INSTITUTIONAL EQUITY RESEARCH
Retail Sector
A new dawn: Pushing digital and physical boundaries
INDIA | RETAIL | Sector Initiation 11 September 2019
The Indian retail sector is going through a very interesting phase, characterised by a Companies curious interplay between e-commerce, technology, and customer experience with brick- and-mortar stores at the centre of it all. Rapid digitisation is driving new customer trends ABFRL and behaviour. Hyper-customization and mass personalization are expected to be basic Reco BUY offerings from retail brands. Millennials tend to cherish experiences rather than CMP, Rs 189 ownership; this mantra has influenced retail too, with experience (innovative presentation Target Price, Rs 262 of products) becoming the new inventory in the sector. Technology has become integral to both B2B and B2C experiences and data analytics and AI are helping companies to FLFL influence both customer-level analytics and store level assortment. Here are the trends Reco BUY that we believe will impact, influence, and shape the future of Indian retail. CMP, Rs 428 Target Price, Rs 556
1) Focus on ‘stores of the future’: Over the next 3-5 years, customer experience will overtake price and product as key differentiators for retailers. Focus on personalised Shoppers Stop services such as endless aisles, self-checkouts, VR zones, free Wi-Fi, lounge areas, Reco BUY WhatsApp shopping, wheelchair services, virtual trial rooms, and customised 3D CMP, Rs 395 printing of accessories will differentiate retailers and drive footfalls. Target Price, Rs 520
2) Investments in private labels to boost margins: With a focus on value offerings, retailers are pushing their private-label brands to control their value chains in terms of Trent designing, branding, sourcing, logistics, promotions, and pricing. This helps them to Reco BUY differentiate themselves and to offer freshness in their stores, along with improving CMP, Rs 460 their working capital and margins. Target Price, Rs 540
3) The rising importance of omni channels: E-commerce transactions are growing 3x faster in tier-2 cities (and beyond) vs. metros. Companies need to invest in their omni V-Mart Retail channels, as these reduce duplication of inventory, increase store throughput, and offer Reco Neutral seamless online and offline experiences to customers. If they do not, new challenger CMP, Rs 2145 brands are already poised to disrupt existing business models, with their e-commerce Target Price, Rs 1905 focussed distribution and influencer and Instagram-led marketing campaigns. 4) The rise of tier 2 and 3 cities with growing value fashion: The next growth phase for Indian retail will come from places with populations of less than a million, through the growing affluent households in these areas. These places will emerge as growth drivers for entry-level fashion retailers due to urbanization and swift moves away from ready- to-stitch towards ready-to-wear, based on increasing supply and value economics.
We initiate coverage on five apparel-retail companies. Trent and Aditya Birla Fashion are our preferred bets, followed by Future Lifestyle and Shoppers Stop. ABFRL (BUY): Best placed to lead the recovery in men’s wear through Madura and women’s wear through Pantaloons. Opportunity for margin expansion and reducing D/E will drive a re-rating. FLFL (BUY): One of the largest branded apparel and physical retailers in India. Virtual monopoly as a liquidation channel through Brand Factory and experience-driven shopping through Central will drive growth. Shoppers Stop (BUY): Expected to script a turnaround with the new management, relentless focus on private label, beauty category, and increased customer engagement through its personal shopper and membership programs. Trent (BUY): Premium valuation will be sustained by rapid store expansion through Westside, larger pie in value fashion through Zudio, healthy SSSG, and margin expansion. Zara continues to remain a value creator. V-Mart Retail (NEUTRAL): We believe increasing competitive intensity would mute Ankit Kedia (+ 9122 6246 4122) margin expansion, even as its return ratios remain flat over the next few years. Current [email protected] valuations are rich, leaving little room for disappointment.
Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
RETAIL SECTOR INITIATION
Table of Contents
Executive summary ··································································································· 3
India retail opportunity ······························································································ 6
Digital to impact, influence, shape the future of retail ·············································· 8
Increasing use of data analytics to understand consumer behaviour························ 11
Retailers are focusing on ‘store of the future’ ··························································· 14
Use of digital in supply chain management ······························································· 19
Focus on private label to boost margins ···································································· 21
Omni channel – Invest or perish ················································································ 25
The rise of tier-2/3 cities and value fashion ······························································· 34
Comparison across retailers ······················································································· 39
Valuations and outlook ······························································································ 45
Companies Section
Aditya Birla Fashion and Retail ··················································································· 49
Future Lifestyle Fashions ···························································································· 69
Shoppers Stop ············································································································ 91
Trent ··························································································································· 115
V-Mart Retail ·············································································································· 140
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Executive summary
Digital to impact, influence, shape the future of retail Offline retailers will find it difficult to differentiate themselves based on traditional factors such as price, promotions, location, and assortment alone. We think that ‘experience over ownership’ would be the new mantra for millennials, and ‘experience’ would be the new inventory in retail. With increasing reliance on technology through the internet and mobiles, consumers are leaving behind an enormous personal digital footprint. Also, technology is becoming intertwined and seamless – in both B2B and B2C experiences. It is providing an opportunity for retailers to acquire new customers, engage better with existing customers, and reduce costs of operations, along with other benefits that impact revenues and margins. Data analytics and AI is helping companies to influence customer-level analytics and store-level assortment among others. With the help of loyalty programs, companies understand customer preferences and aspirations, offer tailor-made promotions, and manage their entire life-cycle.
Retailers are focusing on ‘store of the future’ Customers are becoming channel agnostic, leading to the rapid adoption of multi- channel commerce. Well-integrated technology is no longer an ‘add-on’ but a ‘basic necessity’, needed to deliver unique customer experiences and increase customer stickiness. In fact, over the next 3-5 years, customer experience will overtake price and product as a key brand differentiator. To drive footfalls to stores, retailers are focusing on endless aisles, self-checkouts, VR zones, free Wi-Fi, lounge area, WhatsApp shopping, wheelchair service, virtual trial rooms, and customised 3D printing of accessories. We expect AI services, smart assistance, and cameras and sensors in stores delivering personalised services to customers in the medium term.
Use of digital in supply-chain management We believe supply-chain challenges are multi-fold in the current environment including: (1) inventory management, (2) demand forecast accuracy, (3) order fulfilment, and (4) returns management. Technology has helped design systems to manage and enhance exchange of information between various supply-chain partners to attain outcomes such as increased control over demand planning, better inventory management, and effective and near real-time tracking and delivery. Single view of inventory for efficient execution of online orders is a key for higher sales through the omni channel. Using technology to establish a two-way flow of information, retailers have started to adopt the ‘replenish and pull’ supply-chain model against the ‘forecast and push’ model, leading to better inventory management.
Focus on private labels to boost margins All Indian retailers are focussing on private-label apparel, given the inherent advantage of differentiation. Our channel checks suggest that tier-2/3 customers regard ‘quality’ and ‘value for money’ much more than ‘brand’. Private label has inherent advantages such as: (1) it allows control over the value chain in terms of design, branding, sourcing, logistics, pricing, display, and promotions; (2) offers an opportunity to study consumer shopping habits and preferences as well as global fashion trends and immediately launch products in the market to improve freshness in the store; (3) brings substantial improvement in working capital by increasing inventory turns; (4) helps create a distinctive identity that sets companies apart from competitors, and (5) increases margins.
Omni channel – Invest or perish E-commerce transactions from tier-2 cities and beyond are growing 3-times faster than those in metropolitan cities – making this a huge untapped market for the next growth phase. Further, the cost of servicing tier-2 and other smaller cities is likely to reduce as supply chain and logistics companies are innovating digitally. Omni-channel initiatives such as ‘click and collect’ will allow companies the luxury of not needing to
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RETAIL SECTOR INITIATION maintain a separate inventory at the warehouse and not incur extra costs. This would help companies to reduce duplication of inventory, increase throughput of the store, and offer customers seamless online and offline experiences. Younger consumers’ preference for novelty, coupled with digital technology and social media, has helped new brands to enter the market and disrupt the business models of legacy brands, dramatically levelling the playing field. Instagram advertising and influencer marketing has helped their cause coupled with e-commerce focused distribution.
The rise of tier-2/3 cities and value fashion The next leg of rapid growth in retail, in terms of consumption expenditure, is expected to happen in towns with populations of less than a million, as emerging cities are expected to see the highest growth in number of elite and affluent households. We believe retail companies would innovate for these markets and open smaller stores to reduce upfront capex, and use these stores for omni-channels. Tier- 3/4 cities have started to emerge as growth drivers for entry-level fashion retailers due to urbanization and swift moves away from ready-to-stitch towards ready-to- wear, based on increasing supply and low-price economics. We believe pan-India value fashion retailers are aggressively expanding their reach and have been able to grow faster than the market, based on higher share of private labels, high customer experience and engagement, robust supply chain, and fresh fashion. Economy and mass retailers have established their footprint based on knowing local fashion preference, strong ground level understanding, and converting customers to organised retail from the unorganised market.
We initiate coverage on five apparel-retail companies: ABFRL: BUY TP Rs 262 – upside 39% FLFL: BUY TP Rs 556 – upside 30% Shoppers Stop BUY TP Rs 520 – upside 32% Trent BUY TP Rs 540 – upside 17% V-Mart Retail Neutral TP Rs 1,905 – downside 11% Trent and ABFRL are our preferred bets, followed by FLFL and Shoppers Stop.
Aditya Birla Fashion and Retail Well placed to capture the shift emerging out of rising disposable income towards branded apparel – through its leading brands of Van Heusen, Allen Solly, Louis Philippe, and Peter England. Long-term value creation will come from investments in its innerwear business, tie-ups with international brands, and network expansion of Pantaloons. Opportunity for margin expansion across both divisions and reducing D/E would boost return ratios.
Future Lifestyle Fashions Differentiated business model – owned brands and physical retail through Brand Factory (a discount format store) and Central (department store chain) – gives it an edge over competitors. Brand Factory’s virtual monopoly as a liquidation channel for third-party brands in the offline space brings in unprecedented customer footfalls while Central has positioned itself as a mini-mall. Healthy SSSG, consistently increasing operating margins, and strengthening balance sheet aided by improving inventory turns and reducing D/E augur well for FLFL over the medium term.
Shoppers Stop To script a turnaround in its business over the next three years in the following ways: steady store openings (5 a year), a stronger leadership position in the beauty category (16% of revenue), doubling the share of its private-label contribution while increasing customer engagement through personal shoppers
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(14% of revenue), mining its First Citizen Membership Program, and targeting the younger generation through investments in its omni channel. These (above) measures will consistently deliver mid-single-digit SSSG and sustainably drive operating margins to 8% in FY22 from 7.3% in FY19 (ex-IndAs 116). Current stock valuations do not factor the new management team driving STOP’s operations from here.
Trent Gearing up for rapid store expansion; has shed its conservative approach through its Rs 9.5bn fund raising. Aiming for a larger slice of the value fashion pie through its 215 Zudio stores by FY22. SSSG and margins gains through its focus on the back-end, higher inventory turns, private label portfolio, and offering an international experience to customers. Reducing losses in Star Bazaar and improving traction in Inditex JV augurs well over the medium term. At an inflection point – the execution of its strategy remains its key distinction vs. competition.
V-Mart Retail Value-retail chain, well-poised to capture the opportunity of a shift to organised retail in tier-3 and tier-4 cities with aggressive store openings and a first-mover advantage. While it has built a successful and highly profitable business model in mass value- fashion retail, increasing competitive intensity would mute margin expansion, even as its return ratios remain flat over the next few years. Current valuations are rich, leaving little room for disappointment.
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RETAIL SECTOR INITIATION
India Retail Opportunity Long-term opportunity remains intact
Indian retail market (USD bn) Retail spending across cities (USD bn) in 2017 Unorganised Retail Organised Retail & E-commerce 1800 1600 1400 355 1200 439 1000 168 710 800 78 66 600 1222 66 400 28 822 74 632 200 370 66 0 Top 2 cities Next 6 Next 16 Next 50 Rest of Total FY12 FY17 FY20 FY25 India
Source: Technopak
India’s consumption opportunity is well distributed Per Capita Income Below USD 1,300 USD 1,300-2,000 USD 2,000-2,500 More than USD 2,500 No of States/UT 8 7 8 8 Goa, Haryana, Kerala, Assam, Bihar, Jharkhand, AP, Chhattisgarh, JK, Arunachal Pradesh, Gujarat, Maharashtra, Sikkim, States MP, Manipur, Meghalaya, Nagaland, Rajasthan, HP, Karnataka, Mizoram, Uttarakhand, Delhi, Odisha, UP Tripura, WB Punjab, TN, Telangana Chandigarh StateGDP-FY17(USD bn) 500 460 752 674 Contribution to National GDP 21% 19% 32% 28% Growth Rate (5Y historical) 12.0% 13.2% 12.7% 12.0% India represents a well dispersed opportunity No of districts 278 135 192 107 Urban Population (mn) 97 74 108 98 Source: Future Retail
Share of retail across categories
80% FY17 FY21
60%
40%
20%
0%
Source: Technopak
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Apparel and accessories – second-largest retail categories (2017) Categories (USD bn) Share of Retail Retail Business % of organised retail Organised Market Size Key Retailers Food & Groceries 66.7% 474 3.40% 16.1 Big Bazaar, Dmart, Reliance Fresh, Easy Day, More etc Apparel & Accessories 7.9% 56 24.30% 13.7 Shoppers Stop, ABFRL, Lifestyle, FLFL, Raymond, TCNS Jewellery& watches 7.7% 55 27.70% 15.2 Kalyan Jewellers, Malabar, Tanishq Consumer electronics 5.9% 42 26.60% 11.2 Samsung, Vijay Sales, Croma, Reliance Digital Home & Living 4.3% 31 10.50% 3.2 Home Centre, Home Stop, Home Town Pharmacy & wellness 2.9% 21 10.50% 2.2 Apollo, MedPlus Foot Apparel 1.2% 8 26.70% 2.2 Bata India, Clarks, Metro Shoes, Adidas, Nike Others 3.2% 23 12.50% 2.9 Source: Technopak
Penetration of organised retail across various categories Increasing size of branded and organised retail over time Categories 2007 2017 2021 (USD Bn) 2012 2017 2020 Food and Grocery 1% 3% 5.70% Total Apparel Market 31.6 50.8 65.8 Apparel and Accessories 14% 24% 36% Branded Apparel 7.9 18.8 31.6 Foot apparel 10% 27% 34% Branded Apparel % of total Apparel 25% 37% 48% Jewellery and Watches 6% 28% 34.80% Organised Apparel 6.4 12.2 21.7 Organised apparel as % total apparel 20% 24% 33% Pharmacy and Wellness 21% 11% 30% Consumer Electronics 3% 27% 12.60% Home and Living 6% 11% 12.60% Others 14% 13% 14.60%
Source: Technopak
Share of men, women, and kids in the apparel market
2017 2020
Kids, 20% Kids, 22%
Men, 39% Men, 42%
Women, Women, 38% 39% Source: Technopak
Share of individual categories within menswear Share of individual categories within women’s wear 1% 1% 0.4% 3% 1% 4% Shirts 2% 2% 1.2% Salwar Kameez/Ethnic 7% Trousers Sarees 28% 3% Denims 3% Innerwear 7% Blouse/Petticoat T-Shirts 5% 33% Winterwear Innerwear Sleepwear 7% Ethnics 15% Tops/Shirts Winerwear Denims 7% Suits/Coats Trousers/Skirts Activewear T-Shirts 22% Formal Jackets Others 14% 33% Othes
Source: Technopak
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Digital to impact, influence, shape the future of retail “With e-commerce itself becoming a traditional business, pure e-commerce players will soon face tremendous challenges. In coming years, we anticipate the birth of a re-imagined retail industry, driven by the integration of online, offline, logistics, and data across a single value-chain” – Jack Ma, Letter to Shareholders.
In the current retail environment, where consumer spending is curtailed, consumers are value conscious, digitally connected throughout the day, socially active, and channel agnostic, offline retailers will find it difficult to differentiate themselves based on traditional factors such as price, promotions, location, and assortment alone.
While India is a price-conscious market, we believe price differentiation is not always a sustainable business strategy. We think that ‘experience over ownership’ would be the new mantra for millennials, and ‘experience’ would be the new inventory in retail. Retail brands would need to create a resonating and personalized experience for customers. While majority of sales, even today, happen through the offline channel, more than 20%+ of overall sales are influenced by digital mediums. Therefore, brick-and-mortar retailers need to invest in omni-channel customer engagement to garner a higher share of their customer’s wallet.
With increasing reliance on technology through the internet and mobiles, consumers are leaving behind an enormous personal digital footprint. This, combined with the number of consumers interacting with a retailer’s brand, loyalty program, promotions, and customer service, makes it easier for retailers to know their consumers. While the retail sector has always been data intensive, companies have now started to store, analyse, and use this data more effectively with cheaper, faster, and easier data-management tools. Indian retailers have already started Also, technology is becoming intertwined and seamless – in both B2B and B2C implementing many digital technologies experiences. It is providing an opportunity for retailers to acquire new customers, to improve performance and are open engage better with existing customers, and reduce costs of operations, along with to adopting new capabilities to shape a other benefits that impact revenues and margins. The ability to make business long-term sustainable business model. decisions at the speed of light would give companies a competitive edge.
Companies building capabilities across verticals by leveraging digital to improve efficiencies Verticals Capabilities Omni-channel Integration of store, app and web with features In-store endless aisle, digital kiosks Integration of marketplace with stores Analytics-driven Deciphering customer behaviour and personalised communications personalised services Consumer loyalty program based on 'Customer Lifetime Value' Virtual trial rooms Assortment optimization Analytics driven bottom up retail planning Image recognition/AI-driven design optimization AI-driven buying and margin tracking Data science-led demand forecasting Leads for private label Supply-chain management Segmented supply chain as per the merchandise mix Automated replenishment system Digitised sourcing capabilities MIS Ready dashboards and self-service reports for live monitoring and faster turnaround to improve productivity Source: Industry interactions, PhillipCapital India Research
Companies are undertaking experiments to digitize the in-store experience with elements such as billboards, magic mirrors, endless aisles, and apps. With increasing omni-channel penetration, these elements help offer end-to-end and seamless experiences to customers.
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Customers’ in-store journey in the future would be led by digital
Source: BCG Facebook Fashion Forward 2020
The outcome of retail transformation on footfall, conversion, and bills
Source: Deloitte Touche Tohmatsu India LLP
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Opportunity from digital in the current business PhillipCapital’s First Annual Retail Conference on 14th March 2019 in Mumbai had the theme ‘Disruption in retail through Digital Transformation’. Then, the panel discussion reaffirmed our thesis that technology continues to impact, influence, and shape how and where consumers shop. Retailers need to adapt their strategies to changing consumer preferences, behaviours, and habits.
Here are the key takeaways: The buzz words in retail used to be location, location, location. Now they are The biggest change is consumerisation technology, technology, technology. Retailers all over the globe and in India want of technology, which has made to be algorithmic. The biggest change is consumerisation of technology, which customers empowered like never has made customers empowered like never before. They demand more variety, before. They demand more variety, personalisation, and customization, and use all channels to shop. In order to personalisation, and customization, and influence decision-making at every stage of their customers’ purchases, retailers use all channels to shop. have to stay ahead of their customers’ changing lifestyles and purchase journeys. AI (artificial intelligence) is the new electricity. Currently, most of the transformation is at the customer end, because that has been disrupted the most. Customer data trail is used to offer promotions, personalized services, products, and pricing. Retailers need to look at customers, not from the transaction perspective, but from their lifetime value standpoint. They also need to take a 2-3 year view, not just for one transaction. Customers’ demands are compounding every day, and their expectations from retailers are only growing across the value chain. This is challenging the traditional retailers’ business models. Newer companies do not have the baggage of any system and distribution channel, which is why they can easily launch new products even as traditional companies are bogged down due to legacy systems. New companies can redefine their channel and products to cater to new customers, while old and traditional retailers and brands need to collaborate with new start-ups to learn and become agile to spur their growth. Presently, retailers are 10-15 years behind customers in terms of using technology. Sellers need to work harder to stay relevant to customers. While until a few years ago, retailers were solving supply-chain issues, customer- experience problems have taken centre stage now. Retailers need to change their mind-set to take a more long-term view. Presently, they have a QSQT (quarter se quarter tak) mind-set and expect immediate results.
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Increasing use of data analytics to understand consumer behaviour
Adopting digital to become consumer-ready and for internal transformations Companies are making more investments to enhance data analytics capabilities by setting up data warehouses for aggregating all customer transactions and interactions, both online and offline. Going forward, without data crunching, even the benefits of an omni channel cannot be reaped to the full extent. Data analytics and AI will help companies to influence the following areas:
Customer-level analytics Product-level analytics Transaction-level analytics Data insights and promotions Store-level assortment New store location evaluation Consumer panel for private brands
Source: Mary Meeker – Internet trends 2019 Data on footfall count is indispensable for any retailer Traditionally, retailers used manual methods for footfall collection, which faced challenges such as accuracy and manual errors, limitations due to no formal record maintained in terms of growth, dip, or any kind of variation from peak and lean periods during the day, etc. With advancement in technology, retailers are adopting technologies to automate the process with sensors. Retailers are now able to capture: “Today, we can utilise data and technology Demography: Identify visitors’ gender and age. to send customised offers aligned to each Dwell analysis: Measure zone-based performance, as per number of customers individual customer’s preferences. This also and average time spent. boosts the conversion rate by 1.5-2%. This is the change that customization is bringing Heat map: Indicate store traffic movement across time zones. about in terms of consumerism and how you Queue management: Alerts to store managers to reduce queue length and retail a brand today.”– Abhishek Shetty, increase customer experience. Head – Marketing PR & Loyalty, CELIO
With the help of loyalty programs, companies understand customer preferences and aspirations, offer tailor-made promotions, and manage their entire life-cycle.
Loyalty customers (mn) – help to increase footfalls and ticket size 30
25
20
15
10
5
0 Trent FLFL Shoppers V-Mart Pantaloons ABFRL Lifestyle Stop (Lifestyle)
Source: Companies, PhillipCapital India Research
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Data-plumbing tools are helping business real-time Salesforce + Adidas = Collect data to increase customer input and improve products Salesforce: Annual Revenue Salesforce = Customer Engagement
Adidas: E-Commerce Sales Adidas = Customer Co-creation
Source: Mary Meeker – Internet trends 2019
Management commentary on importance and use of data analytics ABFRL’s focus is on enabling personalized consumer campaigns leveraging the rich data that it has from the loyalty programs and building single-view of customer data models. This has been successfully piloted in Pantaloons and is now being scaled up to extend across brands as well. While analytics-led customer engagement is a key priority, the company has also initiated pilots to knowledge enable core business processes including design, merchandising, allocation and markdown management. – ABFRL in FY19 Annual report
In FY 2019, we effectively carried out 300+ campaigns with 700+ sub-segments and regional segments, customized to each member. First Citizen insights drive personalized experience and relevant recommendations suggested to members who are attended by Personal Shoppers. The insights influence productions, promotion and campaign design and planning as well. – Shoppers Stop FY19 Annual Report
We have created a dedicated analytics team to analyse the proprietary First Citizen data. The team is tasked with the responsibility to understand the shopping data and cull insights. These insights (branded internally as “First Insight”) are used to create targeted one-to-one communications and relevant offers for customers which in turn lead to incremental sales. In FY 2018, we have achieved Rs415 crores worth of incremental sales through such initiatives. – Shoppers Stop FY18 Annual Report
ClubWest membership allows customers to make purchases and avail offers in all our stores. Power targeting and customized campaigns have helped us in improving contribution of the active members to over 80% and increasing shopping frequency of less active members. In FY19, our Clubwest base grew by 14% to more than 50 lakh memberships. – Trent FY19 Annual Report
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The Consumer and Digital Labs (C&D Labs) is the data, technology and innovation platform of Future Group that is accelerating the realisation of its digital business strategy. C&D Labs has pioneered Tathastu, the largest platform for Industry 4.0 technology development. It helps in curating next-generation consumer interactions by combining artificial intelligence, data science and emerging technologies with consumer platforms. – FLFL Annual Report FY19
Case Study: How Myntra uses technology To deliver fast fashion as quickly as possible (with the latest design trends) and at high-quality and low-cost, Myntra used AI and high-end graphics processing units under its ‘Rapid Technology Project’ to successfully launch products that had been turned around in less than 35 days, which would otherwise take 180 days. The technology was masterminded by machines and engineers with no designing background. For example, it has launched private label brands such as ‘Here & Now’ and ‘ModaRapido’, which have apparel specifically designed by machine learning. Fashion being a high-width and low-depth category, it is hard to manage inventory online and offline. Therefore, Myntra uses Big Data to understand in which stores to place what inventory. In its ‘End of Reason Sale’, Myntra used predictive analysis in the AI engine to predict consumer demand in bigger cities and shipped products that consumers usually bought in that particular area to storage facilities near that area – before the actual buying started. This helped them to deliver the product faster to the consumer compared to competitors.
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Retailers are focusing on ‘stores of the future’ While customers would want to seamlessly shop across channels, they would still shop offline in certain categories to have ‘experiences’ that they cannot get online. “If you build a great experience, We believe they expect information, convenience, speed and technological customers tell each other about that. integration for simplified shopping. They are becoming channel agnostic, leading to Word of mouth is powerful” – Jeff Bezos – CEO and Founder of Amazon.com the rapid adoption of multi-channel commerce (it depends on category to category and hence experience makes a difference). Data analytics will increasingly incorporate AI tools to accurately predict their next moves.
Well-integrated technology is no longer an ‘add-on’ but a ‘basic necessity’ for business today, needed to deliver unique customer experiences and increase customer stickiness. In fact, over the next 3-5 years, customer experience will overtake price and product as a key brand differentiator. While some retailers tried their hand at this, sketchy implementation leading to non-adaptability led to their failure. However, now that both customers and retailers have matured, technology adoption will be faster and more seamless.
Case studies in India
Benetton India - Reinventing its India stores Benetton is planning to revamp its existing stores in India along its global lines. It will replicate its London store concept in all Indian stores over a period. The first concept store for the brand will be launched in New Delhi. The London store has no cash desk. It uses technology to raise invoices along with making sure that if a garment is not available in store, it can still be delivered to customers. The London store also boasts of a knitwear theatre displaying the brand’s extensive knitwear collection, LED-screen clad 12-ft. arches, a lounge area, and touch screen interactive tables. By end of 2019 at least six stores in India would be aligned to the global direction with focus on technology.
Myntra’s Roaster Go stores with self-checkout and zero assistance Myntra introduced an element of technology in its Roaster Go stores to enhance customer experience. These stores have digital fashion kiosks that enable product discovery without support and a self-checkout in 30 seconds, with no time wasted in scanning individual products or removing security tags. Product discovery through digital fashion kiosks: The stores are 100% RFID enabled and offer customers a fusion of an online-offline experience. Shoppers can place RFID-tagged garments on the digital fashion kiosks and instantly see all product features including size, price, fabric, washes, colour, etc., on the RFID- enabled digital screen and also see how it looks on models (studio images) wearing them. Offline shopping at real-time online prices - For the first time ever, customers can buy all the products at real-time online prices, which they can discover on the digital screen when they hold the product against it. The Roadster Go stores will enable shoppers to take advantage of the in-store touch and feel experience, while making purchases at real-time online prices. 30-second self-checkout - Long queues and delayed checkouts, common at brick and mortar stores, have been eliminated at this store. Customers can now experience a perfect 30 second self-checkout by placing all the products in the RFID tray, which will capture the product details and display the bill on the screen instantly. This can then be paid using a debit/credit card upon confirmation. There is no need to scan individual products or remove security tags from each garment.
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Decathlon – Phygital experience Express checkout – Customers can place their items in an RFID-enabled kiosk, which automatically detects items and totals the bill. Customers have to just pay via card (no human assistance required). Accessing the entire range of products – The entire offering of Decathlon India’s 50 sports and 5,000 products are on the mobile application. This allows users to access and explore products that might not be featured in store. They can then order the product with free home delivery within 24 hours. Locating product in store – Users no longer need to ask for assistance in finding a product. An easy to use interactive map located at the store entrance allows them to quickly look up products and directions to where they are in the store. Virtual reality zone – Virtual reality technology for users to experience outdoor equipment such as camping tents. Users can use the VR experience to choose various terrains – mountains, beach, forest– and different weather conditions – rainy, sunny, windy or cloudy to experience the features of the camping tents. Miniature tents help them get the look and feel (texture) of the tent. Test zone – These urge people to try a new sport such as football, basketball, cricket, cross training and rock climbing.
VR Zone Test Zone Access entire range on app
Source: Company, PhillipCapital India Research
Self-checkout store at Lifestyle Personalised service offered by Central
“Retail is moving towards providing customers with a seamless, simple, hassle-free and personalized shopping experience. Frictionless journey from discovery to purchase supported by customer-focused services will be the key to attract and retain customers,” Vasanth Kumar, MD, Lifestyle International
Source: Company, PhillipCapital India Research
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ABFRL’s Van Heusen Style Studio has brought in cutting-edge technologies via virtual mirrors, fit scanners, tablet-bearing sales assistants, virtual trial rooms, etc., and combined it with personalised interactions. Customers choose the style by category, colour, patterns, fabric, and move on to the full-length ‘Virtual Trial Mirror’, where the shirts, tees or trousers selected, can be virtually previewed on themselves without stepping into a physical trial room.
Van Heusen My Fit station Van Heusen - Virtual Trial room
Source: Company, PhillipCapital India Research
Raymond – Customised 3D printed accessories Raymond – Design it yourself kiosks
Source: Company, PhillipCapital India Research
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Smart Assistant – Helps compare products in store Change trial room lights according to occasion
Source: Company, PhillipCapital India Research
Focus on Visual Merchandising In order to drive footfalls in stores, companies are consciously investing in visual merchandising. With increasing competition, we believe customers always walk in to a store that has more productive displays, which also help to communicate brand positioning and help up-sell and cross-sell merchandise. The saying goes ‘Jo dikhtahai who biktahai (what can be seen sells)’ is critical to increase sales and engage with the customers. This allows brands to increase their presence in store and create a bespoke brand experience. However, we believe that if products are not good, then no amount of formatting, technology implementation, or visual merchandising can help to increase their sales.
Brand display guidelines to be followed by all stores of a retailer
Brand display Guideline Walls to have colour story-led display, followed by collection-led display Celebration collection (including PKDs, kurtas, bottoms, dresses of the same collection) to be displayed on wooden hangers in celebration wall & floor section only Do not mix celebration collections with other collections on walls and floors PP table to be placed at the entrance of the customer flow direction Bottoms displayed on the browsers to be next to bottom-wear gondola Dupatta display unit to be displayed with bottom and dupatta gondola Rs799MRP kurtas not to be displayed on the wall
Source: Industry, PhillipCapital India Research
Video walls are being deployed in some stores, but right now they just play videos. At some point, they will have touch enablement, a camera, sensors, and scanners. That’s when a world of opportunity will open up for retailers.
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AI driven personalised advertisement in the store could be the future
AI to identify customers’ gender, age and expression – to customize advertisements in-store
Source: PhillipCapital India Research
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Use of digital in supply-chain management
Responsiveness of supply chain management plays a crucial rule The retail supply chain is a complex animal that has been affected by everything from the uptick in e-commerce to the move to omni-channel distribution. With uncertainty in customer demand, responsiveness of supply-chain management plays a crucial rule in not just delivering a seamless experience to customers, but also offers opportunity to outperform competition at the lowest possible cost. Optimal working capital, coupled with effective space utilization at the stores, is key to good supply-chain management. We believe there are many supply-chain challenges in the current environment – one, inventory management, second, demand-forecast accuracy, third, order fulfilment, and fourth returns management.
Traditionally, retailers would use technology to improve stock visibility, accuracy, Technology has helped design systems reduce layers of movement, automation, etc., which have now become basic hygiene to manage and enhance exchange of information of various supply-chain for big retailers. Technology has helped design systems to manage and enhance partners to attain outcomes such as exchange of information of various supply-chain partners to attain outcomes such as increased control over demand increased control over demand planning, better inventory management, and planning, better inventory effective and near real-time tracking and delivery. Real-time data analytics help solve management,and effective and near challenges such as re-stocking. real-time tracking and delivery
Single view of inventory for efficient execution of online orders is a key for higher sales through the omni channel. Retailers have now started to include several deliveries and return strategies to meet the demands of omni-channel consumers. Each delivery and return is unique in term of logistical requirements, as it may include drop shipping, click-n-collect, same-day delivery, etc. The systems take into account reverse logistics, leverage physical store stocks, online-offline integration on returns, and exchange.
Maintaining availability and freshness of merchandise is the most important in fashion retail as it leads to higher sales. This is also a function of increasing seasons. Retailers further divide season by introducing more drops and designs mid-season to keep up with consumer demands. Fast fashion players such as Zara and H&M have substantially shorter cycles and inventory turns of 8-10x.
Lifecycle of the product in the supply chain has reduced Our industry interactions suggest that the over last two years, the lifecycle of the product in the supply chain has reduced to less than 3 months from 6 months earlier. We believe the structure of the warehouse is directly influenced by seasonality. The utilisation of space, procurement, and manufacturing is also impacted by seasonality.
From a 4-season model, the company (ABFRL) will move to a 12-season model, allowing it to reduce lead times significantly. This will enable it to continue its journey of being closer to the market in terms of identifying and addressing latest fashion trends. It is a significant shift that is enabling it to offer greater freshness and latest fashion, in line with changing consumer trends – ABFRL in its FY19 Annual Report.
Typically, retailers forecast inventory based on past sales data, climatic trends, recent fashion trends, economic conditions, demographic factors, festivals, and finally gut feel. In the past, retailers would pre-order inventory a few months ahead of the season using the forecast; 100% of the inventory was sent to respective stores. Here, while some inventory was sold, some moved slowly, which needed to be liquidated in end-of-season sales. There was also opportunity loss, as demand for fast-moving inventory was not replenished due to long manufacturing and transporting lead times and minimum order quantities that vendors demanded. Hence the ‘forecast and push’ supply-chain model led to lower profitability.
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Surplus vs. shortage for bestselling styles Bestselling style (Sell through of about 55-60% in 4-5 weeks)
Impact of forecast and push model on sales and margins Best sellers - Fast Sell well across stores Cause stockouts Sales lost due to selling SKUs inability to replenish The stragglers Sell well in some stores, Stockout of some SKU's and Lost sales and margins poorly in other surplus of others Slow movers Sell poorly across all Surplus of non-selling SKUs Less margin stores Source: Images Retail, PhillipCapital India Research
However, with the use of technology, and establishing a two-way flow of information, first there is a flow of goods from the vendor to the warehouse/showroom while at the same time the system accesses sales data from the showroom. Hence, below a certain level of inventory, the warehouse automatically sends new inventory to the store. This helps in using the ‘replenish and pull’ model. Most companies hold inventory at the central/regional warehouse and replenish stores based on the sales to end customers, ensuring that the merchandise is held at the point of highest forecast accuracy. This helps them reduce both stock-outs and surplus.
Companies prefer working with vendors that can offer end-to-end solutions Vendors are expected to offer solutions from fabric to garment – to reduce lead times. They are sealing deals with mills for large quantities of fabric, in which vendors can directly source the fabric from the mills/companies. This helps them to reduce lead times in case a particular style is gaining traction and needs to be re-ordered. Vendors are also expected to keep some spare capacities to quickly replenish orders. Companies have started increasing ‘drops’ in the store, in which every week there would be fresh apparel in the stores, i.e., new styles/designs are introduced at regular intervals and not at the same time. This helps reduce working capital and bring new styles to the market, which they would have otherwise missed earlier.
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Focus on private labels to boost margins All Indian retailers are focussing on private-label apparel, given the inherent advantage of differentiation. With the help of data mining, retailers are in a better position to zero-in on merchandise and products that sell well and on trends that are in vogue. Our channel checks with the industry suggest that tier-2/3 customers regard ‘quality’ and ‘value for money’ much more than ‘brand’. We believe that by controlling the entire value chain – from contract manufacturing to logistics – companies can offer 20-30% lower prices.
Private labels: Allow control over the value chain in terms of design, branding, sourcing, logistics, pricing, display, and promotions. Offer an opportunity to study consumer shopping habits and preferences as well as global fashion trends and immediately launch products in the market to improve freshness in the store. Bring substantial improvement in working capital by increasing inventory turns. Reduce shrinkage. Help create a distinctive identity that sets companies apart from competitors. Help increase gross margins. Offer high return on capital employed.
Globally, nearly a third of total apparel sold are private-label brands, while in India, the number is in low teens. Online players such as Myntra derive 25% of their revenues from private labels and plan to aggressively grow this segment (15 brands currently).
Easier for retailers to create private-label brands now With increasing convergence through the omni channel, it is now easier for retailers to create brands, as it can cater to niche ‘white spaces’ within stores and online. However, retailers do face the challenge of raising marketing budgets, as they need to build a private label brand online and in-store to drive sales. Private labels offer the advantage of low price to the customers without compromising on product quality and keeping up with high fashion.
Typically, third-party brand retailers work on sale or return (SoR) model and have zero inventory risk, but with a growing share of private labels, companies would need to commit capital for inventory. We believe that over time, companies would need to invest significantly in back-end processes and designing in order to compete with branded retailers.
Share of private label Price of a white shirt across brands and private label 120% 3000
100% 2500
80% 2000
60% 1500
40% 1000
20% 500
0% 0 WES - Stop - Network Code - Louis Arrow Zodiac WestsideShoppers - Lifestyle Philippe Stop Reliance Trends
Source: Companies, PhillipCapital India Research
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To increase its private-label share, Shoppers Stop invested Rs 100mn to re-establish and build this segment. It launched entry-level price points across brands and slashed prices across the range. It is now going with the principal of ‘value and fashion’ vs. ‘fashion and premium’ earlier. Product pricing is now at a 20-25% discount to marquee brands against 0-10% discount earlier. It has also decreased the number of options in each brand to deliver higher throughput rather than having many SKUs (stock keeping units).
Strong private brand portfolio to straddle price points – Shoppers Stop Private Label Brands (prices mentioned are the starting prices) Women - Ethnic kurta: Rs 699, shirts: Rs699, tops: Rs 399, salwar kameez& dupatta (SKD): Rs 1,299. Men - Formal wear shirts: Rs 799, trousers Rs 1,299, T-shirts Rs 399, belts and wallets, accessories. Kids - Boys and girls. Women - Tops and tees Rs 399, dresses Rs 899, handbags Rs 399, bottom wear Rs 699. Men - Shirts Rs 1,050, T-shirts Rs 399, jeans Rs 1,299, shorts Rs 799 Kids - Boys, girls, infants
Women Indian wear - Footwear, handbags, kurtas Rs 699, salwar churidar suits Rs 1,550, wallets & clutches
Women ethnic wear - Kurtas Rs 1,049, SKD Rs 1,750, wallets & clutches
Women - Tops Rs 599, shirts Rs 999, shrugs Rs 999, dresses Rs 799
Bags
Men - Shirts Rs 999, T-shirts Rs 499, cargos & trousers Rs 1499, accessories
Source: PhillipCapital India Research
Pantaloons has consistently increased the share of its private-label brands – to 62% in FY19 from 52% in FY15. Since January 2019, it has internally launched Project Phoenix, where it will change its display every 15 days with 40% new products. Hence, in a 3-month season, it would have 6 display changes, which would give the store a fresh look, offer new trends, and excite customers to walk-in to the store regularly. Further, over the last few years they have rationalised both internal and external brands and currently have 26 private label brands. The management is focusing on improving Pantaloon’s brand positioning and visibility, to capitalize on its strong brand equity. For this, it is investing in marketing and has upped its advertising spends significantly over the last few quarters.
Private label/in-license brands in the Pantaloons store Men
Women
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Kids
Pantaloon, Lifestyle advertising: Attractive price points to attract customers
Source: Company, PhillipCapital India Research
Attractive pricing for Pantaloons’ private label in the women’s category Brand Entry level pricing Maximum pricing Kurta Dress Dupatta Palazzo Kurta Dress Dupatta Palazzo Rangmanch Rs 799 Rs 2,499 Rs 299 Rs 799 Rs 1,999 Rs 2,799 Rs 499 Rs 1,299 Top Tunic Skirt Dress Top Tunic Skirt Dress Akkruti Rs 599 Rs 799 Rs 1,499 Rs 999 Rs 1,299 Rs 1499 Rs 1,999 Rs 1,999 Top Dress Skirt Pants Top Dress Skirt Pants Forever Glam Rs 499 Rs 999 Rs 799 Rs 1,299 Rs 1,299 Rs 1,999 Rs 1,299 Rs 1,499 T-Shirts Tops Dress Skirt T-Shirts Tops Dress Skirt Honey Top Rs 249 Rs 249 Rs 799 Rs 799 Rs 799 Rs 999 Rs 1,699 Rs 1,199 Source: Company, PhillipCapital India Research
Westside’s private-label share has consistently increased – it was 80% in FY13 and touched 97% in FY19. The company has 26 private brands across categories such as apparel, footwear, lingerie, cosmetics, perfume, and handbags, and accessories. Higher ticket-size categories have helped Trent grow its SSSG consistently. Westside has been able to position itself as an aspirational brand and has been able to predict trends – which is evident from its low shrinkage. With a competitive environment and an audience with significant real-time exposure to global fashion trends, Westside is increasingly focusing on rapid delivery of latest fashions, strong emphasis on freshness of the range through the season, and sharply reducing the “design to market” timeframe.
Westside is quick to identify missing gaps in its portfolio, launches/refreshes its portfolio frequently, and expands its brands every year. It also does not shy away from closing down unprofitable brands and releases their space for other brands.
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RETAIL SECTOR INITIATION
Brands introduced by Westside over the years along with closures FY15 FY16 FY17 FY18 FY19 Wunder Love (Women’s Wunder Love (Swimwear Utsa (Ethnic kurta for women) Exit from Bodybasics (everyday Lingerie) range) Gourmentwest food essentials) Sassy Soda (Fashion for young Baby Hop (Infant wear) Vark (Elegant salwar kameez Exit from Lakeland – Diza (ethnic wear for Plus curvier women) dupatta sets) kitchenware size women) Studio West (exclusive beauty Denim Shop (under the NUON Luna Blu (Women’s’ footwear) Studiofit (sports WES (Contemporary and zone) brand) inspired activewear) confident - office wear for men) Oak & Keel (Fashion for beefed Soleplay (Men’s footwear) Yellow Feet (Kids up men) footwear) Source: Company, PhillipCapital India Research
Vendor management is very crucial to successfully implement the private-label strategy. Companies are constantly looking to drive cost efficiencies in product sourcing. Hence, most are consolidating their vendors. They are looking to offer sizeable business to vendors against favourable payment terms and faster delivery timelines.
V-Mart retail vendor consolidation over time 3000
2500
2000
1500
1000
500
0 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
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Omni channel – Invest or perish Lower data prices and the availability of almost unlimited content for entertainment, multimedia, and information has led to an impulsive usage of the internet, leading to significant growth in mobile data traffic in India. We believe that the anticipated increase in users and usage in rural areas will largely drive India’s future internet growth. In 2019, the rural internet density (i.e., the number of internet subscribers per 100 people) was at 25.4, compared to 98 for the urban population with blended penetration at 49. Currently, India has 637mn internet users, which is expected to grow to 829mn users by 2021, led by availability of cheap handsets and lower prices.
Growing internet users in India (mn) Internet penetration in India 60% 10
50% 8
40% 6 30%
4 20%
10% 2
0% 0 2013 2015 2017 2018 2019 Mumbai Bengaluru Chennai Pune Hyderabad
Source: TRAI, IBEF, PhillipCapital India Research
Growth of Indian e-commerce market size E-commerce comprises one-tenth of total global retail sales. In India, e-commerce market share is in its early growth stages and accounts for less than 3% of total retail sales. Indian e-commerce saw revenues of US$ 38.5bn in 2017 and is likely see a CAGR of 12% to touch US$ 69.2bn by 2022. Nevertheless, the market has the potential to grow to US$ 130bn over the same period based on (best case assumption) more avenues for digital payments, accelerated broadband penetration, increasing number of product options, vernacular language user interface.
E-Commerce market size in India (US$ bn) Growing e-commerce users in India
140 Base Forecast Total Potential No. of e-commerce shoppers (Mn) 500 Avg Spends per e-comm shopper ($), rhs 460 120 440 400 100 420 80 300 400 60 200 380 40 100 20 360
0 0 340 2017 2018E 2019E 2020E 2022E 2017 2018 2019 2020 2022 2025
Source: Assocham, Frost & Sullivan, PhillipCapital India Research
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A majority (60%) of all online sales in India in 2017 happened in eight metro cities, while the rest came from tier-2 and 3 cities. However, transactions from tier-2 cities and beyond are growing 3-times faster than those in metropolitan cities – making this a huge untapped market for the next growth phase. Initiatives by the government, including the JanDhanYojana-Aadhaar-Mobile scheme and Unified Payments Interface (UPI), have led to the adoption of digital payments. The cost of servicing tier-2 and other smaller cities is likely to reduce as supply chain and logistics companies are innovating digitally. So, we believe that most e-commerce growth is expected to come from these geographies ahead.
Non-electronic categories to gain prominence in e-commerce Electronics is currently the biggest contributor to online retail sales in India with a 65% share, but by 2025, non-electronics categories are likely to make up for 80% of online retail sales.
Increasing share of non-electronics E-commerce sales by region in India (2017)
2017 2025 4% 100% Tier 1 & Metros Tier 2 and 3 80% Others
60% 36%
40% 60% 20%
0% Electronics Non-electronics
Source: Assocham, Frost & Sullivan
Electronics and apparel categories have the highest digital influence for in-store purchases. We believe categories that are standard/commodity and non-branded will have the maximum impact and consumers will easily switch to online, given the convenience and discounting, which is currently being offered. We believe it would be very difficult to make profits in low-price-point and low-margin categories, given the high cost of delivery. For high-price-point and low-margin categories, it will be viable, as the delivery cost would be fixed even after factoring returns.
% of in-store purchases across categories influenced by use of digital 26% 24% 22% 20% 18% 16% 14% 12% 10%
Source: Deloitte Touche Tohmatsu India LLP
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Online sales margins are lower than in-store sales margins Our interaction with industry experts suggest that brands are using the market-place portals only for liquidating old stock, which releases their cash-flows. Margins through these market places are lower than ‘own brand’ websites and stores. Typically stores sell 40-60% inventory on full price in stores, 20-40% inventory at 20- 50% discount in stores in end-of-season sales, and the remaining 10-20% inventory through market place models and through retailers such as Brand Factory.
Our analysis suggests that companies would make margins of 36-67% if they sold through Amazon using its ‘Fulfilment’ service. At the discounted price, we believe brands would make, at best, low-single-digit margins (breakeven levels), if we add marketing costs on the marketplace platform.
Selling on Amazon – Through Amazon Fulfilment Cost Heads (Rs) Various selling price points Comments Selling Price of Product 500 1000 2000 Discounted value of the product Amazon Referral Fees @17% 85 170 340 For apparel below Rs 300, Amazon referral fees are 13% Fixed Closing Fees 15 12 26 It is a fixed fee based on price bands GST @18% 18 33 66 Fulfilment by Amazon Fees Monthly Storage 1 1 1 Monthly fee for storing product. Calculated based on volume of the product in cubic feet. Pick & Pack 10 10 10 Flat-fee per-unit cost to process the order. Includes the cost of physically retrieving the item, packaging it etc. Weight Handling 56 56 56 Variable per-shipment fee based on weight and dimensions. GST @18% 12 12 12 Cost of Shipping product to Amazon 5 5 5 Cost of transporting products to Amazon centre Fulfilment Centre Amazon Delivery Cost 66 66 66 Delivery cost of the product like COD payments, handling documents etc Return Cost 30 30 30 Amazon doesn’t charge up to 8% returns. Typically returns are 15%. COD cost - 2% or Rs40 whichever is lower 10 20 40 For COD orders, Amazon charges extra Removal Fees 10 10 10 Since there is never 100% sell through, companies need to pay removal fees/piece from Amazon warehouse Total Cost 318 425 662 Realisation to company 182 575 1338 Margin % 36.4% 57.5% 66.9% Source: Phillip Capital India Research
Own portals vs. marketplace portals Selling through their own portals is always the best bet for any brand. However, driving traffic to own portal would need marketing spends. We believe that over a period, as e-commerce matures in India, issues of high returns and high delivery costs will be addressed. This will help brands to compete with large marketplace websites that lure customers with attractive offers.
Omni-channel initiatives such as ‘click and collect’ will allow companies the luxury of not needing to maintain a separate inventory at the warehouse and not incur extra costs. This would help companies to reduce duplication of inventory, increase throughput of the store, and offer customers seamless online and offline experience. We believe omni services are better for high distribution cost items, as its saves incremental spending. We believe companies that have strong physical store networks, coupled with own e-commerce sites, would be able to make incremental margins over the medium to long term, as currently the cost of customer acquisition is very high.
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Selling through own portal Cost heads (Rs) Various selling price points Comments Selling Price of Product (Rs) 500 1000 2000 Warehouse management incl Systems (3rd Party) 9 9 9 Includes software and other cost Pick and pack 10 10 10 Cost saving through Labour and other cost 20 20 20 implementation of Omni and GST @18% 7 7 7 delivery from store Delivery Cost 120 120 120 Returns @30% and additional cost 40 40 40 Payment Gateway @2% + GST 11.8 23.6 47.2 Website Development Cost 30 30 30 This is a lump-sum cost and will get lower with scale. Total Cost 248 260 283 Realisation to company 252 740 1717 Margin % 50.4% 74.0% 85.8% Source: Phillip Capital India Research
While selling through third-party retailers and franchisee stores, brands need to share 35-40% trade margins. The full-price sell-through rate is low at 40-60%. While margins seem high at 65%, we believe they are garnered by selling full inventory and would ideally be lower for brands considering inventory sold at a discount.
Selling through third-party retailers and franchisee stores Cost Heads (Rs) Various selling price points Comments Selling Price of Product (Rs) 500 1000 2000 Sell-through rate at full price is low Retailer margin @ 35% 175 350 700 Realisation to company 325 650 1300 Margin % 65.0% 65.0% 65.0% Source: Phillip Capital India Research
Easy for brands to have a higher share of online sales vs. department stores We believe it is easy for brands to scale up their online presence, as they offer their inventory across marketplace e-commerce websites along with own websites. Hence, the share of online sales is high for companies such as Arvind Fashions, TCNS, and ABFRL’s Madura vertical. However, retailers/department stores such as Shoppers Stop, Lifestyle and Pantaloons, need to invest significantly, as cost of customer acquisition is very high for their own website. Hence, they will always lag brands in terms of increasing their share of online sales unless they can scale up their private brands significantly. For this, these department stores need to open their inventory to marketplace e-commerce players to garner incremental sales – such as Shoppers Stop has done with Amazon.
Share of online across companies (revenues) 16%
12%
8%
4%
0% Shoppers Lifestyle Page Bata Madura - Arvind TCNS Stop Industires Lifestyle Brands
Source: Companies, PhillipCapital India Research
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Current online and omni services offered by companies in India Company / Brands Presence on Major Own website Omni Services Retailer Marketplace Channel ABFRL Van Heusen Amazon / Flipkart / www.vanheusenindia.com Yes Services like endless Aisle in store, Buy Allen Solly Myntra www.allensolly.com/ online (without paying) & try offline. Peter England www.peterengland.com COD not available Louis Philippe www.louisphilippe.com Pantaloons Amazon / Flipkart / www.pantaloons.com No Rs100 shipping on orders below Myntra Rs1000. COD available below Rs 5000 FLFL Central No No No Offer experience shopping Brand Factory No www.brandfactoryonline.com No Rs99 shipping on orders below Rs999, COD not available Brands Amazon / Flipkart / Only for ‘All’ and ‘Cover Story’ No Free shipping above Rs1000, COD not Myntra available Shoppers Stop Shoppers Stop Amazon www.shoppersstop.com Yes Free shipping above Rs1000, Express Store Pickup. COD Available Trent Westside No www.tatacliq.com Yes Pick up from store, COD Available, Free shipping above Rs1000 Zudio No www.tatacliq.com No COD Available, Free shipping above Rs1000 V-Mart V-Mart No No No Expected to start soon Source: PhillipCapital India Research
Omni service offered by ABFRL’s Madura vertical on its own website
Select the store to view You can see the sizes available in Customer can add the SKU for its inventory the store and also online for a ‘TRY and BUY’ in that store. This particular style is a ‘true’ Omni service
Source: PhillipCapital India Research
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Prompting customers to use digital kiosks at Reliance Trends Endless Aisle at an Allen Solly store
Source: PhillipCapital India Research
Separate click and collect point at Lifestyle Advertisement in store for Omni services – Max
Source: PhillipCapital India Research
Key trends in the social and e-commerce space globally
Amazon StyleSnap – machine learning to find similar clothes and styles from photos StyleSnap is built into the Amazon mobile app, where users can take a picture or upload an image and StyleSnap uses machine learning to “match the look in the photo” and find similar items for sale on Amazon.com. It considers a variety of factors when it provides such recommendations, such as brand, price range, and customer reviews. While StyleSnap allows customers to discover inspiring fashion finds by simply taking screenshots of the looks they like, it also helps fashion influencers expand their communities. In addition, fashion influencers who participate in the Amazon Influencer Program are eligible to receive commissions for purchases that they inspire.
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Amazon Live and Taobao live streaming From February 2019, Amazon began to tap the home shopping market in the US with Amazon Live shows, which are like home shopping, where hosts talk about and demonstrate Amazon products. Under the video, customers can view product details and buy them. Live videos are available in multiple categories, so shoppers can tune in to the one that most interests them, view products, and buy. Amazon also allows brands to interact with their customers ‘real time’ through chats during live streams and helps them measure results by offering built-in analytics.
While Amazon Live is a new concept in the US market, Taobao (Hangzhoa headquartered e-commerce platform) is the most popular live streaming platform in China. In 2018, 84 Taobao stores reportedly clocked US$ 7.4mn in sales each through live stream broadcasts, while 23 achieved US$ 15mn or more. Overall, Taobao Live reached a turnover of CNY 100bn (c.US$ 15bn) with more than 600,000 varieties of commodities sold on the platform.
Source: Amazon.com
Instagram launches in-app checkout for e-commerce brands Launched in March 2019, the ‘checkout’ feature on Instagram which lets users buy products and manage their entire purchasing journey, all within the app and not through third-party/brands e-commerce portals. It is currently closed for certain brands/retailers handpicked by Instagram and available to people in the US only. Only after feedback are they likely to release the product to all brands across the globe. Through this feature, we believe Instagram has become a de-facto social media channel for fashion brands, which rely on visual content. Brands need Instagram to reach the right audience, build trust and loyalty, and then use the app’s shopping and advertising suite of tools to market their products.
Source: Instagram
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YouTube Shopping Google plans to add new shopping features to YouTube later this year. It will offer shopping recommendations, share affiliate fees, and enable brands to include shoppable ads. Google is currently testing new features on its You Tube video service that display product prices and recommendations under videos playing on the site – this makes it easy for viewers to buy them on Google. Google is rapidly adding retailers to its Google Express marketplace, which can be re-branded as Google Shopping. Earlier this year, Google launched ‘shoppable images’ which allow advertisers to highlight products and ads in Google image searches.
Search-based shopping to recommendation-based shopping We believe influencers are becoming the new sales persons for online e-commerce. For a small and medium business, influencer-based marketing has huge potential, if a campaign is planned and executed well. Big corporates are also using influencer- marketing to expand reach and build a loyal audience.
In a country such as India, with population of over a billion, it is difficult for brands to reach the right audience with small marketing budgets. We believe these fashion bloggers and Instagrammers help bridge the gap between brands and potential buyers. These people are the new fashion celebrities who influence shoppers and update them about the current trends in fashion.
17% of marketers spend over 50% budgets on influencer Instagram is the most preferred medium for influencer marketing marketing
Source: Bigcommerce.com Blog by Rochelle Bailis
Case studies: Benetton India, Li Jiagi In May 2019, Benetton India launched an exclusive new collectible line on Instagram. The collection was revealed at an Instagram live auction by actress Rhea Kapoor and popular fashion influencers including Pallavi Ruhail, Bahaar Dhawan Rohatgi, Rasna Bhasin and Sherry Shroff – who came to support the technological initiative.
“Indian consumers are keen to own the best of fashion trends today, especially since their fashion sense is rapidly evolving, all thanks to a digital wave which is increasing awareness. To address their growing needs, we introduced this collectible line on Instagram,” Sandeep Chugh – MD and CEO, Benetton India
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Chinese male beauty blogger Li Jiaqi gained fame on Chinese social media in late 2017 after he managed to try on 380 lipsticks in a two-hour livestream show on Taobao. In 2018 he made money by selling lipsticks through livestreaming on video-sharing platforms such as Douyin. He sold 15,000 lipsticks within 15 minutes of livestreaming, beating billionaire Jack Ma who competed with Li in a two-hour livestreaming session selling lipsticks. On Queen's Day in China, he closed 23,000 deals worth 3.53mn Yuan (US$0.5mn+) in a 5.5-hour livestream show viewed by 190,000 people.
"Every time Li endorsed certain lipsticks that were new to the market, I wanted to buy them. He appeared more trustworthy to me, like a friend or classmate, which make his videos really different to other celebrity endorsements," - 29-year-old Beijing- based Huang Xinyi – Chinadaily.com
Disruption through emergence of digital-first brands Younger consumers’ preference for novelty, coupled with digital technology and social media, has helped new brands (challenger brands) to enter the market and disrupt the business models of legacy brands, dramatically levelling the playing field. Instagram advertising and influencer marketing has helped their cause. Challenger brands are disrupting a sector characterised by rapid growth, social media fluency, and e-commerce focused distribution. Legacy brands would need to innovate, build capabilities through M&A, and build innovation bandwidth internally or through incubators – to take on this challenge. They also need to enable faster time-to- market and streamline supply chains. Also, sub-labels will continue to proliferate, enabling brands to experiment while maintaining the authenticity of the parent brand.
An example – Jaypore is an ethnic-wear brand with 230,000 Instagram followers. Its revenues were a mere Rs 389mn in FY19. Allen Solly India’s Instagram followers were 151,000 and revenues were c.Rs7.5bn. Jaypore derives 80% of its revenues online. ABFRL acquired Jaypore in July 2019 for an EV of Rs 1.1bn.
Emerging online first brands in India have strong followers Followers of challenger brands are more active and engaged on Instagram than those of legacy brands Brand Instagram Followers Instagram like/follower ratio (LFR) The Label Life 281K 2.0 The Jodi Life 91.4K Legacy Challenger Lime Road 471K 1.5 Nicobar 105K Voonik 69.5K Fable Street 75.2K 1.0 Bombay Shirt Company 86.5K Andamen 30.6K Cover Story 83K 0.5 Source: PhillipCapital India Research 0.0
Source: McKinsey & Company, PhillipCapital India Research
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The rise of tier-2/3 cities and value fashion There has been a steady increase in the average household incomes in India, leading to an increase in affluence and discretionary spends. By 2025, about 40% of the country’s population will reside in urban areas and account for over 60% of consumption. However, this growth will not happen in the traditional metros or urban areas, but in emerging small towns that are urbanising. In terms of consumption expenditures, towns with populations of less than a million will be growing the fastest. BCG (Boston Consulting Group) expects emerging cities to see the highest growth in the number of elite and affluent households, by a factor of over 2.5x, through 2025. The number of emerging cities with average household incomes matching major metros will rise to 120. A large portion of those shopping online will hail from rural areas due to growing internet penetration, as we will have +850mn smart-phone users.
Affluence will be more widespread by 2025
Source: Storai, Retailers Association of India
Non-metros to become the new retail destinations We believe the top 8-10 cities in India, i.e., Delhi, NCR, Mumbai, Bengaluru, Hyderabad, Chennai, Pune, Ahmedabad and Kolkata have emerged and established themselves as retail destinations over the last decade. Rapid pace of retail sector growth would come from emerging smaller cities spurred by: 1) Lack of available superior-grade space in malls in metros, coupled with low vacancy levels. 2) Increasing lease rentals in metro malls; we have seen lease rental price CAGR of 7% over the last 7 years. 3) Overcrowding of brands/retailers in metro/tier-1 cities paving the way for expansion into emerging and smaller cities. 4) International airport connectivity across many tier-2 cities. 5) Rising income levels leading to increased disposable income and changes in consumption patterns to organized retail.
Over 2019-22, 90 mall projects entailing 34mn sq. ft. will begin operations pan India. We expect c.64% of these spaces to be Grade-A quality vs. 46% share in the last wave of 2008-12. This wave of superior quality malls is a major positive for the retail sector.
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Operational mall stock from 2008-2012 Supply over 2019-22: c.90 new malls
10% 19%
Superior Superior 46% Average 26% Average Poor Poor 64% 35%
Source: Cushman Wakefield, PhillipCapital India Research
Superior malls see single-digit vacancy High 7% CAGR in price realisation in rents (top cities) Superior Grade Average Grade Poor Grade Overall Price in Rs. Psf/pm Change in Price (RHS) 50 140 10%
40 120 8% 100 30 80 6% 20 60 4% 10 40 2% 0 20
- 0% FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: Cushman Wakefield, PhillipCapital India Research
Formats adopted by national anchor retailers in smaller cities: Absence of superior grade malls in tier-2/3 cities is attracting retailers towards high streets and standalone shopping complexes. For example, Westside has launched high street stores in multiple cities. Pantaloons has opened c.100+ stores in high streets. Retailers prefer to open stores in tier-2/3 cities through the FOCO (Franchisee Owned and Company Operated) models to lower their input costs of real estate, since these markets are nascent and largely untested. Such models enable retailers to have a lower investment exposure while still offering their products to untapped tier 2 and 3 cities. Incrementally, 20-25% stores for Pantaloons would be under the FOCO model. Westside prefers BTS (build then sell) options in emerging tier 2 &3 cities. Such options give them the flexibility of designing their store layouts in a better way. Zudio has launched in smaller cities and opts for properties that have low rentals, which are mostly available in smaller cities. For tier-1 markets, it prefers to work on below-market rentals or revenue share, since it achieves higher sales volumes.
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Innovation in store formats with economically viable stores
The coexistence coefficient Indian customers in smaller towns/cities prefer to touch and feel products and like to try the fit before buying apparel. As such, we believe that retail stores will coexists with online channels. However, with growing online transactions (as customers build trust in the e-commerce channel) retail companies would need to innovate and open smaller stores to reduce upfront capex, which can also be used for their omni channels.
Innovation in store formats Particulars Transaction Stores Brand Store Flagship/Mega Stores Size Small Regular Very large stores Locations Pan India Select locations in metros and tier 1/2 cities Major prime locations in metros Product offering Limited assortment Most relevant merchandise based on location Full range coupled with limited editions Other services Pickup and return, trial of sizes OMNI services like ship from store and collect Personalised services, digital innovations, from store community building, etc. Source: Industry, PhillipCapital India Research
Case in point: Trent has recently launched Utsa stores to cater to women’s ethnic apparel. We believe these stores are 1,200-1,500sq. ft. in size compared to Westside stores that are much bigger at 17,000sq. ft. They sell ethnic women’s apparel as this accounts for 50% of Westside revenues. It can expand Utsa stores across locations, given lower store size, and these can be used for its Omni channel.
Research shows that the average person today buys 60% more items of clothing than people did 15 years ago, but keeps clothing for only half as long as before. A survey conducted in Britain found that one in three young women consider clothes “old” after wearing them once or twice. We believe this trend is driven by consumers’ desire for variety and hunger for newness. Retailers are solving the newness and affordability issue through value fashion, given that half of the products made in the industry do not sell at full prices. In recent years, affordable luxury and value-based fashion have gained considerable ground. Several brands globally and in India have introduced sister brands that offer more value for a similar product at a lesser price point.
Aggressive store expansion for economy and value retailers (total stores) Retailer FY18 FY19 Future guidance Reliance Trends 419 676 Aggressive store expansion Pantaloons 275 308 60-70 stores each year Max Fashion 219 265 300 stores by FY20 Westside 125 150 30-40 stores each year Zudio 7 40 70-80 stores each year V-Mart Retail 171 214 50+ stores each year Source: Companies, PhillipCapital India Research
We believe that tier-3/4 cities have started to emerge as growth drivers for entry- level fashion retailers across India due to urbanization and swift moves away from ready-to-stitch towards ready-to-wear, especially in rural fashion based on increasing supply and low-price economics. While price and value sensitivity continue, the read- to-wear segment, being less expensive and cost effective, will continue to grow in organized retail. The convenience of trying out apparel before purchasing, coupled with high fashion quotient, will fuel rural fashion expectations over the medium term.
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Consumer journey: From tailor-stitched to readymade to custom fit clothing
Organised Readymade – Regional - Small Retail – Darji stitched Unorganised Private Label Mass/Economy Market Fashion
Personalised Organised High Street Apparel– Luxury Fashion Retail –Value Fashion Custom Fits Fashion
Source: PhillipCapital India Research
The cost economics of rural fashion Our analysis suggests that the costs for ready-to-wear apparel are cheaper for value and mass segments by 8-10% vs. ready to stitch. Retailers also offer these along with other conveniences, such as trial rooms, etc.
Cost for stitching shirts/trousers Fabric Cost - Total Fabric Cost (1.8 Mtr) and 2x Tailoring Final Range Ex-Mill Mark-up Cost Price Shirt Premium 200 720 250 970 Value 100 360 175 535 Economy 50 180 125 305 Fabric Cost - Total Fabric Cost (1.2 Mtr) and 2x Tailoring Final Range Ex-Mill Mark-up Cost Price Trousers Premium 225 540 300 840 Value 125 300 200 500 Economy 75 180 150 330
Costing of readymade shirts/trousers Fabric Cost - Ex- Cost Retail Selling % change to Range Mill Total Fabric Cost (1.8 Mtr) Manufacturing Cost Price Multiplier Price Stitching Shirt Premium 200 360 80 440 2.75 1210 24.7% Value 100 180 60 240 2 480 -10.3% Economy 50 90 50 140 2 280 -8.2% Fabric Cost - Ex- Cost Retail Selling % change to Range Mill Total Fabric Cost (1.2 Mtr) Manufacturing Cost Price Multiplier Price Stitching Trousers Premium 225 270 100 370 2.75 1018 21.1% Value 125 150 80 230 2 460 -8.0% Economy 75 90 60 150 2 300 -9.1% Source: Industry interactions, Images Business of Fashion, PhillipCapital India Research
We believe the pan-India value fashion retailers are aggressively expanding their reach and have been able to grow faster than the market based on higher share of private labels, high customer experience and engagement, robust supply chain and fresh fashion. They have now started to expand in tier-3/4 markets, which have matured and have higher populations. Economy and mass retailers have established strong footholds across under-served markets of north and east India that have high population density. They know the local fashion preferences and have a strong ground-level understanding, which has helped them grow at a fast pace and upgrade customers from the unorganized market to the organized one.
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Differences between economy/mass fashion retailers and value fashion retailers Particulars Economy/Mass Fashion Value Fashion Target Consumer Aspirer Middle Class Target Early or first-time buyers of branded fashion Buyers seeking fashion and quality at affordable price points Household Income Rs 100,000-300,000 Rs200,000 to Rs 1mn Proposition Upgrade from unbranded fashion Down-trade to smart value buys Merchandise Mix Market and private label Store brands and private label Store Size 6,000 to 10,000 sq. ft. 8,000 to 15,000 sq. ft. Rental cost 4-6% 7-10% Companies/retailers V-Mart Retail, V2 Retail Zudio, Max, FBB Source: Wazir Analysis, PhillipCapital India Research
While economy/mass fashions play at the entry-level price point and compete with the unorganized market, value fashion is impacting the mid segment, as this only uses price as its main selling point (no brand loyalty). Value fashion players differentiate in terms of quality, price, and fashion, while premium players differentiate in terms of brand and experience.
Fashion market – price segmentation and consumption pattern
Source: Wazir Analysis
Price comparison of V-Mart’s apparel to other national value-fashion retailers MEN WOMEN KIDS Entry Price Shirts T-shirts Jeans Formal Trousers Shorts Kurti Tops/T-shirts Pants Leggings T- shirts Jeans Shirts V-Mart Rs 249 Rs 79 Rs 399 Rs 399 Rs 299 Rs 199 Rs 129 Rs 199 Rs 199 Rs 99 Rs 199 Rs 99 Easy Buy Rs 499 Rs 199 Rs 699 Rs 399 Rs 399 Rs 399 Rs 249 Rs 699 Rs 199 Rs 549 Rs 399 Zudio Rs 299 Rs 179 Rs 599 Rs 699 Rs 249 Rs 299 Rs 149 Rs 299 Rs 249 Rs 129 Rs 299 Rs 199 Maximum prices Shirts T-shirts Jeans Formal Trousers Shorts Kurti Tops/T-shirts Pants Leggings T- shirts Jeans Shirts V-mart Rs 899 Rs 899 Rs 2599 Rs 2299 Rs 645 Rs 1200 Rs 599 Rs 799 Rs 699 Rs 1199 Rs 1199 Rs 799 Easy Buy Rs 749 Rs 399 Rs 999 Rs 799 Rs 649 Rs 899 Rs 499 Rs 799 Rs 349 Rs 549 Rs 499 Zudio Rs 799 Rs 799 Rs 999 Rs 999 Rs 599 Rs 899 Rs 599 Rs 899 Rs 799 Rs 499 Rs 599 Rs 399 Source: Company, PhillipCapital India Research
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Comparison across retailers Financial parameters and business models
Store economics for all retailers (mature stores; ex-corporate overheads) For store economics we have assumed financials for a mature store while the reported margins and numbers might vary from company to company. We have excluded corporate overheads cost and other cost such as designing (that impact margins due to limited scale). As a business scales up, there is improvement in margins and RoCE. Store-level economics help to understand a business model better vs. company-level economics.
Store economics Retailers (Rs / Sqft) Particulars Pantaloons Central Brand Factory Westside Zudio Shoppers Stop V-Mart Revenue 9000 9500 10000 10200 15000 9500 9000 Gross Profit 4410 3705 3000 5610 4650 3800 2880 Gross Margin % 49% 39% 30% 55% 31% 40% 32% EBIDTA 900 1283 1000 1326 1200 855 1260 EBIDTA Margin % 10.0% 13.5% 10.0% 13% 8% 9% 14.0% Depreciation 300 490 280 160 120 273 182 Depreciation Rate 15% 14% 14% 8% 8% 13% 13% EBIT 600 793 720 1166 1080 582 1078 Capex 2000 3500 2000 2000 1500 2100 1400 Working Capital 800 600 1150 1800 2200 400 1100 Capital Employed 2800 4100 3150 3800 3700 2500 2500 RoCE (Pre-tax) 21.4% 19.3% 22.9% 30.7% 29.2% 23.3% 43.1% Source: PhillipCapital India Research
Comparison of different formats Product Investment in Control on Assortment merchandising/ Format Companies product and range Inventory Risk designing team Profitability Retailers who stock 3rd Shoppers Stop, Central, Lifestyle, Low High Low Low Medium Party brands Brand Factory Brands Madura (ABFRL), Arvind Fashions etc High Low Medium High High Private Label Retailers Trent, Zudio, Max, Pantaloons, FBB High High High High High Value Retailers V-Mart Retail, V2 Retail Low High High Low Medium Source: Industry, PhillipCapital India Research
Comparison of different channels Channel Margins Inventory Risk Inventory Display Potential Footfall conversion EBOs Zero for own stores, 20-35% for On own books Full range High franchisee stores LFS Highest at 35-45% On consignment or SoR model High Medium MBO High at 20-35% Outright sale, off books Low Mixed E-Commerce Low (15-20%) but high delivery cost Either outright sale or own books Full range but no control Mixed Source: Industry, PhillipCapital India Research
We believe retailers are looking at increasing productivity, so they are constantly reducing store sizes to reduce wastage and unused space. Westside continues to have the most productive store with the highest throughput and optimum store size of c.17,800sq.ft. In value retail, Zudio is emerging a strong player with high throughput/store, given its value proposition on low pricing. However, with a low- margins business model, throughput could increase even more. Central has the lowest throughput given that the store is more than 90,000 sq. ft. in size and offers experienced shopping to customers.
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Sales per sq. ft. on an increasing trajectory Reducing average store size across retailers
FY19 FY22E FY19 FY22E 16000 100000
14000 80000
12000 60000
10000 40000
8000 20000
6000 0
Source: Company, PhillipCapital India Research
To grow and garner a first-mover advantage, all retailers are aggressively expanding their store networks. In larger department stores, Shoppers Stop and Central are expanding store count by mid-single digits. Pantaloons and Westside will add more than 100 and 160 stores respectively over the next three years. Newly launched Zudio is expected to touch 200+ store by FY22 while V-Mart would add 165 stores by FY22. We expect strong high-teens CAGR in area addition from V-Mart, Westside, and Brand Factory and c.10% addition from Pantaloons and Central over the next three years.
Total store count across retailers Total area
FY19 FY22E FY19 FY22 500 6.0
5.0 400 4.0 300 3.0 200 2.0
100 1.0
0 0.0
Source: Company, PhillipCapital India Research
Private-label margins are higher than third-party brands, so all retailers strive to increase the share of their private-label apparel business – presently, Westside has the highest share while Shoppers Stop has the least. Gross margin in apparel is the highest, so higher share helps to boost overall margins. To differentiate and create a niche, Shoppers Stop is focussing on its beauty category, which accounts for 16% of its overall revenues and 10% of department-store revenues.
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Increasing share of private label Share of apparel business across retailers 120% 100%
100% 80%
80% 60%
60% 40%
40% 20%
20% 0%
0% Pantaloons FLFL Westside Shoppers V-Mart Stop
Source: Company, PhillipCapital India Research
We believe consistency in SSSG is the key to success in the retail industry. Trent is the only company that has consistently demonstrated 8-9% SSSG over many years. On the new-stores openings in the last 2-3 years, we believe all companies will report mid to high single-digit SSSG over the next 3 years.
SSSG trend – Trent is the most consistent 20% FY16 FY17 FY18 FY19 FY20 FY21 FY22
15%
10%
5%
0%
-5%
-10% Pantaloons Central Brand Factory Westside Shoppers Stop V-Mart ABFRL (Lifestyle) Source: Company, PhillipCapital India Research
Product mix change, increasing share of private label, improving supply chain management, better sourcing capabilities, would drive gross-margin expansion for companies. Trent and ABFRL has the highest gross margins, given that Trent has high share of private label business while ABFRL has branded retail business under Madura.
Gross margins to remain high Gross margins per sq. ft. FY19 FY22 FY19 FY22 60% 8,000 7,000 50% 6,000 40% 5,000 30% 4,000 3,000 20% 2,000 10% 1,000 0% 0 ABFRL FLFL Trent Shoppers V-Mart Zara ABFRL FLFL Trent Shoppers V-Mart Stop Stop
Source: Company, PhillipCapital India Research
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Rent and employee costs are two major expenses for any retailer. Given their large store areas, players such as Shoppers and Central have high bargaining power and pay lower rentals compared with ABFRL and Trent. Central mostly operates standalone stores, which helps in better negotiations while Brand Factory is not present on high streets. Trent and ABFRL stores are in malls, so pay higher rentals.
Rent to marginally inch up for most retailers Rent per sq. ft. FY19 FY22 FY19 FY22 16% 1,800 14% 1,600 1,400 12% 1,200 10% 1,000 8% 800 6% 600 4% 400 2% 200 0% 0 ABFRL FLFL Trent Shoppers V-Mart ABFRL FLFL Trent Shoppers V-Mart Stop Stop
Employee cost as % of sales Employee cost per sq. ft. FY19 FY22 FY19 FY22 12% 1,600 1,400 10% 1,200 8% 1,000 6% 800 600 4% 400 2% 200 0% 0 ABFRL FLFL Trent Shoppers V-Mart ABFRL FLFL Trent Shoppers V-Mart Stop Stop
We will see margin expansion across all players except V-Mart, which is facing challenges because of lower SSSG and aggressive store expansion. Investment in Omni channel and manpower is hurting margins.
Operating margin expansion across retailers EBITDA per sq. ft. to inch up FY19 FY22 FY19 FY22 12% 1,400 1,200 10% 1,000 8% 800 6% 600 4% 400
2% 200
0% 0 ABFRL FLFL Trent Shoppers V-Mart ABFRL FLFL Trent Shoppers V-Mart Stop Stop
Source: Company, PhillipCapital India Research
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Inventory management is the most important aspect for retailers, as it helps to understand whether the execution capabilities of the store are strong. Fast-fashion retailers such as Zara have the least inventory days, while Shoppers Stop and FLFL have high inventory days as they stock third-party products on sale-or-return basis. Brand Factory has higher inventory days due to its liquidation business model.
Inventory days (on sales) Inventory days (on raw material cost)
FY19 FY22 FY19 FY22 140 250
120 200 100 150 80
60 100 40 50 20
0 0 ABFRL FLFL Trent Shoppers V-Mart Zara ABFRL FLFL Trent Shoppers V-Mart Zara Stop Stop
Source: Company, PhillipCapital India Research
Shoppers Stop and ABFRL has one of the best working capital managements in the industry. Cash-conversion capital for ABFRL is 14 days compared to 19 days for Zara. V-Mart, Trent and FLFL have a cash-conversion cycle of 37-46 days.
Cash-conversion cycle Working capital days
FY19 FY22 FY19 FY22 50 70
40 60
30 50
20 40
10 30
0 20
-10 10
-20 0 ABFRL FLFL Trent Shoppers V-Mart Zara ABFRL FLFL Trent Shoppers V-Mart Zara Stop Stop
Source: Company, PhillipCapital India Research
Shoppers Stop, V-Mart, and Zara are net-cash companies. Trent and FLFL have their D/E ratios under check while ABFRL has a 0.8x net D/E. However, under Ind-As 116 accounting, lease liability is accounted as debt. Hence the D/E has increased for all companies marginally.
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Net D/E increased because of lease liability Net D/E, ex-lease liability
FY19 FY22 FY19 FY22 1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
-0.5 -0.5
-1.0 -1.0 ABFRL FLFL Trent Shoppers V-Mart Zara ABFRL FLFL Trent Shoppers V-Mart Zara Stop Stop
Source: Company, PhillipCapital India Research
CFO/EBIDTA Asset turnover ratio
FY19 FY22 FY19 FY22 120% 5.0
100% 4.0
80% 3.0 60% 2.0 40% 1.0 20%
0% 0.0 ABFRL FLFL Trent Shoppers V-Mart Zara ABFRL FLFL Trent Shoppers V-Mart Stop Stop
Source: Company, PhillipCapital India Research
RoE RoCE FY19 FY22 FY19 FY22 25% 20%
20% 16%
15% 12%
10% 8%
5% 4%
0% 0% ABFRL FLFL Trent Shoppers V-Mart Zara ABFRL FLFL Trent Shoppers V-Mart Zara Stop Stop
Source: Company, PhillipCapital India Research
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Valuation and outlook We expect valuations in the retail sector to remain high, given significant under- penetration of organized retail and high earnings growth trajectory. Improving store economics, high profitability, high returns ratios, and low leverage augur well for the sector. Companies that are consistently delivering high SSSG, investing for future growth, and re-risking the business model through digital transformation would command premium valuations in the medium to long term.
We value companies on EV/EBIDTAR multiple, given new accounting standard Ind-As 116, where lease rent is now part of depreciation and interest. Hence, to compare companies that follow different lease tenure and have own assets on books, EV/EBIDTAR would have to be neutralized to gauge true business performance.
We initiate coverage on five apparel-retail companies - ABFRL (BUY with TP of Rs 262), FLFL (BUY with TP of Rs 556), Shoppers Stop (BUY with TP of Rs 520), Trent (BUY with TP of Rs 540) and V-Mart Retail (Neutral with TP of Rs 1,905).
Trent and ABFRL are our preferred bets, followed by FLFL and Shoppers Stop.
EBIDTAR CAGR vs. EV/EBIDTAR P/B vs. RoE 60% 22% Shoppers Trent 50% 20% Stop
ABFRL
22E -
40% 18%
V-Mart 30% 16%
FLFL RoE FY22 RoE 20% V-Mart 14% ABFRL
EBIDTAR CAGR FY19 CAGR EBIDTAR FLFL 10% 12% Trent Shoppers 0% Stop 10% 4 6 8 10 12 14 3.0 4.0 5.0 6.0 7.0 8.0 EV/EBIDTAR FY22 P/BV FY22
Source: PhillipCapital India Research
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Valuation summary Company Business Multiple Rationale Target CMP Upside Name Price ABRRL Pantaloons 7x EV/EBIDTAR In-line with Shoppers Stop 262 189 39% Lifestyle 10.5x EV/EBIDTAR Strong power brands, high margins and return ratios Other Business + 1x EV/Sales Loss making businesses Fast Fashion FLFL 7.5x EV/EBIDTAR Marginal premium to Shoppers Stop 556 428 30% Shoppers 7x EV/EBIDTAR In-line with long term multiple 528 395 32% Stop Trent Westside 16.5x EV/EBIDTAR Strong private label brand and one of the best store 540 460 17% economics. 30% premium to historical valuations Zudio 1.5x EV/Sales Strong growth opportunity in value segment with highest sales/sqft Zara 25x EV/EBIDTA Implied valuation of 14x EV/EBIDTAR. Premium valuation to ABFRL - Lifestyle business on having healthy inventory turns and strong margins and earnings growth THPL+ Fiora 1.5x EV/Sales Loss making business hence low multiple V-Mart Retail 9.5x EV/EBIDTAR Strong focus on rural India with best return ratios hence 1,905 2145 -11% premium to peers and in line with the long-term multiple Source: Company, PhillipCapital India Research
EV/EBIDTAR – ABFRL EV/EBIDTAR - FLFL 2yr fwd EV/EBITDA-R 2yr fwd EV/EBITDA-R 15 9 14 8 13 7 12 6 11 5 AVG 4.7 10 4 9 3 8 7 2 6 1
5 0
Apr-16 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-14 Apr-15 Apr-17 Apr-18 Apr-19
Dec-15 Dec-16 Dec-17 Dec-18 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Aug-19 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18
Source: Company, PhillipCapital India Research
EV/EBIDTAR – Shoppers Stop EV/EBIDTAR - Trent 2yr fwd EV/EBITDA-R 2yr fwd EV/EBITDA-R 12 32
10 27
8 22 6 AVG 6.84 17 AVG 16.45 4
12 2
0 7
Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19
Apr-16 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-12 Apr-13 Apr-14 Apr-15 Apr-17 Apr-18 Apr-19
Source: Company, PhillipCapital India Research
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EV/EBIDTAR – V-Mart Retail 2yr fwd EV/EBITDA-R 30
25
20
15
10 AVG 9.3
5
0
Jul-14 Jul-19
Jan-17
Jun-17
Oct-15
Apr-13 Apr-18
Sep-13 Feb-14 Sep-18 Feb-19
Dec-14 Dec-19
Aug-16
Nov-17 Mar-16 May-15 Source: Company, PhillipCapital India Research
Peer Comparison Mcap Revenue EBIDTA PAT EV/EBIDTA (x) P/E (x) RoE (%) EV/Sales (x) P/B (x) Companies (USD mn) CAGR 19-21E (%) FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E Coverage Companies ABFRL 2020 13.2 72.5 45.5 12.8 10.8 84.6 54.3 11.9 16.8 1.9 1.7 9.8 8.4 V-Mart Retail 537 20.5 42.8 5.4 19.3 16.0 62.4 49.1 14.2 15.7 2.5 2.1 8.3 7.2 Shoppers Stop 480 7.3 70.4 23.3 7.4 6.4 43.0 29.0 10.7 20.3 1.3 1.2 6.5 5.4 Trent 2280 29.9 81.0 52.5 32.6 25.6 122.9 72.5 6.8 9.5 5.4 4.3 7.1 6.7 Future Lifestyle and Fashion 1165 17.5 61.0 13.9 9.0 7.3 46.7 35.0 9.5 11.3 1.5 1.3 4.2 3.8 Indian Brands & Retailers Kewal Kiran Clothing 170 10.3 7.7 5.6 NA NA 14.7 13.7 18.5 18.5 2.2 2.0 4.5 4.2 Raymond’s 490 11.2 17.2 24.9 NA NA 16.6 13.5 10.4 11.5 0.7 0.7 1.6 1.5 Page Industries 2731 12.2 13.3 12.2 28.8 24.6 46.2 39.0 49.2 47.4 6.4 5.6 21.3 17.9 Future Retail 2855 14.6 46.8 12.4 12.4 10.1 24.4 22.5 20.7 19.6 1.0 0.9 4.2 3.6 Dmart 13199 25.9 29.1 29.7 44.2 34.7 79.4 61.3 19.1 20.4 3.8 3.0 13.4 11.0 Titan 12778 17.9 25.7 24.7 35.2 28.9 52.4 43.0 26.6 27.5 4.2 3.6 12.4 10.6 India Average 3512 16.4 42.5 22.7 22.2 18.1 53.4 38.9 18.0 19.9 2.8 2.4 8.4 7.2 Global Peer VF Corp 32232 -4.4 4.5 10.4 16.7 14.9 23.6 21.0 29.0 31.3 3.0 2.8 7.0 6.6 PVH Corp 5566 2.0 3.4 -1.0 6.3 5.7 7.9 7.3 11.2 11.7 1.0 1.0 0.9 0.8 Adidas AG 58892 7.3 15.1 12.8 15.1 13.7 27.2 24.1 28.5 28.5 2.2 2.1 7.3 6.5 LVMH 203987 9.9 11.6 12.2 13.8 12.4 24.5 22.2 20.7 20.4 4.0 3.7 4.9 4.4 GAP Inc 5859 -0.1 -7.1 -11.6 3.4 3.4 7.4 7.4 22.1 20.1 0.7 0.7 1.6 1.5 Inditex 96878 6.9 18.3 8.5 11.0 10.3 23.2 21.8 25.1 25.9 3.1 2.9 5.6 5.4 H&M 31761 6.6 7.2 4.3 11.8 11.2 23.7 21.9 22.7 25.6 1.4 1.3 5.5 5.5 Nordstorm 4396 -0.7 -0.2 -4.6 4.3 4.2 8.6 8.3 54.0 60.9 0.5 0.5 5.8 7.5 Zhejiang Semir 4438 21.6 33.2 14.9 9.9 8.1 16.5 14.1 16.1 17.2 1.5 1.3 2.6 2.4 Ralph Lauren 6714 2.3 14.0 22.2 5.6 5.3 11.3 10.2 18.8 21.4 1.1 1.1 2.3 2.2 Carter's Inc 3994 2.4 3.6 4.9 8.8 8.6 13.5 12.6 33.6 33.0 1.5 1.5 4.6 4.3 The Childrens Place 1365 1.5 11.3 9.5 6.8 5.7 15.7 11.4 33.9 40.8 1.0 1.0 3.0 2.9 Ross Stores 38300 6.2 6.2 4.4 15.0 13.7 23.3 21.3 50.2 51.2 2.5 2.4 11.2 10.2 Next 9725 3.2 1.7 1.1 10.3 10.1 13.0 12.5 100.6 83.8 2.1 2.1 13.8 10.1 ASOS 2417 14.1 1.2 -21.8 17.9 12.5 71.4 38.7 5.5 9.4 0.7 0.6 4.2 3.8 Marks and Spencers 4556 -0.4 22.3 237.3 4.4 4.4 9.1 9.1 12.9 12.5 0.5 0.5 1.1 1.1 Walmart 327265 2.6 1.3 46.5 11.7 11.5 23.1 22.4 18.7 18.8 0.8 0.7 4.4 4.1 Global Average 49314 4.8 8.7 20.6 10.2 9.2 20.2 16.8 29.6 30.1 1.6 1.5 5.0 4.7 Source: Bloomberg, PhillipCapital India Research
Page | 47 | PHILLIPCAPITAL INDIA RESEARCH
RETAIL SECTOR INITIATION
COMPANIES SECTION COMPANIES
Page | 48 | PHILLIPCAPITAL INDIA RESEARCH INSTITUTIONAL EQUITY RESEARCH
Aditya Birla Fashion & Retail
Play on retail and premium power brands (ABFRL IN)
INDIA | RETAIL | Initiating Coverage 11 September 2019
We believe Aditya Birla Fashion and Retail (ABFRL), through its leading brands of Van BUY Heusen, Allen Solly, Louis Philippe, and Peter England, is well placed to capture the shift CMP RS 189 emerging out of rising disposable income towards branded apparel. Investments in TARGET RS 262 (+39%) innerwear business, tie-ups with international brands, and network expansion of
Pantaloons will drive long-term value creation. Opportunity for margin expansion across COMPANY DATA both divisions and reducing D/E would boost return ratios. We initiate coverage on ABFRL O/S SHARES (MN) : 774 with a BUY rating and target price of Rs 262. MARKET CAP (RSBN) : 145 MARKET CAP (USDBN) : 2.1 Pantaloons on a high growth trajectory 52 - WK HI/LO (RS) : 236 / 161 Over the last five years, ABFRL has transformed Pantaloons after its acquisition from Future LIQUIDITY 3M (USDMN) : 1.5 PAR VALUE (RS) : 1 Group and is now focusing on five levers for future growth, namely: (1) Aggressive store expansion 58/55 new stores in FY20/21; (2) improving share of private-label mix with an SHARE HOLDING PATTERN, % immediate target of 70% with sharper price points at the entry level; (3) improving brand Jun 19 Mar 19 Dec 18 visibility through aggressive marketing spends; (4) improving in-store experience and PROMOTERS : 59.1 59.1 59.2 engaging more with the customers; and (5) drive omni channel through the newly launched FII / NRI : 10.1 10.1 9.9 pantaloons.com e-commerce site. FI / MF : 18.4 18.1 18.5 NON PRO : 2.1 2.2 2.3 PUBLIC & OTHERS : 10.3 10.5 10.1 Strong power brands, asset-light business model to boost Madura’s Lifestyle business Madura’s lifestyle business, which houses India’s leading men’s wear power brands – Van PRICE PERFORMANCE, % Heusen, Louis Philippe, Allen Solly, and Peter England – should see revenue CAGR of 11.6% 1MTH 3MTH 1YR ABS -7.6 -13.3 -4.5 over FY19-22 to Rs 60bn on SSSG of 4%/5.5%, led by incremental growth through brand REL TO BSE -6.4 -7.1 -1.2 extensions, premiumisation, and increasing share of e-commerce revenues. Accelerated network expansion of 300+ stores each in FY20/21 will drive revenue growth. Operating PRICE VS. SENSEX profit CAGR should be 13.3% to Rs 7.5bn in FY22 on a 60bps expansion in margins. 190
Expect innerwear business to breakeven from FY22 160 Van Heusen will capture a significant part of the innerwear market through its new innerwear and athleisure offering, which was launched in FY17, given the strong brand pull 130 in the premium category of formal men’s and women’s outerwear. With the pan-India launch of women’s innerwear in FY20, aggressive distribution expansion, and new product 100 launches, the company should clock revenues of Rs 6bn by FY22. Losses should reduce to 70 Rs320mn in FY21, but the business will turn profitable only in FY22. Apr/16 Apr/17 Apr/18 Apr/19
ABFRL BSE Sensex Strong margin expansion will continue, with reducing leverage We expect revenue CAGR of 13% over FY19-22 to Rs 118bn with 13.3% CAGR in Pantaloons Source: PhillipCapital India Research and 13.2% in Madura. Operating profit CAGR will be 23% to Rs 10.4bn (ex-IndAs 116); KEY FINANCIALS Pantaloons 20%, Madura 25%. Reducing losses in innerwear and fast-fashion portfolios will Rs mn FY19 FY20E FY21E aid operating profit and margins. High FCF generation will help deleverage elevated debt on Net Sales 81,177 91,457 104,067 the books. As a result, gross D/E will reduce steadily to 0.7x in FY22 from 1.2x in FY19 (ex- EBIDTA 5,541 13,946 16,488 lease liability). Net Profit 1,273 1,728 2,694 EPS, Rs 1.6 2.2 3.5 Valuation and outlook PER, x 114.9 84.6 54.3 We initiate coverage on ABFRL with a BUY rating and target of Rs 262. We value Pantaloons EV/EBIDTA, x 29.3 12.7 10.7 at 7x Sep FY21 EV/EBIDTAR and Madura’s Lifestyle business at 10.5x Sep FY21 EV/EBIDTAR. P/BV, x 10.2 9.9 8.4 Other businesses, including Van Heusen’s innerwear business, ABFRL’s international ROE, % 10.1 11.9 16.8 Debt/Equity (%) 1.2 2.3 2.0 business, and fast fashion, we value at 1x Sep FY21 EV/sales. Key risks: (1) Increasing competition from global brands and value fashion; (2) increasing losses in new business and Source: PhillipCapital India Research Est. fast-fashion verticals;(3) lower discretionary spends. Ankit Kedia, Research Analyst (+ 9122 6246 4122) [email protected]
Page | 49 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
ABFRL INITIATING COVERAGE
Investment Rationale
Pantaloons – on a high growth trajectory Over last five years ABFRL has transformed Pantaloons (after it acquired it from the Future Group) and is now focusing on five levers for growth: 1) Aggressive store expansion with more than 58/55new stores for FY20/21. 2) Improving share of private-label mix with an immediate target of 70%, with sharper price points at the entry level. 3) Improving brand visibility through aggressive marketing spends, which increased in FY19 itself to c.3% of sales at present. 4) Improving in-store experience and engaging more with customers. Improving freshness of the merchandise by regularly introducing new variety in stores. 5) Driving omni channel through the newly launched pantaloons.com e-commerce site.
Aggressive store expansion to boost revenue Pantaloons is at an inflection point and is undertaking aggressive network expansion over the next two years. It is planning to open 58/55+ new stores in FY20/21, taking the store count 37% higher to touch 421 stores. Over the last three years, ABFRL has opened 145 new stores and increased the store count to 308 by FY19. We believe Pantaloons is one of the fastest growing retail chains in the value segment only trailing behind Reliance Trends.
ABFRL is incrementally targeting tier-2/3 cities for new store openings and currently has more than 40% of the stores in tier-2/3 cities while metros account for 40%. We believe having the first-mover advantage in tier-2/3 would give it an edge over competition over the long term. Also, in order to have an asset-light model, the company is opening 25% stores through the franchisee route, so we believe that 22% of overall stores would be franchisee owned by FY22. In order to increase throughput, ABFRL has reduced the store size to 13,000 sq. ft. in FY19 from 18,000 sq. ft. in FY13. Incrementally new stores have a size of c.8,000 sq. ft. Typical capex for a new store is Rs 1,800-2,000 per sq. ft. with 120-150 days of inventory, depending on the market.
37% new stores being added over FY19-22 Steady reduction in store size to increase throughput
Total Stores (nos) New Stores (rhs) Area, (mn sq ft; rhs) Avg Store size (sq ft) 500 70 20000 6
60 5 400 16000 50 4 12000 300 40 3 200 30 8000 2 20 4000 100 1 10
0 0 0 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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ABFRL INITIATING COVERAGE
Stores across cities with incremental focus on smaller towns Incremental 20-25% stores through the franchisee route 50% Own Franchisee 100% 13% 17% 19% 20% 40% 21% 22% 80%
30% 60%
20% 40%
10% 20%
0% 0% Metros Tier I Tier II Tier III FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Increasing share of private labels to boost margins Pantaloons has consistently increased the share of its private-label brands – from 52% in FY15 to 62% in FY19. The management has had a conscious strategy to increase the share to 70-75% over the next 2-3 years, which would help in margin expansion. Hence, the company is looking at a price-value equation, and positioning the product as a value retailer. It has sharp entry-level price points across its private brands, which helps increase customer footfalls and compete with other retailers.
As it is not dependent on third-party merchandise, it is able to improve the freshness of its merchandise, by regularly introducing new trends in the store through its private labels. Since January 2019, it has internally launched Project Phoenix, where it will change the display every 15 days with 40% new products. Hence, in a 3-month season it would have 6 display changes, which would give the store a fresh look, offer new trends, and excite customers to walk-in to the store regularly. We believe this has helped ABFRL to steadily increase its loyalty customer base, which has increased from 5mn in FY16 to 14.6mn in FY19.
Increasing share of private label Steady increase in loyalty customers (in lakhs = 1 lakh = 100,000) 64% 160 62% 140 60% 120
58% 100
56% 80
54% 60 40 52% 20 50% FY16 FY17 FY18 FY19 0 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
We believe ABFRL ended up having too many brands, both external and internal brands, under Pantaloons; over the last couple of years, it has rationalized both. It reduced some of the brands it acquired after the acquisition from Future Group, given overlaps, while it introduced new brands to fill gaps. Currently, it has 26 private-label
Page | 51 | PHILLIPCAPITAL INDIA RESEARCH
ABFRL INITIATING COVERAGE brands, of which Rang Manch is the biggest (Rs 5bn+ sales) followed by Bare Denim, Byford, Honey, and Annabelle.
Private label/in-license brands in the Pantaloons store Men
Women
Kids
The management is focusing on improving Pantaloons’ brand positioning and visibility, to capitalize on its strong brand equity. For this, it is investing in marketing and has upped its advertising spends significantly over the last few quarters. Currently, its marketing spend is c.3% of revenues.
Pantaloons advertising: Attractive price points to attract customers
Source: Company
ABFRL has introduced sharp entry-level price points across categories in-order to compete with other value retailers. Pantaloons has the highest contribution from the women’s category, which accounts for c.40% of its revenue. We believe it has created a niche in this category, which attracts significant customer footfalls.
Attractive pricing for Pantaloons private label in the women’s category Brand Entry level pricing Maximum pricing Kurta Dress Dupatta Palazzo Kurta Dress Dupatta Palazzo Rangmanch Rs 799 Rs 2499 Rs 299 Rs 799 Rs 1999 Rs 2799 Rs 499 Rs 1299 Top Tunic Skirt Dress Top Tunic Skirt Dress Akkruti Rs 599 Rs 799 Rs 1499 Rs 999 Rs 1299 Rs 1499 Rs 1999 Rs 1999 Top Dress Skirt Pants Top Dress Skirt Pants Forever Glam Rs 499 Rs 999 Rs 799 Rs 1299 Rs 1299 Rs 1999 Rs 1299 Rs 1499 T-Shirts Tops Dress Skirt T-Shirts Tops Dress Skirt Honey Top Rs 249 Rs 249 Rs 799 Rs 799 Rs 799 Rs 999 Rs 1699 Rs 1199 Source: Company, PhillipCapital India Research
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ABFRL INITIATING COVERAGE
North and east India account for a bulk of ABFRL’s revenues. Pantaloons is a market leader in east India, and while it is consolidating its positioning there, it is slowly expanding in south and west India too. Higher marketing spends in these regions will help it to grow aggressively.
North and east India account for most revenues Pantaloons is strong in women’s apparel Non FY19 apparels, 9.7% West, 24.5% North, 29.1% Kids, 13.1% Mens, 36.8%
Womens - Ethnic, 19.4% Womens - East, 28.0% South, 18.4% Western, 21.0%
Source: Company, PhillipCapital India Research
Multiple drivers to boost SSSG We believe Pantaloons will deliver consistent c.5% SSSG over the next two years through: 1) Price cuts in its private labels. 2) Focus on loyal customers by increasing in-store experience and engaging more. 3) Improving freshness of merchandise by regularly introducing new trends. 4) Stores opened in the last 24 months (99 out of 308 stores) are not part of SSSG for Pantaloons. As these stores mature, their inclusion will drive SSSG. In FY19, 47% of stores were less than three years old, which would decline to 35% in FY21. 5) Focus on the omnichannel through newly-launched pantaloons.com e-commerce site.
SSSG to remain at 5% over next two years % of stores which are >3 years old 60% Sales/sq ft SSSG (rhs) 9200 7% 6% 50% 9000 5% 40% 8800 4% 3% 8600 30% 2% 8400 1% 20% 8200 0% -1% 10% 8000 -2% 7800 -3% 0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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ABFRL INITIATING COVERAGE
21% CAGR in operating profit over FY19-22, driven by margin expansion Revenue CAGR of 13.3% to Rs 46.4bn over FY19-22, led by network expansion and steady SSSG. Margin expansion will help achieve 21% CAGR in operating profit over FY19-22 to Rs 4bn. We have modelled a 150bps rise in operating margins for Pantaloons to 8.7% in FY22 driven by: 1) SSSG of 5% over next two years. 2) Product-mix change with increasing share of private labels, which drives gross margins, given that private labels have 8-10% higher margins. 3) Better markdown management systems. 4) Operating leverage on fixed, marketing, and corporate costs, given aggressive store openings. Store maturity will also drive margins.
Revenues CAGR of 13% over FY19-22 Operating profit CAGR of 21% over FY19-22
Revenue (Rs mn) Growth (rhs) EBITDA (rs mn) EBITDA Margin (rhs) 50000 20% 4500 10% 45000 18% 4000 9% 40000 16% 3500 8% 7% 35000 14% 3000 6% 30000 12% 2500 25000 10% 5% 2000 20000 8% 4% 1500 15000 6% 3% 1000 10000 4% 2% 5000 2% 500 1% 0 0% 0 0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Madura’s lifestyle business; leader in men’s wear, pan-India presence Madura’s lifestyle business houses India’s leading men’s wear power brands – viz. Van Heusen, Louis Philippe, Allen Solly and Peter England. Aditya Birla Nuvo acquired Madura Fashions in 1999 and become the owner of these key brands; it has exclusive rights for Van Heusen. This helped it to control inventory and save royalty costs and invest on designing and distribution to grow the brand.
Louis Philippe: It is a leading menswear brand for over 25 years. Its collection includes both classic fits and contemporary designs, covering formals, semi formals, custom- made clothing, and accessories. Product range includes suits, shirts, trousers, t-shirts, footwear, and accessories. It is one of the biggest and most profitable men’s wear brands in India, with revenue of c.Rs14bn. Louis Philippe’s jeans and sport extensions would account for 40-45% of the brand’s revenues while Luxure (super premium apparel) would be 30% of its sales.
Van Heusen: It is a work-wear brand for men and women. Van Heusen’s collection includes formal and ceremonial wear, and customizable clothing under ‘My Fit’ with a product range that spans shirts to suits for men and dresses to blazers for women. It has revenues of Rs 10bn; Vdot (sub-brand, semi-casual and causal) and Van Heusen Sport account for 30-35% of revenues while women accounts for 9-10%.
Peter England: It offers contemporary work formals for young professionals at value pricing and has strong brand appeal in tier-2/3 cities as a result. Its range includes shirts, trousers, suits, blazers, and accessories for every occasion. It also has a casual line of cotton shits, denims, cargoes, jackets, sweaters, and accessories. 25% of its c.Rs10bn revenue is from casual/Peter England Red portfolio while jeans would account for 22-25%.
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ABFRL INITIATING COVERAGE
Allen Solly: It focusses on the concept of ‘Friday dressing’ and is a leader in smart casuals for men, women, and kids. Its menswear collection spans shirts, t-shirts, chinos, trousers, jeans, and jackets, while women’s wear includes dresses, tops, tunics, trousers, skirts, shorts, suits and blazers. It has revenues of c.7-8bn and women and kids account for 27-29% of revenues while sports and jeans account for 20%.
Asset-light store expansion with multiple distribution channels ABFRL’s lifestyle business has a strong distribution network of 2,400+ stores and accounts for 40% of revenues in FY19 compared with 43% in FY16. The rest of the revenue comes from LFS (large format stores)/wholesale business (41%) and exports/e- commerce (20%). Over time, the company has been able to maintain and grow its wholesale and LFS contribution (34% in FY10), which not only helps it to expand its reach but also maintain an asset-light business model (inventory is not on the company’s books in the wholesale business model).
ABFRL is looking at expanding its retail network over the next two years to 300+ stores each in FY20-21, of which a bulk would be franchisee-led as it has strong brand pull. This will lead to higher ROCE.
Lifestyle business network expansion Revenue mix across channels Brand No of Stores Cities Wholesale Retail Others Van Heusen 357 400+ 100% Louis Phillip 394 400+ Allen Solly 291 400+ Peter England 838 750+ 80% Planet Fashion 240 150+
60%
40%
20%
0% FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Brand extensions to aid growth Over the last few years, ABFRL has increased its brand loyalty across new categories through brand extension, which also helped it to reduce its dependence on main brands to c.50% in FY19 from 55% in FY15 and 72% in FY10. Brand extensions include jeans, sports, and women, apart from accessories and footwear. We believe one of the key brand extensions that happened was Van Heusen Women – which now accounts for 9- 10% of the brand’s sales while Allen Solly Women contributes c.15% of its revenues. Growth in these new categories and extension is happening at a faster pace compared to the main brands, which should drive overall revenue growth. These are also helping the company to de-risk concentration from men’s formal and casual wear, in case of a shift in consumer habits.
Case in point: Our visit to one of the standalone Van Heusen Women exclusive brand outlet (EBO) revealed that the store’s revenues were 50% higher (partly driven by higher area) than when women’s apparel was combined with men at the same mall. Rather recent additions – accessories (shoes, bags) – contribute c.20% of the store sales vs. 7% earlier. Jacqueline Fernandez as a brand ambassador for women’s handbags has helped create brand visibility and aided footfalls.
Page | 55 | PHILLIPCAPITAL INDIA RESEARCH
ABFRL INITIATING COVERAGE
Large following for all Lifestyle brands on social media Reducing share of mainline segment across brands
Instagram Facebook 70% 2.0 60% 1.6 50% 1.2 40% 0.8 30% 0.4 20% 0.0 10%
0% Van Heusen Louis Philippe Allen Solly Peter England
Source: Company, PhillipCapital India Research
Investing on omni-channel initiatives We believe the company is working with both marketplace e-commerce and has own e- commerce portals for all four brands; c.7% of its revenue is now from e-commerce, which is growing at a healthy rate. We believe it is now focusing on the omni-channel initiatives by introducing ‘endless aisles’ across EBOs (see picture on the right), which helps customers select inventory across all warehouses and stored locations. This offers more options, sizes, and colours to the customers. Additionally, customers can customize apparels, say shirts, depending on their preference of cuff, fabric, collar, and buttons. For the omni initiative, ABFRL has invested Rs 200mn to create IT infrastructure and a platform. However, it is slowly increasing the store-level spends to install kiosks with digital displays. Our channel checks suggest that 1-2% of store revenues are from kiosks.
Online e-commerce sites for all 4 lifestyle brands
Source: Company
Revenue CAGR of 11.6% over FY19-22 with steady margin expansion We expect the lifestyle business to post a revenue CAGR of 11.6% over FY19-22 to Rs 59.9bn on 4%/5.5% SSSG for FY20/21, led by incremental growth through brand extensions, premiumisation, and increasing share of e-commerce revenues. Accelerated network expansion of 300+ stores each year in FY20/21 would drive revenue growth. Operating profit will see 13% CAGR over FY19-22 to Rs 7.5bn on 60bps margin expansion. We believe the management is investing in brand building and has upped advertising spends (c.4.5% of sales) over the last few quarters to drive growth. Over the
Page | 56 | PHILLIPCAPITAL INDIA RESEARCH
ABFRL INITIATING COVERAGE medium term, the management would be comfortable with 12.5-13.0% margins, and incrementally it would invest back into the business for network expansion so that the brand remains contemporary, energized, and fresh.
Revenue CAGR of 11.6% over FY19-22 Margin expansion to continue
Lifestyle Revenues (Rs mn) SSSG, (rhs) Operating Profit (Rsmn) Operating Margins (%), rhs 70000 12% 8000 12.8
60000 7000 12.6 8% 12.4 50000 6000 12.2 4% 5000 40000 12.0 4000 30000 11.8 0% 3000 11.6 20000 2000 -4% 11.4 10000 1000 11.2
0 -8% 0 11.0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Recent foray in ethnic wear through the acquisition of Jaypore According to the management, ethnic wear accounts for 25% of the overall market and 70-75% of the women’s wear market. This segment was the missing link in its portfolio and it believes that the acquisition of Jaypore (ethnic clothing store) will help to shorten its learning curve. Investment in these brands/this company won’t be substantial in the near term.
Jaypore: ABFRL acquired 100% in Jaypore in July 2019 at an EV valuation of Rs 1.1bn (2.8x EV/sales) to make its foray into ethnic wear. It plans to leverage Jaypore’s strong online equity (80% of revenues), rapidly build offline distribution, and drive expansion. Currently, Jaypore has only two retail stores, which accounts for c.20% of its revenues. ABFRL’s management plans to open 15-20 stores over the next two years each about 1,500-2,000 sq. ft. in size.
Shantanu & Nikhil: ABFRL also bought a 51% stake in Finesse International Design, owned by designers Shantanu & Nikhil, given the strength of their namesake brand in ethnic wear. Current, the brand Shantanu & Nikhil has a premium collection and the management plans to launch pret lines at lower price points to scale up the brand. It plans to add 5-7 stores in the next three quarters each 1,000-1,500 sq. ft. in size.
FY17 FY18 FY19 Jaypore E-Commerce Pvt Ltd Revenue 406 419 389 EV 1100 EV/Sales (x) 2.8 Finesse International Design Pvt Ltd (Shantanu & Nikhil) Revenue 300 355 352 EV 1137 EV/Sales (x) 3.2 Source: Company, PhillipCapital India Research
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ABFRL INITIATING COVERAGE
Innerwear expected to breakeven from FY22 The innerwear market will reach Rs 468bn by FY20; 14% CAGR over FY15-20. While the growth for men and women would be c.14%, kids’ market could see faster CAGR of c.20%. The organised market is a very small part of the total innerwear market, which is currently attracting multiple players including foreign brands such as Hanes, Fruit of the Loom, Calvin Klein, Pepe, and Levis, apart from Indian players. We believe Van Heusen will capture a significant part of this organised market, through its new innerwear and ‘athleisure’ offerings, which were launched in FY17, based on its strong brand pull in the formal men and women’s outerwear premium categories.
Innerwear market CAGR at 14% over FY15-20 to Rs 470bn
Men Women Kids 500
400
300
200
100
0 FY10 FY15 FY20E
Source: Company, PhillipCapital India Research
Van Heusen is growing its distribution reach by aggressively expanding pan India. Currently, it is available at 18,000 outlets compared with Page Industries’ 55,000+ (Jockey), Dollar Industries’ 95,000, and Rupa’s 120,000. We believe that over the next 3- 5 years, ABFRL would be able to compete with Page Industries at all retail counters based on the management’s investments. It is offering higher trade margins and schemes to retailers and distributors to stock Van Heusen products. Once the company reaches 40,000+ (after 18-24 months), it would potentially launch innerwear across other brands such as Peter England and Allen Solly to tap its existing distribution network and compete with other brands across price points.
Innerwear: Steady increase in multi-brand outlets Van Heusen’s distribution network vs. competitors 16000 140000
14000 120000
12000 100000
10000 80000
8000 60000
6000 40000
4000 20000
2000 0 Page Dollar Rupa Van Heusen 0 Industries FY17 FY18 FY19
Source: Company, PhillipCapital India Research
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Van Heusen has products across three ranges – Classic, Platinum, and Signature. These straddle price points and are positioned at a 5-10% premium to Jockey, which is currently the market leader. Its ‘athleisure’ collection is gaining strong traction with customers because of Van Heusen’s premium branding in the apparel category.
The company is also placing its innerwear collection across EBOs and LFS (large format stores) such as Shoppers Stop and Lifestyle, which is helping it to reach mid-to-premium customers that visit malls and highstreets for shopping. It has also launched exclusive innerwear EBOs that stock and display all products.
Price range for Van Heusen innerwear across products Van Heusen innerwear EBO Product Type/Range Classic Platinum Signature Briefs Rs 199-249 Rs289-369 Rs 379-529 Vests Rs 249-349 Rs 369 NA Trunks Rs 239-269 Rs 329-599 NA Boxer Briefs Rs 209 NA NA Athleisure T-shirts Rs459-899 Track Pants / joggers Rs 849 -2299 Shorts Rs 599-799 Gym Vests Rs 359-419 Sweatshirts 2399
Source: Company, PhillipCapital India Research
Key takeaways from our channel checks with distributors and retailers: 1) Van Heusen’s product quality is superior to competitor Jockey – a key differentiating factor. 2) Customers don’t mind paying a marginal premium for outerwear over Jockey, given Van Heusen’s superior brand pull. 3) Van Heusen has multiple monthly schemes for retailers, more than what Page Industries offers. The former’s retailers can earn 10-15% incentive than the latter’s. 4) Cash discount for Van Heusen is 3% compared to 2% for Page Industries. 5) In some regions, distributors are asking retailers to start stocking Van Heusen innerwear on SoR (sale or return) basis. They believe that once these products receive acceptance and repeat purchases begin, retailers will start stocking products on regular terms. 6) Van Heusen needs to increase its product basket as it is way smaller than to Page Industries’ currently.
Given its initial success, we believe ABFRL will be able to clock revenues of Rs4.6bn by FY21 against its internal target of Rs5bn. Within the first two years of launch, it has already achieved revenues of Rs 2bn. The pan-India launch of women’s innerwear in FY20, aggressive distribution expansion, and new product launches would drive growth. We have modelled losses to the tune of Rs690mn for FY20, which would reduce to Rs 320mn in FY21 and expect the business to turn profitable only in FY22.
In the international portfolio, ABFRL has an exclusive partnership with two of UK’s most successful fashion brands – Simon Carter and Ted Baker. In August 2017, it entered into a multi‐store retail and e‐commerce license agreement with American Eagle Outfitters Inc., and in 2018, it entered into a store-license and distribution agreement with Ralph Lauren Asia Pacific Ltd (Polo Ralph Lauren and Ralph Lauren brands). With this international collection, we expect ABFRL to cater to the super-premium and luxury customers at the top of the pyramid. This business’ revenues in FY19 were Rs 1.7bn, which we expect will grow to Rs 2.7bn by FY22, with a marginal loss of Rs 33mn.
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Overall, other business under the Madura segment would report revenues of Rs 8.7bn in FY22 from Rs 3.7bn in FY19 and see a CGAR of 33%. Losses in the business would half from Rs 845mn in FY19 to a mere Rs 454mn in FY21 and breakeven by FY22.
Expect innerwear business to breakeven from FY22 Margins of other business to improve led by innerwear Sales EBIDTA Revenue, Rs mn EBIDTA, Rs mn 7000 10000
6000 8000 5000 6000 4000
3000 4000 2000 2000 1000
0 0 -1000 -2000 -2000 FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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Fast Fashion – rejig on the cards ABFRL acquired exclusive 30-year rights of US-based Forever21 for the Indian market, in July 2016, along with existing 12 stores from Diana Retail and DLF Brands (previous owners of Forever21 for India) for Rs 1.7bn as it wanted to have a strong presence in the fast-fashion women’s western wear market.
We believe that in the last few years, this portfolio of fast-fashion brands of both Forever 21 (25 stores) and People (94 stores) has not been able to generate the kind of return that was expected. While losses in Forever 21 have been reducing over last two years, it has still not reached a level of profitability that would give the management confidence to invest aggressively to grow the brand. Management has decided to open 3-4 stores every year and track the profitability. To increase gross margins and customize the products for the Indian market, it would have to start local manufacturing of some products. As local manufacturing increases over time, margins will grow and losses will reduce, giving the management confidence to invest further in the brand over the medium term.
Management has decided not to pursue the People brand in the fast-fashion segment as a standalone retail format store; it will convert the stores to other branded stores. Considering the brand equity of People amongst young customers, it would be launched as a youth brand within Pantaloons stores, which will help the company to rationalize its fast-fashion portfolio and address Pantaloons’ need to attract younger customers to its stores. This will help the company reduce losses in this segment from FY21. After this transition, the only meaningful portion in the fast fashion business would be Forever21.
We have modelled revenue CAGR of 8% over FY19-22 to Rs 4.5bn in this segment with People stores closing down. Fast fashion will account for less than 6% of Madura’s revenues in FY22 from 7.2% in FY19. We expect losses in fast fashion to reduce to Rs 86mn in FY21 from losses of Rs 324mn in FY19 and turn profitable in FY22. This portfolio had a peak loss of Rs 534mn in FY18. Most of the turnaround would be on People stores closing, higher gross margins and reducing store size in Forever 21, and increasing SSSG because of products being customised for the Indian market.
Store count Store consolidation to aid profitability
Forever 21 People Revenue, Rs mn EBIDTA, Rs mn 100 5000 90 4000 80 70 3000 60 50 2000 40 30 1000 20 0 10 0 -1000 FY17 FY18 FY19 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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Financials
Revenue CAGR of 13% over FY19-22 We expect revenues CAGR of 13% over FY19-22 to Rs 118bn led by 13.3% CAGR in Pantaloons and 13.2% in Madura. Network expansion, both in Madura and Pantaloons, coupled with healthy SSSG, will drive revenue growth. Innerwear business could surprise positively, aiding revenue growth. Pantaloons should contribute 39% of revenues in FY22, up from 35% in FY16.
Revenue CAGR of 13% over FY19-22 Pantaloons to contribute c.39% to revenues and EBIDTA
Net Sales, Rs mn Growth, % (rhs) Revenue EBIDTA 50% 140,000 16
120,000 14 40% 12 100,000 10 30% 80,000 8 60,000 20% 6 40,000 4 10% 20,000 2
0 0 0% FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E
Source: Company, PhillipCapital India Research
Operating margin expansion to continue We expect operating profit CAGR of 23% over FY19-22 to touch Rs 10.4bn (ex-IndAs 116) with Pantaloons CAGR at 20.4% and Madura at 25.4%. Reducing losses in the innerwear and fast fashion portfolio will aid operating profit and margins, so we expect operating margins to rise to 8.8% by FY22 from 6.8% in FY19; +150bps Pantaloons, +230bps Madura. Reported operating profit CAGR will be 51% over FY19-22 to Rs 19.1bn. On strong operating profit, adjusted PAT CAGR will be 45% to Rs 3.7bn. We have modelled 20% tax rate from FY20, as we expect the company to come under MAT.
Operating profit to see 51% CAGR over FY19-22 Adj. PAT CAGR at 45% over FY19-22 Operating profit, Rs mn Operating Margins, % (rhs) Adj Net Profit, Rs mn Growth, % (rhs) 22,000 18 5,000 180 160 20,000 16 4,000 18,000 140 14 16,000 3,000 120 12 14,000 2,000 100 12,000 10 80 10,000 8 1,000 60 8,000 6 0 40 6,000 4 20 4,000 -1,000 0 2,000 2 -2,000 (20) 0 0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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Low working capital to aid FCF generation We expect inventory days at 86, given increasing share of revenues from Pantaloons’ private label. We believe Pantaloons would have near three months of inventory while the wholesale business of the lifestyle vertical (41% of its revenues) has zero inventory as it works on the ‘buy and sell’ model. We believe the inventory in the retail business of the lifestyle vertical would be slightly less than four months, given lower turns in e- commerce, innerwear, and fast fashion (which is loss making currently). With the scale of the business, ABFRL is negotiating favourable terms with suppliers so payable days would remain high at 108 days. Receivable days remain less than a month since they are only from the wholesale and e-commerce channel. Overall, ABFRL has a 10-day cash-conversion cycle, which we believe is helping it to generate high operating cash flows. We have modelled operating cash flow generation of Rs 23.5bn while capex will be Rs 11.5bn. Despite aggressive store opening targets over the next two years, we believe that capex will be limited as ABFRL is incrementally opening more franchise store both for its lifestyle and Pantaloons verticals.
Working capital is under control Healthy FCF generation (ex-lease liability) Free Cash Flow, Rs mn OCF, Rs mn Inventory Days Debtor Days Payable Days 9000 150 8000
100 7000 6000 50 5000 0 4000 3000 -50 2000 -100 1000 0 -150 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E Source: Company, PhillipCapital India Research
We believe high FCF generation will help the company to deleverage its high debts on the books. Gross D/E will reduce steadily to 0.7x in FY22 from 1.2x in FY19 while net D/E (ex-lease liability) will reduce to 0.4x. The return ratios will improve significantly on increasing margins and profitability. Low capex model will aid return ratios. We have modelled RoCE increasing to 13% while RoE will improve to 19.6% by FY22.
Return ratios to improve to mid-teens Net D/E on a reducing trajectory Net Debt (ex-lease liabity), Rs mn RoCE, % RoE, % RoIC, % 25 Net D/E (ex-lease liability)(rhs) 25000 Net D/E (rhs) 2.5 20
15 20000 2.0
10 15000 1.5 5 10000 1.0 0
-5 5000 0.5
-10 0 0.0 -15 FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21EFY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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Margin profile FY16 FY17 FY18 FY19 EBIT Pantaloons -1565 -177.5 223.4 867.8 Madura Fashion & Lifestyle 2232 2583 2022 2497 Total 667 2405 2246 3365 Capital Employed Pantaloons 13414 13770 14450 16183 Madura Fashion& Lifestyle 16512 16731 15858 15071 Total 27865 30651 31188 33706 RoCE Pantaloons -11.7% -1.3% 1.5% 5.4% Madura Fashion & Lifestyle 13.5% 15.4% 12.8% 16.6% Total 2.4% 7.8% 7.2% 10.0% Source: Company, PhillipCapital India Research
DuPont analysis Particulars FY17 FY18 FY19 FY20E FY21E PAT/Sales (x) 0.01 0.01 0.02 0.03 0.03 Sales/Assets (x) 2.29 2.44 2.82 2.49 2.23 Assets/Equity (x) 3.09 2.87 2.28 2.53 2.91 RoE (%) 5.7 4.8 10.1 11.9 16.8 Source: Company, PhillipCapital India Research
Outlook and valuations We believe ABFRL, through its leading brands of Van Heusen, Allen Solly, Louis Philippe and Peter England, is well placed to capture the shift emerging out of rising disposable income channelled towards branded apparel. Investments in its innerwear business, tie- ups with international brands, and Pantaloon’s network expansion will drive long-term value creation. Opportunity for margin expansion across both divisions and reducing D/E will boost return rations.
We initiate coverage on ABFRL with a BUY rating and target of Rs 262. We value Pantaloons at 7x Sep FY21 EV/EBIDTAR while Madura Lifestyle we value at 10.5x Sep FY21 EV/EBIDTAR. Other business that include Van Heusen’s innerwear business, international business and fast fashion we value at 1x Sep FY21 EV/sales.
Valuations Segment Parameter Year Particular (Rs mn) Multiple (x) EV (Rs mn) Pantaloons EV/EBIDTAR Sep FY21E 10457 7 73200 Lifestyle Business EV/EBIDTAR Sep FY21E 13991 10.5 146910 Other business + Fast Fashion EV/Sales Sep FY21E 12106 1 12106
Total EV 232216 Less: Net Debt (Rs mn) Sep FY21E 29538 Market cap (Rs mn) 202678 No of shares (mn) 773 Target Price (Rs) 262 Source: Company, PhillipCapital India Research
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PE chart EV/EBIDTA charts 2yr fwd P/E 2yr fwd EV/EBITDA 450 50 400 45 40 350 35 300 30 250 25 200 20 150 AVG 134.32 15 100 10 50 5
0 0
Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Jan-16 Jan-17 Jan-18 Jan-19
Oct-15 Oct-16 Oct-17 Oct-18
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Source: Company, PhillipCapital India Research
EV/sales EV/EBIDTAR charts 2yr fwd EV/Sales 2yr fwd EV/EBITDA-R 3.5 15 14 3.0 13 12 2.5 11 10 2.0 9 8 1.5 7 6
1.0 5
Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Jan-16 Jan-17 Jan-18 Jan-19
Oct-15 Oct-16 Oct-17 Oct-18
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Jan-19 Jan-16 Jan-17 Jan-18
Oct-15 Oct-16 Oct-17 Oct-18
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Source: Company, PhillipCapital India Research
Key Risks
Increasing competition from global brands and value fashion: Increasing presence of foreign brands in India with the government easing sourcing norms for single-brand retail could impact growth in the Madura vertical while increasing competition in value fashion would impact growth for Pantaloons.
Increasing losses in new business and fast fashion: While the management has said that new business will breakeven in FY21, and delay in this will impact margins.
Lower discretionary spends: Any material slowdown will lower discretionary spends and have an adverse impact on revenue and margins.
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Company Background ABFRL emerged with the consolidation of the branded apparel businesses of Aditya Birla Group comprising Aditya Birla Nuvo’s (ABNL) Madura Fashion division and ABNL's subsidiaries Pantaloons Fashion and Retail (PFRL) and Madura Fashion & Lifestyle (MFL) in May 2015. After the consolidation, PFRL was renamed Aditya Birla Fashion and Retail Ltd.
ABFRL hosts India's largest fashion network, which include close to 2,700+ exclusive ABFRL brand outlets across 750+ cities and towns across the country. It has c.30mn Loyalty Members as of 31st March 2019. The ABFRL umbrella includes: Madura Fashion & Lifestyle: Custodian of several icons including the top-four fashion brands of India – Louis Philippe, Van Heusen, Allen Solly, and Peter England. Pantaloons: As a family-fashion destination, Pantaloons has emerged as a strong brand over the past two decades and is making fashion accessible across the length and breadth of the country.
Company flowchart
Aditya Birla Fashion & Retail
Madura Pantaloons
Other business (innerwear, Retailer of own and third- Lifestyle brands Fast Fashion International brands) party brands
Van Heusen innerwear Brands: Allen Solly, Louis International brands: Philippe, Peter England, Van Forever 21 & People Hackett, Simon Carter, Ted Heusen Baker, American Eagle etc.
Source: Company, PhillipCapital India Research
Products landscape and store locations
Source: Company
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Management Team NAME DESIGNATION PROFILE Ashish Dikshit Managing Director Electronics and Electrical Engineer from IIT - Chennai. MBA from IIM - Bangalore. He has worked in diverse roles across industries and functions over the last 24 years. Has been associated with Madura Fashion and Lifestyle for the last 18 years, where he headed various functions. Earlier, he was Principal EA to the Chairman of Aditya Birla Group. Mr Vishak Kumar CEO: Madura Fashion and IIM Bangalore alumnus and a computer engineer from BIT Ranchi. Joined as a management trainee in Lifestyle 1995; been with the Aditya Birla Group ever since. Was CEO of Aditya Birla Retail Limited, the food and grocery arm of group, for 4+ years. Sangeeta Pendurkar CEO - Pantaloons Successful career of +30 years across diverse sectors, e.g., FMCG, pharmaceuticals and financial services. Before this, she was the Managing Director for Kellogg India and South Asia. She has held senior positions at Coca-Cola India, HSBC Bank, Hindustan Unilever, and Novartis Mr Sooraj Bhat CEO - Fast Fashion IIM Bangalore alumnus and a mechanical engineer from NIT (previously REC) - Calicut. He joined Madura in Business ABFRL 2002 and has been with the company since then. He has also served as the Brand Head of Allen Solly, COO - Allen Solly and Louis Philippe and COO - Fashion Brands before assuming his current role Mr Puneet Malik CEO – Innerwear Business Alumnus of IIM Bangalore, NIFT Delhi and a Textile Technologist from TIT Bhiwani. Joined Madura in 1994 as a management trainee; been with Aditya Birla Group since then. Over the last 24 years, he has led diverse functions across manufacturing, sourcing, supply chain, brand, retail and sales. COO - Sales, Planet Fashion and Branded Exports. Conceptualized and started the innerwear business for ABFRL. Mr R Sathyajit CEO- International Brands He is an IIM Bangalore alumnus and has been associated with the company since 2004. Mr Chandrashekhar Chief Human Resource Mr. Chandrashekhar Chavan holds a Master's Degree in Personnel Management & Industrial Relations Chavan Officer - Apparel & Retail from Tata Institute of Social Sciences, Mumbai. He joined the Aditya Birla Group in 1996. Completed close to 21 years in the group across metals (Hindalco Industries), financial services (Birla Sunlife Mutual Funds), cement (Ultratech Cement) and apparel (Madura Fashion & Lifestyle and Pantaloons Fashion & Retail Ltd). Mr Jagdish Bajaj Chief Financial Officer Chartered Accountant with rich experience in finance operations. Expertise in business restructuring and M&As. Been with the Aditya Birla Group for 29 years in multiple businesses such as ABNL, Grasim, etc. Mr Neeraj Pal Singh Chief Information Officer MTech. in Computer Science.+30 years of rich experience in varied industries such as FMCG, retail, breweries, and IT consulting. Been with the Aditya Birla Group for 20 years. Before this, he was Senior Systems Manager of Hindustan Unilever Limited and as Corporate IT head for erstwhile Madura Coats. He has also worked for highly reputed organisations such as PricewaterhouseCoopers and the UB Group. Source: Company, PhillipCapital India Research
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Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Net sales 80,402 90,644 1,03,215 1,17,134 Pre-tax profit 1,491 2,159 3,368 4,721 Growth, % 12.5 12.7 13.9 13.5 Depreciation 2,823 8,678 10,076 11,447 Other income 776 813 852 893 Chg in working capital -937 1,447 -789 -895 Total income 81,177 91,457 1,04,067 1,18,027 Total tax paid -196 -432 -674 -944 Raw material expenses -39,250 -43,866 -49,485 -55,809 Other operating activities 2,095 3,109 3,044 2,990 Employee expenses -9,130 -10,386 -11,800 -13,275 Cash flow from operating activities 5,276 14,962 15,026 17,319 Other Operating expenses -27,257 -23,259 -26,294 -29,784 Capital expenditure -2,792 -3,500 -3,800 -4,200 EBITDA 5,541 13,946 16,488 19,158 Chg in investments 22 -1,610 0 0 Growth, % 18.3 151.7 18.2 16.2 Other investing activities 4 680 740 829 Margin, % 6.8 15.2 15.8 16.2 Cash flow from investing activities -2,766 -4,430 -3,060 -3,371 Depreciation -2,823 -8,678 -10,076 -11,447 Free cash flow (ex-Lease Liability) 2,484 4,389 3,260 4,367 EBIT 2,717 5,268 6,412 7,711 Equity raised/(repaid) 9 0 0 0 Growth, % 44.7 93.9 21.7 20.3 Debt raised/(repaid) -1,576 -500 -500 -500 Margin, % 3.3 5.8 6.2 6.5 Other financing activities -1,098 -8,850 -9,649 -10,383 Interest paid -1,874 -3,789 -3,784 -3,819 Cash flow from financing activities -2,664 -9,350 -10,149 -10,883 Other Non-Operating Income 648 680 740 829 Net chg in cash -154 1,182 1,817 3,065 Pre-tax profit 1,491 2,159 3,368 4,721 Tax provided 1,721 -432 -674 -944 Profit after tax 3,212 1,728 2,694 3,777 Valuation Ratios Net Profit 3,212 1,728 2,694 3,777 FY19 FY20e FY21e FY22e Growth, % 172.7 -46.2 55.9 40.2 Per Share data Net Profit (adjusted) 1,273 1,728 2,694 3,777 EPS (INR) 1.6 2.2 3.5 4.9 Unadj. shares (m) 773 773 773 773 Growth, % 159.3 35.8 55.9 40.2 Book NAV/share (INR) 18.5 19.0 22.5 27.4 FDEPS (INR) 1.6 2.2 3.5 4.9 Balance Sheet CEPS (INR) 5.3 13.5 16.5 19.7 Y/E Mar, Rs mn FY19 FY20e FY21e FY22e CFPS (INR) 3.2 14.8 14.5 17.0 Cash & bank 574 1,754 3,571 6,636 Return ratios Debtors 7,866 8,770 9,979 11,318 Return on assets (%) 5.3 5.7 6.2 6.8 Inventory 19,213 21,298 24,235 27,486 Return on equity (%) 10.1 11.9 16.8 19.6 Loans & advances 6,393 5,487 6,244 7,082 Return on capital employed (%) 11.7 10.6 11.8 13.0 Other current assets 2,562 2,690 2,825 2,966 Turnover ratios Total current assets 36,608 40,000 46,854 55,487 Asset turnover (x) 2.9 2.1 2.3 2.6 Investments 42 1,652 1,652 1,652 Sales/Total assets (x) 1.3 1.1 1.1 1.2 Gross fixed assets 32,410 35,910 39,710 43,910 Sales/Net FA (x) 3.1 2.3 2.5 2.8 Less: Depreciation -6,855 -15,533 -25,609 -37,056 Working capital/Sales (x) 0.0 0.0 0.0 0.0 Add: Capital WIP 224 224 224 224 Receivable days 35.4 35.0 35.0 35.0 Net fixed assets 25,779 40,559 41,823 41,813 Inventory days 86.4 85.0 85.0 85.0 Non-current assets 1,149 1,206 1,266 1,330 Payable days 107.8 108.0 108.0 108.0 Total assets 63,577 83,416 91,595 1,00,282 Working capital days 10.3 3.4 5.7 7.8 Current liabilities 32,871 36,487 40,689 45,314 Liquidity ratios Provisions 2,023 2,124 2,230 2,341 Current ratio (x) 1.1 1.1 1.1 1.2 Total current liabilities 34,893 38,610 42,919 47,656 Quick ratio (x) 0.5 0.5 0.6 0.6 Total Debt 17,029 33,421 34,597 34,771 Interest cover (x) 1.4 1.4 1.7 2.0 Deferred Tax Liabilities -2,634 -3,333 -3,333 -3,333 Dividend cover (x) n/m n/m n/m n/m Total liabilities 49,288 68,698 74,182 79,093 Total debt/Equity (%) 1.2 2.3 2.0 1.6 Paid-up capital 7,735 7,735 7,735 7,735 Net debt/Equity (%) 1.1 2.1 1.8 1.3 Reserves & surplus 6,554 6,983 9,677 13,454 Valuation Shareholders’ equity 14,289 14,718 17,412 21,189 PER (x) 114.9 84.6 54.3 38.7 Total equity & liabilities 63,577 83,416 91,595 1,00,282 PEG (x) - y-o-y growth 0.7 2.4 1.0 1.0 Price/Book (x) 10.2 9.9 8.4 6.9 Source: Company, PhillipCapital India Research Estimates EV/Net sales (x) 2.0 1.9 1.7 1.5 EV/EBITDA (x) 29.3 12.7 10.7 9.1 EV/EBIT (x) 59.8 33.8 27.6 22.6 EV/EBIDTAR (x) 9.8 9.3 8.0 6.8
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Future Lifestyle Fashions (FLFL IN)
Differentiated model = bright future
INDIA | RETAIL | Initiating Coverage 11 September 2019
FLFL’s differentiated business model – owned brands and physical retail through Brand BUY Factory (a discount format store) and Central (department store chain)–gives it an edge CMP RS 428 over competitors. Brand Factory’s virtual monopoly as a liquidation channel for third- TARGET RS 556 (+30%) party brands in the offline space brings in unprecedented customer footfalls while Central has positioned itself as a mini-mall. Healthy SSSG, consistently increasing operating COMPANY DATA margins, and strengthening balance sheet aided by improving inventory turns and O/S SHARES (MN) : 195 reducing D/E augur well for FLFL over the medium term. We initiate coverage with a BUY MARKET CAP (RSBN): 82 rating and a target of Rs 556(7.5x Sep FY21 EV/EBIDTAR). MARKET CAP (USDBN): 1.1 52 - WK HI/LO (RS): 502 / 359 Brand Factory – monopoly as discount retailer for brands LIQUIDITY 3M (USDMN): 0.4 PAR VALUE (RS): 2 FLFL is expected to aggressively open 20-25 Brand Factory stores every year over the next 2- 3 years. Its business model makes it viable to open stop stores even in smaller cities, SHARE HOLDING PATTERN, % compete with value-fashion retailers, and sell its products round the year at 20-70% Jun 19 Mar 19 Dec 18 discounts. We expect its SSSG to increase by 6%/8% for FY20/21 because of limited PROMOTERS : 53.4 53.5 53.5 competition, attractive pricing and improving store maturity that will increase throughput. FII / NRI : 20.6 22.3 22.4 FI / MF : 12.6 9.7 9.3 NON PRO : 4.3 4.7 4.9 Central to offer a premium experience in the mini-mall format PUBLIC & OTHERS : 9.1 9.9 10.0 Despite being a late entrant, Central’s store count has consistently increased to 44 in FY19, which it plans to take to 58 by FY22. More than 90% of these are standalone stores on high PRICE PERFORMANCE, % streets, which allow them to be positioned as mini malls. Central has one of the highest SKU 1MTH 3MTH 1YR ABS -5.0 -5.3 3.0 ranges in the ‘shop-in-shop’ format and sells 550+ brands. We expect its SSSG to increase REL TO BSE -3.8 1.0 6.2 5.0-6.5% over FY20-22, based on increasing private-label sales (currently 30%), reducing store sizes, improving store layout, and better customer experience, which will drive PRICE VS. SENSEX throughput; current sales per sq. ft. stand at c.Rs 7,500for Central and Rs 10,000 for Central 740 HD (premium stores). 640
540 Own-brands portfolio to aid revenue growth and margins 440 FLFL’s own-brand apparel portfolio (Lee Cooper, aLL, Indigo Nation, etc.) helps to drive 340 footfalls in Central and Brand Factory, control inventory and back-end operations, and 240 improve margins. Each of its seven power brands have more than Rs 1.5bn in MRP sales and 140 cumulatively account for Rs 24bn in FY19, 17% CAGR over FY16-19. As these brands scale up, 40 FLFL will be able increase its margins based on operating leverage and its bargaining power Apr/16 Apr/17 Apr/18 Apr/19 with suppliers. The share of its own and licensed brands has increased to 41% of revenues in FLFL BSE Sensex FY19 from 36% in FY14. Source: PhillipCapital India Research Balance sheet on an improving trajectory KEY FINANCIALS By FY22, we expect Brand Factory to overtake Central in terms of revenues as the former’s Rs mn FY19 FY20E FY21E share will increase to 45% from 21% in FY15. Increasing operating leverage because of Net Sales 57,281 67,268 79,024 higher SSSG, supply-chain efficiencies, and falling discounts will aid EBIDTA-margin EBIDTA 5,259 11,417 13,647 expansion to 9.5% (ex-IndAS 116) in FY22 from 9.2% in FY19. Lower working capital and high Net Profit 1,890 1,843 2,452 cash flows will reduce debt. Gross D/E will reduce from a peak of 1x in FY16 to 0.3x in FY22, EPS, Rs 9.7 9.2 12.2 while net D/E will fall to 0.1x in FY22 (ex-lease liability). PER, x 42.6 46.7 35.1 EV/EBIDTA, x 16.1 9.0 7.3 Outlook and valuations P/BV, x 4.5 4.2 3.8 We initiate coverage on FLFL with a BUY rating and value it at Rs 556 (7.5x Sep FY21 ROE, % 11.3 9.5 11.3 consolidated EV/EBIDTAR – marginal premium with Shoppers Stop’s valuation). This Debt/Equity (%) 49.5 109.3 92.7 valuation is based on healthy revenue/EBIDTA/PAT CAGR of 17%/45%/16%, improving Source: PhillipCapital India Research Est. balance sheet, and improving return ratios. Through FLBL, a 49% associate company, Ankit Kedia, Research Analyst investee companies offer an upside of Rs 23 per share, considering FLBL’s conservative (+ 9122 6246 4122) [email protected] valuation at Rs 9bn (FY17 deal value). Key risks: Lower-than-expected Brand Factory store openings; high pledges in promoter group companies.
Page | 69 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
FLFL INITIATING COVERAGE
Investment Rationale
Brand Factory – monopoly as a discount retailer for brands Brand Factory (BF) holds a monopoly as a discount retailer for brands, since it provides a controlled environment to them for liquidating their stocks without disturbing other profitable distribution channels. It also delivers a richer customer experience than factory outlets. It is positioned as a budget family shopping destination to help the aspirational customer access branded apparel and accessories. It attracts value-seeking suburban families and the 'brand conscious’ aspirational youth, given that Brand Factory sells products all-year at 20-70% discounts.
With a select range of made-to-order exclusive products from brands (45% of inventory), Brand Factory can provide the latest in fashion at a discounted price – a unique proposition. Brand Factory: Inventory breakup 50% We believe Brand Factory differentiates itself from competition as: 40% 1) It helps brands to manage their inventory – Being a discount retailer, it helps 30% national brands to liquidate old inventory; 15% of BF’s sales are from 3-5 season- old inventory while 40% is 1-2 seasons old. This helps brands maintain fresh 20% stock in their EBOs (exclusive brand outlets), LFS (large format stores), and MBOs 10% (multi-brand outlets). 60% of BF’s sales are from third-party national brands 0% while the remaining 40% are from FLFL’s own brands. 1-2 Season Made to 3-5 season 2) Answer to online discounting – Given that BF offers discounts throughout the old order old year, it continues to garner steady footfalls, not losing them to online e- commerce sites that offer similar discounts. Customers go to BF because they get Brand Factory: Online portal to try apparel, get to buy immediately, and brands don’t have issues with returns etc., which customers face from online channels. In any case, BF has also launched its own portal in June 2019.
We believe that the company will aggressively open 20-25 stores every year (management guidance is 30 stores) over the next 2-3 years. Given its business model, it can open stores even in smaller cities and compete with value-fashion retailers at attractive price points.
Steep growth in store addition Reducing store size (sq. ft.) No of Stores Area (mn sq ft) (rhs) 180 5 40000 160 140 4 30000 120 3 100 20000 80 2 60 10000 40 1 20 38 39 42 53 63 93 113 138 163 0 0 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
We expect BF’s SSSG to increase at a good pace of 6%/8% in FY20/21, based on limited competition and attractive branded apparel prices. Improving store maturity will increase throughput, also leading to healthy SSSG. Currently, its throughput is c.Rs 10,000 per sq. ft. with an average ticket size of c.Rs 2,300. Men’s apparel contributes to 64% of its sales while women’s contributes 15%. In terms of product
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FLFL INITIATING COVERAGE mix, apparel contributes 88% while 12% comes from accessories. Own brands constituted c.40% – which is increasing slowly.
Increasing throughput (Rs/sq. ft.) Healthy SSSG to drive growth (%) 11000 18 10000 16 9000 14 8000 12 7000 10 6000 8 5000 6 4000 4 3000 2 2000 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
More focus on men’s apparel in Brand Factory Apparel accounts for bulk of the revenues for Brand Factory
9% 12%
Men Apparel 15% Women Accessories Kids
64% 88%
Source: Company, PhillipCapital India Research
In2019, BF (Brand Factory) ran multiple promotions to attract customers – such as Free Shopping Weekend, Rock Bottom Fridays, and Bag Bag Sale. It introduced India first ‘ticketed’ shopping event – Free Shopping Weekend. Under this, it sold shopping passes – a classic pass at Rs 150, which allowed members to enter the store at 11 AM and a premium pass at Rs 250 that allowed store access between 8AM and 11AM. In this event, customers could shop for a certain amount – let’s say Rs 5,000 for which they would need to pay a much lower amount – say Rs 2,000. Even the amount they paid could be recovered through gift vouchers and Future Pay cashbacks (therefore ‘free’ – see table below). During this promotion, it notched up sales that were 12 times more than its normal ones.
‘Free shopping weekend’ promotion in Brand Factory, which attracts customers Rs Shopping amount MRP 5000 Immediate Discount 60% Amount to pay 2000 Free Apparel at MRP 500 Gift voucher for future purchase 1000 Future Pay Cashback 500 Net amount 0 Source: PhillipCapital India Research
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FLFL INITIATING COVERAGE
Offers in Brand Factory to attract customers
Source: PhillipCapital India Research
Case Study: TJX The TJX Companies, Inc. is a leading off-price apparel and home-fashion retailer in the United States, Canada, and Europe. It has over 4,300 stores that offer a rapidly changing assortment of quality, fashionable, brand name and designer merchandise at 20-60% discounts to a full-price retailer’s regular prices. It operates stores under the brand names T.J.Maxx, Marshalls, Homegoods, Sierra, Winners and T.K.Maxx.
Financials of TJX Particulars (USD mn) 2005 2019 CAGR 2005-19 SSSG 5% 6% Average 4% Off-price retailers in the US have No of Stores 2224 4306 4.8% demonstrated the success of this Avg Store Size (sq. ft.) 23167 21151 business model – in their ability to Revenue 14913 38973 7.1% expand store count, deliver consistent Gross Profit 3542 11142 8.5% SSSG, and generate high operating Gross Margin % 23.7% 28.6% margins, ROE, and cash flows. We EBIDTA 1394 5038 9.6% believe Brand Factory could replicate EBIDTA Margin % 9.3% 12.9% this success in India over time PAT 664 3060 11.5% CFO 1079.8 4088.5 10.0% Inventory Days 68.7 57.3 RoE 41.4 60.0 RoCE 28.0 32.7 Source: Company, Bloomberg, PhillipCapital India Research
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Central to offer a premium experience in the mini-mall format Despite being one of the last entrants (2004) as a branded retailer (after the entry of Shoppers Stop and Lifestyle), Central has consistently increased its store count. It currently has 44 stores, which we expect will increase to 58 by FY22, with 4-5 new stores per year. Management believes that 10 more cities can accommodate Central. While West and South India are saturated, it will focus on Gujarat and North India for new store openings. We believe the company has now got the store size right with new stores having about 85,000 sq. ft. of space vs. larger stores in the past; this will reduce its average store size to 89,000 sq. ft. in FY22 from 107,000 sq. ft. in FY14.
We believe Central differentiates itself from competition to drive growth in the following ways: Mini mall concept on high streets – More than 90% of Central stores are standalone and located on high streets, which helps it to position itself as a mini- mall with the highest area per store in the industry at c.90,500 sq. ft. Some of these stores also have cafeterias and food joints. A wide range of SKUs and premium brands – Central has one of the highest ranges of SKUs in the shop-in-shop format and sells more than 550 brands. It has recently launched Central HD stores, which offer premium ambience and fashion trends, and ‘experience-led’ shopping for both upscale and value-based branded fashion. These stores offer differentiated services such as free Wi-Fi, easy billing, Central – Hi Definition express alterations, baby care facilities, free home delivery, valet parking, and fashion experience WhatsApp reservations for products.
Limited store addition in Central Average store size continues to reduce (sq. ft.) No of Stores Area (mn sq ft) (rhs) 110000 70 6 105000 60 5 50 100000 4 40 95000 3 30 2 90000 20
10 1 85000 25 29 31 35 40 44 48 53 58 0 0 80000 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
We expect the SSSG to increase by 5-6% over FY20/21 on increasing private-label sales (currently at 30%), reducing store size, improving store layout, and customer experience. This will aid throughput with sales per sq. ft. (currently at Rs 7,500). For Central HD stores the sales per sq. ft. are at Rs 10,000. Average ticket size for Central is Rs3,200. Men’s apparel contributes 38% and women’s 28% of Central’s total sales. Apparel contributes 72% while 28% comes from accessories.
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Throughput to increase steadily (Rs per sq. ft.)… …on high-single-digit SSSG (%) 8000 20 18 7500 16 14 7000 12 6500 10 8 6000 6 4 5500 2 5000 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Men’s products account for half of Central’s sales while apparel forms 75% of sales
6% Men 28% Apparel Women Accessories 28% 38% Kids 72%
Source: Company, PhillipCapital India Research
Strong growth in both Brand Factory and Central We expect Central to post revenue CAGR of 11% over FY19-22 to touch Rs 38.5bn in FY22 from Rs 28.5bn in FY19, based on store expansion and 5-6% SSSG. We calculate Brand Factory’s revenue CAGR at 24.6% to touch Rs 41.8bn on 6%/8% SSSG in FY20/21 and aggressive store expansion. Rising share of own brands will help revenue growth.
Central’s revenue CAGR will be 11% while Brand Factory will grow faster at 24.6% over FY19-22 Central Revenue (Rs mn) Growth (rhs) BF Revenue (Rs mn) Growth (rhs) 50000 25% 50000 60%
50% 40000 20% 40000
40% 30000 15% 30000 30% 20000 10% 20000 20%
10000 5% 10000 10%
0 0% 0 0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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Customer walk-ins and conversions have steadily increased for both Central and Brand Factory. Central had more than 35.7mn customer walk-ins in FY19 – 2.9% CAGR over FY16-19 – while Brand Factory had 29.6mn customer visits – 35% CAGR over FY16-19. Average customer visits-per-store CAGR was 9% over FY16-18 for Brand Factory. Customer conversion increased steadily from 21% in FY16 to 27% in FY18 for Central; for Brand Factory it increased to 36% from 34%.
Customers walk-ins and customer conversions growing at a fast pace Central Brand Factory Central Brand Factory 40 40%
35 35%
30 30%
25 25%
20
(mn) 20% 15 15% 10 10% 5 5% 0 FY16 FY17 FY18 FY19 0% FY16 FY17 FY18 Source: Company, PhillipCapital India Research
A typical Central store takes 6 years to mature and generates a high RoCE of 18-20% with 4-5 years of the payback period. With more than 59% stores at less than 5 years old, we expect better profitability, margins, and improvement in return ratios over time. Brand Factory attains maturity from year-5 itself and earns higher RoCE compared to Central. More than 70% of BF stores are less than 5 years old. Over 3-5 years, given the aggressive expansion, we expect margins and profitability to improve. Gross margins are higher in Central than in Brand Factory. With FLFL increasing the share of own brands, we expect margins to improve, but the shift in mix towards BF will limit the increase in margins.
Average age for both Central and Brand factory (FY19) Age of Store Central Brand Factory EBOs Total >5 Years 18 26 78 122 2-5 years 12 25 76 113 Less than 2 Years 14 42 48 104 Total Store Count 44 93 202 339 Less than 5 Y Mix 59% 72% 61% 64% Source: Company, PhillipCapital India Research
Central and Brand Factory mature in year 5 and 6 Store Journey Central Y1- Y2 Y3- Y4 Y4- Y5 Y6 Onwards Store Maturity Cycle Cash Break even Scale Up Pay back Matured & High RoCE Brand Factory Y1 Y2-Y3 Y4 Y5 onwards Store Maturity Cycle Cash Break even Scale Up Pay back Matured & High RoCE Source: Company, PhillipCapital India Research
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Gross margins across platforms 60%
50%
40%
30%
20%
10%
0% Central Brand Factory EBO 3rd Party Brands
Source: Company, PhillipCapital India Research
Own brands portfolio to aid revenue growth and margins FLFL has 30+ strong brands – owned, licensed, and investee – across categories and price points, marketed across various channels. The share of own and licensed brands have increased to 41% of revenues in FY19 from 36% in FY14. Own channels/stores account for c.70% of brand sales. Its own retail platform helps FLFL to boost margins; standalone brands would have ended up paying 35-40% channel margins to other large-format stores which would now be retained by the company.
Very few players in the industry have been able to replicate FLFL’s brand success over Unique business model of brands the last few years. Its branded apparel portfolio helped it to drive footfalls in Central and retail chain and Brand Factory. This also helps FLFL to control inventory and back-end (from designing to delivery) and improve its overall margins. Management intends to increase the share of its own brands slowly to drive margins.
Portfolio of strong brands across key categories
Source: Company, PhillipCapital India Research
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FLFL INITIATING COVERAGE
Increasing share of own and licensed brands as % of revenues
FY14 FY19
13% 15% Owned Brands Owned Brands
Licensed Brands 23% Licensed Brands 26% 3rd Party brands 64% 60% 3rd Party brands
Source: Company, PhillipCapital India Research
Reducing focus on brand EBOs Over the last two years, the company has consolidated its exclusive brand outlets; total EBOs reduced to 202 in FY19 compared to 284 in FY17. EBOs are for brands such as Lee Cooper, aLL (79 stores), and Converse. Share of revenues from EBOs have declined to 4% in FY19 from 9% in FY15. EBOs cumulatively have total area of 250,000 sq. ft. Revenues from EBOs have declined because of store closures. We believe EBOs are profitable and have high gross margins of +50%.
Consolidation in number of brand EBOs Positioning of brands 350
300
250
200
150
100
50
0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Targeting categories for increasing traction in own/investee brands Footwear: In the footwear category, FLFL wants to be positioned between the mid and super premium category through brands such as Lee Cooper, Tresmode, Clarks, Spunk, Ceriz, and Converse. It has clocked sales of Rs10bn in FY19, up from Rs7bn in FY18 in the footwear segment through Central, Brand Factory, and investee companies. A large part of this growth came from Lee Cooper Footwear (bought the license in FY19), which it introduced from FY19 as its own brand. The revenue share of own brands in footwear has increased to 17% in FY18 from 13% in FY16.
Ethnic women’s wear: This segment’s sales for FLFL were +Rs5bn in FY19. It has introduced new brands and is focusing on full-priced sales in Morpankh, increase width by catering to categories such as dupatta and legwear. It introduced a new category for work wear and launched a dedicated brand Mohr for Brand Factory. The share of own brands in ethnic women’s wear increased to 36% in FY18 from 30% in FY16.
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FLFL INITIATING COVERAGE
Plus size: This is another category where FLFL is a market leader and it plans to capture this market through its aLL brand. This category accounts for 10-15% of the total apparel market and is growing in high double digits. aLL associates annually with Lakme Fashion Week, where each year a fashion designer launches a plus size collection called aLL Primero, which is presented on the runway by winners of auditions for plus-sized models.
Building brands to focus on opportunity in footwear and women’s ethnic wear
Source: Company, PhillipCapital India Research
Increasing share of own brands FY16 FY18 40%
35%
30%
25%
20%
15%
10%
5%
0% Womens Ethnic Wear Footwear
Source: Company, PhillipCapital India Research
Power brands contribute to 60%+ of own-brands sales FLFL has 7 power brands, each with +Rs 1.5bn in MRP sales, which cumulatively accounted for Rs 24bn in FY19 – a CAGR of 17% over FY16-19. On a net sales basis, these brands accounted for Rs 15bn in total revenues. Management believes these brands have the potential to grow and become big in the medium to long term and has therefore allocated a team, resources, and capital to them. As these brands attain scale, FLFL will be able derive higher margins, given these brands’ operating leverage and bargaining power with suppliers.
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FLFL INITIATING COVERAGE
Power brands: MRP sales trend Power brands contribute to +60% sales Brands (Rs mn) FY16 FY17 FY18 FY19 CAGR FY16-19 of own brands Lee Cooper 5670 6510 6670 8260 13.40% 64% John Miller 2430 2120 2550 3260 10.30% 62% Indigo Nation 1650 2110 2160 3130 23.80% Bare 1570 1850 2140 3330 28.50% 60% aLL 800 950 1940 2220 40.50% 58% Scullers 1610 2020 1690 2130 9.80% 56% Jealous 21 1450 1080 1490 1830 8.10% Total 15180 16640 18640 24160 16.80% 54% Source: Company, PhillipCapital India Research 52% FY17 FY18 FY19
Snapshot of key brands along with power brands Brands Category Target customer Competitors Distribution Avg. price point Other points Levi’s, Pepe Jeans, Central, Brand Licensed from Denim and casual Wrangler, Lee, Killer. In Factory, EBOs, Iconix Brand Young men and wear, classical / footwear - Red Tape, leading ecommerce 2,500 Group, it is sold women traditional footwear Woodlands and Hush websites and 3rd in over 100
Puppies party MBO countries Plus-size clothing Plus size category category for men is Rs110Bn. It and women. Population of Central, EBOs and Largest player 1,710 makes up 15% of Western/ethnic overweight crowd online store. the Indian wear and
apparel market. accessories Central, Brand Young women, Factory, EBOs, Forever New, Levi’s, Pepe Casuals and denims upper to middle leading ecommerce 1,500 Jeans income group websites and 3rd party MBO Central, Brand Factory, EBOs, Positioned as Semi-casuals and Mid-level Peter England, Excalibur leading ecommerce 1,340 semi-casual & relaxed office wear executive websites and 3rd affordable brand party MBO Central, Brand Young urban Factory, EBOs, Work, Street, Club Fast fashion to Indian male aged Wrangler, Parx leading ecommerce 1,640
and Casual wear the young Indian 21-30 years websites and 3rd party MBO Central, Brand Factory, EBOs, Inspired by the Middle-aged men; Casual and sports Parx, Color Plus leading ecommerce 1,700 Harvard Yale women and kids websites and 3rd boat race party MBO, LFS Central, Brand Lee, Pepe Jeans, Colour Factory, EBOs, e- Casual and denim Fashion for Unisex and kids Plus, Indian Terrain, Allen commerce websites 1,000 wear everyone
Solly and 3rd party MBO, LFS Source: Company, PhillipCapital India Research
The company depends on third-party e-commerce platforms for its online presence. We gather that only for the aLL brand, it has its own e-commerce website, possibly because this brand has a strong presence and is a market leader. For its other brands, FLFL depends on Brand Factory and the recently launched online e-commerce site of Brand Factory for liquidation of inventory. It does not intend to have a separate site for each of its brands as the cost of its own portal will prove expensive and customer returns would be an additional drag on margins.
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FLFL INITIATING COVERAGE
Dependence on 3rd party e-commerce portals for online presence (men’s apparel) SKUs (nos) Own Website Amazon Myntra Jabong Flipkart Lee Cooper NA 226 312 286 139 It will continue to depend on third-party John Miller NA 387 28 122 226 e-commerce portals and on Brand Indigo Nation NA 613 100 235 84 Factory in the near term Bare NA NA NA NA 20 ALL 774 436 468 314 640 Scullers NA 60 26 35 48 Source: PhillipCapital India Research
Unlocking value in Lee Cooper with Rs 2.5bn fund-raising In March 2017, FLFL transferred the Lee Cooper brand (on a slump sale basis) to its step-down subsidiary Future Speciality Retail (FSRL), which in turn issued Compulsory Convertible Preference Shares (CCPS) of Rs 2.5bn to FSRL CCPS Trust. Beneficiaries of the Trust are Barclays Bank PLC, Nomura Capital, and Adani Capital. These CCPS are convertible into 26% equity of FSRL on a fully diluted basis on or before 48 months from the subscription date and have an IRR of up to 19%, based on performance. In this way, FLFL unlocked the value of its Lee Cooper brand and brought it into focus by having separate teams and monitoring standalone profitability. FLFL also used the proceeds to reduce debt, which is now very healthy. The deal was valued at 3.2x FY17 EV/sales, which we believe was reasonable, given that KKCL, which owns the ‘Killer’ denim brand, was valued at 4x FY17 EV/EBIDTA. The step-down subsidiary’s minimum value is Rs 10bn with an upside bias, because it houses Lee Cooper’s footwear license from FY19.
In July 2019, Apollo India invested Rs 3bn in FLFL through preference shares against a 3.3% stake. We believe that from this capital, the company will buyback the CCPS from investors and FSRL will become a fully owned subsidiary of FLFL.
Strong bouquet of investee brands FLFL has regularly invested in start-ups at an early stage of their brand evolution, given its own experience in the retail and fashion industry. It has backed talented designers and entrepreneurs by picking up minority or even majority stakes in the latter’s start-ups. These investments have helped FLFL to increase the variety in its stores and allows it to unlock value in these companies after they achieve scale (say after 6 years), to deleverage its balance sheet. This strategy also helps FLFL to learn about and access new categories such as footwear, handbags, and accessories with only a small investment. Past investments in BIBA and AND have helped FLFL to make 6x and 24x returns on its investments in 6 years. Currently, it has invested in 15 investee brands – key ones are Cover Story, Turtle, and Clarks.
Investee brands offer upside Investee Brands FLBL Stake Segment Cover Story 90% Super trendy and affordable Indian fast fashion brands for women. A bridge between luxury and unorganised brands. Alice & Mae: Brand Factory Exclusive Best sellers of Cover Story (separate brand exclusively for BF, which has the best-selling apparel of Cover Story) Clarks 50% Footwear for men and women Turtle 26% Offers formidable value and international styles across a range of menswear apparel and accessories Giovani 96% Premium apparel brand for men Mother Earth 72% Women’s apparel, home décor, linen, etc. Spunk 100% Leisure wear Mineral 67% Women’s apparel designer brand from Priyadarshini Rao Holii 50% Leather bags Tresmode 38% Shoes - men and women Famozi 100% Private label footwear for e-commerce Peperone 12% Accessories – handbag Celio 2.5% Men’s wear - French brand Source: Company, PhillipCapital India Research
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Past investments have unlocked significant value BIBA AND Entry Year 2007 2007 Exit Year 2013 2013 Entry Revenue (Rs mn) 430 80 Exit Revenue (Rs mn) 2100 1810 Stake % 25.80% 22.90% Entry Price (Rs mn) 420 60 Exit Price(Rs mn) 2350 1450 Source: Company, PhillipCapital India Research
Opportunity to further unlock value in the investee brands To reduce the debt on its balance sheet, in March 2017, FLFL transferred all its investments (in its investee companies) to a wholly owned subsidiary – FLFL Lifestyle Brands Ltd (FLBL). After this consolidation of the investee brands, it sold stake to investors for Rs 4.5bn, which resulted in FLFL holding a 49% stake in FLBL. Investee companies generated revenues of Rs 6bn in FY17. On a weighted average basis, we believe FLFL holds 40% stake in its investee companies, which values this investment at 3.7x EV/sales on a trailing FY17 basis. We believe FLFL’s stake in FLBL is valued at Rs 4.5bn (minimum) with an upside bias.
Investment in Koovs is a long-term online play To gain traction in the e-commerce space, FLFL bought c.25% stake in July 2018 in Koovs Plc – an AIM-listed company – for Rs 520mn. It invested another Rs 324mn in June 2019 to increase the stake to 25.8%. FLFL has committed to invest a total Rs1.4bn in Koovs and increase its stake up to 29.9% over time. In FY18, Koovs had consolidated revenues of Rs 543mn with a loss of Rs 1.3bn.
Koovs curates fashion (western wear) from various international brands targeted at 18-30-year-old Indians with c.40% of the company’s sales coming from its private labels. The designing and top management teams work out of London, while the buying and merchandising is done from India. Customers make 80% of their transactions on Koovs through their mobile and 40% comes from repeat-customer sales. The company has an established customer base of 500,000 active users with blended gross margins of 46%.
Investment in Koovs helps FLFL on multiple fronts Provides FLFL access to an online e-commerce platform and FLFL brands with an immediate meaningful online presence, which the company was missing. FLFL will help strengthen Koovs product offerings, particularly providing it with a large footwear opportunity. Gives FLFL access to Koovs’ design capabilities. Allows FLFL to retail Koovs’ brand apparel offline across its formats.
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FLFL INITIATING COVERAGE
Customer loyalty program to boost spends per head Future Pay is a secure, digital, loyalty wallet of the group, which allows cashless shopping across Future Group stores with cash-back benefits. The Future Pay app allows FLFL to: (1) enhance customer visits in the store through cash-back offers, (2) gather customer data on shopping spends, (3) increase spending per customer, and (4) cross-sell.
The app allows customers to manage loyalty accounts such as Payback within the app, and to use Central and Brand Factory Future Pay Wallets. Through this app, the company runs customized cashback offers, loads money into the customers’ wallets, regularly run promos during festivals, and makes in-store offers. It sends regular communication and notifications to customers who have a cash balance in their wallet inviting them to redeem it.
Currently there are 6mn Future Pay users and management believes that cash bank has a 3x multiplier effect. For example, if the cashback amount provided is Rs 250, then customers spend Rs 750 in the store. The company runs algorithms and targets customers depending on their spending pattern and location.
Leverage Future group loyal customers through the Future Pay app
Payback loyalty card for Brand Factory and Central
Source: PhillipCapital India Research
Future Group has a coalition program with Payback, which is a point-based loyalty program and aggressively enrols customers and tracks customer purchases. Payback slots customers into four categories – Beginners, Gold Premium, Lapser Premium, One-Timer – based on their shopping behaviour and targets them with customized offers every month.
It is aiming to re-activate the ‘lapsers’ through aggressive offers, which it believes will drive them back to the store. Weak stores are identified, and Payback pursues customers in these catchment areas with aggressive offers to drive conversions. It also entices customers to redeem points in stores to drive footfalls. It uses birthdays, anniversaries, and other occasions to provide exclusive offers.
Payback helps to increase customer traction KPIs Central Brand Factory Total Active Base 5.3Mn 2.7Mn Sales contribution 70% 60% Frequency (Loyalty / Regular customers) 2.0 / 1.2 3.5/1.8 ATS (Loyalty / Regular base) (Rs) 3200/2950 2300/2100 Source: Company, PhillipCapital India Research
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FLFL INITIATING COVERAGE
Financials
Strong revenue growth led by Brand Factory We expect the company to report revenues of Rs 92.5bn based on aggressive store openings in Brand Factory with 6%/8% SSSG in FY20/21; SSSG in Central would remain at 5-6% over the next two years. BF will overtake Central by FY21 in terms of revenues as its share increases to 45% from 21% in FY15; Central’s share will reduce to 41% from 57%.
Revenue CAGR at 17% over FY19-22 Brand Factory to overtake Central by FY21 in revenues Net Sales Growth (rhs) 100,000 30 Central Brand Factory Others 100% 25 80,000 80% 20
60,000
60%
15
(%) (Rs mn)(Rs 40,000 40% 10
20,000 5 20%
0 0 0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Healthy margins expansion on operating efficiencies/higher share of own brands Gross margins: FLFL’s gross margins will remain flat at 35-36% over FY19-22 as margins for Brand Factory are lower than Central. The change in mix towards Brand Factory will be mitigated by both BF and Central’s gross margins increasing by c.100bps over FY19-22 due to higher share of own brands and better bargaining power over third-party brands. EBITDA margins: Increasing operating leverage on higher SSSG will aid EBIDTA margin expansion to 9.5% in FY22 from 9.2% in FY19 (ex-IndAs 116). Margins will also expand on supply-chain efficiencies and reduction in discounts. Profit: Operating profit CAGR will be 18.7% over FY19-22 to touch Rs 8.8bn (ex- IndAs116). On a reported basis, we expect operating profit CAGR of 45% over FY19-22. Adj. PAT CAGR will be 16.4% to touch Rs 2.9bn, led by high operating profit.
EBIDTA CAGR of 44% over FY19-22 Adj. PAT CAGR of 16% over FY19-22 Operating profit Operating Margins (rhs) Adj Net Profit % Growth (rhs) 18,000 19 3,500 250 16,000 17 3,000 200 14,000 15 2,500
12,000 150
2,000 10,000 13
100
(%) (%)
8,000 mn)(Rs 1,500
(Rs mn)(Rs 11 6,000 50 9 1,000 4,000 500 0 2,000 7 0 5 0 (50) FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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FLFL INITIATING COVERAGE
Low working capital to help generate steady FCF Cash conversion: FLFL had a cash conversion cycle of 40 days in FY19, lower than a peak of 71 days in FY15, led by lower inventory days. While its inventory days are still the highest in the industry due to the different business models of different brands and retail stores, c.60% of the inventory is on SoR (sale or return) basis, which is backed by payable days (115 days in FY19) – therefore the inventory at risk is very minimal. Debtor days were 25 in FY19. Cash flow: We believe healthy working capital helps generate high OCF; so, we have modelled OCF of Rs 16.8bn over FY19-22 and FCF at Rs 7.0bn. Debt: High cash flows will help the company to reduce debt. However, due to lease liability, gross D/E would increase to 0.8x in FY22, while net D/E would reduce to 0.1x in FY21 (ex-lease liability). Capex: Rs 3.0/3.4bn forFY20/21; will be funded internally. Typically, per sq. ft. capex for Central is Rs 3,500 and for Brand Factory it is Rs 2,500.
rd Improving working capital 60% of inventory is from 3 party brands (SoR model) Payment Days Debtor Days Inventory Days 70% 200 60% 150 50% 100 40%
50 30%
(Days) 0 20% -50 10%
-100 0% Third Party Own Brands - Core Own Brands - -150 Fashion FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Gross D/E increasing due to lease liability Net D/E to remain in check (ex-lease liability) Gross Debt (Rs mn) Net D/E (x) Net D/E ex- lease liability(x) 25,000 Lease liability 1.20 0.9 D/E Ratio (x) (rhs) 0.8 1.00 20,000 0.7 0.6 0.80 15,000 0.5 0.60 0.4 10,000 0.3 0.40 0.2 5,000 0.1 0.20 0.0 0 0.00 -0.1 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Increase in mature stores and Central’s margin profile will improve profitability and RoCE. Brand Factory has higher RoCE than Central because of its low-capex model. RoCE for Central is 10-11% while it is +15% for Brand Factory. With increasing share of BF revenues, RoCE should increase to 11.5% in FY22 from 4.9% in FY15; RoE should improve to 12.5% led by healthy profitability, from 1.3% in FY15.
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FLFL INITIATING COVERAGE
Return ratios to steady increase to low teens Cash-flows to remain healthy 8000 16 RoCE RoE RoIC 7000 14 6000 12 5000
10 4000
8 3000 (%) (Rs mn)(Rs 2000 6 1000 4 0 2 (1000) 0 (2000) FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
DuPont Analysis Particulars FY15 FY16 FY17 FY18 FY19 FY20E FY21E PAT/Sales (x) 0.01 0.01 0.01 0.03 0.03 0.03 0.03 Sales/Assets (x) 1.12 1.31 1.87 2.13 2.38 1.92 1.83 Assets/Equity (x) 1.94 1.84 1.65 1.45 1.44 1.80 1.99 RoE (%) 1.3 2.2 3.3 8.7 11.3 9.5 11.3 Source: Company, PhillipCapital India Research
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FLFL INITIATING COVERAGE
Valuations Differentiated business model of owned brands and physical retail gives FLFL an edge over competitors. Brand Factory’s virtual monopoly as a liquidation channel for third- party brands in the offline space helps garner unprecedented customer footfalls. Healthy SSSG, consistently increasing operating margins, and strengthening balance sheet, aided by improving inventory turns and reducing D/E augurs well over the medium term.
We initiate coverage on FLFL with a BUY rating and value it at Rs 556 (7.5x Sep FY21 consolidated EV/EBIDTAR) – marginal premium to Shoppers Stop’s valuation. Investee companies (through FLBL) offer an upside of Rs 23 per share, considering FLBL’s conservative valuation at Rs 9bn (FY17 deal value).
PE chart EV/EBIDTA charts 2yr fwd P/E 2yr fwd EV/EBITDA 70 13 12 60 11 50 10 40 9 AVG 31.8 8 30 AVG 7.36 7 20 6 10 5
0 4
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Source: Company, PhillipCapital India Research
EV/sales EV/EBIDTAR charts 2yr fwd EV/Sales 2yr fwd EV/EBITDA-R 1.8 9 1.6 8 1.4 7 1.2 6 1.0 AVG 0.91 5 AVG 4.7 0.8 4 0.6 3 0.4 2 0.2 1
0.0 0
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19
Source: Company, PhillipCapital India Research
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FLFL INITIATING COVERAGE
Key risks 1. Increasing competition in key cities could result in lower-than-expected SSSG. 2. Slower-than-expected store opening for Brand Factory. 3. Margins could be under pressure on subdued performance of own brands. 4. While currently FLFL has limited related-party transactions with other group companies, investors will take any increase in these negatively. 5. High pledges in the promoter group companies. Also, in July 2019, promoters sold 6% of their stake in FLFL to Blackstone to reduce group debt. In turn, there has been a restriction on promoter holding dilution, so 100% of the promoter holding is seen as pledged. Promoter holding after the Apollo transaction will reduce to 45.9%.
High pledges in promoter group companies (June 2019)
Promoter Holding Pledges as % of Holding 80%
60%
40%
20%
0% FRL FCL FSCS FEL FLFL
Source: Company, PhillipCapital India Research
Page | 87 | PHILLIPCAPITAL INDIA RESEARCH
FLFL INITIATING COVERAGE
Company Background Future Lifestyle Fashions (FLFL) is the flagship fashion business of Future Group. It operates more than 339 stores in 100+ cities, occupying 6.8mn sq. ft. retail space. It owns and markets leading brands through its in-house retail chains Central and Brand Factory, exclusive brand outlets, and other multi-brand outlets (MBOs). In addition, it also makes investments in branded fashion companies that are at an early stage of their lifecycles.
In 2013, the Future Group restructured its fashion business – its two listed entities [Future Consumer (erstwhile Future Ventures) which had all the brands] and Future Retail (Central and Brand Factory) – were carved out together to form Future Lifestyle Fashions.
Company formation
Source: Company
Store locations
Source: Company
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FLFL INITIATING COVERAGE
Management Team NAME DESIGNATION PROFILE Mr Kaleeswaran Arunachalam Chief Financial Officer 15-year experience in the food and fashion industry. Previously worked with Mondelez International, Aditya Birla Nuvo, and TVS Motors. A Chartered Accountant from ICAI and Master of Business Administration (Finance), Singapore. Mr Hetal Kotak Head- of Lee Cooper and aLL Previously Vice President and Business Head at Raymond Limited. B.Tech with over 17 years of experience across branded apparel and retail. Experience includes Brand Director and Chief Operating Officer, Color Plus and Park Avenue at Raymond. Mr M. Vishnu Prasad Chief Executive Officer of Over 30 years of sales and retail experience. Joined Future Group in 2001 to set up the Big Central & Brand Factory Bazaar stores in south India before moving on to head the Central business. Mr Suresh Sadhwani Head – Brand Factory He has 20 years of rich retail experience. Heading Brand Factory since 2014. Ms. Manjula Tiwari Head – Cover Story Over 22 years of experience in the fashion and lifestyle industry. Launched and developed a range of high street brands like Esprit, Benetton bringing significant knowledge of Indian customers. Heads Future Style Lab looking after Cover Story Mr Venkatesh Raja Human Resources Heads the People Office for FLF with 23 years of varied experience in organizations like Sterling Holidays, Reliance Petroleum, Reliance Infocom, MTS Group. Source: Company, PhillipCapital India Research
Page | 89 | PHILLIPCAPITAL INDIA RESEARCH
FLFL INITIATING COVERAGE
Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Net sales 56,243 66,172 77,818 91,193 Pre-tax profit 2,355 2,792 3,716 4,518 Growth, % 27.6 17.7 17.6 17.2 Depreciation 2,071 6,444 7,559 8,813 Other income 1,039 1,096 1,206 1,326 Chg in working capital 350 -67 -1,083 -780 Total income 57,281 67,268 79,024 92,519 Total tax paid -463 -949 -1,263 -1,536 Raw material expenses -36,894 -43,206 -50,779 -59,637 Other operating activities 1,308 2,208 2,373 2,639 Employee expenses -3,308 -3,977 -4,592 -5,358 Cash flow from operating activities 5,622 10,428 11,301 13,653 Other Operating expenses -11,820 -8,669 -10,005 -11,555 Capital expenditure -4,313 -2,944 -3,409 -3,457 EBITDA 5,259 11,417 13,647 15,969 Chg in investments -2,286 0 0 0 Growth, % 27.1 117.1 19.5 17.0 Other investing activities 320 418 473 494 Margin, % 9.2 17.0 17.3 17.3 Cash flow from investing activities -6,280 -2,526 -2,936 -2,962 Depreciation -2,071 -6,444 -7,559 -8,813 Free cash flow ex-Lease Liabilities 1,309 2,256 1,768 3,036 EBIT 3,188 4,972 6,089 7,156 Equity raised/(repaid) 1,710 1,015 0 0 Growth, % 22.7 56.0 22.5 17.5 Debt raised/(repaid) 1,202 -500 0 0 Margin, % 5.6 7.4 7.7 7.7 Dividend (incl. tax) -281 -423 -484 -544 Interest paid -1,168 -2,598 -2,846 -3,133 Other financing activities -1,168 -6,379 -7,275 -8,312 Other Non-Operating Income 383 418 473 494 Cash flow from financing activities 1,462 -6,288 -7,759 -8,856 Pre-tax profit 2,403 2,792 3,716 4,518 Net chg in cash 804 1,614 606 1,835 Tax provided -465 -949 -1,263 -1,536 Profit after tax 1,938 1,843 2,452 2,982 Valuation Ratios Others (Minorities, Associates) 48 0 0 0 FY19 FY20e FY21e FY22e Net Profit 1,890 1,843 2,452 2,982 Per Share data Growth, % 49.9 -2.5 33.1 21.6 EPS (INR) 9.7 9.2 12.2 14.8 Net Profit (adjusted) 1,890 1,843 2,452 2,982 Growth, % 46.7 (5.6) 33.1 21.6 Unadj. shares (m) 195 201 201 201 Book NAV/share (INR) 93.9 102.7 112.5 124.6 FDEPS (INR) 9.7 9.2 12.2 14.8 Balance Sheet CEPS (INR) 20.4 41.2 49.8 58.7 Y/E Mar, Rs mn FY19 FY20e FY21e FY22e CFPS (INR) 6.7 37.2 39.3 50.7 Cash & bank 1,256 2,779 3,385 5,220 DPS (INR) 1.4 1.8 2.0 2.3 Debtors 3,903 4,792 5,629 6,590 Return ratios Inventory 20,315 23,590 27,496 31,685 Return on assets (%) 5.7 5.1 5.8 6.3 Loans & advances 3,580 3,229 3,793 4,441 Return on equity (%) 11.3 9.5 11.3 12.5 Other current assets 2,718 2,881 3,054 3,237 Return on capital employed (%) 10.7 8.3 10.0 11.5 Total current assets 31,772 37,271 43,358 51,174 Turnover ratios Investments 3,490 3,490 3,490 3,490 Asset turnover (x) 2.6 1.8 2.2 2.6 Gross fixed assets 16,670 37,428 43,655 50,371 Sales/Total assets (x) 1.1 1.0 1.1 1.1 Less: Depreciation -3,932 -10,377 -17,935 -26,748 Sales/Net FA (x) 4.0 2.3 2.9 3.7 Add: Capital WIP 1,578 1,578 1,578 1,578 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Net fixed assets 14,315 28,629 27,297 25,201 Receivable days 25 26 26 26 Non-current assets 745 798 853 913 Inventory days 129 128 127 125 Total assets 50,323 70,189 74,999 80,778 Payable days 115 115 115 115 Working capital days 51 44 42 39 Current liabilities 22,135 26,037 30,430 35,626 Liquidity ratios Provisions 1,165 1,223 1,284 1,349 Current ratio (x) 1.4 1.4 1.4 1.4 Total current liabilities 23,300 27,261 31,714 36,975 Quick ratio (x) 0.5 0.5 0.5 0.6 Total Debt 9,036 22,568 20,957 19,038 Interest cover (x) 2.7 1.9 2.1 2.3 Deferred Tax Liabilities -283 -283 -283 -283 Dividend cover (x) 6.9 5.2 6.1 6.6 Total liabilities 32,053 49,546 52,388 55,729 Total debt/Equity (%) 49.5 109.3 92.7 76.0 Paid-up capital 389 402 402 402 Net debt/Equity (%) 23.8 79.0 62.3 41.2 Reserves & surplus 17,881 20,240 22,209 24,646 Valuation Shareholders’ equity 18,271 20,642 22,611 25,048 PER (x) 42.6 46.7 35.1 28.9 Total equity & liabilities 50,323 70,188 74,999 80,778 PEG (x) - y-o-y growth 0.9 (8.3) 1.1 1.3 Price/Book (x) 4.5 4.2 3.8 3.4 Source: Company, PhillipCapital India Research Estimates Yield (%) 0.3 0.4 0.5 0.5 EV/Net sales (x) 1.5 1.5 1.3 1.0 EV/EBITDA (x) 16.1 9.0 7.3 6.0 EV/EBIT (x) 26.6 20.6 16.4 13.5 EV/EBIDTAR (x) 7.9 8.0 6.6 5.4
Page | 90 | PHILLIPCAPITAL INDIA RESEARCH INSTITUTIONAL EQUITY RESEARCH
Shoppers Stop (STOP IN)
There is no stopping this one
INDIA | RETAIL | Initiating Coverage 11 September 2019
Shoppers Stop is expected to script a turnaround in its business over the next three years BUY in the following ways: steady store openings (5 a year), a stronger leadership position in CMP RS 395 the beauty category (16% of revenue), doubling the share of its private-label contribution TARGET RS 520 (+32%) (currently 12%), while increasing customer engagement through personal shoppers (14% of revenue), mining its First Citizen Membership Program, and targeting the younger COMPANY DATA generation through investments in its omni channel. We believe that these measures will O/S SHARES (MN) : 88 consistently deliver mid-single-digit SSSG and sustainably drive operating margins to 8% in MARKET CAP (RSBN) : 36 FY22 from 7.3% in FY19 (ex-IndAs 116). Current stock valuations do not factor the new MARKET CAP (USDBN) : 0.5 management team driving STOP’s operations from here; initiate coverage with a Buy 52 - WK HI/LO (RS) : 667 / 339 rating and a target of Rs 520. LIQUIDITY 3M (USDMN) : 0.2 PAR VALUE (RS) : 5
Success in the private-label portfolio – a key to margin expansion SHARE HOLDING PATTERN, % We believe Shoppers Stop could surprise positively with the share of its private-label Jun 19 Mar 19 Dec 18 business doubling over the next three years on: (1) launch of entry-level price points,(2) 20- PROMOTERS : 63.7 63.7 63.7 25% price discounts to marquee brands, and (3) correcting the number of options to deliver FII / NRI : 8.6 10.6 11.8 higher throughput. We believe that a 200bps increase in the contribution of private-label FI / MF : 16.6 14.3 12.8 NON PRO : 1.9 1.7 1.9 business to revenue would help the company to drive gross margins by 30-40bps. This is PUBLIC & OTHERS : 9.2 9.7 9.7 assuming low inventory write-offs, higher full-price sales, and a change in the business mix. PRICE PERFORMANCE, % Strengthening leadership position in the beauty segment 1MTH 3MTH 1YR ABS 1.4 -17.4 -38.0 We expect STOP to get aggressive in the beauty segment (16% revenue share currently) by REL TO BSE 2.6 -11.2 -34.8 adding 14-20 stores each year over the next three years, as it is already the market leader in this category. This segment offers double-digit operating margins with high double-digit PRICE VS. SENSEX RoCE. We expect STOP to redesign its beauty stores to provide a better experience to its 190 customers, add beauty hubs using ‘gondola’ concepts, and have exclusive brand tie-ups (like it does with Estee Lauder) and even evaluate private brands such as Nykaa. 160 130 Engage with customers through its First Citizen Program and personal shopper services 100 We believe that through its First Citizen Loyalty Program (77% of revenues), Shoppers Stop understands its customer preferences and aspirations well, which allows it to offer tailor- 70 made promotions and manage its customers’ life-cycles fully. Currently only 50% of its 40 members shop private brands and only 35% shop beauty products – making these low- Apr/16 Apr/17 Apr/18 Apr/19 hanging fruits for the loyalty program. Its Personal Shopper service yields a 3x increase in Shopper Stop BSE Sensex ticket size and repeat purchases. We believe that with these two programs, STOP can listen, understand, and talk to its customers in a personalised manner, differentiating it from its Source: PhillipCapital India Research competition. KEY FINANCIALS
Rs mn FY19 FY20E FY21E Lean balance sheet to aid growth Net Sales 34,813 36,952 40,117 STOP exited its non-core loss making businesses of Hypercity, Nuace, and Timezone in FY18, EBIDTA 2,533 6,678 7,356 and gave 5% stake through preferential allotment to Amazon in January 2018. After this, it Net Profit 788 808 1,197 turned net-cash positive vs. a debt of Rs 5.7bn in FY17 on a standalone basis. We believe EPS, Rs 9.0 9.2 13.6 that based on a negative-cash-conversion cycle and expansion in margins, STOP will be able PER, x 59.5 43.0 29.0 to generate FCF of Rs 5.2bn (ex-IndAs 116) over the next three years and fund its capex of Rs EV/EBIDTA, x 17.4 7.4 6.4 3.9bn internally. We have modelled revenue/EBIDTA/PAT CAGR of 7.7%/47%/19.6% over P/BV, x 4.8 6.5 5.4 FY19-22. We calculate RoE increasing to 19% in FY22 and RoCE to 13.4%. ROE, % 8.2 10.7 20.3 Debt/Equity (%) 0.0 3.5 2.7 Outlook and valuations Source: PhillipCapital India Research Est.
We initiate coverage on the stock with a BUY rating and value it at Rs 520 (7x September Ankit Kedia, Research Analyst FY21 standalone EV/EBIDTAR) – in-line with its long-term average. Crossword could offer (+ 9122 6246 4122) [email protected] additional upside if it scales up meaningfully in the medium term. Key risks: (1) Slower-than- expected growth in private label business, (2) younger customers preferring competing platforms.
Page | 91 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
SHOPPERS STOP INITIATING COVERAGE
Investment Rationale
New management team focusing on products and customer service Over the last 15 months, the top management team of Shoppers Stop has changed. Rajiv Suri has appointed business heads for each of the company’s ‘growth pillars’. These recruitments include new heads for marketing, private brands, beauty, omni channel, brands, and design. The KPI (key performance indicators) of the top management is linked to STOP’s P&L, with ESOPs in place as incentives.
New management team in place to drive changes Name Designation Profile / Past Experience Rajiv Suri MD & CEO Strategic Retail Management from Harvard Business School. CEO for the Majid Al Futtaim (MAF) Fashion business with 140 stores in the Middle East. CEO of Jashanmal Group from 2007 to 2014; it included global brands such as Burberry, Salvatore Ferragamo, Bally, Kate Spade New York, Brooks Brothers, Calvin Klein, and Clark’s. Karunakaran Mohanasundaram CFO Chartered Accountant and Company Secretary. +25 years of experience. Worked across retail, manufacturing, and pharmaceutical industries. Previously with Avon, a US-based direct selling beauty company as Executive Director (Finance) - Asia Pacific region, at Singapore. Uma Talreja Chief of Marketing Former chief digital officer-strategy Raymond where she oversaw leading the digital transformation and customer centricity. Before this she was chief marketing officer with Burger King and Head Marketing at Westside -Trent. Amitabh Suri President - International & Post graduate in Garment Manufacturing Technology from NIFT, Chennai. COO at Landmark Private Brands and COO of Indian Terrain – where he worked for 18 years. Anupam Saxena President - Beauty Previously Managing Director at True Lucent International in the Middle East. Handled master distribution and business consultancy for emerging brands in beauty, personal care, watches, fashion accessories, and sports goods. Maneesh Mittal Chief of Omni channel Previously head of e-commerce and big data at Infiniti Retail - Croma. Neeraj Nagpal President Brands Post graduate in Garment Manufacturing Technology from NIFT Delhi, Executive PG Diploma in Management, Marketing & Finance from MDI. Previously Senior Vice President & Chief Merchandising and Sourcing Officer at Pantaloons (ABFRL). Also worked in various positions in Madura Fashion for 12 years. Shilpee Sharma Head of Design Fashion designer from NIFT. VP Designs at Reliance Trends for five years. Before that VP & Director Design at Globus. Source: Company, PhillipCapital India Research
Strategic growth pillars STOP has identified four strategic growth pillars; for customers – First Citizen Program and personal shopper – and products – private brands and beauty. It believes that these pillars will help it to retain and increase its customer base and strengthen its product basket – which would in turn drive margins and differentiate it from competition. It expects sustained investments in the omni channel, technology transformation, and manpower to help it to achieve its goals.
Strategic growth pillars for future growth
Strategic growth pillars
Customer Product
First citizen Personal shopper Private Beauty programme programme brands segment
OMNI + TECHNOLOGY
Source: PhillipCapital India Research
Page | 92 | PHILLIPCAPITAL INDIA RESEARCH
SHOPPERS STOP INITIATING COVERAGE
Success in its private-label portfolio is a key to margin expansion
Big investments to rekindle vigour in private-label business The revenue share of its private-label business dropped to 10% in FY19 from 16.5% in FY14. The share of its exclusive portfolio fared even worse, reducing to just 1.8% in FY19 due to uncompetitive pricing and poor product assortment. However, STOP should see renewed vigour in its private-label business because of a very high investment of Rs 100mn over the last one year – done to re-establish and build this business. We believe STOP’s private-label share could double over the next three years based on the management’s multiple measures. Even after this, it would still be lower than peers, leaving significant headroom for future growth.
New management team to work their mojo STOP has a dedicated leadership team in place with Amitabh Suri as President, Private Brands and Shilpee Sharma as Head of Design. They have already built an in- house sampling unit, design studio (c.6,000sq. ft.) and testing lab for product development. STOP’s Autumn Winter2019collection would be its first season from the in-house sampling unit; we expect the results to be visible in H2FY20.
Expect the decline in private label to reverse from FY20 Exclusive portfolio to be driven by new brands 18% 4.5% 16% 4.0% 14% 3.5% 12% 3.0% 10% 2.5% 8% 2.0% 6% 1.5% 4% 1.0% 2% 0.5% 0% 0.0% FY14 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Entry-level price points, category extensions To become competitive, STOP has launched entry-level price points across its private brands for value-conscious customers. It has slashed prices across all private brands and is now going with the principal of ‘value and fashion’ vs. ‘fashion and premium’ earlier. Product pricing is now at a 20-25% discount to marquee brands against 0-10% discount earlier. It has also decreased the number of options in each brand to deliver higher throughput rather than having many SKUs (stock keeping unit). It plans to focus on design-led merchandise to improve sales while it is tightening its presentation and fashion quotient. STOP also plans to leverage brand loyalty over the medium term through category extensions.
Focus is on six private-label brands; STOP positioned as a value-fashion brand The company currently has six key private-label brands catering to consumer requirements across all categories except watches and cosmetics. Out of these, STOP is its highest-selling brand as it is presents across categories and is positioned as an entry-level brand; LIFE is its casual and youth brand. It is positioning STOP as a value- fashion brand and hopes to increase full-price sales to drive margins. Kashish caters to ethnic women wear while Haute Curry is a women’s ‘fusion’ brand (ethnic and western wear). Our channel checks suggest that management has high aspirations to position Kashish as a premium brand; it has experimented with expensive designer suits, Rs 15,000 onwards, and seen good success in the past.
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Vettorio Fratini caters to trendy clothing and accessories for both men and women. We believe that women account for c.55% of private-label brand revenue.
Strong private brand portfolio to straddle price points Private Label Brands (prices mentioned are the starting prices) Women - Ethnic kurta: Rs699, shirts: Rs 699, tops: Rs 399, salwar kameez& dupatta (SKD): Rs1,299. Men - Formal wear shirts: Rs799, trousers Rs1,299, T-shirts Rs 399, belts and wallets, accessories. Kids - Boys and girls. Women - Tops and tees Rs 399, dresses Rs 899, handbags Rs399, bottom wear Rs 699. Men - Shirts Rs1,050, T-shirts Rs399, jeans Rs1,299, shorts Rs799 Kids - Boys, girls, infants
Women Indian wear - Footwear, handbags, kurtas Rs699, salwar churidar suits Rs1,550, wallets & clutches
Women ethnic wear - Kurtas Rs1,049, SKD Rs1,750, wallets & clutches
Women - Tops Rs599, shirts Rs999, shrugs Rs999, dresses Rs799
Bags
Men - Shirts Rs999, T-shirts Rs499, cargos & trousers Rs1499, accessories
Source: PhillipCapital India Research
To invest heavily in marketing and communication for private label brands Marketing of entry-level price points will become aggressive. Its aim is to attract youth through social-media channels. This is already visible in its stores; STOP has already defined brand positioning with dedicated visual merchandise.
Dedicated space with highly visual merchandising for women’s private label brands
Clear positioning visible for both its casual and formal private-label brands – LIFE and STOP
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Celebrity brands and exclusive tie-ups We expect STOP to re-establish relationships with celebrities and add more celebrity brands for exclusive tie-ups to its portfolio over the next two years. It is also focusing on its exclusive international brands such as Kendall & Kylie, Jones NY, and Desigual. We believe exclusive celebrity brands help the company to attract greater footfalls and differentiate itself from competition. STOP typically pays a royalty of c.5% across brands to the celebrity while the celebrity helps the company in terms of marketing and takes an active interest in designing.
Expect Shoppers Stop to add more celebrity brands to drive footfalls Exclusive brands
Lifestyle collection and clothing line by Kendall and Kylie Jenner
Designer Rocky Star - Men, women, and kids
Rhea & Sonam Kapoor's high street fashion brand
Desigual is a Spanish casual fashion brand for women
Anushka Sharma's High Street Fashion Brand
Contemporary fashion and lifestyle brand offering a chic wardrobe for the modern woman
A women’s fashion brand by Dolly Sidhwani, Bhavana Pandey, and Nandita Mahtani
Home Furnishing
New Brands to be launched Disha Patani French Connection Jones New York Source: PhillipCapital India Research
Private-label contribution lowest currently, to increase fast ahead Shoppers Stop has the lowest revenue contribution from its private-label brands among peers, which can significantly increase ahead. Its gross margins in this segment is the highest (at 46-48%) compared with beauty, exclusive, and third-party brands. We reckon that a 200bps increase in the contribution of price labels will help increase its overall gross margins by 30-40bps, with help from low inventory write- offs, increased full-price sales, and a change in product mix. This gross-margin expansion would lead to an EBIDTA margins expansion of 70bps over the next three years, aided by operating leverage.
In FY19, Shoppers Stop had the lowest contribution from …while this segment earned its highest gross margins private labels… 120% 60%
96% 100% 50%
80% 40% 63% 30% 60% 38% 20% 40% 10% 20% 10% 0% 0% Shoppers Stop Exclusives Beauty Private Lable Shoppers Stop Central Westside Pantaloon Chain
Source: Company, PhillipCapital India Research
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Strengthening leadership position in the beauty segment We expect the company to become aggressive in the beauty segment by adding 14- 20 stores every year over the next three years, higher than its previous guidance of 10-12 stores. This will take its total store count to 127 by FY22 from 81 in FY19; including shop-in-shop, it currently has 115 stores. STOP currently has an exclusive brand tie-up with Estee Lauder Company to market this brand. Anupam Saxena heads the new team that will manage the beauty segment. We believe the advantage of the beauty business is that it has a shorter lifecycle of 60 days vs. 180 days for apparel, so customers come back to the store more often.
Aggressive store opening planned in the beauty segment Brand store count FY19 (including shop-in-shop) 2 140 14
120 MAC 8 100 Clinique Estee Lauder
80 58 Bobbi Brown (nos) 60 Smashbox 40 33 20
0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
High growth and margins in beauty will continue to lend support We believe Shoppers Stop is the market leader in the beauty segment. This segment contributes c.16% of its revenues (10% from Shoppers Stop department stores and Overall, the contribution of non-apparel c.6% from beauty stores). Also, 60-70% of beauty sales are from exclusive products, to STOP’s revenues is the highest which gives STOP an edge over competition. Growth in this segment is ahead of the among retailers at c.38% in FY19 company average and we believe it would continue to be one of the key growth drivers in the medium to long term. The beauty category offers double-digit operating margins with high double-digit RoCE, which will support overall margins. Seamless online availability of products also boosts sales in the premium category.
Contribution of beauty segment to revenues is on an increasing trajectory
18% Contribution in Department store Overall Contribution
16%
14%
12%
10%
8%
6%
4%
2% Shoppers Stop regularly organises 0% ‘international celebrity make-up- FY14 FY15 FY16 FY17 FY18 FY19 artist camps’ at its stores to drive footfalls Source: Company, PhillipCapital India Research
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STOP has the highest contribution from non-apparel Increasing share of non-apparel portfolio 40% 38.0%
35% 37.5% 30% 37.0% 25% 36.5% 20% 36.0% 15% 35.5% 10%
5% 35.0%
0% 34.5% Shoppers Stop Central Westside Pantaloon FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Key strategic initiatives to be undertaken by the management in the beauty segment: Re-design 15 stores for a premium look and feel to better the customers’ shopping experience and strengthen its leadership position in the premium segment. Adding Beauty Hub brands in stores using a ‘wall and gondola’ concept rather than complete shop-in-shop. Doing away with traditional counters of ‘masstige’ brands, replacing them with modern gondolas. Could increase its exclusive brand tie-ups like the one it has with Estee Lauder. Franchisee opportunities from global multi-brand beauty stores such as Boots, Ulta, and Blumercury. Evaluate private brands for beauty such as Nykaa – which would offer higher margins and control on inventory.
Shoppers Stop to straddle the pyramid in the beauty segment
Source: Company, PhillipCapital India Research
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Differentiated service offering through personal shoppers Shoppers Stop is aggressively investing in its Personal Shopper services to increase customer stickiness. Since its launch in September 2016, this segment’s contribution has touched c.14% of store revenues, which we believe would slowly increase to c.20% over the next two years. Ticket size for a personal shopper is 3x the regular ticket size. Currently, the company has more than 280 personal shoppers, which they plan to increase by 50 in FY20, taking the total strength to 330+. Online players cannot offer this service, so this is a differentiating factor.
The Personal Shopper is a well-trained advisor who has expertise in the latest fashion trends, a complete understanding of the store and brands, and an innate ability to assess customer needs, shortlist products, and help them arrive at a shopping Repeat purchase of First Citizen decision. Stores have designated premium Personal Shopper Lounges, where customers availing Personal Shoppers is 20-30% customers are consulted and assisted. Through this initiative, the company aims to create a stress-free shopping experience for its customers. The Personal Shopper Service is complimentary and available across all stores.
Owing to the programme’s success, STOP has rolled out the ‘Personal Shopper Service AT HOME’ concept across its stores in a phased manner. Under this, when customers taken an appointment at select stores, a Shoppers Stop Personal Shopper will visit their homes to offer complimentary trials, pay-at-home service, curated collections and personal styling.
Aggressively marketing Personal Shopper Services Increasing revenue contribution from personal shopper 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% FY18 FY19 FY20E Source: Company, PhillipCapital India Research
Takeaways (about personal shoppers) from channel checks in the store: Since the stores are big at 40K+ sq. ft., customers tend to get lost and hence they take the services of personal shopper. The service is most availed by aged customers and families who shop for special occasions. Currently, every personal shopper assists 6-8 customers in a day; every store has c.4 personal shoppers, depending on the location. STOP is training personal shoppers on fashion, soft skills, selling techniques, and behaviour aspects. The training is done 3-4 times a year. The Personal Shopper is compensated through a fixed salary and sales incentives. The Personal Shopper takes the customer through STOP’s private brands, which helps their sales. A Personal Shopper studies buying patterns of customers in advance as often customers are First Citizen members. Repeat customer purchases tend to be very high once customers experience personal shopping.
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Personal Shopper Lounge and services offered to the customers exclusively
First Citizen: Increases customer stickiness; helps offer customized services Shoppers Stop has 6mn loyal First Citizen members, which account for 77% of its revenues – and their number is steadily increasing. These members tend to spend 3x more than non-members at STOP. Apart from being a tiered program – Classic Moments, Silver Edge, and Golden Glow – the company also has a co-branded credit/debit card programme with Citibank, which gives First Citizens an option to add on a credit card to its existing loyalty cards, giving these members the advantage of a credit-line. We believe this is the most successful customer relationship and loyalty program in the industry today.
Increasing sales contribution from STOP’s membership program
7 First Citizen Membes (Mn) Share of Revenues (rhs) 78%
77% 6 76% 5 75% Scope is immense – currently only 4 74% c.50% of First Citizen members shop 3 73% private brands and c.35% shop beauty 72% 2 71% 1 70%
0 69% FY14 FY15 FY16 FY17 FY18 FY19 Source: Company, PhillipCapital India Research Re-launched the First Citizen Black card in June2019 STOP has created a dedicated analytics team to evaluate the proprietary First Citizen data. The team has to understand the data and cull insights, which are then used to create targeted one-to-one communication and offers for customers, which in turn lead to incremental sales. In FY18, STOP’s incremental sales through such initiatives were Rs4bn. We believe that some key impact areas are: Customer-level analytics Product-level analytics Transaction-level analytics Data insights and promotions Store-level assortment New store location evaluation Consumer panel for private brands
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Through its loyalty program, Shoppers Stop can understand the preferences and aspirations of its customers, offer them tailor-made promotions, and manage their entire life-cycle. With over 20 years of recorded transactions from the program, the vast data provides rich insights into customers’ shopping behaviour, habits, and preferences. We believe STOP is able to listen, understand, and talk to customers in a customized and personalised manner, which differentiates it from competition.
STOP recently re-launched a First Citizen Black Card, personalized website, and mobile app for members. It plans to increase the reach of this program into beauty and private brands. Currently, only 50% First Citizen members shop private brands and only 35% shop in its beauty range. In the coming months, STOP is considering unifying the First Citizen experience across touch points, which would differentiate them from competition and drive both footfalls and sales.
Unifying is First Citizen experience across touch points (please send this for editing)
Single repository of all Manage entire wardrobe – Fashion, Lifestyle, Beauty Reminder for replenish, Shoppers Stop including non SS purchases Trends – now with shopping list for the next transactions (scan/shoot & add) personalized content store visit
Recommend latest styles Connect with Personal Notify Personal Shopper Side-by-Side, assisted based on affinities & Shopper – including when First Citizen steps selling by Personal preferences remote screen view into store Shopper
Reduce Trail Room hassles Hands free always – Self-serve for First Citizens – Virtual try-on mirrors Queue-less check - out priority delivery (will – scan & know, scan & buy with in-store and chain include in-store purchases) catalog
Source: Company
Target youth via OMNI channel, strong marketing communication While STOP’s customer conversion rate has been increasing steadily to c.28% in FY19 from 21% in FY14, customer footfalls have declined over the last two years – which is a cause for concern. While the primary target for stores is the mid-high-income family, STOP is targeting the youth and young professionals through its omni channel.
While touch-feel-try is vital for certain customers, it is also important for STOP to become a one-stop-destination for all its digital needs. So, over the last three years, STOP has made significant investments in embracing new technologies and infrastructure for the omni channel – a combination of its physical and digital customer touch points.
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STOP is targeting the youth and professionals through its omni channel
AIM: Make Shoppers Stop relevant for young millennials through omni- channel initiatives
New initiatives to revive customer footfalls Increasing customer conversion mitigates lower footfalls Customer Entry (mn) Growth (rhs) 48 20% 30%
47 15% 25% 46 10% 45 20%
44 5% 15% 43 0% 42 10% -5% 41 5% -10% 40 0% 39 -15% FY14 FY15 FY16 FY17 FY18 FY19 FY14 FY15 FY16 FY17 FY18 FY19 Source: Company, PhillipCapital India Research
Mining social media for sales Shoppers Stop is at the forefront of social media and has the highest number of Facebook and Twitter followers compared with competition. It is working with leading internet companies such as Google, Amazon, and Facebook to ensure that customers discover Shoppers Stop at an early stage of their buying journey, allowing it to stay connected and engage with them. From Facebook interactions to viral Twitter campaigns, from informative YouTube videos to quirky Instagram stories, the social media platforms speak the language of the youth and the young-at-heart and helps STOP to build a long-term relationship with them. It has also started tracking the impact of the online presence in driving customers’ store visits and sales.
Shoppers Stop has highest following in social media among peers Followers Instagram (‘000) Facebook (Mn) Twitter (‘000) Shoppers Stop 132 10.0 149 Central 84 1.2 26.9 Lifestyle 464 4.7 120 Pantaloons 260 2.2 33.5 Westside 286 0.7 10.1 FBB 244 0.8 45.3 Reliance Trends 238 1.7 9.7 Engaging with customers for Brand Factory 261 1.4 6 shopping on Instagram Source: PhillipCapital India Research
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Digital transformation of its stores The company continues to make focused investments in technology and operations for providing a seamless shopping experience online – by digitally transforming its stores to drive profitable revenue growth. It has been able to introduce omni channel experiences such as ‘Express Store Pickup’ in 50 of its stores and ‘Ship from Store’ at 51. Its Android and iOS mobile apps continue to gain in popularity with over 6mn downloads – and now contribute to a third of its online sales.
Increasing revenue contribution from online sales Number of stores that offer omni services Buy online and collect from store 1.75% 60 Ship from store for fullfilment of order 1.70% 50 1.65% 40 1.60% 30 1.55% 20 1.50%
1.45% 10
1.40% 0 FY18 FY19 FY18 FY19 Q1FY20
Source: Company, PhillipCapital India Research
Aggressive marketing for omni-shopping in stores
Personal Shoppers in stores are equipped with digital tools that allow them to create personalised experiences for each customer, while helping them to purchase products (through the website) that may not be available in that store. The company is introducing many brands and products on its website that have not traditionally been available in stores. It intends to introduce customers to many new digitally enabled experiences and has already made First Citizen a card-less loyalty program – by enabling it through STOP’s website and mobile apps.
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Seamless shopping experience online
Asking customers to enroll in its First Citizen Program
Express shop - pickup with store location at the checkout page
Seamless integration of the First Citizen program with online shopping Amazon’s investment could provide a fillip Amazon has invested Rs 1.8bn for a 5% stake in Shoppers Stop in January 2018. STOP entered into a commercial agreement with Amazon Seller Services Pvt. Ltd., where it now has an exclusive flagship store on the Amazon marketplace listing its portfolio of 400+ brands. Additionally, as part of this arrangement, Amazon ‘experience centres’ have been created across Stop’s physical network, and both companies will conduct joint marketing efforts.
Shoppers Stop inventory is currently available on Amazon Amazon ‘experience centres’ at Shoppers Stop
Digital sales to take-off despite recent FDI hiccup Shoppers Stop products were unavailable on Amazon after the new FDI guidelines came about. But the company has started to sell on Amazon again through its subsidiary. We believe that within this, STOP will give a big push to its private label brands – where it will get an edge over competition with access to Amazon’s customers. It believes that more consumers across the country will discover Shoppers Stop through its digital shopping channels due to the convenience of shopping a full assortment at best prices across channels – stores (omni), mobile, website, and Amazon – with the added advantage of being able to return, exchange anytime, anywhere.
In a joint marketing effort, STOP will provide 50-100 sq. ft. space to Amazon (on lease) to develop Amazon experience centres (touch and feel) at its stores to increase
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SHOPPERS STOP INITIATING COVERAGE consumer relevance, engagement, and hence footfalls with exclusive Amazon products such as Echo, Kindle, and Alexa.
Focus on growth through store openings We expect store opening to gain precedence with STOP guiding at opening 5-7 stores each year. In the last three years, it has opened only six stores, which we believe it would open in a single year – FY20 itself – and a further five stores in FY21.
The company plans to open department stores in bigger cities with a million-plus population, which it believes will offer growth opportunities, given its position as a bridge to luxury in apparel. Home Stop stores would remain the same at 12 and the company won’t expand these, given their low profitability.
Shoppers Stop is likely to keep adding five new stores each year No of Stores (SS) Net New Stores (rhs) 120 14
100 12
10 80 8 60 6 40 4
20 2
0 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Its store size will gradually reduce The average size of new stores would be 40,000 sq. ft. STOP restructured its store size to reduce wastage of space, helping it to reduce rent and increase profitability. Average store size has shrunk to 47,800 sq. ft. in FY19 from c.53,000 sq. ft. in FY14; it will reduce to 47,000 sq. ft. by FY21.
Reducing store size for Shoppers Shop Total Area (SS) Avg Store Size (rhs) 5.0 54000
52000 4.0
50000 3.0 48000
(mn sq ft) sq (mn 2.0 46000
1.0 44000
0.0 42000 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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SSSG, sales per sq. ft. to increase Shoppers Stop has lagged peers on the SSSG front over the last three years at a mere 3%, because of declining footfalls, falling share of private labels, aggressive store openings in a short period – from FY11-14, and the construction of metros near malls. This will reverse over the next three years and it will begin to see mid-single-digit SSSG because of its focus on private labels, the beauty segment, personal shoppers, closure of low profitable stores, and its focus on the omni channel. We also believe that sales per sq. ft. would increase by c.3.3% over the next three years.
SSSG to revive … …with increasing sales per sq. ft. Sales/sq ft % growth (rhs) 12% 10000 10%
10% 9500 5%
8% 9000
0%
6% 8500 (Rs) -5% 4% 8000
-10% 2% 7500
0% 7000 -15% FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Increasing average transaction and selling price (Rs)
3500 Cash Memo Size Avg Selling Price
3000
2500 Average transaction price CAGR over 2000 FY14-19 has been 3.8% while for average selling price it has been 1500 2.9%
1000
500
0 FY14 FY15 FY16 FY17 FY18 FY19 Source: Company, PhillipCapital India Research
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Shoppers Stop maintaining leadership position despite losing market share Shoppers Stop has lost market share in-terms of number of stores over the last four years due to its focus on reducing debt and slow pace of mall development. Also, its store openings in FY11-14 were aggressive. Its market share reduced to 43% in FY18 from c.50% in FY15, but it maintained its leadership position, which we believe it will continue to hold based on aggressive openings ahead.
Shoppers Stop continues to maintain leadership position in total number of stores
Central Shoppers Stop Lifestyle 60%
50%
40%
30%
20%
10%
0% FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: PhillipCapital India Research
Shoppers Stop vs. nearest competitor Lifestyle In comparison, Lifestyle is present in a higher number of cities than Shoppers Stop. For example, it is present in four cities in Kerala where Shoppers Stop doesn’t have a presence.
Mapping geographies of Shoppers Stop and Lifestyle (nos)
Shoppers Stop Lifestyle 50
Shoppers Stop is present in nine cities 40 where Lifestyle doesn’t have a presence while Lifestyle is present in 15 cities 30 where Shoppers Stop doesn’t have presence
20
10
0 Cities Unique cities without overlap States
Source: PhillipCapital India Research
Shoppers Stop has a clear edge over Lifestyle in Maharashtra; STOP has 12 stores in Mumbai and 20 in Maharashtra while Lifestyle has 9 stores in Mumbai and 15 in Maharashtra. In south India, Lifestyle is dominant player; it has 30 stores vs. STOP’s 25. In north India, STOP has a slight edge over Lifestyle.
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Shoppers Stop has higher share in Maharashtra and NCR (nos)
Shoppers Stop Lifestyle Shoppers Stop Lifestyle 25 6
5 20
4 15 3 10 2
5 1
0 0 Mumbai Maharashtra Delhi Noida / Ghaziabad Gurgaon
Source: PhillipCapital India Research
Lifestyle is leading in south India (nos) No of cities covered in south India 35 Shoppers Stop Lifestyle 14
30 12
25 10
20 8
15 6
10 4 2 5 0 0 Shoppers Stop Lifestyle Overall Hyderabad Bangalore Chennai Source: PhillipCapital India Research
Using Google Trends, we infer that in west and east India, Shoppers Stop has more visibility. Despite having higher store count in Bangalore and Hyderabad, Lifestyle is leading in Google trends in these states. On a standalone basis, Karnataka, Maharashtra, NCR and West Bengal are core regions for Shoppers Stop.
Shoppers Stop vs. Lifestyle comparison - Shoppers Stop's heat map for the last 12 months
Source: Google Trends
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Financials (Standalone)
Revenue CAGR at 7.8% over FY19-22 We expect STOP to post revenue CAGR of 7.8% over FY19-22 to Rs 43.5bn, based on new store openings and conservative 4.0%/5.5% SSSG for FY20/21. Focus on the First Citizen Program and Personal Shopper should enhance sales while leadership in beauty across channels and focus on private brands will also drive growth.
STOP’s revenue fell 3% in FY19 due to change in revenue recognition to IndAS115, under which it came in Rs 3.9bn lower. Adjusting for this, it would have been 8% higher.
Healthy revenue growth based on SSSG and new store openings
50000 Net Sales (Rs mn) Growth (%) (RHS) 14 45000 12 40000 10 35000 8 30000 6 25000 4 20000 2 15000 0 10000 -2 5000 -4 0 -6 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Healthy EBIDTA margin expansion to drive profitability We expect operating profit CAGR of 11.2% to Rs 3.5bn on sustainable margin expansion – from 7.3% in FY19 to 8% in FY22 (ex-IndAs116). However, after accounting for IndAs116, operating profit CAGR would be 47% - to touch Rs 8.1bn in FY22, with margins at 18.5%. We believe margins would expand because of increasing contribution from private-label brands (10% revenue contribution) that have gross margins of 46-48% and the beauty segment (16% revenue contribution) that have 42-44% gross margins. Along with increasing SSSG, we believe operating leverage and efficiencies will drive margins. Strong operating profit will help STOP post 20% CAGR in PAT to Rs 1.35bn in FY22 from Rs 788mn in FY19.
Healthy EBIDTA growth led by margin expansion Adj. PAT CAGR of 19% over FY19-22
Operating profit (Rs mn) Operating Margins (%) (RHS) Adj Net Profit (Rs mn) % Growth (RHS) 9000 20 1500 150 18 8000 120 1200 7000 16 14 90 6000 12 900 5000 60 10 4000 30 8 600 3000 6 0 2000 4 300 -30 1000 2 0 0 0 -60 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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Lean balance sheet to drive return ratios Shoppers Stop has negative working capital – one of the best in the industry – with inventory days of 110, receivable days at just 5, and creditor days at 132. In FY19, due to a change in accounting, inventory days increased to 110 days from 33 days and in the same proportion, payable days also increased to 132 days from 50 days. It has 62% inventory on SoR (sale or return) basis, which has steadily increased over time, giving it an edge over competition. The negative cash-conversion cycle helps STOP to scale up its business.
Cash conversion cycle – best in the industry
Inventory Days Debtor Days Payment Days 150
100
50 110 110 110 110 33 40 39 40 39 42 35 33 0 -48 -45 -46 -42 -40 -40 -33 -50 -50 -132 -130 -130 -130 -100
-150 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Exit from non-core businesses helped to deleverage the balance sheet Over the last two years, STOP exited its non-core loss-making businesses– Hypercity, Nuace, and Timezone. It also gave 5% stake through preferential allotment to Amazon.com in January 2018 at Rs 407.7 per share, which garnered it Rs 1.8bn. After the transactions, debt reduced to Rs874mn in FY18 from Rs 5.7bn in FY17. With healthy cash flows and no cash burn in its non-core business, STOP turned net cash positive in FY18. However, under the new accounting standard (IndAs 116) we have modelled lease liability at Rs 18.7bn for FY20 and Rs 16.8bn for FY22.
Net debt increasing due to lease liability (from FY20) Debt-free company (ex-lease liability) Net Debt (Rs mn) Net D/E (x) (RHS) Net Debt (Rs mn) Net D/E (x) (RHS) 16000 3.2 3000 0.40 14000 2.8 2000 0.20 1000 12000 2.4 0 10000 2.0 0.00 -1000 8000 1.6 -2000 -0.20 6000 1.2 -3000 -0.40 4000 0.8 -4000 2000 0.4 -5000 -0.60 0 0.0 -6000 -0.80 -2000 -0.4 -7000 -4000 -0.8 -8000 -1.00 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21EFY22E FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21EFY22E
Source: Company, PhillipCapital India Research
STOP had 40% stake in Nuance, which operated duty-free stores at international airports in India, while Timezone engaged in family entertainment centres at malls under the ‘Timezone’ brand.
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Exiting non-core business helped to de-leverage the balance sheet Month of sale % Stake Sale Price (Rs mn) Sold to Nuance Oct'17 40% 60 Nuance Group AG, Switzerland Hypercity Nov-17 51% 5907 Future Retail Timezone Feb-18 48% 277 Time Zone West Asia Shoppers Stop Jan'18 5% 1792 Issued 4.39mn shares @Rs407.78/share to Amazon.com NV Investment Holding LLC Preferential issue Source: Company, PhillipCapital India Research
STOP got Rs 5.9bn through its exit in Hypercity to Future Retail. In this transaction, it received 4.7mn shares of Future Retail at Rs 537 per share, which it can monetize anytime (the lock-in period of one year ended in December 2018). STOP’s debt reduced by Rs 2.5bn because of this transaction, while it received Rs790mn in cash. We believe this deal will boost STOP, because Hypercity made losses of Rs 847mn in FY17 and Rs 561mn in H1FY18.
Hypercity retail sale transaction Details Amount (Rs mn) Comments Future Retail Shares received 2,555 4.75mn shares received at Rs537 per share. Lock in ended in December 2018. Debt of Hypercity reduction 2,560 Cash Received 790 Total 5,905 Source: Company, PhillipCapital India Research
Return ratios to inch up to mid-teens over the next three years Improving profitability – on margin expansion and becoming net cash positive – should help STOP to improve its return ratios considerably. We expect RoE to improve to 19% in FY22 from a low of 3.6% in FY17 while RoCE should improve to 13.4% in FY22 from 5.2% in FY17. RoIC will touch 18.3% in FY22. We believe capex will remain under check at Rs 1.4bn for FY20 and Rs 1.2bn for FY21 (ex-IndAs-116), as the company has a capex of Rs 2,100-2,300 per sq. ft. for new department stores (Rs80-90mn per store). It has also increased store renovation capex (Rs400mn) to drive footfalls in the older stores coupled with capex for new beauty stores (Rs90mn), and IT &SAP spends of Rs 250mn. We model FCF generation of Rs 5.2bn (ex-IndAs116) over the next three years.
Improving return ratios (%) Healthy FCF generation post IndAs116 Free Cash Flow (Rs mn) Operating Cash Flow (Rs mn) 25 RoCE RoE RoIC 4000 3500 20 3000
15 2500 2000
10 1500 1000
5 500 0
0 -500 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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DuPont analysis FY15 FY16 FY17 FY18 FY19 FY20E FY21E PAT/Sa les (x) 0.01 0.01 0.01 0.02 0.02 0.02 0.03 Sales/Assets (x) 2.46 2.53 2.71 3.05 3.47 2.42 1.92 Assets/Equity (x) 1.66 1.72 1.75 1.37 1.04 2.02 3.55 RoE (%) 5.4 6.0 3.6 7.2 8.2 10.7 20.3 Source: Company, PhillipCapital India Research
Crossword is the only meaningful remaining subsidiary After the stake sales of its loss-making businesses, Crossword remains the only 100% subsidiary run by Shoppers Stop in its consolidated business. It currently has 83 Crossword stores (39 owned and 44 franchisee), which garner Rs 1bn in revenues with a marginal operating loss. In FY19, Crossword posted higher losses as the company had a one-time inventory write-off of Rs 80-100mn. Going forward the management plans to build Crossword as a children-focused store to drive sales and profitability – with an increasing assortment of stationery and toys.
Subsidiary financials - Crosswords Rs mn FY14 FY15 FY16 FY17 FY18 FY19 Sales 904 928 982 1092 1053 970 % growth -0.2% 2.6% 5.9% 11.2% -3.6% -7.9% EBIDTA 13 -1 7 -5 -1 -77 EBIDTA Margins % 1.4% -0.1% 0.7% -0.5% -0.1% -7.9% PAT -39 -72 -32 -42 -50 -145 Source: Company, PhillipCapital India Research
Valuations and outlook We expect Shoppers Stop to script a turnaround in its business operations on steady pace of store opening, strengthening its leadership position in the beauty category, doubling the share of its private-label contribution while increasing customer engagement through its personal shopper service and First Citizen membership program, and targeting the younger generation through omni-channel investments. We believe these measures will help STOP increase its SSSG and sustainably drive margins over the medium term, which will in-turn improve return ratios and FCF generation.
We believe the stock valuations are not factoring the new management team driving its operations from here. We initiate coverage with a BUY rating and a valuation of Rs 520 (7x Sept FY21 standalone EV/EBIDTAR) – in line with its long-term average. Crossword could offer further upside if it scales up meaningfully in the medium term.
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PE chart EV/EBIDTA charts 2yr fwd P/E 2yr fwd EV/EBITDA 160 30
140 25 120 20 100 AVG 14.58 80 15 AVG 65.86 60 10 40 5 20
0 0
Oct-19 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19
Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Source: Company, PhillipCapital India Research
EV/Sales EV/EBIDTAR 2yr fwd EV/Sales 2yr fwd EV/EBITDA-R 2.0 12 1.8 10 1.6 1.4 8 1.2 AVG 1.15 1.0 6 AVG 6.84 0.8 4 0.6 0.4 2 0.2
0.0 0
Jul-14 Jul-19
Oct-19 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Jan-17
Jun-17
Oct-15
Apr-18
Sep-13 Feb-14 Sep-18 Feb-19
Dec-19 Dec-14
Aug-16
Nov-17
Mar-16 May-15
Source: Company, PhillipCapital India Research
Key Risks Slower-than-expected growth in the private-label business Younger customers preferring competitor’s platforms for shopping Churn in the top management team
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Company Background Shoppers Stop Ltd., part of the K Raheja Group of Companies, is a leading fashion and beauty destination with over 27 years of retail experience in India. It offers over 400+ international, national, and exclusive brands spread across multiple categories including apparel, cosmetics, fragrances, artificial and fine jewellery, footwear, personal accessories such as watches, sunglasses, handbags, wallets and belts, kids wear, toys, home décor, etc., under one roof.
Shoppers Stop also has an Omni-channel presence across offline and online retailing. Currently, it has a footprint of 83 large stores spread across 39 cities in the country along with an e-commerce website and mobile application. Shoppers Stop also operates 12 HomeStop and 115 specialty beauty stores along with 83 Crossword bookstores.
Revenue breakup Shoppers Stop store locations
4% 2% 7%
Department Store
Beauty Stores
Home Shop
Omni
89%
Source: Company, PhillipCapital India Research
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Financials (Standalone)
Income Statement Cash Flow Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Net sales 34,288 36,411 39,549 42,938 Pre-tax profit 1,237 1,262 1,870 2,105 Growth, % -3.2 6.2 8.6 8.6 Depreciation 1,351 3,591 3,519 3,874 Other operating income 525 541 568 596 Chg in working capital -24 -155 -16 -18 Total income 34,813 36,952 40,117 43,534 Total tax paid -565 -454 -673 -758 Raw material expenses -20,272 -21,395 -23,067 -24,902 Other operating activities 101 1,824 1,968 2,091 Employee expenses -3,145 -3,390 -3,642 -3,973 Cash flow from operating activities 2,100 6,068 6,667 7,294 Other Operating expenses -8,863 -5,489 -6,051 -6,590 Capital expenditure -1,123 -1,405 -1,226 -1,248 EBITDA 2,533 6,678 7,356 8,070 Chg in investments -304 0 0 0 Growth, % 19.7 163.6 10.2 9.7 Other investing activities 47 218 244 288 Margin, % 7.3 18.1 18.3 18.5 Cash flow from investing activities -1,380 -1,187 -982 -960 Depreciation -1,351 -3,591 -3,519 -3,874 Free cash flow (ex-Lease Liability) 977 1,184 1,844 2,182 EBIT 1,183 3,086 3,837 4,196 Equity raised/(repaid) 11 0 0 0 Growth, % 18.6 161.0 24.3 9.4 Debt raised/(repaid) -398 -400 0 0 Margin, % 3.4 8.5 9.7 9.8 Dividend (incl. tax) -80 -79 -79 -79 Interest paid -124 -2,042 -2,212 -2,379 Other financing activities -124 -3,832 -4,185 -4,597 Other Non-Operating Income 179 218 244 288 Cash flow from financing activities -591 -4,311 -4,264 -4,676 Non-recurring Items 0 0 0 0 Net chg in cash 130 571 1,421 1,658 Pre-tax profit 1,237 1,262 1,870 2,105 Tax provided -449 -454 -673 -758 Valuation Ratios Profit after tax 788 808 1,197 1,347 FY19 FY20e FY21e FY22e Net Profit 788 808 1,197 1,347 Per Share data Growth, % 578.7 2.6 48.1 12.6 EPS (INR) 9.0 9.2 13.6 15.3 Net Profit (adjusted) 788 808 1,197 1,347 Growth, % 27.0 2.6 48.1 12.6 Unadj. shares (m) 88 88 88 88 Book NAV/share (INR) 111.1 60.7 73.4 87.8 FDEPS (INR) 9.0 9.2 13.6 15.3 Balance Sheet CEPS (INR) 24.3 50.0 53.6 59.3 Y/E Mar, Rs mn FY19 FY20e FY21e FY22e CFPS (INR) 11.1 53.0 61.8 68.7 Cash & bank 167 742 2,164 3,822 DPS (INR) 0.8 0.8 0.8 0.8 Debtors 444 449 488 529 Return ratios Inventory 10,535 11,173 12,136 13,175 Return on assets (%) 3.5 5.9 6.9 7.3 Loans & advances 157 165 173 181 Return on equity (%) 8.2 10.7 20.3 19.0 Other current assets 2,254 2,367 2,485 2,610 Return on capital employed (%) 8.8 10.2 12.4 13.4 Total current assets 13,558 14,895 17,445 20,317 Turnover ratios Investments 2,935 2,935 2,935 2,935 Asset turnover (x) 2.8 6.2 4.7 3.8 Gross fixed assets 9,907 23,633 26,095 28,657 Sales/Total assets (x) 1.4 1.0 1.1 1.1 Less: Depreciation -3,958 -7,550 -11,069 -14,943 Sales/Net FA (x) 5.5 2.2 2.6 3.1 Add: Capital WIP 351 351 351 351 Working capital/Sales (x) 0.0 0.0 0.0 0.0 Net fixed assets 6,299 16,434 15,377 14,065 Receivable days 5 4 4 4 Non-current assets 1,641 1,806 1,986 2,185 Inventory days 110 110 110 110 Total assets 24,433 36,070 37,743 39,502 Payable days 132 130 130 130 Working capital days 5 6 6 5 Current liabilities 14,483 15,246 16,528 17,911 Liquidity ratios Provisions 93 103 113 124 Current ratio (x) 1.0 1.1 1.2 1.2 Total current liabilities 14,577 15,349 16,641 18,036 Quick ratio (x) 0.3 0.4 0.4 0.5 Total Debt 400 18,482 17,745 16,841 Interest cover (x) 9.5 1.5 1.7 1.8 Deferred Tax Liabilities -320 -3,100 -3,100 -3,100 Dividend cover (x) 11.9 12.2 18.1 20.4 Total liabilities 14,657 30,731 31,286 31,777 Total debt/Equity (%) 0.0 3.5 2.7 2.2 Paid-up capital 440 440 440 440 Net debt/Equity (%) (0.3) 2.8 2.0 1.3 Reserves & surplus 9,337 4,899 6,017 7,285 Valuation Shareholders’ equity 9,777 5,339 6,457 7,725 PER (x) 59.5 43.0 29.0 25.8 Total equity & liabilities 24,434 36,070 37,743 39,502 PEG (x) - y-o-y growth 6.6 4.7 2.1 1.7 Price/Book (x) 4.8 6.5 5.4 4.5 Source: Company, PhillipCapital India Research Estimates Yield (%) 0.2 0.2 0.2 0.2 EV/Net sales (x) 1.3 1.3 1.2 1.0 EV/EBITDA (x) 17.4 7.4 6.4 5.6 EV/EBIT (x) 37.3 16.1 12.4 10.7 EV/EBIDTAR (x) 6.9 7.0 6.1 5.3
Page | 114 | PHILLIPCAPITAL INDIA RESEARCH INSTITUTIONAL EQUITY RESEARCH
Trent Ltd. (TRENT IN)
In a league of its own
INDIA | RETAIL | Initiating Coverage 11 September 2019
Trent is gearing for rapid store expansion and has shed its conservative approach through BUY its Rs 9.5bn fund raising. It is aiming for a larger slice of the value fashion pie through its CMP RS 460 215 Zudio stores by FY22. Focus on the back-end, higher inventory turns, private label TARGET RS 540(+17%) portfolio, and offering an international experience to customers would aid SSSG and margins. Reducing losses in Star Bazaar and improving traction in Inditex JV augurs well COMPANY DATA over the medium term. We believe Trent is at an inflection point and that the execution of O/S SHARES (MN) : 355 its strategy remains its key distinction vs. competition. Initiate coverage with BUY. MARKET CAP (RSBN) : 166 MARKET CAP (USDBN) : 2.3 Two-pronged strategy to boost Westside: Store expansion and private label 52 - WK HI/LO (RS) : 489 / 313 We expect Trent to fast-track Westside store opening and focus on tier-2 and 3 locations, LIQUIDITY 3M (USDMN) : 1.5 PAR VALUE (RS) : 1 apart from top-30 cities. It is accelerating its store-modernization program, and over last 3 years, it has renovated and modernized 27 stores to offer an international experience and to SHARE HOLDING PATTERN, % experiment with new visuals. Westside’s private-label share has consistently increased to Jun 19 Mar 19 Dec 18 touch 97% in FY19 and this helps to control the value chain, improve margins, reduce PROMOTERS : 32.6 32.6 32.6 working capital, and increase throughput. FII / NRI : 22.7 22.5 23.3 FI / MF : 16.6 16.6 15.6 NON PRO : 3.4 3.5 3.5 Zudio – entry into mass value fashion PUBLIC & OTHERS : 24.7 24.8 25.0 We expect Trent to open 215 standalone Zudio stores by FY22 with an average space of 6,000-8,000 sq. ft. per store. Zudio addresses the fast and edgy fashion needs of customers PRICE PERFORMANCE, % at lower price points, with infrastructure and backend processes closely aligned with 1MTH 3MTH 1YR ABS 3.1 13.8 27.0 Westside. This enables it to drive better efficiencies. While Zudio is profitable at a store REL TO BSE 4.2 20.1 30.2 level, we expect it to post operating profit from FY21 with higher RoCE (than Westside) given its lower capex and higher revenue per sq. ft. PRICE VS. SENSEX
320 Star Bazaar – continues to be ‘work in progress’ 280 Trent has not been able to replicate the success of Westside in its hypermarket business 240 under Star Bazaar despite having an early mover advantage. The silver lining is that it has 200 shied away from aggressive expansion unlike peers. Closing Star Bazaar outlets in FY18 160 proved beneficial as Star’s operating losses reduced in FY19; its gross margin expansion is happening through private labels and focus on fresh food. However, only with more than Rs 120 20bn in revenues will the company turn profitable. 80 40 Apr/16 Apr/17 Apr/18 Apr/19 Financials Trent BSE Sensex Trent should post consolidated revenue/EBIDTA/PAT CAGR of 27%/60%/46% over FY19-22. Aggressive store opening for Westside and Zudio, coupled with high single-digit SSSG would Source: PhillipCapital India Research aid revenue growth. Improving efficiency, operating leverage, and reducing losses in Zudio KEY FINANCIALS would drive operating margins. The Rs 9.5bn fund raising will help Trent to fund its capex for Rs mn FY19 FY20E FY21E the next three years and reduce D/E. Net Sales 26,302 34,112 44,423 EBIDTA 2,277 5,646 7,462 Outlook and valuations Net Profit 970 1,330 2,256 We value Trent on SOTP and assign separate valuations for each of its businesses and JVs. EPS, Rs 2.9 3.7 6.3 For its healthy and consistent track record, we value Westside at 16.5x September FY21 PER, x 117.3 122.9 72.5 EV/EBIDTAR; Inditex Trent Retail JV for Zara at 25x September FY21 EV/EBIDTA, since it is a EV/EBIDTA, x 51.1 32.6 25.6 financial investment and Trent holds a minority stake; THPL (Trent Hypermarket) at 1.5x P/BV, x 6.9 7.1 6.7 September FY21 EV/sales, as it is loss making. We believe the JVs would account for 23% ROE, % 6.0 6.8 9.5 (16% Zara and 7% THPL) of Trent’s target market cap. The new value-fashion business, Debt/Equity (%) 0.3 1.3 1.4 Zudio, we value at 1.5x September FY21E EV/sales - as we expect it to breakeven only from Source: PhillipCapital India Research Est.
FY21. We initiate coverage with a BUY rating and an SoTP-based target of Rs 540. Key risks Ankit Kedia, Research Analyst include inability to take price hikes and drive operating leverage, resulting in declining-to- (+ 9122 6246 4122) [email protected] stable margins for Westside and increasing losses for Zudio based on aggressive expansion.
Page | 115 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
TRENT LTD INITIATING COVERAGE
Investment Rationale
Twin strategy to boost Westside – store expansion, private-label Westside, Trent’s flagship store format, is planning to accelerate store expansion in coming years by focusing on two store concepts – (1) flagships stores with full offerings and (2) curated smaller stores – in non-metros and emerging micro cities. We believe that now that it has perfected its business model on a limited number of stores, the company has shed its conservative approach and plans to rapidly expand. In the last 3 years (FY17-19) it has opened 57 stores compared with 93 stores between 1998 and FY16, and only 43 stores from FY16 to FY10. We believe the company paid a lot of attention to the property and let go of locations if they were not sure of long-term profitability, which is also one of the reason for slower growth. However, due to this careful approach, store closures have also been limited in last seven years – only 17 stores closed.
Westside plans to expand into tier-2 and tier-3 cities also now, through the franchisee route. Over last few years, it has expanded in cities such as Palakkad (Kerala), Dimapur (Nagaland), Solan (Himachal Pradesh), Kolam (Tamil Nadu), Erode (Tamil Nadu), Gangtok (Sikkim), and Gandhidham (Gujarat) – all cities that have a population of less than 500,000. We believe this will aid store expansion in the medium term for the company. We have modelled 35 new stores each in FY20 and FY21.
Aggressive store opening… (numbers) …with limited closures 300 Total Stores Addition (rhs) 40 30 Store Opening Store Closures
35 250 25 30 200 20 25
150 20 15
15 100 10 10 4 50 5 3 3 5 2 2 2
0 0 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Westside has perfected its store size at about 17,700 sq. ft. for optimum SKUs and maximum store efficiency and productivity. We have modelled Westside having 4.5mn sq. ft. by FY22 from 2.6mn sq. ft. in FY19.
Increasing througput Perfect store size compared to competition (sq. ft.) 100000 Area (mn sq ft) (RHS) Sales/sq ft (Rs) 12000 5 80000 10000 4 60000 8000 3 40000 6000 2 4000 20000 1 2000 0 Central Shoppers Brand Westside Pantaloon V-Mart 0 0 Stop Factory FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
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TRENT LTD INITIATING COVERAGE
High share of private labels helps to control supply chain and inventory Westside’s share of private label has consistently increased – it was 80% in FY13 and touched 97% in FY19. This helps the company to: Control the value chain in terms of design, branding, sourcing, logistics, pricing, displays and promotions. Bring substantial improvement in working capital. Inventory turns have increased to 5.2x in FY19 from 4.5x in FY12, which boosts throughput. Reduce shrinkage, which is the best in the industry and stands at 0.18% in FY19. Create a distinctive identity compared with competitors, which sell a higher proportion of national and international brands. Increase gross margins, which have increased consistently – to 53% in FY19 from 45.8% in FY13. Offers high return on capital employed.
Private label brands across categories (entry-level price points) Private Label Description Products MEN Ascot Modern classic lifestyle brand for the T-shirts (Rs 999 ), Shirts (Rs 1299 to Rs 1499), Jeans (Rs 1699), trousers (Rs 1499 to Rs 1699), discerning man Shorts (Rs 1499) E.T.A Understated casual wear for T-shirts (Rs 599 to Rs 799 ), Shirts (Rs 999), Jeans (Rs 1499), trousers (Rs 1499 to Rs 1699), contemporary men Shorts (Rs 799) West sport Functional & stylish casual men apparel T-shirts (Rs 399 to Rs 699 ), Shirts (Rs 999 to Rs 1299) Sole play Men Footwear Formal ( Rs 1499), Casual ( Rs 499 to Rs 699), Sneakers ( Rs 1799 to Rs 1999), Home wear ( Rs 299 to Rs 499) Body Basics Casual wear and Inner wear T-shirts ( Rs 399), Shorts ( Rs 499), Vests ( Rs 399), Pyjamas ( Rs 899) Wes Office wear for men – contemporary and T- shirts ( Rs 799), Shirts ( Rs 799 to Rs 1499), Jackets ( Rs 4999), Trousers ( Rs 999 to Rs confident 1599) WOMEN Bombay Paisley Fusion wear for women Tops ( Rs 599 to Rs 799), Dress ( Rs 999 to Rs 1499), Trousers ( Rs 799 to Rs 999) Gia Curves Fashionable city and casual collection for Dress ( Rs 1299 to Rs 1699), Tops (Rs 699 to Rs 1099), Jeans ( Rs 1699 to Rs 1799), Trousers ( curvy women Rs 1099) L.O.V Smart, casual, feminine offer for 25+ Dress ( Rs 1499 to Rs 1699), Tops (Rs 699 to Rs 899), Jeans ( Rs 1299 to Rs 1499), Trousers ( women Rs 999), Shorts ( Rs 1299) Wardrobe Trendy 9-to-9 fashion for woman Dress ( Rs 1299 to Rs 1699), Tops (Rs 699 to Rs 999), Skirts ( Rs 1299 to Rs 1499) , Trousers ( Rs 1299 to Rs 1699),Shirts( Rs 699 to Rs 899) Zuba Premium Indian wear offering – in silk Kurtis (Rs 1599 to Rs 1999),Bottoms ( Rs 999), Dupatta ( Rs 599) and handloom blends with handcrafted embroidery Wunderlove Innerwear women’s brand Innerwear ( Rs 599 to Rs 999) Sassy Soda Fashion for young curvier women Dress ( Rs 1299 to Rs 1899), Tops (Rs 699 to Rs 1099), Jeans ( Rs 1699 to Rs 1899) , Skirts ( Rs 1699) ,Shirts( Rs 1499) Studio west Exclusive beauty zone at Westside and has several leading beauty brands together with an exciting new range of StudioWest cosmetics Luna blue Women’s Footwear Formal ( Rs 1499), Casual ( Rs 399 to Rs 799), Sneakers and Sandals ( Rs 999 to Rs 1499), Home wear ( Rs 299) Utsa Ethnic wear for women Kurtis (Rs 699 to Rs 1499),Bottoms ( Rs 399 ), Dupatta ( Rs 349 to Rs 799) Vark Festive and intricate collection Suits ( Rs 2299 to Rs 5999) Diza Ethnic wear for curvy women Kurtis ( Rs 799 to Rs 1599),Bottoms ( Rs 899 ) UNISEX NUON Young and casual fashion brand T-shirts and tops (Rs 399 to Rs 599 ), Shirts (Rs 999 to Rs 1499), Jeans (Rs 999), trousers (Rs 1299 to Rs 1699), Shorts (Rs 1499),Dresses ( Rs 999),Shorts ( Rs 799) Studio fit Sports active wear T-shirts and tops (Rs 399 to Rs 599 ), Jackets( Rs 999),Track pants ( Rs 899 to Rs 1299) , Shorts (RS 499 to Rs 699),Dresses ( Rs 799),Shorts ( Rs 799) KIDS HOP Infants and 5 to 10 year olds T-shirts and tops ( Rs 299 to Rs 799), Jeans ( Rs 499 to Rs 699),Shorts and jumpsuits ( Rs 499 to Rs 999),Dress ( Rs 499 to Rs 999), Y&F Y&F kids wear T-shirts (Rs 399 to Rs 599), Shirts (Rs 799 to Rs 1299), Jeans (Rs 799 to Rs 899 ), trousers (Rs 1699 to Rs 799), Shorts (Rs 599 to Rs 699) Utsa kids Ethnic wear for kids Kurta ( Rs 1599), Tops ( Rs 499),Dress ( Rs 599 to Rs 1299), Suits ( Rs 1299) Yellow feet Footwear for kids Casual shoes ( Rs 399 to Rs 1099), Home wear ( Rs 399 to Rs 499), Ethnic ( Rs 899) Source: Company, PhillipCapital India Research
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TRENT LTD INITIATING COVERAGE
The company has 26 private brands across categories such as apparel, footwear, lingerie, cosmetics, perfume, and handbags, and accessories. Higher ticket-size categories have helped Trent grow its SSSG consistently. Westside has been able to position itself as an aspirational brand and has been able to predict trends – which is evident from its low shrinkage. With a competitive environment and an audience with significant real-time exposure to global fashion trends, Westside is increasingly focusing on rapid delivery of latest fashions, strong emphasis on freshness of the range through the season, and sharply reducing the “design to market” timeframe. It has a higher share of women’s apparel (50%+) compared with competition. Higher contribution from women’s fashion helps to attract the complete family to the store, and to increase ticket size.
The company is quick to identify missing gaps in its portfolio, launches/refreshes its portfolio frequently, and expands its brands every year. It also does not shy away from closing down unprofitable brands and releases their space for other brands.
Brands introduced by the Westside over the years along with closures FY15 FY16 FY17 FY18 FY19 Wunder Love (Women’s Wunder Love (Swimwear Utsa (Ethnic kurta for Exit from Gourment West Bodybasics (everyday Lingerie) range) women) food essentials) Sassy Soda (Fashion for Baby Hop (Infant wear) Vark (Elegant salwar kameez Exit from Lakeland – Diza (ethnic wear for Plus young curvier women) dupatta sets) kitchenware size women) Studio West (exclusive Denim Shop (under the Luna Blu (Women’s’ Studiofit (sports inspired WES (Contemporary and beauty zone) NUON brand) footwear) activewear) confident - office wear for men) Oak & Keel (Fashion for Soleplay (Men’s footwear) Yellow Feet (Kids footwear) beefed up men) Source: Company, PhillipCapital India Research
Westside has the highest share in women’s apparel Steady increase in number and size of bills Bills Size (Rs) No of bills (mn) (rhs) 60% 2,500 12
50% 10 2,000
40% 8 1,500 30% 6 1,000 20% 4
500 10% 2
0% 0 0 Shoppers Stop Central Pantaloon Westside FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Westside uses power targeting to run customised campaigns for ClubWest members (4.5mn), which account for 80% of its revenues. This has helped it to improve the contribution of its active members and increase the frequency of its less active members.
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TRENT LTD INITIATING COVERAGE
Increasing revenues from Clubwest Members Reducing shrinkage
6 Clubwest Members (Mn) 85% 0.6% Revenue Contribution (%) (rhs) 5 0.5% 80%
4 0.4% 75% 3 0.3% 70% 2 0.2%
65% 1 0.1%
0 60% 0.0% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Westside is accelerating its modernization program for stores, and over last three years, it has renovated and modernized 27 stores. The management wants to deliver a ‘fashion theatre’ experience for its customers by upgrading to an ‘international experience’ in its stores and experiment with new visuals initiatives across the stores. We believe these moves would help increase customer footfalls and SSSG.
Westside is the only retail format to have consistently delivered 8-9% SSSG over the last decade. Hence, we have modelled 9% SSSG over the next three years (FY20-22). A high share of private labels helps to increase gross margins, which in turn have boosted operating margins.
Increasing share of own brands leading to gross margin Consistent SSSG helps in operating margin expansion expansion EBIDTA Margin % SSSG 12% Share of own brands Gross Margin (rhs) 120% 58% 11% 56% 100% 54% 10% 80% 52% 50% 9% 60% 48% 8% 40% 46% 44% 7% 20% 42% 6% 0% 40% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
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TRENT LTD INITIATING COVERAGE
Westside reporting healthy SSSG against competition over the years
Westside Pantaloon Shoppers Stop Central V-Mart Brand Factory 20%
15%
10%
5%
0%
-5% FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Based on Westside’s aggressive store openings and consistent high single-digit SSSG, we have modelled revenue CAGR of 18% over FY19-22 to Rs 38.1bn against a revenue CAGR of 16.8% over FY15-18. Operating profit should see 18.3% CAGR to touch Rs 4.2bn in FY22 (ex-Ind AS116) with operating margin expansion to 11.1% from 10.7% in FY18. We have modelled FY22 gross margin at 54.5% vs. 54.4% in FY19.
Westside Store offers healthy revenue growth Operating leverage to aid margin Revenue (Rs mn) % Growth (rhs) EBIDTA (Rs mn) EBIDTA Margin (rhs) 45000 25% 4500 12% 40000 4000 20% 10% 35000 3500 30000 3000 8% 15% 25000 2500 6% 20000 2000 10% 15000 1500 4%
10000 5% 1000 2% 5000 500 0 0% 0 0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Google Trend suggests that there is more interest in Westside in West and South India while Pantaloons is leading in East India. This is corroborated by the fact that 38% of Westside revenues come from west India, while 28% of Pantaloon’s revenues come from the east.
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TRENT LTD INITIATING COVERAGE
Westside leading in West and South India against Pantaloon Westside and Pantaloon’s revenue mix across regions
Westside
26% 38% North South East 28% 8% West
Pantaloons
25% 29% North South East 28% 18% West
Source: Google Trends, Company, PhillipCapital India Research
Aggressive push for the omni channel Westside sells its products exclusively on TataCliq.com – a Tata group market place initiative under Tata Unistore, where Trent holds 10% stake and 90% ownership is “All our sales on TataCliq are from the with Tata Industries. The website also sells luxury products from brands such as current range displayed in the stores Michael Kors, Hugo Boss, Coach, Armani, Furla, Tumi, and Emporio Armani across and not from past-season merchandise. categories that drive top of the pyramid customers to the portal. The portal has a They are also full priced, and not sold at central inventory position and offers complete merchandise range synchronized with discount, except during the two EOSS in-store offers, which allows it to offer omni service. It also emphasises leveraging the annually,” – Noel Tata in a business Westside store network in various omni-channel initiatives to drive operating magazine efficiencies. The management had a target of Rs 1bn in revenues from this channel in FY19 and the omni-channel accounted for 75% of its revenues from online sales.
Zudio – Entry into mass value fashion Based on Trent’s success in value fashion offered at its Star Bazaar stores (15 stores) and its first standalone store in Bangalore in FY17, the company acquired Zudio (a “After 20 years as a retailer, it is much easier to build Zudio today than it was value-fashion business) in October 2018 for Rs 878mn from Trent Hypermarket. Since to build westside” – Noel Tata then, Zudio has aggressively expanded to 40 stores in FY19 and is targeting 215stores by FY22, with an average store size of 6-8,000 sq. ft. We believe that the value- fashion business presents significant growth opportunities and offers synergies with its existing fashion businesses. Significantly, Zudio addresses ‘fast and edgy fashion needs’ at sharper price points, with infrastructure and back-end processes closely aligned with Westside – which enables it to drive better efficiencies. This is the second time that Trent is dabbling with fast fashion. In FY08, it closed its Fashion Yatra stores, targeting low-income shoppers in smaller cities, due to losses. “Newness will be measured in days rather than week or season” – Philip Auld We believe Zudio has higher revenue per sq. ft. than Westside; it has consistently increased to Rs 14,000 per sq. ft. in FY19 from Rs 7,817in FY16. We expect Zudio to touch Rs 14bn in revenues by FY22 (25% of Trent’s total) based on aggressive store openings and high inventory turns. Currently, Zudio is profitable at a store level and we believe it would be EBIDTA positive from FY21.
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Aggressive store opening Leading to strong revenue growth (Rs mn)
Stores (nos) Area (mn sqft) (rhs) 10000 250 1.20 9000 200 1.00 8000 7000 0.80 150 6000 0.60 5000 100 4000 0.40 3000 50 0.20 2000 1000 0 0.00 0 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, PhillipCapital India Research
Zudio stores are present in striking locations and offer a compelling shopping experience to its target audience. Our analysis suggests that Trent is mostly expanding Zudio stores in cities where Westside is present and following a cluster approach, given Zudio’s synergies with Westside.
Initial store opening in cities where Westside is present States Stores Cities Westside Presence in cities Bihar 1 Patna No Chhattisgarh 1 Raipur Yes Goa 1 Madgoan Yes Gujarat 9 Jamnagar, Rajkot, Ahmedabad, Vadodra, Surat, Not present in Rajkot Bhavnagar, Baroda, Mehsana and Mehsana Haryana 2 Karnal, Ambala No Karnataka 6 Bengaluru Yes Kerala 1 Kochi Yes Madhya Pradesh 2 Bhopla, Indore Yes Maharashtra 7 Nashik, Pune, Nagpur, Mumbai, Navi Mumbai Yes Odisha 1 Bhubneshvar Yes Punjab 3 Jalandar, Amritsar, Zirakpur Not present in Amritsar and Zirakpur Rajasthan 2 Jaipur, Jodhpur Yes Tamil Nadu 1 Chennai Yes Telangana 5 Hyderabad, Secunderabad Yes West Bengal 1 Siliguri Yes Source: Company, PhillipCapital India Research
Zudio’s pricing is at a discount to Max Zudio focuses on young and edgy fashion through its 100% ‘own brand’ offerings. Its product range is curated in-house, in line with the latest fashion trends, and at An independent design team handles affordable price points. Our analysis and store visits suggest that every SKU in the the products lines at Zudio to ensure store is below the Rs 999 price point, with more than 65% SKUs below Rs 500. differentiation compared with Comparing the entry-level prices across retailers in the value-fashion segment, Zudio Westside has the cheapest pricing across all SKUs, positioning it as a one-stop shop for customers. We believe customers would start shopping in Zudio and later, with increasing income levels, shift their loyalties to Westside.
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Zudio is the cheapest among competitors (entry-level product pricing) Men Women (Rs) Shirts T-shirts Polo t-shirts Jeans Formal Trousers Shorts Kurti Tops/T-shirts Pants Dresses Zudio 299 179 299 599 399 399 299 149 399 599 Max 549 249 349 799 699 399 399 199 499 699 FBB 499 299 499 599 799 699 399 299 499 799 Reliance Trends 699 299 399 699 799 599 499 299 699 699 Source: Company, PhillipCapital India Research
Gaining traction online Trent offers full Zudio SKUs on tatacliq.com with attractive, pricing, offers, and delivery options pan-India. We believe it can become the first choice for value- conscious customers. Online interest in Zudio has grown 4x over last 12 months as seen on Google Trends, with key markets being Gujarat, Maharashtra, and Andhra Pradesh.
Interest in Zudio increasing over the last 12 months Interest in Zudio by region
Source: Company, PhillipCapital India Research
Full inventory available online with 65% of the SKU below Rs500
65% of SKUs for Zudio are below Rs500 and all SKUs below Rs1000
Source: Company
Takeaways from our Zudio store visit Every Friday, 30% of the stock in the store is changed with new designs and styles across categories. Typically, the company sends 4-5 SKUs/design/size to the store. Target for the store is to sell 50% of the new stock by the weekend, so that they can refill the stock on Thursday night again.
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From FY19, the company has stopped alteration of apparel, which it previously allowed, to reduce costs. No advertisement and marketing to promote the store. Focus is only on word of mouth publicity, as the company believes the pricing is compelling enough for customers to step in. While Zudio has a returns policy, it does not yet have a loyalty program like Westside does. A few Westside store have been converted to Zudio stores when these Westside stores relocated (for a larger area). A typical 6,000sq. ft. store would have 20-25 employees, including back-end employees. Significant control on costs and focus on inventory turns will drive profitability. Average capex is Rs 1,500 per sq. ft. for Zudio, compared to Rs 2,000 per sq. ft. for Westside. Previously, the same employees would work for both Zudio and Westside at the back-end, but now, given Zudio’s scale, the management has appointed dedicated personnel for Zudio.
Zudio stores offer a premium look and feel
Source: Company
Standalone store for Utsa Trent also has plans to open standalone stores of its private label brand Utsa, which caters to ethnic women’s wear. Its offering includes Indian kurtas, tops, palazzos, salwars, and churidars. Over a period, the store would also have non-ethnic apparel. It has opened its first store in Pune and plans to scale up store opening over the next few years. The idea is to be present close to customers, as Trent cannot open Westside stores across multiple geographies easily (availability of quality space). Given the strong demand seen for Utsa among women customers, the management is planning to focus on the omni channel through these smaller stores, as they can deliver the product to customers within 24 hour, or customers can pick them up from the store after online purchases.
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First Utsa store launched in Pune… …with focus on women’s ethnic wear
Source: Company, PhillipCapital India Research
Financial investment in Zara bearing fruits Trent operates two JVs – one with Inditex Group of Spain for Zara, and the other with Massimo Dutti, in which Trent holds 49% stake and is a financial investor while all business decisions are taken by Inditex Group (it independently manages the operations). Management views its commitment to the JVs primarily as a financial investment, and consequently not as a long-term strategic investment integral to other retail operations.
Trent’s JV with Zara operates 22 stores in Delhi, Mumbai, Bangalore, Kolkata, Pune, Surat, Jaipur, Chandigarh, Chennai, Mohali, Hyderabad. Management plans to steadily expand the presence of its Zara stores over the next few years (maximum 1-2 stores every year) only in major tier-1 cities. It feels that the main challenge in opening more stores is the availability of high-quality retail spaces, which can generate high sales throughput. Hence, we have modelled the company opening only two stores over the next three years with high sales per sq. ft. of Rs 45,400 by FY21, 9.3% CAGR over FY19-22.
Steady store openings for Zara (nos) Best in industry sales/sq. ft. (Rs)
30 Stores Addition 5 50000
25 4 40000
20 3 30000 15 2 20000 10
1 5 10000
0 0 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
Source: Company, PhillipCapital India Research
While Zara’s revenue CAGR has been a good 20% over FY14-18, we have modelled a little more conservative 13.4% CAGR over FY19-22, given the challenging macro environment and lower store openings ahead. We see its operating margins recovering to 12-13% over the next two years, from 10.7% in FY19; operating profit
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CAGR at 19.3% over FY19-22 to Rs 2.6bn in FY22 (ex-IndAs 116), while PAT CAGR would be 20.6% to Rs 1.3bn. RoE would be high at 16.8% in FY22 and RoCE 16.4%.
Inditex Trent Retail: Financials (Rs mn) FY16 FY17 FY18 FY19 FY20E FY21E Total Revenues 8401 10118 12200 14319 16506 18366 % growth 19.40% 20.40% 20.60% 17.4% 15.3% 11.3% COGS 4,499 6,281 7,014 8,837 9,904 11,020 Employee Cost 294 340 396 498 561 624 Other expenses 2047 2537 3097 3459 3994 4408 Total Expenses 6839 9158 10507 12794 14459 16052 EBIDTA 1563 960 1692 1525 2047 2314 EBIDTA Margin 18.60% 9.50% 13.90% 10.7% 12.4% 12.6% PBT 1233 725 1241 1119 1463 1692 PAT 804 476 826 715 951 1100 Source: Company, PhillipCapital India Research
Zara is focusing on growth in the non-apparel segment, which is impacting its margins. Currently, apparel and accessories account for 86% of its revenues compared with 91% in FY14, while shoes account for 11% of revenues. However, we believe its gross margins in apparel and accessories were 43% in FY18, higher than c.38% in FY17, affected by price cuts; perfumes have higher gross margins at c.55%. Gross margins for shoes have increased from lows of 7% in FY14 to c.18% in FY18, which we believe is still low, given the scale of business. Overall gross margins for Trent are at 38.3% in FY19, down 420bps yoy on an increase in customs duty by the Indian government.
Zara’s revenue mix Gross margins across segments Clothes & Accessories FY14 FY18 Shoes 1% 3% 70% 8% 11% Perfumes 60%
50%
40%
30%
20% FY18 91% 86% 10%
0% Clothes & Accessories Shoes Perfumes FY14 FY15 FY16 FY17E FY18E
Source: Company, PhillipCapital India Research
H&M India giving tough competition to Zara India We believe Zara has competition from other fast-fashion retailers such as H&M, which has impacted its revenue growth. Swedish multinational company H&M launched in India through a 100% subsidiary in FY16, and since then, it has expanded aggressively to 42 stores across 20 cities. It has plans to reach 50 stores by FY20. While Zara (JV with Trent) has focused on larger cities, H&M has opened stores in relatively smaller cities of Aurangabad, Indore, Raipur, Mysore, and Coimbatore, which has aided the latter’s revenue growth.
In FY18, H&M India reported revenues of Rs 8.9bn and we expect FY19 revenues to be c.Rs 13bn on aggressive store openings. In fact, we believe that by FY21, H&M could overtake Zara in terms of revenues. It has steadily increased its margins too over the last two years; operating margins were 13.6% in FY18.
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H&M Hennes & Mauritz Retail Pvt Ltd Financials H&M India store opening (nos) Mar end (Rs mn) FY16 FY17 FY18 Total Stores Addition (rhs) Total Revenues 1424 6311 8927 45 18 % growth 343% 41% 40 COGS 552 2,745 4,051 15 35 Employee Cost 429 826 945 Other expenses 848 2222 2721 30 12 Total Expenses 1830 5793 7716 25 EBIDTA -405 518 1211 9 20 EBIDTA Margin -28.40% 8.20% 13.60% PBT 35 188 538 15 6 PAT 15 134 351 10 3 5 0 0 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Being a fast-fashion retailer, Zara has one of the best working capitals in the industry with only 38 inventory days translating to 9-10x inventory turn compared to H&M’s 64 days. Zara’s inventory days reduced to 38 days in FY19 from 39 days in FY14, which gives it an edge over competition as it is able to bring freshness to its store regularly. Further, payable days are 19 for Zara and 11 for H&M, while debtor days remain below one for both companies.
Zara superior to H&M in terms of working capital management Inventory Days Debtor Days Payable Days 200 Inventory Days Debtor Days Payable Days 60 150 40 100 20
0 50
-20 0
-40 -50 -60 -100 -80 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Financials for Zara and H&M must be looked at in context that Zara pays higher royalty (c.7%) compared to H&M (6%) while rent as a percentage of sales is similar at c.10% for both companies. While rent is increasing for Zara, it is on a declining trajectory for H&M on healthy revenue growth and store opening in smaller cities. Further, gross margins for Zara were at 42.5% in FY18 while H&M’s were 54%.
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Zara paying higher royalty compared with H&M Rents as % of sales for H&M is lower than for Zara Inditex Trent Retail Inditex Trent Retail H&M Hennes & Mauritz Retail Pvt Ltd. 10% H&M Hennes & Mauritz Retail Pvt Ltd. 20%
8% 15%
6% 10% 4%
5% 2%
0% 0% FY16 FY17 FY18 FY16 FY17 FY18
Source: Company, PhillipCapital India Research
In FY17, Zara launched its online shopping portal in India to offer an omni-channel experience to customers. Currently, Zara sells online in 202 markets and this stream accounts for 12% of its total revenues globally and 14% of sales in markets that have online sales. On the other hand, H&M launched its online store in 2018, making India its 45thonline market. It is currently present in 47 markets, lower than Zara, but online accounts for 14.5% of its total revenue, which is higher than Zara. Further, H&M offers “online-only” pieces that are available all year round, which helps it expand in tier-2 and tier-3 markets, where opening new stores is not profitable.
Both Zara and H&M targeting online customers
Source: Company, PhillipCapital India Research
Google trends suggest that Zara is more popular in bigger markets of Surat, Jaipur, Pune, Mumbai, and Noida, while H&M is more popular in cities such as Chennai, Bangalore, Hyderabad, and other cities where Zara doesn’t have stores. Surprisingly Zara is more popular in East India, where they don’t have any physical stores. However, with its higher online sales, we believe H&M is giving tough competition to Zara in smaller cities.
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Zara and H&M’s interests online across regions (last 90 days)
Source: Google Trends
Slow and steady growth through Massimo Dutti Trent’s JV with Spanish clothing company Massimo Dutti currently operates 3 of its stores in Mumbai and Delhi with revenues of Rs 635mn in FY19, which we expect will grow to Rs 1.22bn by FY22, based on 2 new store additions; its operating profit was Rs 39mn in FY19. With high operating leverage, this JV could post modest operating margins of 7.2% by FY22; it had posted a net loss of Rs 19mn for FY19.
Massimo Dutti: Small presence, but scope to scale up in key metro cities (Rs mn) Total Revenues EBIDTA PAT No of Stores (RHS) 700 4
600
500 3
400
300 2
200
100 1
0
-100 0 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Star Bazaar continues to be ‘work in progress’ We believe Trent has not been able to replicate the success of Westside in its hypermarket business under Star Bazaar, despite having an early-mover advantage. However, the silver lining is that Trent has shied away from aggressive expansion unlike peers until it gets its sustainable business model right. Trent has a 50:50 JV with Tesco under Trent Hypermarket (THPL), which operates under the Star banner and focuses on the multi-brand food and grocery segment. The company currently operates 39 stores in 5 cities of Mumbai, Bangalore, Pune, Kolhapur, and Hyderabad. The brand is anchored primarily by the Star Market concept, which has 30 stores, while 10 are under the ‘Star Hyper’ format. Separately, the company operates five
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Star Hyper stores in Ahmedabad and Surat under Fiora Hypermarket (FHL) – a 100% subsidiary due to FDI restrictions in Gujarat on multi-brand retail.
Different formats of Star Bazaar stores Format Size (Sq. Ft) Store Details Star Hyper 30,000-50,000 Hypermarket format store. Diverse product categories including food and grocery, fresh produce, bakery, beauty, home needs and more. Offers a wide range in apparel and footwear under its brand 'Zudio'. Star Market 5,000-10,000 Supermarket format store. Positioned as a one-stop shop for monthly and top-up needs for groceries, fresh produce, FMCG products, personal grooming and general merchandise. Star Daily c.2,000 Neighbourhood format store. Aimed at serving daily needs of the immediate catchment. Source: Company, PhillipCapital India Research
In FY18, the company shut all its Star Daily outlets that had c.2,000sq. ft. space and decided that 5,000-10,000 sq. ft. is the optimum store space for a sustainable business model. It is now expanding stores under the Star Market format that fit this model. We have projected 20 new Star Market stores each year, in line with the management’s guidance, and expect total stores to be 81 by FY21.
Overall, we believe that Trent Hypermarket is adopting a multi-pronged approach to drive growth, including: Food and grocery portfolio anchored by Fresh Food, which is the key to drive regular footfalls. Own private label offerings to improve margins across key categories. Cluster-based standalone expansion in select cities and states to create local scale and optimize supply-chain efficiencies. Focus primarily on the Star Market format with an optimum store size of 5,000- 10,000 sq. ft. Omni channel – an online grocery portal and app ‘Starquik’ under FHL with Trent Hypermarket being the wholesale supply partner. This will leverage its capabilities and infrastructure across channels.
Aggressive store opening expected Steady increase in sales/sq.ft. Star Dailies Star Markets Star Hypers Sales/Sq ft (Rs) Total Area (Mn) (rhs) 120 14000 1.8 1.6 100 13000 1.4 80 12000 1.2 1.0 60 11000 0.8 40 10000 0.6
20 0.4 9000 0.2 0 8000 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Focus on private label and fresh food to drive margins Trent’s management believes that to build a sustainable long-term profitable model, it needs to increase the share of branded private label offerings. Its focus would be on providing quality and reasonably priced fresh produce, meat, and fish – and to position itself as famous for ‘fresh food’. For this, Trent directly engages with over 200 farmers and c.70% of the vegetables it sells are directly sourced from them.
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Tesco helps the company, not only to develop private-label branded products, but also for sourcing fresh food. Trent currently has 70+ product variants and 400+ SKUs in the private-label business under its four brands. 1) Klia – Premium homecare products including detergents, household cleaning, fresheners, and disposable ware 2) Fabsta – Flavourful food and beverages include savouries, biscuits, noodles, breakfast cereals, tea & coffee 3) SKYE – Health and beauty products including skincare, hair-care, oral-care, body- spray and perfumes 4) Kitchen Culture – groceries, including grains, flour,1 etc.
Increasing push of private label in the store with branding
Source: Company
Our analysis of the pricing of private-label products across companies suggest that Trent’s pricing is very competitive and is slowly gaining acceptance in the market.
Private label products: Competitive pricing Klia Competitor 1 Competitor 2 Competitor 3 Floor cleaner (Rs 129) 1ltr Domex cleaner (Rs 170) 1ltr Cif floor cleaner (Rs 225) 1 ltr Lizol floor cleaner (Rs 179) 975ml Dishwash bar(Rs20) 3*200gm Patanjalidishwash bar(Rs30) 3*175 Vim dishwash bar(Rs30) 3*125 Prildishwash bar( Rs 47) 3*200 Toilet cleaner(Rs90) 750 ml Harpic toilet cleaner( Rs 168) 1 litre Sani fresh ( Rs 139 ) 1litre Domex toilet cleaner ( Rs 170) 1ltr Glass cleaner ( Rs 65) 500ml Colin glass cleaner ( Rs 85) 500ml bb home class cleaner ( Rs 82) 500ml Mr muscle ( Rs 72) 500ml Air freshener(Rs145) 300ml Godrej air freshener ( Rs 149) 300ml Odonil air freshener( Rs 149) 200gm Airwick air freshener( Rs 149) 250 ml Bathroom cleaner( Rs 80) 500ml Harpic cleaner(Rs 84) 500ml Lizol cleaner ( Rs 129) 450ml Sani bathroom cleaner ( Rs 82) 500ml Wet wipes ( Rs 80) 25 pulls bb wet wipes ( Rs 65) 30 pulls Origami ( Rs 75) 25 pulls Cif wet wipes ( Rs 199) 30 pulls Toilet tissue ( Rs 480 ) 10 rolls Tempo ( Rs 575 ) 9 rolls Origami ( Rs 330) 10 rolls Mystique ( Rs 234) 6 rolls Aluminium foil ( Rs 80 ) 9 mtr Premier (Rs 80) 9 mtr Freshee ( Rs 80) 9 mtr Freshwrapp ( Rs 71) 9 mtr Paper napkin ( Rs 55) pack of 100 Soft touch ( Rs 32) 100 sheets Origami ( Rs 80) 100 pulls Godya ( Rs 60) 100 pcs Fabsta Competitor 1 Competitor 2 Competitor 3 Instant coffee ( Rs 90) 50gm Bru coffee (Rs 89) 50gm Tata coffee ( Rs 125) 50gm Nescafe (Rs 140) 50 gm Kadak leaf tea(Rs120) 500gm Taj mahal tea(Rs 280) 500gm Waghbakri( Rs 205) 500gm Red label( Rs 215) 500gm Pure honey(Rs380) 1kg bb royal honey ( Rs 380) 1kg Dabur honey ( Rs 395) 1kg Zandu honey( Rs 270) 500gm Instant noodles(Rs 65) 420gm Maggi ( Rs 67) 420 gm Yipee noodles( Rs 67) 420 gm Chings ( Rs 60 ) 240 gm Tomato ketchup(Rs 120) 900gm Kissan ketchup (Rs125) 950gm Maggi ketchup ( Rs 147) 1kg Heinz ketchup( Rs 165) 900gm Plain oats (Rs75) 400gm Quaker oats ( Rs 77) 400gm Saffola masala oats ( Rs 190) 500gm Kellogg’s oats ( Rs 95) 500gm Schezwan chutney ( Rs 60) 250 gm Chingsschezwan (Rs70) 250 gm Surabhi ( Rs 69) 250 gm
Veg mayonnaise( Rs 120) 450gm Funfoods ( Rs 110) 500gm Veeba ( Rs 84) 275 gm Delmonte ( Rs 125) 450gm Cornflakes ( Rs 300) 875gm Kellogs ( Rs 310) 875 gm Bagrrys ( Rs 300) 800gm lawrence mills ( Rs 120) 500gm
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Green tea( Rs 130) 30 pcs lipton green tea( Rs 145) 25 pcs Girnar green tea ( Rs 330) 36 pcs Tetley ( Rs 145) 25pcs Kitchen culture and Star Competitor 1 Competitor 2 Competitor 3 Sooji (Rs60) 1kg Golden harvest sooji(Rs 140) 2KG Satyam ( Rs 70) 1kg bb royal sooji ( Rs 60) 1kg besan(Rs60) 500gm Patnjalibesan (Rs65) 500gm Tata sampann ( Rs 64) 500gm bb royal besan ( Rs 82) 500gm Jeera (Rs52) 100gm Everest jeera ( Rs 51) 100gm MDH ( Rs 67) 100gm MTR ( Rs 55) 100gm Chana dal (Rs58) 500gm Tata sampann ( Rs 58) 500gm bb royal ( Rs 69) 500gm Satyam ( Rs 63) 500 gm Sunflower oil (Rs110) 1ltr Fortune sunflower oil ( Rs 115) 1ltr Gemini (Rs 140 ) 1ltr Sundrop ( Rs 135) 1ltr Fresh atta(Rs410) 10kg bb royal aata ( Rs 425) 10kg Aashirvaadatta(Rs 440) 10kg Pillsbury atta ( Rs 440) 10kg Sugar (Rs50) 1kg Madhur ( Rs 65) 1kg Dmartpremia ( Rs 51) 1 kg bb sugar ( Rs 55) 1kg Garam masala (Rs 35) 50gm Everest garam masala ( Rs 41) 50gm MDH garam masala ( Rs 38) 50gm Catch garam masala ( Rs 40) 100gm Chat masala(Rs24) 50gm Catch chat masala ( Rs 31) 50gm Everest chat masala ( Rs 33) 50gm MDH ( Rs 62) 100gm Turmeric powder(Rs 24) 100gm MTR turmeric powder ( Rs 32) 100gm Everest turmeric ( Rs 27) 100 gm Catch turmeric ( Rs 27) 100gm Toor dal(Rs120) 1kg,500gm(Rs80) Tata sampann ( Rs 135) 1kg bb royal toordalm ( Rs 160) 1kg
Skye Competitor 1 Competitor 2 Competitor 3 Hand wash (Rs135 ) 750ml Dove handwash ( Rs 97) 220ml Dettol ( Rs 139) 750ml lifebuoy( Rs 175 ) 750 ml Body spray(Rs 160) 150ml Adidas ( Rs 199) 150ml Fogg ( Rs 230) 150ml Old spice ( Rs 199) 150ml Shower gel(Rs195) 250 ml Pears shower gel ( Rs 180) 250ml Palmolive shower gel ( Rs 180) 250ml Fiama shower gel ( Rs 199) 250ml Bathing soap(Rs 55) 125 gm lux (Rs30) 75gm Dove(Rs ) 3*100g Patanjali soap(Rs 60) 4*75g Talc (Rs 65) 100gm Yardley ( Rs 99) 100gm Axe talc ( Rs 70) 100gm Candid ( Rs 140) 100gm Face wash(Rs 60) 50ml Himalaya face wash (Rs 65) 50ml Ponds face wash ( Rs 90 ) 50g lakme face wash ( Rs 110) 50 gm Toothbrush ( Rs 120) pack of 3 Colgate ( Rs 60) pack of 3 Sensodyne ( Rs 100) pack of 3 Oral- b ( Rs 150) pack 0f 4 Sunscreen ( Rs 325) 100ml Himalaya sunscreen( Rs 200) 100ml Lakme ( Rs 120) 60ml Nivea ( Rs 385) 125ml Lotion ( Rs 150) 100ml Himalaya lotion ( Rs 85) 100ml Vaseline ( Rs 115) 100ml Ponds ( Rs 87) 100ml Lip balm ( Rs175) 4.8gm Nivea ( Rs 185) 8 gm Himalaya lip balm ( Rs 134) 4.5gm Lotus herbals ( Rs 155) 5gm Source: Company, PhillipCapital India Research
We believe Trent Hypermarket is moving in the right direction, based on its focus on getting the right format size, improving its backend operations, and focusing on product development through private labels. While Star Bazaar is focussing on offering convenience and facilities, it has lately become aggressive on pricing to compete with Reliance Fresh and Dmart by offering 7% discount on all MRP products. In addition, by offering fresher food it differentiates itself from competition (direct sourcing from farmers ensures better quality and faster availability at stores) and drives customers to Star stores regularly.
We have modelled single-digit SSSG for the business, which would be driven by private label and fresh food. Revenue CAGR for Trent Hypermarket would be 21.6% over FY19-22 to touch Rs 18bn; this is especially significant considering that revenue growth was a mere 1.8% in FY14-17 because of store closures and the change in format size.
Healthy SSSG… ...leading to strong revenue growth 12% Revenues (Rs mn) % Growth (rhs) 20000 30%
10% 18000 25% 16000 20% 8% 14000 12000 15% 6% 10000 10% 8000 4% 5% 6000 0% 2% 4000 2000 -5% 0% 0 -10% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Higher contribution of private labels, coupled with operating leverage, will help the company to drive margins. We believe that the operating losses would reduce to Rs
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487mn in FY22 from Rs 802mn in FY18. Five of FHL’s stores would contribute Rs 1.6bn in revenues by FY22 and become EBIDTA positive from making losses of a mere Rs 40mn in FY18.
Both Trent Hypermarket and DMart have similar inventory days at 28 while payable days are a lower 9 for Dmart vs. 43 for Trent.
Losses to reduce in the medium term (Rs mn) Revenue of FHL (5 stores in Gujarat/Maharashtra) (Rs mn)
EBIDTA (Rs mn) PAT (Rsmn) 1800 0 1600
-200 1400 1200 -400 1000 -600 800 600 -800 400 -1000 200 -1200 0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Landmark impacted by e-commerce Landmark has evolved into an entertainment-concept store offering curated products such as toys, front-list books, and sports merchandise after having undergone significant restructuring over the past few years. Its back-end operations have been integrated with those of Westside, to drive synergies and contain overhead costs. Landmark currently runs 5 independent stores along with 10 SIS (inside Westside) stores. We believe its overall contribution to Trent would remain minuscule despite it turning profitable at an operating level.
Landmark store openings to remain muted (nos) Turning EBIDTA positive (Rs mn)
20 1200 Revenue EBIDTA 18 1000 16 800 14 600 12 400 10 200 8 0 6 -200 4 -400 2 -600 0 -800 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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TRENT LTD INITIATING COVERAGE
Consolidated Financials
Revenue CAGR of 27% over FY19-22 We believe FY19-22 revenue CAGR would be 27% to touch Rs 54.3bn at a CAGR of 27% over FY19-22 against 16.5% CAGR over FY16-18 because of aggressive push in store openings for Westside and focus on value fashion concept through Zudio. Healthy SSSG aided by private label and push towards omni would help increase sales per sq. ft.
Strong revenue growth led by Westside and Zudio Net Sales Growth (rhs) 60,000 35
50,000 30
25 40,000
20
30,000 (%)
(Rs mn)(Rs 15 20,000 10
10,000 5
0 0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
EBIDTA CAGR of 60% over FY19-22 to aid profitability We are modelling a 160bps decline in gross margins over FY19-22 due to lower margins in Zudio and difficulty in improving gross margins of Westside, as its private- label portfolio has already crossed 97% of its revenues. However, improving efficiency, operating leverage, and reducing losses in Zudio and Landmark should drive operating margins to 9.2% in FY22 from 8.7% in FY19 and aid EBIDTA to Rs 5bn (30% CAGR over FY19-22 ex-IndAs116). We believe adjusted PAT CAGR would be 46% with reducing losses in Trent Hypermarket and increasing profitability in Zara. We have modelled a PAT of Rs 3bn in FY22 against Rs 960mn in FY19. On a standalone basis, PAT CAGR would be 32% over FY19-22, to touch Rs 3bn from Rs 1.28bn in FY19.
Strong margin expansion to continue Adj. PAT CAGR of 46% over FY19-22 Operating profit Operating Margins (rhs) Adj Net Profit % Growth (rhs) 10,000 20 3,500 250 9,000 18 3,000 8,000 16 200
7,000 14 2,500
6,000 12 150
2,000
5,000 10
(%)
(%) (Rs mn)(Rs 4,000 8 mn)(Rs 1,500 100 3,000 6 1,000 2,000 4 50 1,000 2 500 0 0 0 0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Healthy working capital to help generate steady cash flows We expect Trent to generate strong OCF of Rs 5.6bn over FY20-22. Recent fund- raising plans would help Trent to fund its capex. Historically, the company has grown
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TRENT LTD INITIATING COVERAGE through both debt and improving working capital. It has a cash-conversion cycle of 38 days, which is one of the best in the industry, backed by its strong private-label portfolio.
Best in industry working capital Significant OCF generation Inventory Days Debtor Days Payable Days FCF OCF 80 3000
60 2000
40 1000
20
0 (Rs mn)(Rs (Days) 0 (1000) -20 (2000) -40
-60 (3000) FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
We expect its return ratios to consistently improve; RoE should touch 12% in FY22 based on strong earnings growth, ROCE will rise from a low of 5% in FY16 to touch 9.3% in FY22, which should push RoIC to 8%. Net D/E ex-lease liability would reduce to -0.1x due to fund raising of Rs 9.5bn in FY19-20 while net D/E would increase to 1.2x due to incremental lease liability.
Improving return ratios D/E
RoCE RoE RoIC Lease liability 14 40000 Net Debt ex-lease liability 1.5 Net D/E ex-lease liability (rhs) 12 30000 Net D/E 1.0 10 20000
8 0.5 (%) 6 10000
4 0.0 0 2 -10000 -0.5 0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Dividend pay-out trend Dividend Payout (%) Dividend/share (Rs) (rhs) 14 2.1
12 1.8
10 1.5
8 1.2
6 0.9
4 0.6
2 0.3
0 0.0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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TRENT LTD INITIATING COVERAGE
Rs 9.5bn fund raising to boost back-end and front-end both Trent is looking at raising Rs 9.5bn through a preferential issue to Tata Sons. The proceeds would be used for: Accelerated store expansion in the fashion and foods space across concepts. Target is 100 stores per year across formats. Long-term +20-year leases; is willing to pay stamp duty for this. Contracting retail space over a three-year horizon. Substantial expansion and automation of supply chain and warehouse capacity. The management feels that they need a certain level of automation, as it plans to replenish stores on a daily and weekly basis. Significantly scaling up and upgrading information technology and digital infrastructure. Select investments in freehold retail real-estate developments.
Valuations and Outlook We initiate coverage with a BUY rating and SoTP-based target of Rs 540. We value Trent on SOTP and assign separate valuations for each of its businesses and JVs. Westside: We value it at 16.5x September FY21 EV/EBIDTAR (30% premium to its historic multiple) based on healthy and consistent revenue track record and margin expansion. Inditex Trent Retail JV with Zara: We value this at 25x September FY21 EV/EBIDTA since it is a financial investment and Trent holds a minority stake. Implied value of 14x September FY21 EV/EBIDTAR. Trent Hypermarket: We value this at 1.5x September FY21 EV/Sales as it is loss- making; the management is focusing on private-label products and store expansion under Star Market.
We believe the JVs would account for 23% (16% Zara, 7% Trent Hypermarket) of the target market cap for the company. Zudio: This new business of value fashion - we value at 1.5x September FY21 EV/Sales given that we expect it to breakeven only from FY21.
Segment Parameter Year Particular (Rs mn) Multiple (x) EV (RsBn) Westside EV/EBIDTAR Sep FY21E 6502 16.5 160.4 Trent (50%) EV/Sales Sep FY21E 16432 1.5 13.5 Zara (49%) EV/EBIDTA Sep FY21E 2314 25 30.0 Zudio EV/Sales Sep FY21E 9383 1.5 17.5 Total EV 221.5 Less: Net Debt (Rs mn) Sep FY21E 29.4 Market cap (Rs mn) 192.0 No of shares (mn) 355 Target Price (Rs) 540 Source: PhillipCapital India Research
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TRENT LTD INITIATING COVERAGE
PE chart EV/EBIDTA charts 2yr fwd P/E 2yr fwd EV/EBITDA 120 100
100 80
80 60 AVG 62.13 60 AVG 41.47 40 40 20 20
0 0
Oct-19 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19
Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Source: Company, PhillipCapital India Research
EV/Sales EV/EBIDTAR charts 2yr fwd EV/Sales 2yr fwd EV/EBITDA-R 5 32
27 4
22 AVG 3.01 3 17 AVG 16.45
2 12
1 7
Oct-19 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Oct-16 Oct-12 Oct-13 Oct-14 Oct-15 Oct-17 Oct-18 Oct-19
Apr-13 Apr-12 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Source: Company, PhillipCapital India Research
Key risks Increasing competition resulting in slower-than-expected SSSG in Westside. Inability to take price hikes and drive operating leverage could lead to declining- to-stable margins for Westside. Increasing losses for Zudio on aggressive expansion. Increasing loss and inability to scale-up Trent. Inditex buying out its 49% stake in the Inditex Trent Retail JV for Zara.
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TRENT LTD INITIATING COVERAGE
Company Background Trent, incorporated in 1998 as part of the Tata Group, is a leading organised retail player in India operating various chains of stores such as Westside and Zudio. It acquired Landmark, a books and music retail chain, in 2005, and merged it with the standalone company in FY14. It ventured into the hypermarket business in 2004 with Star Bazaar and formed a JV (50:50) with Tesco in FY14. In FY10, it formed a JV with Inditex to operate Zara stores in India with Trent holding a 49% stake.
Company structure TRENT
Westside FioraHypermarket Trent Hypermarket Pvt Ltd (93% standalone revenue) (100% subsidiary) (50:50 JV with Tesco) – Operates 2 Star Operates Star Bazaar Zudio Bazaar stores in (6% standalone revenue) Gujarat Inditex Trent Retail India Pvt Ltd (49:51 JV with Inditex) Landmark Operates Zara stores (1% standalone revenue) Massimo Dutti India Pvt Ltd Standalone Financials (49:51 JV with Inditex) Operates Massimo Duttistores Consolidated Financials
Management team NAME DESIGNATION PROFILE Mr Philip N. Auld MD & Non-Independent He joined Trent in 2011 as the CEO and was appointed as MD in November'14. Before Trent, he spent five Executive Director years with Vendex KBB, Netherlands (now called Maxeda BV). With Vendex, Mr Auld was the CEO for the M&S Mode business, followed by the CEO for the Claudia Strater business. He has also spent four years as the MD of George Clothing at Asda Plc, part of the Walmart group. His other experience includes working with B&Q as Director of Operations. He started his career with Marks & Spencer, where he worked for 17 years. Mr P. Venkatesalu Executive Director of Finance, CFO and ED, ED - Finance since June 2015. Non-Executive Director of Trent Hypermarket Private Limited. CFO & Executive Director Alumni of Symbiosis International University. Mr P. K. Anand Senior Vice-President of Has been associated with Trent since 1998. Previously VP Operations & Human Resources – Trent. He has Operations over 33 years of experience. Served as VP Fiora Cosmetics Ltd before. M.Com. Damani Madhulika Head of Ethnic Wear At this post since March 2015. She served as Buying Manager of Ethnic Wear at Trent Ltd from August 1999 to February 2015. She has 18 years of experience and served as Senior Designer of Shoppers Stop before Trent. She has a Diploma in MM Textile Chemistry, Fibre Manufacturing, and in Dress Making & Fashion Co-ordination. Mr Venu Nair Chief Commercial Officer In Trent from April 2017. Was CEO at Marks and Spencer Reliance India Ltd. Was the MD of Indian Operations at M&S from March 2012 to April 2017. Head of region (South Asia & Southern Africa) at M&S Group and looked after sourcing of goods from the Indian subcontinent for the global needs of the British retailer. Source: Company
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TRENT LTD INITIATING COVERAGE
Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Net sales 25,858 33,677 43,948 53,761 Pre-tax profit 1,685 2,093 3,307 4,421 Growth, % 22 30 30 22 Depreciation 517 2,590 3,207 4,001 Other income 445 434 475 519 Chg in working capital -1,352 -910 -1,240 -1,261 Total income 26,302 34,112 44,423 54,280 Total tax paid -773 -745 -1,102 -1,469 Raw material expenses -13,114 -17,096 -22,860 -28,333 Other operating activities 134 944 1,000 1,003 Employee expenses -2,868 -3,234 -4,271 -5,309 Cash flow from operating activities 210 3,973 5,171 6,695 Other Operating expenses -8,043 -8,135 -9,830 -11,325 Capital expenditure -1,953 -4,106 -3,456 -2,999 EBITDA 2,277 5,646 7,462 9,313 Chg in investments 1,401 0 0 0 Growth, % 13 148 32 25 Other investing activities 182 914 1,104 1,170 Margin, % 8.7 16.6 16.8 17.2 Cash flow from investing activities -370 -3,192 -2,352 -1,829 Depreciation -517 -2,590 -3,207 -4,001 Free cash flow (ex-Lease liability) -1,743 -2,654 -1,697 -594 EBIT 1,760 3,055 4,255 5,312 Equity raised/(repaid) 0 9,513 0 0 Growth, % 13 74 39 25 Debt raised/(repaid) 1,061 -500 -500 -500 Margin, % 6.7 9.0 9.6 9.8 Dividend (incl. tax) -459 -640 -768 -853 Interest paid -368 -1,876 -2,052 -2,061 Other financing activities -227 -3,022 -3,913 -4,792 Other Non-Operating Income 408 914 1,104 1,170 Cash flow from financing activities 375 5,352 -5,181 -6,145 Non-recurring Items 0 0 0 0 Net chg in cash 214 6,132 -2,362 -1,279 Pre-tax profit 1,801 2,093 3,307 4,421 Tax provided 736 745 1,102 1,469 Valuation Ratios Profit after tax 1,065 1,348 2,205 2,952 FY19 FY20e FY21e FY22e Others (Minorities, Associates) -95 -18 52 112 Per Share data Net Profit 970 1,330 2,256 3,064 EPS (INR) 2.9 3.7 6.3 8.6 Growth, % 12 37 70 36 Growth, % 11.5 28.3 69.6 35.8 Net Profit (adjusted) 970 1,330 2,256 3,064 Book NAV/share (INR) 49.5 64.5 68.7 74.9 Unadj. shares (m) 332 355 355 355 FDEPS (INR) 2.9 3.7 6.3 8.6 CEPS (INR) 4.5 11.0 15.4 19.9 Balance Sheet CFPS (INR) (5.2) (0.4) 4.8 10.4 Y/E Mar, Rs mn FY19 FY20e FY21e FY22e DPS (INR) 1.3 1.5 1.8 2.0 Cash & bank 542 6,675 4,313 3,034 Return ratios Debtors 165 231 301 368 Return on assets (%) 9.9 9.6 11.4 12.3 Inventory 4,970 6,459 8,428 10,310 Return on equity (%) 6.0 6.8 9.5 12.0 Loans & advances 1,935 2,032 2,133 2,240 Return on capital employed (%) 7.7 8.7 9.2 9.3 Other current assets 710 795 891 1,025 Turnover ratios Total current assets 8,323 16,191 16,066 16,977 Asset turnover (x) 1.4 0.8 0.9 0.9 Investments 8,828 8,828 8,828 8,828 Sales/Total assets (x) 1.0 0.6 0.7 0.8 Gross fixed assets 9,379 35,666 45,607 54,993 Sales/Net FA (x) 3.6 1.1 1.2 1.3 Less: Depreciation -2,757 -5,347 -8,554 -12,555 Working capital/Sales (x) 5.3 5.3 5.3 5.3 Add: Capital WIP 872 872 872 872 Receivable days 2.3 2.5 2.5 2.5 Net fixed assets 7,494 31,191 37,924 43,309 Inventory days 69.0 69.1 69.3 69.3 Non-current assets 943 1,037 1,141 1,278 Payable days 34.0 35.0 35.0 35.0 Total assets 25,588 57,248 63,959 70,392 Working capital days 66.2 60.8 56.8 55.0 Liquidity ratios Current liabilities 3,743 4,653 5,742 6,796 Current ratio (x) 2.3 3.5 2.9 2.6 Provisions 212 223 234 246 Quick ratio (x) 1.1 2.2 1.5 1.1 Total current liabilities 3,955 4,876 5,976 7,042 Interest cover (x) 0.2 0.6 0.5 0.4 Total Debt 4,941 29,205 33,328 36,484 Dividend cover (x) 2.2 2.5 3.5 4.3 Deferred Tax Liabilities 255 255 255 255 Total debt/Equity (%) 0.3 1.3 1.4 1.4 Total liabilities 9,152 34,336 39,559 43,781 Net debt/Equity (%) 0.2 0.9 1.1 1.2 Paid-up capital 332 355 355 355 Valuation Reserves & surplus 16,133 22,585 24,074 26,285 PER (x) 117.3 122.9 72.5 53.4 Shareholders’ equity 16,465 22,941 24,429 26,640 PEG (x) - y-o-y growth 40.2 32.8 11.4 6.2 Minority Interest -29 -29 -29 -29 Price/Book (x) 6.9 7.1 6.7 6.1 Total equity & liabilities 25,588 57,248 63,959 70,392 Yield (%) 0.4 0.3 0.4 0.4 EV/Net sales (x) 4.4 5.4 4.3 3.6 Source: Company, PhillipCapital India Research Estimates EV/EBITDA (x) 51.1 32.6 25.6 21.0 EV/EBIT (x) 66.1 60.3 44.8 36.8 EV/EBIDTAR (x) 21.3 18.0 14.0 11.4
Page | 139 | PHILLIPCAPITAL INDIA RESEARCH INSTITUTIONAL EQUITY RESEARCH
V-Mart Retail (VMART IN)
Play on rural India
INDIA | RETAIL | Initiating Coverage 11 September 2019
Value-retail chain, V-Mart, is well-poised to capture the opportunity of a shift to organised Neutral retail in tier-3 and tier-4 cities with aggressive store openings and a first-mover advantage. CMP RS 2145 While V-Mart has built a successful and highly profitable business model in mass value- TARGET RS 1905 (-11%) fashion retail, we believe increasing competitive intensity would mute margin expansion, even as its return ratios remain flat over the next few years. Current valuations are rich, COMPANY DATA leaving little room for disappointment. We initiate coverage with a Neutral rating on the O/S SHARES (MN) : 18 stock with a target of Rs1,905. MARKET CAP (RSBN) : 36 MARKET CAP (USDBN) : 0.5 V-Mart will aggressively expand stores from FY20 52 - WK HI/LO (RS) : 3295 / 1698 It will follow the ‘cluster’ approach. For FY20/21, we have modelled 50/55 new stores with LIQUIDITY 3M (USDMN) : 0.4 PAR VALUE (RS) : 10 an average store size of 8,400 sq. ft. Tier-3 and 4 cities offer much better financial viability, because they have high demand and an under-serviced appetite for quality products, which SHARE HOLDING PATTERN, % is why the company has been inclined to open more new stores in these cities over the last Jun 19 Mar 19 Dec 18 few years. In FY19, revenue per sq. ft. in tier-3 cities was Rs 10,140 while it was Rs 10,130 for PROMOTERS : 52.5 53.0 54.0 metros and tier-1 cities. We expect 20% CAGR in total area over FY19-22 to touch 3.2mn sq. FII / NRI : 31.1 30.9 30.0 ft.; basically, V-Mart will add 1.4mn sq. ft. in these three years. FI / MF : 5.7 5.6 4.7 NON PRO : 5.4 5.5 6.3 PUBLIC & OTHERS : 5.3 5.0 5.1 Capture tier-2 and tier-3 opportunity Tier 2 and 3 markets provide huge demand opportunity, based on their growing and young PRICE PERFORMANCE, % population with a high propensity to spend, increasing affordability with easy access to 1MTH 3MTH 1YR ABS 15.9 -7.3 -23.0 credit, and higher consumer awareness because of increasing internet penetration. While REL TO BSE 17.1 -1.1 -19.8 there are more than 700+ districts in the country with 4,000 cities and towns, only 500+ cities have any form of organised retail. V-Mart is trying to bridge this demand-supply gap in PRICE VS. SENSEX tier-2 and 3 cities and match the aspiration levels to the price point of these customers. 740
640 Competition emerging in mass value fashion 540 Given vast opportunity in mass value fashion retail over the past few years, this segment has 440 seen increasing competitive intensity. Our visits to some cities suggest that there are more 340 than 2-3 players in each market offering similar services. Not only regional players, national players are also aggressively targeting these markets to gain market share and get the first- 240 mover advantage. Companies such as Nysaa Retail, Baazar Retail, Baazar Style Retail, and 140 Citykart Retail have received funding in the last 18 months, which has resulted in aggressive 40 Apr/16 Apr/17 Apr/18 Apr/19 store openings, not only in explored cities, but also in virgin markets. V-Mart BSE Sensex
Limited levers to grow operating margins Source: PhillipCapital India Research Because of increasing competitive intensity, we expect rent expenses to increase steadily to KEY FINANCIALS 4.9% of sales in FY22 (ex-IndAs 116) for V-Mart, while its employee costs will grow to 9.3% Rs mn FY19 FY20E FY21E from 8% in FY19. As a result, operating margins will fall 38bps to 8.9% (ex-IndAS 116) and Net Sales 14,337 17,170 20,832 return ratios will decline marginally with RoE at 17% in FY19-22 and ROCE declining slightly EBIDTA 1,329 2,220 2,711 more to 11.6% in FY22 from 18.5% in FY19, based on change in accounting. Net Profit 714 624 793 EPS, Rs 39.4 34.4 43.7 Valuation and outlook PER, x 62.9 62.4 49.0 While we like V-Mart’s business model and believe in the opportunity in mass value fashion EV/EBIDTA, x 33.3 19.3 16.0 in tier-3 and 4 cities, increasing competitive intensity could impact footfalls and SSSG in the P/BV, x 11.0 8.3 7.2 medium term. We don’t see any levers for operating-margin expansion in the near term, ROE, % 18.9 14.2 15.7 which would mean muted return ratios. The current stock price captures all the upsides and Debt/Equity (%) 0.0 1.0 1.0 leaves little room for disappointment. We value the company at 9.5x September FY21 Source: PhillipCapital India Research Est.
EV/EBIDTAR to arrive at a target of Rs 1,905. Initiate coverage on the stock with a Neutral Ankit Kedia, Research Analyst rating. Key risks: (1) Increasing competitive intensity; (2) slowdown in rural spending. (+ 9122 6246 4122) [email protected]
Page | 140 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
V-MART INITIATING COVERAGE
Investment Rationale
Capture the tier-2 and tier-3 opportunity V-Mart is trying to bridge the demand-supply gap in tier-2 and tier-3 cities, whose residents are exposed to the same media as tier-1 residents, including movies, entertainment channels on TV, and the internet. This makes them aware of the latest fashion and style trends, and since they have the same aspiration levels, it creates unmet demand because of lack of availability. Given their low affordability levels, companies such as V-Mart step in to match aspiration levels to the price points of these customers.
There are more than 700+ districts in the country with 4,000 cities and towns. Currently, only 500+ cities have any form of organized retail in India. Uttar Pradesh, Bihar, Orissa, Jharkhand, West Bengal have 190 districts while northeast India has 105. Together, these 295 districts are the catchment area for V-Mart to expand its presence, as it currently services only 3-5% of the market in these districts. As of now, V-Mart is present in only 174 cities while each of the districts and larger cities has potential for multiple stores in the medium to long term.
We believe towns with a population of 100,000-200,000 would enable V-Mart to service not only the residents of such a town, but also peripheral rural areas. In such cases, residents of surrounding villages usually come to such towns for shopping for things that aren’t available in the village or simply to avail of better quality or experience; these are the target markets for the company. Hence, the opportunity size for V-Mart is much larger than merely the population size of a target town or city.
Demand-supply gap in tier-2 and tier-3 cities
Demand scenario
Growing Growing Easy access Consumer consumerism affordability to credit awareness
Increasing Increased Growing youth Incresing internet percentage of penetration of population penetration working women plastic money
Advertising and High propensity High dispossable sales promotion to spend income strategies
Govt. schemes, Trend especially in rural consciousness areas among the youth
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V-MART INITIATING COVERAGE
Supply scenario
Limited product Lack of specialized Limited number of offerings due to Power shopping Lack of sufficient formats; eg., organised retailers supply-chain experience production electronics, furniture bottlenecks information. Lack of facilities viz. No price display, bar AC stores, coding. parking, trial No information on rooms, etc. schemes and discounts
Source: Company, PhillipCapital India Research
Rural customers behave differently from their urban counterparts We believe rural and urban customers behave quite differently because of geography, disposable income, education, culture, aspirations, and basic needs. Additionally, customers’ behaviour and market dynamics are not homogenous across the country and companies need to understand local trends to offer products that fulfil customers’ needs.
Spending pattern of consumers in Maharashtra Kolhapur Amaravati
60
50
40
30
20
10 % spend of the household the of spend % 0
Source: IIPA report on buying behaviour of rural consumer in India, January 2016
Spending pattern of consumers in Bihar Aara Sitamarhi
50
40
30
20
10 % spend of the household the of spend % 0
Source: IIPA report on buying behaviour of rural consumer in India, January 2016
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V-MART INITIATING COVERAGE
Extent of influence of city-based family on village/small town relatives in terms of fashion Bihar Maharashtra Response Aara Sitamarhi Kolhapur Amaravati Population (Lakh) 2.6 1.1 5.5 6.5 Large extent 82.5 50.7 69.7 65 Some extent 12.3 18.1 19.4 19.4 Not at all 5.2 31.2 10.9 15.6 Source: IIPA report on buying behaviour of rural consumer in India, January 2016
Aggressive store expansion from FY20 We believe that V-Mart will aggressively expand its store network from FY20, following the cluster approach. For FY20/21, we have modelled 50/55 new stores with an average store size of 8,400 sq. ft. The management’s strategy to follow a ‘cluster-based’ approach (new stores within a range of 100-150kms) is to its advantage as: (1) this enhances brand visibility in the district and efficient implementation of marketing activities, (2) it helps the company to understand customer preferences as the culture varies every 100kms, which leads to different preferences, tastes, and physical attributes, (3) it leads to cost-efficient logistics and helps in inter-store stock movement, and (4) it provides for better utilization of human resources.
Management follows a cautious approach to open new store. Here is how: 1) It opens stores only in tier-2, 3, and 4 locations. 2) Opens stores only in pockets where it can breakeven by the end of the first quarter of its launch and be net-positive starting the first year itself. 3) Open only as many stores as it can fund with internal accruals.
Management maintains that it will consolidate its leadership position in Uttar Pradesh and Bihar, as it would open incremental 50%+ stores in these states and incrementally focus on east India in FY20. V-Mart focuses on three things to decide the location of the stores – high aspiration for fashion, low affordability, and high population density. These attributes are there in UP, Bihar, Jharkhand, Orissa, and West Bengal – so bulk of the company’s stores are in these states.
V-Mart has had only 18 store closures (out of its 214 stores opened so far) from its To open half its incremental stores in inception, which shows the management’s skill in finding locations with long-term Uttar Pradesh and Bihar potential. Typically, the company closes a store if its revenue per store is consistently less than Rs 60mn per year. We believe that with aggressive expansion, store closures could marginally increase, thus impacting profitability.
Aggressive store expansion to aid revenue growth (nos) Low store closures (nos) 400 Total Stores Stores Addition (rhs) 70 4
350 60 300 3 50 250 40 200 2 30 150 20 100 1
50 10
0 0 0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
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V-MART INITIATING COVERAGE
Over last few years, V-Mart is increasingly opening new stores in tier-3 and 4 cities as they offer much better financial viability based on demand and under-serviced appetite for quality products. Over FY12-19, the CAGR of stores in tier-3 cities has been the highest at 19% against other cities. In the past two years, the management has become aggressive in opening stores in tier-4 cities too; we believe the competitive intensity in these cities is lower and it offers V-Mart a first-mover advantage.
Our interaction with the management suggests that the RoI in smaller (tier-3/4 cities) is higher than in larger (tier-1/2) ones, given higher sales per sq. ft. in the former. In FY19, revenue per sq. ft. in tier-3 cities was Rs 10,140 vs. Rs 10,130 for metro and tier-1 cities. V-Mart has decided to expand in smaller cities over the next few years. It does not open stores if it calculates that the sales per sq. ft. would be below Rs 7,200. We expect its SSSG to grow by 2%/6% for FY20/21 against a mere 3.7% growth in FY19.
Overall, we expect the total area CAGR of 20% to 3.2mn sq. ft. over FY19-22; basically, it will add 1.4mn sq. ft. in these three years. We expect average store size to remain c.8,400 sq. ft.
Stores across types of cities FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 CAGR FY12-19 Metro and Tier-I 11 13 13 18 18 19 22 34 17.5% Tier II 15 20 29 35 36 40 41 50 18.8% Tier III 29 36 47 55 69 79 89 99 19.2% Tier IV 0 0 0 0 0 3 19 31 NM No of stores 55 69 89 108 123 141 171 214 21.4% Source: Company, PhillipCapital India Research
Focus on higher area addition (mn sq. ft.) Avg store size to remain in check at c.8,400 sq. ft. Area Area Addition (rhs) 8600 3.50 0.60 8500 3.00 0.50 8400 2.50 0.40 8300 2.00 0.30 8200 1.50 0.20 8100 1.00 0.50 0.10 8000 0.00 0.00 7900 7800 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21EFY22E
Source: Company, PhillipCapital India Research
Revenue per sq. ft. across types of cities (Rs) SSSG to remain in the c.6% range over the medium term -Metro and Tier I -Tier II -Tier III -Tier IV 20% 11000
10000 15%
9000 10%
8000 5% 7000 0% 6000
-5% 5000 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
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Higher share of apparel helps improve margins V-Mart’s revenue share of apparel has steadily increased to 80% in FY19 from 64% in Increasing revenue share of apparel FY12. General merchandise such as footwear, bags, fashion jewellery, and home- (higher margin than kirana) will push up ware account for 14% of revenues while kirana accounts for the remaining 7%. V- overall margins Mart currently has 38 composite stores that sell apparel and kirana products; of these, 17 are in Uttar Pradesh. Incrementally, the management is not keen on opening composite stores (it opened only 1 in FY19). Hence, we believe the share of apparel is likely to steadily increase.
V-Mart intends to start marketing its products on its own e-commerce platform, which would provide it with an additional channel of reaching out to its customers. We believe that the growing internet penetration in tier-2 and 3 cities has increased the potential of growth in online shopping. We expect the company to leverage its existing back-end logistics infrastructure and sourcing capabilities to offer omni- channel services without substantial additional investment. It has already launched pilot testing and the service could start in Q2FY20, which should increase the revenue share of apparel in its portfolio.
Increasing share of apparel augurs well for margins Apparel Non-Apparel Kirana 100%
80%
60%
40%
20%
0% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Typically the company has two types of customers: 1) Quality-conscious: These customers have small cupboards for storing apparel and tend to buy limited quantities as a result. Usually they need good-quality apparel that they can wash and wear regularly. 2) Price conscious: Young customers need a high fashion quotient at affordable price points, but do not have too much money to spend.
Usually, customers enter the store with a fixed budget in mind. So, it would be difficult for V-Mart to increase the average selling price (ASP) of its apparel. In fact, over the last three years (FY16-19), the ASP for its fashion apparel has declined by 1% while overall ASP has increased only marginally by 1.3%. Average ticket size has consistently increased to Rs 754, up 4.4% over FY16-19.
Our channel checks suggest that V-Mart is the strongest in men’s apparel followed by kids. It is weak in women’s wear, particularly ethnic and fusion wear. Also, it has very little presence in the ath-leisure category (footwear and apparel), which is the topmost growth category for the industry.
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Declining ASP for apparel and overall business(Rs) Average ticket size per customer (Rs)
400 ASP - Fashion ASP - Total 800
350 700
300 600
250 500
200 400
150 300
100 200
50 100
0 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Focus on private label V-Mart is slowly increasing its focus on its private-label apparel collection. It has more than seven private label brands currently, and this segment accounted for 67% of its revenues in FY19 vs. 20% in FY17. Our interaction with the management suggests that it intends to increase this share to 75-80% soon. We believe that higher share of private labels helps V-Mart differentiate against competition. While this collection helps to increase margins, management plans to pass on benefits to customers and increase customer stickiness over the medium term. To become highly successful, the management needs to develop capabilities in understanding fabric and designs; it currently depends on third-party vendors.
Currently ‘FLICK’ is its most successful private-label brand and it has a dedicated area with branding within the stores. FLICK’s pricing is currently 10-12% lower than Sparky, a third-party brand that V-Mart also markets in the same store.
Focus on private label to differentiate against competition 80% 70% 60% 50% 40% 30% 20% 10% 0% FY17 FY18 FY19
Source: Company, PhillipCapital India Research
Private label brands – positioning and price points Brands Description Average prices range J- white Formal wear for men Shirts( Rs299 to Rs 599),Trousers( Rs 499 to Rs 799) Flick Casual menswear T-shirts ( Rs199 to Rs 699),Pants( Rs 399 to Rs 599), Jeans ( Rs 399 to Rs 499) Desi Mix Ethnic wear for women Kurtis( Rs 299 to Rs 599),Leggings( Rs 199) Charcoal Casualwear for women Tops( Rs 299 to Rs 599) , T- Shirts ( Rs 299 to Rs 599) Twizt Casual wear for boys and girls (2 to 15 year olds) Tops and T- shirts ( Rs 300 to Rs 600), Shorts ( Rs 199 to Rs 399) Kidistan Casual wear for boys and girls ( 1 to 5 year olds) T- shirts ( Rs149 to Rs 299),Jeans( Rs 399 to Rs 599), Princess Casual wear for girls ( 14 to 15 year olds) Tops ( Rs 300 to Rs 800), Jeans( Rs 499 to Rs 799) Source: Company, PhillipCapital India Research
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V-Mart apparel is 15-20% cheaper than its national peers. We have compared pricing with Zudio (Trent’s mass value fashion brand) and Easy Buy (Landmark Group’s similar brand).
Price comparison of V-Mart’s apparel to other national value fashion retailers MEN WOMEN KIDS Entry Price Shirts T-shirts Jeans Formal Trousers Shorts Kurti Tops/T-shirts Pants Leggings T- shirts Jeans Shirts V-Mart Rs249 Rs79 Rs399 Rs399 Rs 299 Rs199 Rs129 Rs199 Rs 199 Rs99 Rs199 Rs99 Easy Buy Rs 499 Rs 199 Rs699 Rs 399 Rs 399 Rs 399 Rs 249 Rs 699 NA Rs 199 Rs 549 Rs 399 Zudio Rs 299 Rs 179 Rs 599 Rs 699 Rs 249 Rs 299 Rs 149 Rs 299 Rs 249 Rs 129 Rs 299 Rs 199 Maximum prices Shirts T-shirts Jeans Formal Trousers Shorts Kurti Tops/T-shirts Pants Leggings T- shirts Jeans Shirts V-mart Rs899 Rs899 Rs2599 Rs2299 Rs645 Rs 1200 Rs 599 Rs 799 Rs 699 Rs1199 Rs1199 Rs 799 Easy Buy Rs 749 Rs 399 Rs 999 Rs 799 Rs 649 Rs 899 Rs 499 Rs 799 NA Rs 349 Rs 549 Rs 499 Zudio Rs 799 Rs 799 Rs 999 Rs 999 Rs 599 Rs 899 Rs 599 Rs 899 Rs 799 Rs 499 Rs 599 Rs 399 Source: Company, PhillipCapital India Research
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Aggressive competition emerging in mass value fashion With the vast opportunity that mass value fashion retail offers, many companies have flocked to cater to its demands, increasing competitive intensity in this segment. Our visit to some cities suggests that there are more than 2-3 players in each market offering similar services to customers. Additionally, national players are also aggressively targeting these markets to gain market share and have the first-mover advantage. Companies such as Nysaa Retail, Baazar Retail, Baazar Style Retail, and Citykart Retail have received funding in the last 18 months, which has resulted in aggressive store openings – not only in serviced cities but also virgin markets. A look at the FY18 financials of some of these companies suggests that many of them have revenues of more than Rs 4bn with attractive margins and return ratios.
Value fashion competitor analysis Company Name Baazar Retail Citylife Retail Metro Retail Baazar Style Citykart Nysaa Retail V-bazaar V2 Retail V-Mart Retail Retail Retail Retail Store Name Baazar City Life M Bazaar Style Bazaar City Kart 1India Family V-Bazaar V2 Retail V-Mart Kolkata Mart
Since 2002 2006 2009 2013 2015 2013 2016 2011 2003 Promoter Manoj Rajesh Baid, Sanjay Saraf Rohit Kedia Sudhansu JP Shukla, Hemant Ram Chandra Lalit Agarwal Khemka Manish Agarwal Ravinder Agarwal, Agarwal Kakrani, Singh Rahul Ritesh Kedia Jhunjhunwala No of Stores 70 121 65 35 41 90 50 77 220 Top 3 states % of 43% West 30% UP, 37% West 45% Bihar, 56% UP, 45% UP, 70% UP, 25% Bihar, 40% UP, stores Bengal, 25% 21% West Bengal, 20% 20% Odisha, 37% Bihar, 26% Bihar, 30% Bihar 25% UP, 10% 20% Bihar, Odisha, Bengal 13% Bihar, 15% 5% Assam 17% Jharkhand & 8% Jharkhand 12% Bihar Bihar 13% UP & Jharkhand Jharkhand Odisha Odisha State presence 7 11 7 6 4 10 2 17 16 City presence 55+ 100+ 50+ 30+ 34 80 43 71 175 Private labels 12 brands No No No 45 brands Yes No Yes Yes Loyalty program No Yes No Yes Yes No Yes No Yes Avg Size/store (sq.ft.) 8-10K ~7-9K 7-10k 9K onwards 8-10K 8-10K 7-8K 10-12K 7-9K Apparel & Yes Yes Yes Yes Yes Yes Yes Yes Yes Accessories Kirana / FMCG No Yes No Yes No Yes No Yes Yes Marquee brand NA Shruti Hasan, Jacqueline NA NA SoumyaTondo NA NA AyushmanKh ambassador Rajkumar Rao Fernandez n urana, BhumikaPedn ekar Instagram Followers 306 1151 822 2476 1434 97 102 62 17100 Facebook Followers 120,350 34,300 158,000 82,371 14,688 48,960 5,196 13,037 245,000 FY18 Financials (Rs mn) Revenue 5,036 4,889 4,329 3,074 1,910 2,309 1,203 5,594 12,224 EBIDTA 521 488 352 246.9 127 148 97 538 1328 EBIDTA Margin (%) 10.30% 10.00% 8.10% 8.00% 6.60% 6.40% 8.00% 9.60% 10.90% PAT 340 202 177 94.9 81 64 54 311 777 Cash Conversion Day 31 62 55 NA 2 4 -5 39 42 Inventory Days 71 110 78 NA 85 118 164 104 92 RoE 40.3 25.4 28.9 NA 44.1 10.5 34.2 11.3 25.2 RoCE 37.4 16.1 20.8 NA 28.2 14.2 30.8 22.6 23.3 Source: PhillipCapital India Research
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Increasing PE funding to new players will lead to aggressive expansion Company Name Date Buyer Amount Raised (USD mn) Nysaa Retail Dec'17 Carpediem Capital Partners Fund I, Beeline ImpexPvt. Ltd., Harinder Singh, Aashish Vinod Pitale 6.50 Baazar Style Retail Feb'18 Intensive Fiscal Services Pvt. Ltd., RARE Enterprises, Rakesh Jhunjhunwala, and others 4.66 Baazar Retail Nov'18 NR Group, o3 Capital Global Advisory Pvt. Ltd., Siguler Guff India Advisors Pvt. Ltd. 50.00 Baazar Style Retail Jan'19 Haldiram Group, Rakesh Jhunjhunwala, Dhirander Kumar Surana 7.21 Citykart Retail Jan'19 India SME Investments LLP, IDFC Private Equity Fund IV 14.15 Source: Company, PhillipCapital India Research
We analysed cities with populations of 0.2-1mn where V-Mart is present. Out of 25 such cities, big regional and national competitors are present in more than 22. We observed that competition is opening stores in cities where V-Mart is not present in order to have the first-mover advantage, which would make it tough for V-Mart to penetrate the market at a later stage.
Increasing competition with regional and national players in key states/cities with 0.2-1mn population City State Population Regional players (no. of stores) National players (no. of stores) FIROZABAD Uttar Pradesh 604214 V2 Retail(1),V-Mart(1) GORAKHPUR Uttar Pradesh 673000 V2 Retail(2),V-Mart(4),CityLife(1),M Baazar(1),V- Fbb(2),Reliance Trends(3),Max Fashion(1) Bazaar(1),Bazar India(2),1 India Family Mart(2),Citykart(1) JAUNPUR Uttar Pradesh 180000 V2 Retail(1),V-Mart(2),Baazar Kolkata(1),1 India Family Reliance Trends(1) Mart(4) BAREILLY Uttar Pradesh 903668 V-Mart(2),Bazar India(1),1 India Family Mart(1) Fbb(1),Reliance Trends(2),Max Fashion(1) JHANSI Uttar Pradesh 507000 V-Mart(1),CityLife(1),Citykart(1) Reliance Trends(1) MIRZAPUR Uttar Pradesh 234000 CityLife(1),Citykart(1),V- Bazaar(1) BHAGALPUR Bihar 400146 V2 Retail(1),V-Mart(2),CityLife(1),M Baazar(1),Style Fbb(1),Reliance Trends(1) Baazar(1),Citykart(1),Bazar India(1) MUZAFFARPUR Bihar 354462 V-Mart(1),Baazar Kolkata(1),CityLife(1),M Baazar(1),Style Fbb(1),Reliance Trends(1),Max Fashion(1) Baazar(1),Citykart(1),V-Bazaar(1),1 India Family Mart(1) DARBHANGA Bihar 267000 V2 Retail(1),V-Mart(1),CityLife(1),Citykart(2) Reliance Trends(1) SILCHAR Assam 172830 V2 Retail(1),CityLife(1),Baazar Kolkata(1),Bazar India Fbb(1),Reliance Trends(2) (1),Citykart(1),M Baazar (1) GUWAHATI Assam 957000 V2 Retail(2),V-Mart(1),CityLife(1),Bazar India(1) Fbb(3),Reliance Trends(4) BERHAMPORE Odisha 656000 M Baazar(1),Style Baazar(1) Reliance Trends(1) BHUBNESHWAR Odisha 838000 V2 Retail(1),City Style(1),Bazar India(1),M Baazar(1) Fbb(5),Reliance Trends(4) CUTTACK Odisha 606000 Baazar Kolkata(1),V2 Retail(1),City Style(1),CityLife(2),M Fbb(2),Reliance Trends(3) Baazar(1),Bazar India(2) SAMBALPUR Odisha 636000 Bazar India(1),Style Baazar(1),M Baazar(1),CityLife(1),Baazar Fbb(1),Reliance Trends(1) Kolkata(1) SILIGURI West Bengal 705579 Baazar Kolkata(1),M Baazar(1) Fbb(2),Reliance Trends(3),Max Fashion(2) REWA Madhya Pradesh 235000 V2 Retail(1),Bazar India(1) Reliance Trends(1) DEOGHAR Jharkhand 203000 Bazar India(1),Baazar Kolkata(1),V-Mart(1),V2 Retail(1) Fbb(1) AGARTALA Tripura 438000 V2 Retail(1),CityLife(1),M Baazar(1),Style Baazar(1),Bazar Fbb(1),Reliance Trends(1) India(1) HALDWANI Uttarakhand 356000 V2 Retail(1),V-Mart(1),Bazar India(1) Fbb(1), Reliance Trends(1),Max Fashion (1) DEHRADHUN Uttarakhand 578000 V-Mart(3),1 India Family Mart(1) Fbb (2),Reliance Trends(3) JAMMU Jammu and Kashmir 504000 V2 Retail(1),V-Mart(6),Bazar India(1) Fbb(1) Source: PhillipCapital India Research Note: FBB is present through Big Bazaar in most of the cities
Incrementally, competitors are becoming aggressive and following V-Mart’s footsteps – to drive footfalls, some of them have also signed on brand ambassadors, which is negative for V-Mart, as it could impact its incremental customer footfalls. Some of its competitors offer heavy discounts to clear unsold inventory and drive customer acquisition, which V-Mart must also do, hurting its gross margins – this was visible in Q4FY19.
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Competitors using brands ambassadors to drive footfalls
Source: Company, PhillipCapital India Research
Competitors offer high discounts to drive footfalls and clear inventory
Source: Company, PhillipCapital India Research
Competition to impact rental, employee cost As majority of V-Mart’s stores are in tier 2, 3, and 4 markets, it enjoys low employee costs. However, with increasing competition and because it is a leader in the mass value fashion retail space, it has become a poaching ground for competitors. Also, it currently pays only minimum wages to majority of its store employees, so it is possible that to curtail attrition, employee cost would steadily increase.
Currently the lease rentals for V-Mart are the lowest in the industry at 4.7% of revenues. We expect these to increase steadily to 4.9% by FY22 (ex-IndAs 116) as the company expands to cities where competitive intensity is strong, leading to higher rentals. In tier-4 cities, V-Mart needs to pay even higher costs, given that these cities have limited quality real estate available; this impacts margin expansion.
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Employee cost and rentals (ex-IndAs 116) to trend upwards Rent % of sales (rhs) Employee Cost % of Sales (rhs) 1,200 5.2 2,500 10 1,000 5.0 2,000 9 4.8
800
4.6 1,500 8
600 (%)
(Rs mn)(Rs 4.4 (%)
(Rs mn)(Rs 1,000 7 400 4.2 200 500 6 4.0
0 3.8
0 5
FY16 FY13 FY14 FY15 FY17 FY18 FY19
FY20E FY21E
FY16 FY14 FY15 FY17 FY18 FY19
FY21E FY22E FY20E
Source: Company, PhillipCapital India Research
V-Mart has lowest rental expenses as % to sales among listed peers 16% 14% 12% 10% 8% 6% 4% 2% 0% Vmart V2 Retail Future Shoppers Stop Trent ABFRL Flifestyle
Source: Company, PhillipCapital India Research
Customer footfalls under pressure Because of increased competitive intensity, we have seen average footfall per store declining by 6.7% in FY19, while absolute footfall increased by 15% to 35mn. Footfall conversion rate declined to 59% in FY19 from 66% in FY14 while average footfall conversion per store declined by 4% in FY19. Over FY15-19, average footfall per-store CAGR was 1.5% while average footfall converted per-store fell by 2.4%. Our interaction with the management suggests that parking and restrooms are two critical factors that drive footfalls in stores.
Customer footfalls and conversions trend Effective Footfall (mn) Oveall Footfall (mn) Conversion rate (rhs) 40 72% 35 68% 30 64% 25 20 60% 15 56% 10 52% 5 0 48% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, PhillipCapital India Research
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Financials
New stores and SSSG to spur revenue growth We expect total revenue CAGR of 21% over FY19-22 to Rs 25.1bn on 50/55 new stores in FY20/21, taking the total count to 379 by FY22. SSSG would be 2%/6% in FY20/21.
Revenue CAGR at 21% over FY19-22
30,000 Net Sales Growth (rhs) 60
25,000 50
20,000 40
15,000 30
(%) (Rs mn)(Rs 10,000 20
5,000 10
0 0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
Limited levers to increase operating margins Because of increasing competitive intensity, we expect rent expenses to increase steadily, from a low of 4.3% of sales in FY18 to 4.9% in FY22 – while employee costs would grow to 9.3% of sales in FY22 from 8% in FY19. Gross margins will increase marginally by 60bps over FY19-22, based on increasing share of private labels, reducing shrinkage, operating efficiencies, and scale. While management has guided for flat gross margins (as it plans to pass on the benefits from private label to customers), we believe some benefits would still be retained on increasing throughput and reduction in shrinkage. Operating margins will decline by 38bps to 8.9% in FY22 (ex-IndAs-116), which is why we have modelled a 19% CAGR in operating profit over FY19-22 to Rs 2.2bn. On a reported basis, operating profit CAGR would be 36% to touch Rs 3.3bn by FY22. PAT CAGR will be 12% over FY19-22 to touch Rs 1,019mn.
Operating margins to expand on Ind-AS116 PAT to be impacted due to IndAs-116 Operating profit Operating Margins (rhs) Adj Net Profit % Growth (rhs) 1,200 100 3,600 15
3,200 1,000 80 2,800 13 60
2,400 800
40
2,000 600
11 (%) (%)
1,600 mn)(Rs 20 (Rs mn)(Rs 400 1,200 0 800 9 200 (20) 400 0 7 0 (40) FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21EFY22E
Source: Company, PhillipCapital India Research
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Lean balance sheet to help generate steady cash flows Management has guided for 20-25% area addition per year and further refurbishment of c.20 stores per year. Typical capex for a V-Mart stores is Rs 1,300 per sq. ft., translating to a capex per store of Rs 11mn; renovation capex for FY20/21 will be Rs 80mn each year. Management is also focusing on opening a new warehouse in east India with a capex of Rs 500mn over FY20-21. IT/omni capex would be to the tune of Rs 50mn. Hence, we have modelled a capex of Rs 0.8bn for FY20 and Rs 1bn for FY21. Given its healthy working capital and debt-free status, we expect V-Mart to fund capex through internal accruals. It should generate an OCF of Rs 2.9bn over FY20-22, while free cash flow generation would be Rs 200mn over FY20-22. We expect inventory days to remain under check at 84 over the next two years. Inventory days have reduced steadily to 84 currently from 105 in FY13. Apparel inventory is c.88 days while non-apparel and kirana inventory is 65 days and 36 days respectively. Trade payable days have reduced and now stand at 38. Total cash-conversion cycle has reduced to 46 days currently from 55 days in FY14.
Working capital remains in check Consistent FCF generation Inventory Days Creditor Days Free Cash OCF 120 1400 100 1200
80 1000 60
800
40
20 600
(Rs mn)(Rs (Days) 0 400 -20 200 -40 0 -60 -80 (200) FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
We expect return ratios to remain stable on flat margins. RoE will stay in the 16-17% band in FY20-22 while ROCE will marginally decline to 11.6% in FY22 from 18.5% in FY19, based on the change in accounting to IndAs116. On 36% CAGR in operating profit, RoIC has corrected from a peak of 26% in FY18 to c.12% in FY22.
Return ratios remain muted D/E dented due to lease liability RoCE RoE RoIC Net D/E ex-lease liability (rhs) Net D/E (rhs) 30 1.0
25 0.8 0.6 20
0.4
(%) 15 0.2
10 0.0 -0.2 5 -0.4 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
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V-Mart has consistently paid dividends and we expect the pay-out ratio to be in the 6-7% range. Being debt-free, the company follows a conservative approach and relies on internal accruals to fund capex.
Healthy dividend pay-out
12 Dividend Payout (RHS) Dividend/share (Rs) (rhs) 3.5
10 3.0
2.5 8
2.0
6 (%) 1.5 4 1.0
2 0.5
0 0.0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Company, PhillipCapital India Research
DuPont analysis Particulars FY15 FY16 FY17 FY18 FY19 FY20E FY21E PAT/Sales (x) 0.05 0.03 0.04 0.06 0.05 0.04 0.04 Sales/Assets (x) 3.23 3.37 3.69 3.84 3.90 2.60 2.11 Assets/Equity (x) 1.19 1.11 1.09 1.03 0.97 1.51 1.95 RoE (%) 20.9 12.2 17.7 25.2 18.9 14.2 15.7 Source: Company, PhillipCapital India Research
Valuations and outlook While we like V-Mart’s business model and believe in the opportunity in mass value fashion in tier-3 and tier-4 cities, increasing competitive intensity could impact footfalls and SSSG in the medium term. We do not see any levers for operating margin expansion in the near term, which would mute return ratios. Also, the current stock price captures all the upside and leaves little room for disappointment. We value the company at 9.5x September FY21 EV/EBIDTAR (in line with the long-term average) and arrive at a target of Rs 1,905; initiate coverage with a Neutral rating.
PE chart EV/EBIDTA charts 2yr fwd P/E 2yr fwd EV/EBITDA 90 30 80 25 70 60 20 50 15 40 AVG 11.28 AVG 28.62 30 10 20 5 10
0 0
Jul-14 Jul-19
Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Jan-17
Jun-17
Oct-15
Apr-13 Apr-18
Sep-13 Feb-14 Sep-18 Feb-19
Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Dec-14 Dec-19
Aug-16
Nov-17
Mar-16 May-15
Source: Company, PhillipCapital India Research
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EV/Sales EV/EBIDTAR 2yr fwd EV/Sales 2yr fwd EV/EBITDA-R 3.5 30
3.0 25
2.5 20 2.0 15 1.5 AVG 1.3 10 AVG 9.3 1.0 5 0.5
0.0 0
Jul-14 Jul-19
Jul-14 Jul-19
Jan-17
Jun-17
Oct-15
Apr-13 Apr-18
Sep-13 Feb-14 Sep-18 Feb-19
Jan-17
Dec-14 Dec-19
Jun-17
Aug-16
Oct-15
Nov-17
Apr-13 Apr-18
Sep-13 Feb-14 Sep-18 Feb-19
Mar-16
Dec-14 Dec-19
Aug-16
May-15
Nov-17 Mar-16 May-15 Source: Company, PhillipCapital India Research
Key Risks Increasing competitive intensity Could see increasing competition, not only from local players but also from national ones, which will lead to lower gross margins on higher discounting, increasing employee and lease rentals, coupled with higher marketing costs. Further, footfalls could decline with increasing competition in the same location.
Changing customer preferences We believe that the company’s success depends upon its ability to forecast, anticipate, and respond to changing customer preferences and trends in a timely manner. Failure to understand prevailing trends or forecast changes could result in merchandise obsolescence, thereby increasing the dead stock and loss of brand image.
Slowdown in rural spending Any slowdown in rural spending will impact revenues, given that the bulk of its stores are in tier-3 and 4 locations. Weak monsoon can also hurt demand.
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Company Background Incorporated in 2002, V-Mart primarily operates in tier-2 and 3 cities, with a chain of “value retail” departmental stores offering apparels, general merchandise, and kirana – catering to the entire family. Based in New Delhi, the operations are spread across northern, western, and eastern parts of India. It is a “one-stop family shop”. The product range specifically caters to the ‘aspiring and ‘middle’ classes with an added focus on the demands of the youth and young families in these cities.
Store locations
Source: Company, PhillipCapital India Research
Company timeline
Source: Company, PhillipCapital India Research
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Management Team Samir Misra COO His role is a strategic consolidation of Marketing, Operations, Visual Merchandising, Retail Planning, Retail Human Resource, Projects and Business Development. He has 15 years of multi-faceted industry experience with some of the country’s leading retailers. Before V-Mart, he had been associated with the Aditya Birla Group for 8 years, with leadership roles with Pantaloons Fashion Retail & Madura Fashion & Lifestyle. He has led business roles with diversified organizations like Mc Donald’s, Marico & Future Group. Anand Agarwal CFO He is a core member of the leadership team, driving growth, strategic execution and corporate governance agenda in the company. He has more than 22 years of rich experience in strategic planning, finance, legal, treasury, fund raising, M&As, investor relations and board management. Before V-Mart, Anand has held leadership roles in companies like HT Media and Reebok, and has earlier worked with Ernst & Young. Rajan Sharma President – Sourcing & Rajan has over 25 years of proven experience in Sourcing, Merchandising, Buying, Product development Procurement and Sales, working with some of the leading retailers and fashion brands. Prior to joining V-Mart, Rajan worked with Vishal Mega Mart as VP – Apparels for over 8 years. He has acquired vast experience in Sourcing and Manufacturing for global brands like Limited Express, Lerner’s, Lane Bryant, Limited too, J.C. Penny, Walmart, Tommy Hilfiger, and DKNY. Snehal Shah Sr. VP – Operations & In his long stint at V-Mart almost since its inception, Snehal has been instrumental in building the retail Marketing presence of the company, and establishing key processes in New Store Operations (NSO), business development, and site selection, and marketing. He has over 18 years of experience across back andfront- end retail operations. Srinivasan VP - Planning and Supply Over the past 3 years at V-Mart, he has established the Planning and Allocation function, helping design Chain and implement a rule-based engine that fulfils stock replenishment and reordering requirements at the store level. He has over 17 years of professional experience spread over retail and manufacturing industries, consulting, and planning and managing operations. Before V-Mart, he was a consultant for many retail companies including brands and departmental stores. VenugopalKonchada VP – Store Operations 25+ years of experience in cross-functional retail operations and has strong focus on execution at the store level. Prior to joining V-Mart, he has worked in senior roles with companies like Avis, Cantabil, OCM, Givo and Vishal. Ramesh Agarwal VP – Supply Chain He has been associated with V-Mart since 2011, and is responsible for supply chain planning, warehouse Management & FMCG and logistics operations, and FMCG planning and buying. Prior to joining V-Mart, Ramesh played a key role in Vishal Mega Mart, where he led the development of over 200 FMCG/staples private labels, and also handled New Store Operations in V2 Retail Ltd. Syed Akhtar Head, Skill Development Syed is leading the Skills Development Initiative since he joined V-Mart in 2018 after having served in key Initiative strategic positions at NIS Sparta (Business Head), Bharti Comtel (National Head), Centum Learning (VP) & NIIT (Business Head/VP). Ranjan Kumar VP, Strategy and Corporate At V-Mart, Ranjan works closely with the leadership team to plan and execute strategic initiatives focused Communication on growth, operational excellence and corporate citizenship. He is also responsible for providing oversight and guidance on key stakeholder communication initiatives targeting investors, customers, and employees. Before joining V-Mart, he worked with companies like Religare, Axience Consulting, Ranbaxy, and Eli Lilly in P&L leadership roles. Anjali Goel AVP – Human Resources As Head, HR in V-Mart for the past 5 years, Anjali works closely with the stakeholders and the leadership team to design and implement HR strategy in line with the business strategy and the future work scenarios in the VUCA space. Before joining V-Mart, in 2013, Anjali worked with the DLF Group in a managerial capacity for 6 years. Source: Company, PhillipCapital India Research
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Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Y/E Mar, Rs mn FY19 FY20e FY21e FY22e Net sales 14,322 17,154 20,814 25,096 Pre-tax profit 993 945 1,202 1,544 Growth, % 17.3 19.8 21.3 20.6 Depreciation 268 890 1,091 1,340 Other income 16 17 18 20 Chg in working capital -270 -331 -452 -532 Total income 14,337 17,170 20,832 25,116 Total tax paid -332 -321 -409 -525 Raw material expenses -9,703 -11,579 -14,008 -16,839 Other operating activities 105 385 418 453 Employee expenses -1,257 -1,552 -1,918 -2,331 Cash flow from operating activities 763 1,567 1,850 2,280 Other Operating expenses -2,048 -1,820 -2,196 -2,609 Capital expenditure -407 -826 -992 -860 EBITDA 1,329 2,220 2,711 3,336 Chg in investments -338 0 0 0 Growth, % 0.1 67.0 22.1 23.1 Other investing activities 11 65 85 120 Margin, % 9.3 12.9 13.0 13.3 Cash flow from investing activities -734 -761 -907 -740 Depreciation -276 -890 -1,091 -1,340 Free cash flow (ex-Lease Liability) 357 -41 -77 317 EBIT 1,053 1,330 1,620 1,997 Equity raised/(repaid) 19 0 0 0 Growth, % -4.1 26.3 21.8 23.3 Debt raised/(repaid) -3 0 0 0 Margin, % 7.3 7.7 7.8 8.0 Dividend (incl. tax) -44 -44 -55 -65 Interest paid -16 -450 -503 -573 Other financing activities -16 -797 -950 -1,118 Other Non-Operating Income 59 65 85 120 Cash flow from financing activities -44 -841 -1,004 -1,184 Non-recurring Items -98 0 0 0 Net chg in cash -14 -35 -62 356 Pre-tax profit 998 945 1,202 1,544 Tax provided 382 321 409 525 Valuation Ratios Profit after tax 616 624 793 1,019 FY19 FY20e FY21e FY22e Others (Minorities, Associates) 0 0 0 0 Per Share data Net Profit 616 624 793 1,019 EPS (INR) 39.4 34.4 43.7 56.2 Growth, % -20.7 1.2 27.1 28.5 Growth, % (8.2) (12.7) 27.1 28.5 Net Profit (adjusted) 714 624 793 1,019 Book NAV/share (INR) 225.7 257.7 298.5 351.1 Unadj. shares (m) 18.1 18.1 18.1 18.1 FDEPS (INR) 39.4 34.4 43.7 56.2 CEPS (INR) 54.6 83.5 103.9 130.1 Balance Sheet CFPS (INR) 19.7 40.9 47.3 78.3 Y/E Mar, Rs mn FY19 FY20e FY21e FY22e DPS (INR) 1.7 2.0 2.5 3.0 Cash & bank 166 131 69 425 Return ratios Inventory 3,290 3,948 4,790 5,776 Return on assets (%) 11.1 7.8 8.3 9.0 Loans & advances 110 120 146 176 Return on equity (%) 18.9 14.2 15.7 17.3 Other current assets 252 264 277 291 Return on capital employed (%) 18.5 10.0 10.7 11.6 Total current assets 3,817 4,463 5,283 6,668 Turnover ratios Investments 607 607 607 607 Asset turnover (x) 4.4 2.0 2.1 2.3 Gross fixed assets 2,296 8,150 10,090 12,077 Sales/Total assets (x) 2.3 1.5 1.5 1.6 Less: Depreciation -641 -1,531 -2,621 -3,961 Sales/Net FA (x) 8.5 2.6 2.8 3.1 Add: Capital WIP 40 40 40 40 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Net fixed assets 1,695 6,660 7,509 8,156 Inventory days 84 84 84 84 Non-current assets 81 85 89 94 Payable days 38 38 38 38 Total assets 6,200 11,815 13,488 15,525 Working capital days 38 39 40 41 Liquidity ratios Current liabilities 2,056 2,393 2,807 3,289 Current ratio (x) 1.8 1.8 1.8 1.9 Provisions 169 186 205 225 Quick ratio (x) 0.3 0.2 0.2 0.3 Total current liabilities 2,225 2,579 3,012 3,515 Interest cover (x) 65.3 3.0 3.2 3.5 Total Debt 0 4,681 5,182 5,764 Dividend cover (x) 23.2 17.2 17.5 18.7 Deferred Tax Liabilities -118 -118 -118 -118 Total debt/Equity (%) 0.0 1.0 1.0 0.9 Total liabilities 2,107 7,142 8,077 9,160 Net debt/Equity (%) (0.2) 0.9 0.8 0.8 Paid-up capital 181 181 181 181 Valuation Reserves & surplus 3,911 4,491 5,230 6,183 PER (x) 62.9 62.4 49.0 38.2 Shareholders’ equity 4,093 4,673 5,411 6,365 PEG (x) - y-o-y growth 1.6 1.8 1.1 0.7 Total equity & liabilities 6,200 11,815 13,488 15,525 Price/Book (x) 11.0 8.3 7.2 6.1 Yield (%) 0.1 0.1 0.1 0.1 Source: Company, PhillipCapital India Research Estimates EV/Net sales (x) 3.1 2.5 2.1 1.7 EV/EBITDA (x) 33.3 19.3 16.0 13.1 EV/EBIT (x) 42.0 32.2 26.8 21.9 EV/EBIDTAR (x) 22.01 18.59 15.43 12.57
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Stock Price, Price Target and Rating History (ABFRL) 250
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0 J-17 A-17 S-17O-17N-17D-17D-17 J-18M-18M-18A-18M-18J-18 J-18 A-18 S-18O-18N-18D-18 J-19 F-19M-19A-19M-19J-19 J-19 A-19
Stock Price, Price Target and Rating History (FLFL) 600
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0 J-17 A-17 S-17O-17N-17D-17D-17 J-18M-18M-18A-18M-18J-18 J-18 A-18 S-18O-18N-18D-18 J-19 F-19M-19A-19M-19J-19 J-19 A-19
Stock Price, Price Target and Rating History (Shoppers Stop) 700
600
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0 J-17 A-17 S-17O-17O-17N-17D-17 J-18 F-18M-18A-18M-18J-18 J-18 A-18 S-18O-18N-18D-18 J-19 F-19M-19A-19M-19J-19 J-19 A-19
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Stock Price, Price Target and Rating History (Trent) 500
450
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0 J-17 A-17 S-17O-17N-17D-17D-17 J-18M-18M-18A-18M-18J-18 J-18 A-18 S-18O-18N-18D-18 J-19 F-19M-19A-19M-19J-19 J-19 A-19
Stock Price, Price Target and Rating History (V-Mart) 3500
3000
2500
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0 J-17 A-17 S-17O-17N-17D-17D-17 J-18M-18M-18A-18M-18J-18 J-18 A-18 S-18O-18N-18D-18 J-19 F-19M-19A-19M-19J-19 J-19 A-19
Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15% SELL <= -15% Target price is less than or equal to -15%.
Disclosures and Disclaimers
PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.
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This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:
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IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report is a product of PhillipCapital (India) Pvt. Ltd. which is the employer of the research analyst(s) who has prepared the research report. PhillipCapital (India) Pvt Ltd. is authorized to engage in securities activities in India. PHILLIPCAP is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor. Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through PHILLIPCAP. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.
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