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<GO>, Reuters and DOWJONES. Emkay Global Financial Services Ltd. 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.