India Equity Research | Retail © March 20, 2017 Initiating Coverage Emkay Your success is our success Future Lifestyle
CMP Target Price Rs221 Rs316 The Future is Bright Rating Upside
BUY 42.7 %
Future Lifestyle Fashions Ltd. (FLFL) is a leading branded-fashion player in the country Change in Estimates with a portfolio of over 25 brands. We expect FLFL's revenue to grow by 18% CAGR over EPS Chg FY17E/FY18E (%) NA FY16-19E Target Price change (%) NA Owned and licensed brands command higher gross margins and have outpaced Previous Reco NA third-party brands over the past two years. We expect improved mix and operating leverage in the business to drive EBITDA margin by 60bps over FY16-19E to 10.5%. Emkay vs Consensus FLFL has a retail footprint of over 5.5mn sq. ft. and is one of the country's largest retailers EPS Estimates by network size. The company has outperformed peers with higher like-to-like growth. We FY17E FY18E expect FLFL's retail footprint to grow to over 6.6mn sq. ft. by FY19E. Emkay 2.4 5.1 We believe FLFL is well placed to benefit from increasing brand awareness amongst Consensus NA NA consumers. Furthermore, value unlocking in investee brands will help deleverage the Mean Consensus TP NA balance sheet. We Initiate Coverage with a BUY rating and a TP of Rs316/share. Stock Details Strong brand portfolio: FLFL has emerged as a leading branded fashion player with a Bloomberg Code FLFL IN portfolio of over 25 brands, of which 18 are either owned or licensed. The top six brands have Face Value (Rs) 2 sales of over Rs 1bn each and reported at a 12% sales CAGR over FY14-16, higher than overall revenue growth of 9%. Investee brands not only fill gaps in FLFL's portfolio but also Shares outstanding (mn) 190 provide value unlocking to the company upon divestment. We expect FLFL's overall brand 52 Week H/L 222 / 75 portfolio to grow at an 18.3% CAGR over FY16-19E, led by licensed brands reporting a 22% M Cap (Rs bn/USD bn) 42 / 0.64 CAGR over the same period. Daily Avg Volume (nos.) 190,423 Improving owned/licensed brand mix to boost margins: As of FY16, FLFL's owned/licensed Daily Avg Turnover (US$ mn) 0.5 brands contributed to 38.3% of its revenue and outpaced third-party brands by growing at a 15% CAGR over FY14-16. Owned/licensed brands command a higher gross margin (+5-10%) Shareholding Pattern Dec '16 vs. third-party brands. We not only expect the growth momentum of these brands to sustain Promoters 60.2% but also expect them to improve to provide a fillip to the overall margin profile. We expect FIIs 6.0% EBITDA margin to improve by 60bps over FY16-19E to 10.5%. DIIs 14.1% Retail footprint of over 5.5mn sq. ft.: FLFL operates its retail outlets in three broad formats, Public and Others 19.7% namely Central (big-box fashion retailer), Brand Factory (liquidation channel) and EBO/Planet
Sports. The company's retail stores have consistently outperformed peers with respect to like- Price Performance to-like growth, averaging 10% over the past three years. Currently, FLFL has a retail footprint of over 5.5mn sq. ft., which is expected to grow to over 6.6mn sq. ft. by FY19E, well ahead of (%) 1M 3M 6M 12M its peers. Absolute 18 83 73 181 Rel. to Nifty 15 63 67 137 Valuation and view: We believe FLFL's unique business model, consisting of owned & licensed brands, investee brands and retail outlets stand to benefit from the growing shift Relative price chart
towards organised retail and increasing brand awareness. Furthermore value unlocking in 225 Rs % 140 brands (eg. Lee Cooper) will aid in deleveraging the balance sheet. We have valued FLFL at 194 110 12x FY19E EV/EBITDA, 33% premium to that of Shoppers Stop. We Initiate Coverage on the stock with a BUY recommendation and TP of Rs 316/share. 163 80
132 50 Financial Snapshot (Standalone) 101 20 (Rs mn) FY15 FY16 FY17E FY18E FY19E 70 -10 Revenue 31,341 33,002 39,079 46,421 54,613 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 EBITDA 3,302 3,251 3,656 4,644 5,726 Future Lifestyle (LHS) Rel to Nifty (RHS) EBITDA Margin (%) 10.5 9.9 9.4 10.0 10.5 Source: Bloomberg
APAT 185 295 449 964 1,599 Sameep Kasbekar, CFA EPS (Rs) 1.0 1.6 2.4 5.1 8.4 [email protected] EPS (% chg) (46.9) 56.1 52.5 114.6 65.9 +91 22 66121281 ROE (%) 1.3 1.8 2.7 5.7 8.8
P/E (x) 222.4 142.5 93.5 43.6 26.3 Amit Purohit EV/EBITDA (x) 15.1 15.2 13.8 10.8 8.6 [email protected] P/BV (x) 2.6 2.6 2.5 2.4 2.2 +91 22 66121340 Source: Company, Emkay Research
Emkay Research is also available on www.emkayglobal .com, Bloomberg EMKAY
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Unique business model
FLFL follows a unique model, wherein the company has four major pillars that drive its revenue and profitability. The company has a strong brand portfolio, both owned and licensed, with a range of investee brands to fill in gaps in the brand portfolio. This portfolio covers the entire spectrum of retail fashion (menswear, womenswear, value fashion and premium offerings). Over the years, the company has established itself as a leading incubator of emerging and growing apparel brands in the country. FLFL has a high share of private labels, inclusive of both owned and licensed brands (38.3% of sales as of FY16). The company is focused on improving the share of these brands, which is evident from the growth rates registered over the past few years. The likely increase in revenue mix will provide a fillip to FLFL's gross margin. FLFL's brand portfolio is complemented by an equally robust distribution network via the company’s extensive retail presence (5.5mn sq. ft. as of December 2016). FLFL’s flagship big-box retail store, Central, is being repositioned to the premium lifestyle segment with a greater emphasis on fast-fashion apparel. Brand Factory (22% of revenue as of FY16) enables the company and other branded players to liquidate older inventory. With an average discount ranging between 20%-70%, Brand Factory is in direct competition with various ecommerce players.
Exhibit 1: Unique business model
Unique business model
High share of private labels with Strong brand portfolio across Brand Factory (22% of revenues own and licensed brands FLFL has a retail reach of over price points, catering to men's and in FY16) provides FLFL with an contributing to c.38% of overall 5.5mn sqft far ahead of its peers women's wear excellent liquidation channel sales in FY16
Source: Company, Emkay Research
Emkay Research | March 20, 2017 2
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Strong brand portfolio
Over the years, FLFL has created a strong portfolio of around 30 brands to capture the entire fashion value chain for both menswear and womenswear. The company's diverse brand offerings range from fast fashion (Cover Story) to premium suits (Giovani). These brands also offer footwear and accessories (Ceriz). FLFL has 18 owned and licensed brands, comprising six power brands, and a collection of 12 investee brands. These investee brands not only fill in the gaps in FLFL's fashion brand portfolio but also create significant value unlocking opportunities for the company. FLFL's power brand portfolio includes brands such as Lee Cooper, John Miller, Indigo Nation, Scullers, Jealous 21 and aLL.
Exhibit 2: FLFL's brand portfolio
Source: Company, Emkay Research
Owned and licensed brands have been driving growth FLFL's owned brands registered an 11.5% CAGR over FY14-16 and its licensed brands outperformed by reporting a 16.5% CAGR over the same period.
Exhibit 3: Owned brands reported an 11.5% CAGR over FY14-16 Exhibit 4: Licensed brands outperformed, 16.5% CAGR over FY14-16
5000 12000
4500 10000
4000 8000
3500 6000
3000 4000 FY14 FY15 FY16 FY14 FY15 FY16
Owned brands (Rs mn) Licensed brands (Rs mn)
Source: Company, Emkay Research Source: Company, Emkay Research
Emkay Research | March 20, 2017 3
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Over FY14-16, amongst owned brands, Jealous21 reported an 11% CAGR; while new brand additions such as Urban Yoga, Ceriz and Mohr in recent years have resulted in other owned brands registering a 17% CAGR.
Exhibit 5: Other owned brands reported a 17% CAGR over FY14-16
2000
1500
1000 Rs mn Rs 500
0 Indigo Nation Scullers Jealous21 Other own brands
FY14 FY15 FY16
Source: Company, Emkay Research
FLFL's licensed brand portfolio consists of well-established large brands such as Lee Cooper (MRP sales of Rs 5.7bn) and John Miller (MRP sales of Rs 2.4bn), which have reported CAGRs of 14% and 11%, respectively, over FY14-16.
Exhibit 6: New brand additions resulted in a 22% CAGR FY14-16 in other licensed brands
5000
4000
3000
Rs mn Rs 2000
1000
0 Lee Cooper John Miller Bare Other licensed brands
FY14 FY15 FY16
Source: Company, Emkay Research
Over the years, FLFL has added brands such as Umbro, Converse and Champion in its portfolio. This led to a 22% revenue CAGR over FY14-16 in the other licensed brands category. The contribution from third-party brands has declined from 66.1% in FY14 to 61.7% in FY16 owning to the increased focus on owned and licensed brands.
Exhibit 7: Revenue contribution from third-party brands has declined
120% 100% 80% 66% 59% 62% 60% 40% 29% 20% 22% 26% 12% 12% 13% 0% FY14 FY15 FY16
Owned brands Licensed brands Third-party Brands
Source: Company, Emkay Research
We believe i) growing shift from unorganised to organised retail, ii) increased brand awareness amongst consumers and store expansion to drive owned and licensed brands growth by 14.4% and 22.2% respectively over FY16-19E. We expect third-party brands to register a growth of 17.5% over FY16-19E.
Emkay Research | March 20, 2017 4
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Exhibit 8: Owned brands to grow at 14.4% CAGR FY16 -19E Exhibit 9: Licensed brands expected to grow 22.2% CAGR FY16 -19E
8000 20000
6000 15000
4000 10000
2000 5000
0 0 FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
Owned brands (Rs mn) Licensed brands (Rs mn)
Source: Company, Emkay Research Source: Company, Emkay Research
Power brand portfolio's share to increase in the coming years FLFL recognises six brands (namely Lee Cooper, John Miller, Indigo Nation, Scullers, Jealous21 and aLL) as power brands within its portfolio. The diverse collection of brands covers menswear, womenswear as well as unisex brands.
Exhibit 10: Top owned/licensed brands sales (at MRP) in FY16 Exhibit 11: Share of power brands set to increase
6000 80% 70% 4000 60% 60% 53% 2000 40% 0
aLL 20% Bare Scullers
Jealous21 0% John Miller John Lee Cooper Lee FY15 FY16 FY20E Indigo Nation Indigo
Sales at MRP FY16 (Rs mn) Share of power brands as % of own brands
Source: Company, Emkay Research Source: Company, Emkay Research
While the six power brands have sales (at MRP) over Rs 1bn, Bare too has reported revenue in excess of Rs 1bn and is a potential addition to the company's power brand portfolio. The company's power brand portfolio has been growing at a c.12% CAGR over FY14-16, led by Lee Cooper and Jealous21. The share of power brands in the owned /licensed brand portfolio has increased from 53% in FY15 to 60% in FY16. The company is focused on building its power brands, with dedicated teams assigned to them. FLFL expects its power brands to contribute 65-70% to owned/licensed brand revenue by FY20/21.
Exhibit 12: Power brand portfolio Brand Category Target Customer Competitors Distribution Avg. price point Levi's, Pepe Jeans, Central, Brand Factory, EBO, Lee Cooper Denim and Casual wear Young men and women Rs 1,500-2,500 Wrangler, Lee, Killer MBO, Ecommerce Central, Brand Factory, EBO, John Miller Men's formal wear Mid-level executives Peter England, Excalibur Rs 1,200 MBO, Ecommerce Premium Casuals and Central, Brand Factory, EBO, Scullers Youth focused Parx, Color Plus Rs 1,700 Chinos LFS, MBO, Ecommerce Central, Brand Factory, EBO, aLL Plus sized clothing Plus sized individuals No meaningful competition Rs 1,200 MBO, Ecommerce Central, Brand Factory, EBO, Indigo Nation Men's casual wear Young urban men Wrangler, Parx Rs 1,500 LFS, MBO, Ecommerce Upper-middle income Levi's, Pepe Jeans, Central, Brand Factory, EBO, Jealous21 Women's denim wear Rs 1,500 group women Forever New LFS, MBO, Ecommerce Source: Company, Emkay Research
Emkay Research | March 20, 2017 5
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Uptick in owned & licensed brand mix to boost margins
Focus on owned/licensed brands Owned and licensed brands contributed to 38.3% of revenues in FY16. The company is consistently trying to improve its owned/licensed brand mix, with an added focus on its power brand portfolio. Consequently, owned and licensed brands have outperformed third-party brands with respect to growth over the past three years.
Exhibit 13: Owned/licensed brands mix at 38% in FY16 Exhibit 14: Large portion of brand sales via owned retail network
13% 12%
26%
62% 88%
Owned brands Licensed brands Third-party brands Retail sales Wholesale sales
Source: Company, Emkay Research Source: Company, Emkay Research
Owned and licensed brands typically command gross margin of c.45%, which is almost 500-1000bps higher than the gross margin offered by third-party brands. While a large portion of FLFL’s brands are sold via its own retail network (namely Central, Brand Factory, Planet Sports and EBOs), ~12% of the brands are sold via the wholesale/MBO channel. Going forward, improved offerings, better visual merchandising, in-store presentation, brand building and aid from analytics are likely to drive sales of both owned and licensed brands. We expect owned and licensed brand’s revenue mix to improve to 40% by FY19E.
Exhibit 15: Revenue mix moving in favour of owned/licensed brands Exhibit 16: Increasing share of owned brands to boost gross margin Retail Channel Case 1 Case 2 Case 3 120% Share from owned brands 30% 40% 50% 100% Share from third-party brands 70% 60% 50% 80% Gross margin 38% 39% 40% 62% 62% 61% 60% 60% Source: Company, Emkay Research 40%
20% 38% 38% 39% 40% 0% FY16 FY17E FY18E FY19E
Owned/licensed brands Third-party brands
Source: Company, Emkay Research
For every 10% increase in the share of owned brands in the retail channel, FLFL's gross margin is expected to witness an uptick of 100bps.
Emkay Research | March 20, 2017 6
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
One of the largest retail networks in the country
FLFL has a vast retail reach spanning over 5.5mn sq. ft. with 380 stores spread across 80+ cities, far ahead of its peers (such as Pantaloons and Shoppers Stop), making FLFL one of the largest retail players in the country. Central commands c.64% of the total retail area and contributes to c.58% of the company's overall revenue, with Brand Factory contributing to c.22% of sales in FY16.
Exhibit 17: Network strength vs. peers Exhibit 18: Central dominates the channel mix
6.0 5.5 12%
5.0 4.3 8% 4.0 2.9 3.0 2.0 58% 1.0 22% 0.0 FLFL Pantaloons* Shoppers Stop
Network area (mn sq ft) Central Brand Factory EBO & others Non FLFL channels
Source: Company, Emkay Research; * Pantaloons as of FY16 Source: Company, Emkay Research
The role of brands driving consumer choice and store experience driving footfalls and sales in the retail environment has increased over the years. Through its wide brand portfolio and revamped store network, FLFL has been able to command a higher same-store sales growth compared to its peers. Moreover, FLFL has been adding c.0.5mn sq. ft. per year over the past three years.
Exhibit 19: FLFL has outperformed its peers wrt. organic growth Exhibit 20: FLFL had 380 stores as of December 2016
12% 10% 10% 400 5.6 9% 9% 380 8% 6% 6% 5.2 5% 6% 360 4% 4.8 -2% 340 0% 4.4 320
-4% 300 4.0 FLFL SSG Shoppers Stop SSG Pantaloons SSG FY14 FY15 FY16 9MFY17
FY14 FY15 FY16 Number of stores - LHS Total area (mn sqft) - RHS
Source: Company, Emkay Research Source: Company, Emkay Research
Central – Re-imagining big-box retail Central is the flagship retail format of FLFL, with a current store network of 34 stores covering a retail footprint of 3.5mn sq. ft. The retail chain is present in 24 cities and offers over 500 brands (both owned and third-party brands) targeting the urban aspirational shopper across age groups. Central is undergoing a transformation to maintain its competitive advantage over other retail outlets and ecommerce platforms. The retail network is being re-designed under the theme 'Brands in High Definition,' which is being backed by high-quality designers, visual merchandisers and a German architecture firm – Blocher Blocher Partners. 'Brands in High Definition' involves focus on premiumisation of offerings, enhancing the overall ambience of the retail outlet and increasing freshness quotient in the inventory. Central is being repositioned to the premium lifestyle segment, with a great emphasis on fast-fashion apparels. Consequently, Central is tying up with various leading brands to widen its premium offerings.
Emkay Research | March 20, 2017 7
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Exhibit 21: Revenue growth was flat yoy in FY16 Exhibit 22: Average double -digit SSG over the past seven quarters
20000 7000 25% 20% 6500 18000 15% 6000 10% 16000 5% 5500 0%
14000 5000 FY14 FY15 FY16 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17
Revenue (Rs mn) LHS Gross revenue per sq ft (RHS) Central SSG
Source: Company, Emkay Research Source: Company, Emkay Research
Effects of the new design were witnessed in FY16, where Central reported an SSG of 10.3%. Quarterly SSG has averaged 10%+ over the past seven quarters for Central. However, store closures (renovation of Hyderabad and Bangalore stores) impacted revenue growth in FY16, where Central reported flat yoy growth.
Exhibit 23: Steady store addition over the past three years Exhibit 24: Central store matrix Average Store 40 4.0 Size (sq. ft.) 100000 30 3.0 Capex (Rs/sq. ft.) 3500 Inventory (Rs mn) 250 20 2.0 Breakeven (months) 18 Payback (months) 36-48 10 1.0 Source: Company, Emkay Research
0 0.0 FY14 FY15 FY16 9MFY17
Total number of stores - LHS Total area (mn sq ft) - RHS
Source: Company, Emkay Research
FLFL expects all older stores to undergo the transformation towards 'Brands in High Definition' over time and plans to launch 7-8 stores a year under the new format.
Brand Factory – The liquidation channel Brand Factory is one of the leading fashion discount chains in the country, with a retail footprint of over 1.5 mn sq. ft. (as of 9MFY17) covering 22 cities and 51 stores. The retail outlet is a key liquidation channel not only for FLFL but also for the branded apparel industry. Typically, malls and retailers have a sell through of ~80%, indicating a large potential for the liquidation channel. Brand Factory operates as a 365-day discount store, offering discounts varying from 20% to 70%. The retail outlet keeps inventory that is up to 3-4 seasons old. Apparels contribute to ~95% of its overall sales.
Exhibit 25: Gross revenue per sq. ft. has inched up over the years Exhibit 26: FLFL has added 13 stores over the past three years
8000 8000 60 1.60
50 1.50 6000 7500 40 1.40 4000 7000 30 1.30 20 2000 6500 10 1.20 0 6000 0 1.10 FY14 FY15 FY16 FY14 FY15 FY16 9MFY17
Revenue (Rs mn) - LHS Gross revenue per sq ft - RHS Total number of stores - LHS Total area (mn sq ft) - RHS
Source: Company, Emkay Research Source: Company, Emkay Research
Emkay Research | March 20, 2017 8
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
While most retailers have started investing in omni-channel platforms to compete with ecommerce, FLFL’s Brand Factory offers a direct competition to online players following similar models by offering discounts to older inventory. The company plans on adding 10-12 Brand Factory stores each year.
De-focusing on EBO and Planet Sports FLFL also retails through various EBOs (both owned and franchise) as well as Planet Sports (with a focus on footwear and sports goods). This channel contributes to ~8% of the company's overall revenue. The retail network of EBO and Planet Sports covers 0.5mn sq. ft., with 295 stores across 90+ cities. Franchise EBOs provide an asset-light route for brand building (especially on High Streets). However, the company has reduced its focus on the EBO and Planet Sports channels and has shifted its energies towards growing Central and Brand Factory going forward. The company has recently indicated its intent to shut down Planet Sports. Due to the strength of its brand portfolio, FLFL is able to retail its owned/licensed brands through third-party channels/MBOs. This channel contributes to ~12 % of overall sales and provides the company with an asset-light and high-profitability channel to sell its wares.
Emkay Research | March 20, 2017 9
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Inventory adjusted for SOR under control
Inventory management is a key metric for any retailer. FLFL’s inventory days have averaged at 133 days over the past three years. When compared to its retailer peers, inventory days appear elevated. However, this is largely due to the company reporting its Sale-or-Return (SOR) inventory which inflates the overall inventory levels. About 55% of the total inventory is on SOR basis, which is backed by equivalent payable days. Additionally, Brand Factory keeps older inventory for up to four to five seasons, skewing overall inventory levels.
Exhibit 27: Adjusted inventory days comparable with peers – FY16
120 98 100 90
80 67 55 60 44 40 20 0 FLFL Pantaloons Shoppers Stop Trent VMart
Inventory days
Source: Company, Emkay Research; * Excluding SOR inventory
When adjusted for the SOR inventory, FLFL's inventory turns are comparable with peers such as Pantaloons and Trent. FLFL is in the process of improving its inventory turn via i) supply-chain transformation, ii) demand-led forecasting, iii) quicker transfer of inventory from Central to Brand Factory, and iv) increasing number of seasons.
Exhibit 28: Concept to consumption cycle Exhibit 29: Inventory overview
Inventory – Rs 13 bn
Own Brands Third Party – SoR ~(45%) ~(55%)
Core ~(14%)
Fashion ~(31%)
Source: Company, Emkay Research Source: Company, Emkay Research
Emkay Research | March 20, 2017 10
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Investee brands – Untapped potential
FLFL has invested in a plethora of fast-growing fashion companies and has been building a portfolio of fashion brands backed by talented designers and entrepreneurs. These brands help FLFL offer a wider bouquet of choices to its customers, enhancing customer experience and choices. The company is focused on fast-growing categories such as footwear, handbags and accessories apart from apparel.
Exhibit 30: Investee brands
Source: Company, Emkay Research
Fashion brands in the country suffer from high mortality rates due to the initial spends required for brand building, creating visibility and building a strong distribution network. FLFL invests, mentors and partners with select brands, providing them space and visibility across its stores, equity to invest in working capital and mentorship to grow the brand. This strategy also enables the generation of significant value for the company in the near future, as seen with the stake sale of AND Designs and BIBA (total proceeds from sale of Rs 3.8bn vs. investment of Rs 480mn). FLFL has recently signed a term sheet to dilute its stake in Lee Cooper to unlock value.
Unlocking value in brands to be used to deleverage the balance sheet FLFL intends on unlocking value from investee brands at a suitable time and use the proceeds to deleverage its balance sheet. The company has recently signed a term sheet with Barclays Bank India, which transfers the Lee Cooper business into a wholly-owned subsidiary and raise ~Rs 2.5bn via compulsorily convertible preference shares (CCPS). These CCPS will convert to a 26% stake on a fully diluted basis. FLFL intends to use the proceeds to reduce its debt. Furthermore, in the latest EGM, the company has proposed to transfer certain investee brands into a wholly owned special purpose vehicle (WOSPV). This WOSPV will be used to unlock value of the investee brands and the funds would be utilised to deleverage the balance sheet.
Historically has been successful in value unlocking
Case Study 1 - BIBA BIBA was founded in 1986 by Meena Bindra. The brand caters to women’s ethnic wear (including salwar, kameez and dupattas). BIBA’s range is available through its EBOs as well as Large Format Stores (LFS) such as Shoppers Stop, Pantaloons and Central. The Future Group acquired a 25.8% stake in the brand for a consideration of Rs 420mn in FY07. Future Group’s extensive distribution reach helped the brand’s revenue to grow at a 30% CAGR over FY07-13 to Rs 2.1bn. The group divested the stake for a total consideration of Rs 2.4bn in FY13 (exit multiple of 15x FY14E EBITDA and 5.6x investment value).
Exhibit 31: BIBA's financials BIBA - Rs mn FY07 FY08 FY09 FY10 FY11 FY12 FY13 Revenue 430 670 810 990 1370 1730 2100 Growth (%) 55.8% 20.9% 22.2% 38.4% 26.3% 21.4% EBITDA 73.1 107.2 48.6 168.3 260.3 380.6 567 Growth (%) 46.6% -54.7% 246.3% 54.7% 46.2% 49.0% Margin (%) 17.0% 16.0% 6.0% 17.0% 19.0% 22.0% 27.0% Source: Company, Emkay Research
Emkay Research | March 20, 2017 11
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Case Study 2 - AND Designs AND Designs is a high-street fashion brand focused on women’s western wear. The brand was created by Anita Dongre, Meena Sehra and Mukesh Sawlani in 1995. Following AND’s success, the company launched Global Desi (Boho chic brand for women) and the luxury brand Anita Dongre (offering bespoke bridal wear). AND retails through its EBOs and various LFS. The Future Group acquired a 22.9% stake in the company for a total consideration of Rs 60mn in FY08. The brand reported a 62% revenue CAGR over FY08-13, with EBITDA margin improving by 800bps over the period. The group divested the stake in FY13 for Rs 1.5bn (exit multiple of 15x FY14E EBITDA and 24x investment value).
Exhibit 32: AND Designs' financials AND FY07 FY08 FY09 FY10 FY11 FY12 FY13 Revenue 80 160 230 420 830 1190 1810 Growth (%) 100.0% 43.8% 82.6% 97.6% 43.4% 52.1% EBITDA 8 19.2 23 79.8 141.1 226.1 362 Growth (%) 140.0% 19.8% 247.0% 76.8% 60.2% 60.1% Margin (%) 10.0% 12.0% 10.0% 19.0% 17.0% 19.0% 20.0% Source: Company, Emkay Research
Emkay Research | March 20, 2017 12
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Financials and our expectations
We expect FLFL to report revenue growth at an 18.3% CAGR over FY16-19E to Rs 54.6bn, driven by licensed/third-party/owned brands registering CAGRs of 22.2%/17.5%/14.4%, respectively. We expect the share of owned and licensed brands to improve by 135bps over FY17-19E to 39.7%, resulting in gross margin expansion of 100bps to 37.9% in FY19E.
Exhibit 33: Revenue expected to report 18.3% CAGR over FY16-19E Exhibit 34: Owned/Licensed brand mix at 39.7% in FY19E
60000 100%
80% 40000 61.7% 61.7% 60.9% 60.3% 60%
40% 20000 25.5% 26.6% 27.5% 28.1% 20% 12.8% 11.7% 11.6% 11.6% 0 0% FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
Revenue (Rs mn) Owned Brands Licensed Brands Third-party Brands
Source: Company, Emkay Research Source: Company, Emkay Research
Operating leverage is likely to result in EBITDA margin expanding to 10.5% in FY19E, implying EBITDA to report a 21% CAGR over FY16-19E to Rs 5.7bn.
Exhibit 35: EBITDA expected to grow at a 21% CAGR over FY16-19E Exhibit 36: Improved mix and op. leverage to boost EBITDA margin
8000 11.0%
10.5% 6000 10.0% 4000 9.5%
2000 9.0%
0 8.5% FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
EBITDA (Rs mn) EBITDA margin (%)
Source: Company, Emkay Research Source: Company, Emkay Research
We expect relatively stable debt levels and correspondingly interest burden going forward to result in 76% profit CAGR over FY16-19E. Our estimates are subject to an upside risk arising from debt reduction following the closure of the stake sale in the Lee Cooper subsidiary (Rs 2.5bn).
Exhibit 37: We expect 76% profit CAGR FY16-19E Exhibit 38: FLFL to generate OCF of Rs 4.6bn over the next 3 years
2000 4000
1500 3000
1000 2000 Rs mn Rs 500 1000
0 0 FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
PAT (Rs mn) OCF
Source: Company, Emkay Research Source: Company, Emkay Research; FY16 OCF includes cash from sales of balance investment proceeds from BIBA
Emkay Research | March 20, 2017 13
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
We expect FLFL's initiatives to improve inventory management to result in enhanced inventory turns (2.9x by FY19E from 2.7x in FY16). Improved profitability, and higher asset turns are likely to result in double-digit ROCE by FY19E.
Exhibit 39: Expect steady improvement in inventory days Exhibit 40: Expect double-digit ROCE by FY19E
140 14% 137 135 12% 135 10% 131 8% 130 127 6% 4% 125 2%
120 0% FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E ROCE (%) ROE (%) Inventory days
Source: Company, Emkay Research Source: Company, Emkay Research
Exhibit 41: Our assumptions Assumptions FY17E FY18E FY19E Revenue Owned brands 4968 5854 6887 Growth (%) 8.0% 17.8% 17.6% Licensed brands 11337 13924 16728 Growth (%) 23.8% 22.8% 20.1% Third-party brands 26256 30814 35932 Growth (%) 18.5% 17.4% 16.6% Total Revenue 39079 46421 54613 Growth (%) 18.4% 18.8% 17.6%
EBITDA 3656 4644 5726 EBITDA margin (%) 9.4% 10.0% 10.5% Source: Emkay Research
Emkay Research | March 20, 2017 14
Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Valuation and Risk
We have valued FLFL using the EV/EBITDA methodology, assigning it a 12x FY19E multiple. Comparable peer such as Shoppers Stop currently trades at 9x FY19E EV/EBITDA. However, FLFL has a higher private label mix, enhanced growth profile and, consequently, a better margin profile. Therefore, we believe that a 33% premium on Shoppers Stop multiple is justified. We have not accounted for the value of the investee brands, amounting to Rs 3.8bn book value, which is an upside risk to our valuation target. We believe value unlocking in the investee brand portfolio and the subsequent debt reduction are likely to result in a re-rating in the stock in the medium term.
We Initiate Coverage on FLFL with a BUY rating and a target price of Rs 316/share.
Exhibit 42: Valuation FY19E EBITDA EV Multiple Enterprise Value Company Rs. mn (x) Rs. mn Future Lifestyle 5,726 12 68,716
Total Enterprise value 68,716 Less: Net Debt* 8,717 Equity Value 59,999 Equity Value / Share 316 CMP 221 Upside (%) 43% Source: Emkay Research; *adjusted for cash infusion from Lee Cooper deal
Risks Increased competition from existing organised and unorganised players. New brands entering the Indian apparel market and gnawing away market share. Lack of quality retail space resulting in a slowdown in network expansion. Dip in consumer confidence resulting in a slowdown in discretionary demand.
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Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Company and management background
FLFL was formed from the de-merged branded fashion business of Future Consumer Ltd. (erstwhile Future Ventures India Ltd.) and the Lifestyle Fashion business of Future Retail. FLFL commenced operations in May 2013 and has a portfolio of over 25 brands and operates with a retail footprint of 5.5mn sq. ft.
Promoter and Key management Kishore Biyani, Managing Director : Mr Biyani is the Founder, Promoter and Group CEO of Future Group. He has over 25 years of experience and is known as the pioneer of modern retail in India. Rakesh Biyani, Non-Executive Director : He has been associated with the Future Group for over 20 years and has led the management and expansion of flagship formats such as Pantaloons, Central and Big Bazaar. Vishnu Prasad, Head – Central : Mr. Prasad has over 30 years of experience in sales and retail and has been associated with the Future Group since 2001. He was involved in setting up Big Bazaar stores in the south of the country before moving to FLFL to head the Central business. Suresh Sadhwani, Head – Brand Factory: Mr. Sadhwani has headed the Brand Factory business since 2014 and has been instrumental in doubling its revenue, adding over 20 new stores across the country. He has over 20 years of experience in the retail business. Rachna Agarwal, Head – Brands : Ms. Agarwal has over 22 years of experience in brand management and information system management. She has served as the Head of FLFL brands since 2008. Hetal Kotak, Head – Lee Cooper and aLL : Mr. Kotak has over 17 years of experience across branded apparel and retail and has been previously associated with Raymond Limited, where he held the position of Brand Director and Chief Operating Officer for Color Plus and Park Avenue. Kaleeswaran Arunachalam, CFO : Mr Kaleeswaran has over 15 years of experience in the food and fashion industry, having been previously associated with Mondelez International, Aditya Birla Nuvo and TVS Motors. He is a qualified chartered accountant from ICAI and holds a Master’s degree in Business Administration (Finance).
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Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Key Financials (Standalone) Income Statement Y/E Mar (Rs mn) FY15 FY16 FY17E FY18E FY19E Revenue 31,341 33,002 39,079 46,421 54,613 Expenditure 28,039 29,750 35,423 41,778 48,887 EBITDA 3,302 3,251 3,656 4,644 5,726 Depreciation 1,701 1,614 1,833 1,995 2,118 EBIT 1,601 1,637 1,823 2,649 3,608 Other Income 217 165 66 76 87 Interest expenses 1,583 1,353 1,203 1,254 1,254 PBT 235 450 686 1,471 2,441 Tax 49 155 236 507 842 Extraordinary Items 0 0 0 0 0 Minority Int./Income from Assoc. 0 0 0 0 0 Reported Net Income 185 295 449 964 1,599 Adjusted PAT 185 295 449 964 1,599
Balance Sheet Y/E Mar (Rs mn) FY15 FY16 FY17E FY18E FY19E Equity share capital 372 379 379 379 379 Reserves & surplus 15,325 15,853 16,202 17,056 18,534 Net worth 15,697 16,232 16,581 17,435 18,913 Minority Interest 0 0 0 0 0 Loan Funds 12,744 11,405 12,405 12,405 12,405 Net deferred tax liability 650 709 709 709 709 Total Liabilities 29,091 28,347 29,696 30,549 32,027 Net block 13,019 12,428 12,393 11,631 10,745 Investment 3,437 3,754 3,754 3,754 3,754 Current Assets 21,312 21,771 24,801 28,884 34,033 Cash & bank balance 597 146 227 456 1,188 Other Current Assets 380 571 563 669 787 Current liabilities & Provision 10,398 11,469 13,115 15,582 18,368 Net current assets 10,914 10,302 11,686 13,302 15,666 Misc. exp 0 0 0 0 0 Total Assets 29,091 28,347 29,696 30,549 32,027
Cash Flow Y/E Mar (Rs mn) FY15 FY16 FY17E FY18E FY19E PBT (Ex-Other income) (NI+Dep) 17 285 619 1,395 2,354 Other Non-Cash items 0 0 0 0 0 Chg in working cap (3,087) 220 (1,303) (1,386) (1,632) Operating Cashflow 2,308 3,584 945 1,712 2,336 Capital expenditure (3,047) (1,164) (1,799) (1,232) (1,232) Free Cash Flow (739) 2,420 (854) 480 1,103 Investments 348 (317) 0 0 0 Other Investing Cash Flow (185) (237) 0 0 0 Investing Cashflow (2,666) (1,553) (1,733) (1,157) (1,145) Equity Capital Raised 2,721 311 0 0 0 Loans Taken / (Repaid) (814) (1,339) 1,000 0 0 Dividend paid (incl tax) (80) (91) (100) (110) (121) Other Financing Cash Flow (2,000) (10) 1,172 1,038 916 Financing Cashflow (1,756) (2,481) 869 (327) (459) Net chg in cash (2,114) (450) 81 229 732 Opening cash position 2,711 597 146 227 456 Closing cash position 597 146 227 456 1,188
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Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Key Ratios Profitability (%) FY15 FY16 FY17E FY18E FY19E EBITDA Margin 10.5 9.9 9.4 10.0 10.5 EBIT Margin 5.1 5.0 4.7 5.7 6.6 Effective Tax Rate 21.0 34.5 34.5 34.5 34.5 Net Margin 0.6 0.9 1.1 2.1 2.9 ROCE 6.5 6.3 6.5 9.0 11.8 ROE 1.3 1.8 2.7 5.7 8.8 RoIC 7.6 7.1 7.9 11.0 14.5
Per Share Data (Rs) FY15 FY16 FY17E FY18E FY19E EPS 1.0 1.6 2.4 5.1 8.4 CEPS 10.1 10.1 12.0 15.6 19.6 BVPS 84.3 85.6 87.5 92.0 99.8 DPS 0.5 0.5 0.5 0.6 0.6
Valuations (x) FY15 FY16 FY17E FY18E FY19E PER 222.4 142.5 93.5 43.6 26.3 P/CEPS 21.9 22.0 18.4 14.2 11.3 P/BV 2.6 2.6 2.5 2.4 2.2 EV / Sales 1.6 1.5 1.3 1.1 0.9 EV / EBITDA 15.1 15.2 13.8 10.8 8.6 Dividend Yield (%) 0.2 0.2 0.2 0.3 0.3
Gearing Ratio (x) FY15 FY16 FY17E FY18E FY19E Net Debt/ Equity 0.6 0.5 0.5 0.5 0.4 Net Debt/EBIDTA 2.6 2.3 2.3 1.8 1.3 Working Cap Cycle (days) 120.2 112.3 107.0 101.0 96.8
Growth (%) FY15 FY16 FY17E FY18E FY19E Revenue 15.1 5.4 18.5 18.9 17.7 EBITDA 28.8 (1.5) 12.5 27.0 23.3 EBIT 0.0 2.3 11.3 45.3 36.2 PAT (20.4) 58.9 52.5 114.6 65.9
Quarterly (Rs mn) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Revenue 8,776 8,501 8,038 10,222 10,637 EBITDA 1,010 865 778 848 1,005 EBITDA Margin (%) 11.5 10.2 9.7 8.3 9.4 PAT 197 52 35 73 159 EPS (Rs) 1.0 0.3 0.2 0.4 0.8
Shareholding Pattern (%) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Promoters 60.3 60.3 60.2 60.2 60.2 FIIs 6.0 6.1 6.1 6.0 6.0 DIIs 11.7 12.1 12.2 13.9 14.1 Public and Others 22.0 21.5 21.5 19.9 19.7
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Future Lifestyle (FLFL IN) India Equity Research | Initiating Coverage
Emkay Rating Distribution BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months. ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months. HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months. SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
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