Aditya Birla Fashion & Retail –
Initiating Coverage
August 2016
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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
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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
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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
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products or services other than those above
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(2/2)
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