This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark

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or reliance on this report.

Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year

horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year

horizon SELL Stock expected to fall >10% over a 1-year horizon

(1/2)

Disclaimer

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement ABFRL IN

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

products or services other than those above

in connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

(2/2)

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

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This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under

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