Initiating Coverage

July 7, 2017
Rating Matrix
Rating : Buy
Aditya Birla Fashion & Retail (ADIFAS)
Target : | 210 | 170
Target Period : 12-18 months Established supremacy in branded fashion
Potential Upside : 24%
ABFRL combines Maduras portfolio of leading power brands with
YoY Growth (%)
Pantaloons forte of largest value fashion retailer. The combination
(| Crore) FY16 FY17E FY18E FY19E
positions ABFRL as Indias fashion powerhouse offering 5000 styles and
Net Sales 6,035 6,633 7,783 8,841
200+ brands. A pan-India distribution network of 2261 exclusive brand
EBITDA 378 437 599 703 outlets (EBOs) spanning across 6.2 million sq ft covering 375 cities and
Net Profit* 11 53 182 262 towns, ABFRL reaches out to over 13 million discerning customers. With
EPS* (|) 0.1 0.7 2.4 3.4 induction of brands like Ted Baker, Simon Carter and Forever 21, ABFRL
*adjusted PAT and EPS
continues to provide greater choice to its consumers across formats and
Valuation Summary channels. In-house design and product development capabilities remain
FY16 FY17E FY18E FY19E central to merchandising requirements of its widespread network. Strong
EV/Sales 2.5 2.3 1.9 1.7 track record of organic & inorganic growth, restorative growth in Madura
Target EV/Sales 3.1 2.9 2.4 2.1 through extensions and turnaround in Pantaloons position ABFRL at a
EV / EBITDA 39.4 34.8 24.9 20.8 vantage point leading to five-fold increase in PAT to | 262 crore by FY19E.
P/BV 14.4 13.7 11.5 9.3 Maduras renewed focus, Forever 21 - Anchoring core portfolio
RoNW (%) 1.3 5.6 15.9 18.7
A slew of newer brands entering the Indian fashion industry resulted in
RoCE (%) 2.4 7.5 12.3 14.6
flat LTL in the past two years for Madura. We believe moderation of prices
Stock Data (~10%), coupled with a change in inventory cycle from two to four
Particular Amount season and launch of brand extensions (innerwear) would revive LTL
Market Capitalization (| Cr) 13,330.2 growth to 5-6% in Madura posting revenue CAGR of 12% in the lifestyle
Total Debt (FY17) (| Cr) 2,160.6 category. Furthermore, fast fashion (Forever 21 + People) is expected to
Cash and Investments (FY17) (| Cr) 44.5 grow at a CAGR 26% in FY17-19E. Cumulatively, Maduras revenues are
EV (| Cr) 15,446.3 expected to grow at a CAGR of 13% to | 5247 crore in FY17-19E.
52 week H/L 189 / 127
Pantaloons turnaround Enabling profitable growth
Equity capital (| Cr) 770.5
Face value (|) 10.0 The integration issues of Pantaloons, since its acquisition in FY13, have
FII Holding (%) 11.6 largely been addressed. Refurbishment of store product mix by hiring a
DII Holding (%) 15.0 core team of 280 people across design, merchandising and sourcing has
Comparative return matrix (%) struck the right chord to Maduras ideology, resulting in consistent LTL
Return % 1M 3M 6M 12M
growth for Pantaloons. Increased share of private labels (61% vs. earlier
Arvind Ltd (3.0) (7.6) 3.4 10.3 45%) has resulted in a 300 bps expansion in EBITDA margins to 5% in
Raymond 12.4 26.8 60.4 78.0 FY17. With the right model in place, we expect Pantaloons to accelerate
ABFRL (4.8) 7.4 23.2 18.5 store openings to ~50 stores annually in FY17-19E (vs. sub-30 stores over
FY14-17), generating revenue CAGR of 19% to | 3594 crore.
Price movement
Oneness to provide quality earnings to ABFRL; recommend BUY
11,000 300
ABFRL enjoys a vantage position in its mens portfolio built over wide
10,000
9,000
250 offerings across price points (mass to luxury), broad categories (mens,
8,000 200 womens and kidswear & accessories) and diversified market channels
7,000
150 (MBO+EBO+SIS). Newer brands coupled with the existing portfolio
6,000 would provide cohesive growth to ABFRLs revenues, which are expected
5,000 100
4,000
to grow at a CAGR of 15% to | 8841 crore and RoCE expansion to 14.6%
50 (vs. 2.4% currently). Ascribing 2x EV/sales (two-year trailing average) to
3,000
2,000 0 FY19E earnings (implied MCap/sales of 1.8x), we initiate coverage on
Jun-14 Jan-15 Aug-15 Apr-16 Nov-16 Jul-17 ABFRL with a BUY recommendation and a target price of | 210.
Price (R.H.S) Nifty (L.H.S) Exhibit 1: Financial Performance
(Year-end March) FY16 FY17E FY18E FY19E
Research Analysts Revenues (| crore) 6,034.6 6,633.0 7,782.7 8,840.5
Bharat Chhoda EBITDA (| crore) 378.4 437.5 598.9 703.1
bharat.chhoda@icicisecurities.com Adjusted Net Profit (| crore) 11.4 53.5 181.7 261.5
EPS (|) 0.1 0.7 2.4 3.4
Ankit Panchmatia P/E (x) NM NM 72.1 50.1
ankit.panchmatia@icicisecurities.com Price / Book (x) 14.4 13.7 11.5 9.3
EV/EBITDA (x) 39.4 34.8 24.9 20.8
Cheragh Sidhwa RoCE (%) 2.4 7.5 12.3 14.6
cheragh.sidhwa@icicisecurities.com RoNW (%) 1.3 5.6 15.9 18.7
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

 Company background
Shareholding pattern
Madura - Powerhouse of Indias leading fashion brands
(in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
Aditya Birla Fashion and Retail (ABFRL) is Indias largest fashion hub.
Promoter 59.5 59.5 59.4 59.4 59.3
FII 12.2 12.2 12.8 12.4 11.6
ABFRL was formed by a merger of Madura Fashion & Lifestyle and
DII 14.8 14.7 13.6 13.5 15.0 Pantaloons. Established in 1988 by Madura Coats Ltd, Madura Fashion &
Others 13.5 13.6 14.2 14.7 14.1 Lifestyle has its origins in the erstwhile Coats Viyella Plc, Europes largest
clothing supplier. Aditya Birla Nuvo (one-time Indian Rayon) acquired
Madura Fashion & Lifestyle from Madura Coats in 2000. ABFRL inherited
FII & DII holding trend (%) brands like Louis Philippe, Van Heusen, Allen Solly and Peter England.
Total payout for the same was at | 187.8 crore. With a preliminary area of
16.0 14.8 14.7 15.0 0.21 million square foot (mn sq ft) across 52 retail outlets, Madura has
13.6 13.5
14.0 12.2 12.2 12.8 12.4 embarked upon its retail journey currently managing 3 mn sq ft across
11.6 2052 owned stores and 7800 retail touch points (MBOs + SISs).
12.0
10.0 Throughout its journey, Madura achieved a number of milestones. In
8.0 FY05, Louis Philippe and Peter England became the first Indian brands to
%

6.0 achieve a turnover of | 100 crore. As on date, these brands, in addition to

4.0 Van Heusen, gross an annual turnover of | 1000 crore each (Allen Solly at
2.0 | 700 crore). Madura remains an early implementer of enterprise resource
- planning (ERP), which enabled management of rapid scale store level
Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

inventory and accountability resulting in higher store level margins.

Exhibit 2: Madura - Bouquet of brands
FII DII

Source: Company, ICICIdirect.com Research

Establishing phenomenal growth of 20% CAGR over a decade, revenues

of Madura grew nearly 10x from | 473 crore in FY05 to | 4081 crore in
FY17. EBITDA growth, tackling the initial hiccups (loss of | 158 crore, | 4
crore in FY09, FY10, respectively), was much stronger at 25% CAGR in
FY11-17 at | 350 crore. Strong brand positioning enabled Madura to focus
on a franchisee based expansion model, which peculiarly commands
higher RoCEs (65% in FY14). Accounting for goodwill (| 638 crore), post
merger, resultant RoCE for Madura declined to 18% in FY17.
Exhibit 3: Madura revenue, EBITDA and RoCE trend

30 65 28 64 70

25 60
50
20
16 40
15 29
%

25
10 13 30
10 18
20 20
5 4 5 10
10 12 12 10
9 9
0 0
FY12 FY13 FY14 FY15 FY16 FY17

Revenue growth EBITDA margins (%) RoCE

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

 Pantaloons - One of Indias largest big-box fashion retailer
Exhibit 4: Pantaloon Largest big box retailer
Future Group launched Pantaloons in 1997. Pantaloons was acquired by
250 Aditya Birla Nuvo in 2013 for a consideration of | 1600 crore (50%
209 Pantaloons - One of the largest debenture + 50% debt). This enabled ABFRLs foray into fast fashion
200 big box fashion retailer
retail, inheriting 65 stores and 21 factory outlets across 35 cities and a
150 retail space of ~2 mn sq ft. Pantaloons offers one-stop shopping across
No. of stores

107 categories of men, women and kids offering a wide range of brands
100 86 80 across apparel (casual, ethnic, formal, party & active wear) and non-
54
50 apparel (footwear, handbags, cosmetics, perfumes, fashion jewellery &
watches). It retails over 200 licensed and international brands, including
0 14 exclusive in-house brands. Womenswear is the lead category
Pantaloons Westside Unlimited Shoppers FBB
Stop
contributing to half of total apparel sales.
No of Stores
Exhibit 5: Pantaloons assemblage of private labels
Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Pantaloons also houses Maduras brands like Louis Philippe, Van Heusen,
Exhibit 6: Geographical break-up (Revenue) Allen Solly, Peter England and People in menswear, Van Heusen and
120 Allen Solly in womenswear and Allen Solly Junior.
Pantaloons enjoys strong customer patronage handling ~7 million
100
14 16 17 customers as on FY17, which is considered to be one of the largest
80
29 28 26 among Indian apparel retailers. Since FY13, Pantaloons has exhibited
60 revenue growth of 19% CAGR to | 2552 crore in FY17. Given the
40 31 29 29 integration challenges and aggressive expansion of stores from 68 in
20 FY13 to 107 in FY14, EBITDA over the period declined from | 66 crore in
26 27 28
FY13 to | 33 crore in FY14. Post-acquisition, with a change in strategy, the
0
FY15 FY16 FY17 revival in Pantaloons remained robust reflecting an EBITDA CAGR of 56%
North East West South in FY14-17 to | 126 crore.
Source: Company, ICICIdirect.com Research Exhibit 7: Pantaloons revenue and EBITDA trend

3000 5.1 6.0

4.8 4.9
2500 5.0
3.9
2000 4.0

1500 3.0
%
|

2.0
1000 2.0

500 1.0
1285

1661

1851

2157

2552

0 0.0
FY13 FY14 FY15 FY16 FY17

Revenue EBITDA margins (%)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

 Madura & Pantaloons - Enabling wider coverage; winning strategy
ABFRL was formed by a combination of brands from Madura and value
fashion from Pantaloons. It has succeeded as one of the largest pure
fashion apparel players in the Indian market. The combined entity is
poised to be the first billion dollar pure fashion player in India. The merger
enabled operational efficiencies subsuming operational activities like
technology platforms, HR management, etc. under one entity. Moreover,
economies of scale have been achieved related to either raw material
sourcing, inventory management or while negotiating on retail space.
Exhibit 8: ABFRL FY17 revenue break-up

ABFRL
FY17 Revenue: |6633 crore

Madura Fashion & Lifestyle Pantaloons Fashion & Retail

~62% of the Sales (| 4081 crore) ~38% of the Sales (| 2552 crore)

Own Brands
~61% of Pantaloons
Lifestyle Brands Fast Fashion (| 1557 crore)
92% of the Madura (| 3770 crore) 8% of the Madura (| 345 crore)
External Brands
~39% of Panatallons
(| 995 crore)
Other new
brands
| 170 crore
~| 1000 ~| 1000 ~| 1000
~| 600 crore
crore crore crore

Source: Company, ICICIdirect.com Research

With the merger, ABFRL has diversified its earlier mens focused portfolio
Exhibit 9: Category wise revenue-break-up to a more balanced mix of brands targeting customers across price points
and categories. Furthermore, the merger bestows ABFRL with a presence
4%
5% Men's Casuals in 375 cities and towns with 6.2 mn sq ft of retail network space and 7800
8%
Men's Formals
point of sales and 2261 EBOs.
39% Exhibit 10: ABFRL - Managing one of the largest footprints pan-India
Women's western wear
12%
Women's ethnic wear

Kids

Accessories
32%

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 4

 Investment Rationale
Madura, largest brand player, to anchor future growth
Exhibit 11: FY17 - Revenues for Brands
Revenues of Madura grew 10-fold (21% CAGR over the decade) to | 4081
5000 ABFRL brands - Biggest crore vs. | 390 crore in FY04. The phenomenal growth surpasses the
4081 grossers in the industry branded apparel industry growth rate, which was at 14% CAGR in FY04-
4000 17. The managements astute efforts across branding & marketing (~5%
2898 2826
3000 of total revenues) have provided ABFRL with Indias largest mens wear
| cr

brand portfolio. The portfolio generates a turnover of ~| 4081 crore,

2000
nearly 1.4x more vs. | 2898 crore for the second largest player (Arvind
1000 488 403 Ltd.) in the industry. Moreover, Madura owns majority of its brands (Louis
0
Philippe, Allen Solly and Peter England), except Van Heusen of which it
holds exclusive distribution rights in India, Middle East and Saarc. Unlike
Arvind

Raymond

KKCL

Terrian
Garments

Indian
Madura

JVs, franchisee, licensed, the ownership model enables Madura to benefit

from brand designing, aggressive expansion and salvage of royalty
expenses. Madura remains crucial to ABFRL as it contributes 60%, 90% of
Source: Company, ICICIdirect.com Research consolidated FY17 revenues, EBITDA, respectively.
Exhibit 12: Madura channel wise revenue break-up
CAGR
5500 103
10%
5000 94 545
4500 26%
10 85 439
4000
149 345
3500 1931
1719 12%
| crore

3000 1546 1536

2500
2000
1500 2420 2668 12%
2188 2115
1000
500
FY16 FY17 FY18E FY19E
MBO's EBO's Fast Fashion Other brands

Source: Company, ICICIdirect.com Research

For FY17, share of revenues from EBOs, MBOs, fast fashion & other
brands were at 38%, 52% & 10%, respectively. However, with addition of
revenues from newer brands, we expect Maduras revenue mix to change
to 37%, 51% and 12% for EBOs, MBOs and fast fashion and newer
brands, respectively. Subsequently we believe Maduras revenues will
grow at 13% CAGR to | 5247 crore by FY19 vs. | 4081 crore in FY17.
Exhibit 13: Madura revenue to revive post internal restructuring
Internal 13% CAGR
6000.0 restructuring 30%
28% 5247.1
5000.0 4670.1 25%
3878.0 4081.0
3735.0
4000.0 20%
3226.0
| cr

3000.0 2523.0 16% 15%

14%
13% 12%
2000.0 10%

1000.0 5% 5%
4%
0.0 0%
FY13 FY14 FY15 FY16 FY17 FY18E FY19E

Madura revenues
% growth
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 5

 Initiatives addressing recent deceleration in growth
Over the past two years (FY15, FY16) Madura experienced flattish like to
like (LTL) growth resulting in slowest revenue growth of 7% CAGR in the
same period. Moreover, LTL growth for FY17 was at -5%, resulting in
revenue (ex-Forever 21 & People) de-growth of 2%. The impact of
demonetisation in the current year further impacted overall revenues.
Muted consumer sentiment was further blurred by a slew of other brands
(H&M, GAP, etc) available at lower prices. Moreover, e-commerce
companies resorting to deep discounting practices caused pricing
pressure in the price sensitive Indian market. An aggressive competitive
scenario led ABFRL to reduce its selling prices across products in the
range of 5-10% further impacting overall revenues. However, Madura
believes that aggressive discounts would dilute the image of its brands.
Following this, the company underwent a restructuring of its business to
preserve the long-term inherent strength of its brands.

Exhibit 14: Hiccups in Madura reflecting in quarterly financials

5
30 26 6
25 24 2 2 2 4

20 0 0 2
Revenue Growth (%)

LTL growth (%)

16 0 0
15
-4 -2
10 9 10 -7 5 -4
5 6 -7
-1 -10 -6
0 -8
Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17
-5 -3 -2 -10
-10 -7 -12

Revenue growth (YoY %) LTL (%)

Source: Company, ICICIdirect.com Research, Revenue growth excluding fast fashion business

Exhibit 15: EBO addition through consolidation phase Lossmaking stores were phased out while older stores were recalibrated,
Net additions stood at mere 1 store
resulting in net addition of a mere one store in FY17. In the past year, the
1,900 1,895
1,890
reflecting sluggish store additions management has embarked upon a number of strategies to revive growth
1,880 1,877 1,878 in Madura. These strategies are focused on making Madura agile by
building a healthy, sustainable, future ready business model. It involves:
No. of stores

1,870
1,860 1,856
a) avoiding heavy discounting maintaining intrinsic value of premium
1,850
1,840
1,841 brands through calibrated price concession keeping prime costs intact
1,830 b) Continued investments directed towards brand building remains core
1,820 to maintain cult over other plethora of available brands
1,810
Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 c) Providing seamless omni-channel experience currently fulfilled by
No. of EBO's
vast pan-India presence enabling digital transformation
Source: Company, ICICIdirect.com Research d) Keeping a closer eye on profitability metrics and continuously
rationalising its cost structure

ICICI Securities Ltd | Retail Equity Research Page 6

 Consolidation through; Madura to be back on growth path
We expect the LTL of Madura to gradually recover to 5-6% in FY18-19 on
the back of a number of following corrective measures adopted by the
company:
Exhibit 16: LTL growth to revive over FY18E and FY19E

Sharp revival in LTL growth

expected on the back of
8 7
corrective steps 6
6
5
4 4
2 1.5

(%)
0 0

FY18E

FY19E
FY13

FY14

FY15

FY16

FY17
-2
-4
-5
-6

LTL growth

Source: Company, ICICIdirect.com Research

A) Inventory shift - Adapting to changing fashion

The Indian fashion industry now demands faster trends, newer designs
and latest fashion. The earlier two inventory cycles (summer and winter)
resulted in increased production time ensuring the seasonal lines stick
around in stores for a longer period resulting in fashion that was pass.
This results in declining LTL sales growth, also impacting the brand
image. To cope with the changing trend, Madura has resorted to leaner
supply chain shifting to four cycles (summer, winter, spring and autumn)
from earlier two cycles. This would infuse fresh inventory to its selling
channels offering customers the latest and upcoming trends in fashion.

Exhibit 17: Benefits of improved inventory cycle

Faster
Inventory turnover

Dynamics
Lower Change in cycle Enabling
Working capital Fashion - Time to
from two to
requirement market
four

Leading
Lower inventories

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 7

 B) Brand extensions - Creating a fashion eco-system
Predominantly in the premium menswear brand, Madura has, over the
years, successfully leveraged its brands in newer consumer segments
and product categories. Madura has gradually shifted from mainline
formal wear of its core brands to sub brands under other categories like
casual wear, womenswear, kidswear, sports and accessories (belts and
wallets). The launch of these sub-brands de-risked its business model,
which derived ~72% of its overall revenues from mainline SKUs in FY10
to 55% of total revenues in FY17.
Exhibit 18: Product extensions enabling More of same brand
Extensions over a period of time
Brands
FY05 FY06 FY08 FY10 FY11 FY13 FY16 FY17
Trendy Formals/ Accessories - Bags &
Louis Philippe Suits and Coats - Elite casuals Golf collection - LP Time wear -
Office Casuals Footwear
Women / Vdot Lifestyle dressing /
Van Heusen Trendy Trousers V casuals Vdot Denims Sporty collection - Innerwear & Athleisure
casuals Fashionable formals
Peter England Innerwear - Elite Sport Party wear Accessories - Bags - Elite Sport / Travellers

Allen Solly - - Kids - - Women - -

Source: Company, ICICIdirect.com Research

Madura intends to continuously evolve its brands with further extensions.

It launched mens innerwear and athleisure SKUs in FY17 under Van
Heusen brand in South India (Chennai, Bengaluru & Hyderabad). The
launch was across 1000+ MBOs & an EBO in Chennai. These extensions
are expected to facilitate Madura brands dominance in the branded
industry. We believe brand extensions would continue to provide
customers with more of the same" brand enabling incremental LTL.
C) Newer brands - Filling white spaces
Madura continues to strengthen its brand portfolio adding newer brands
to its kitty. In FY16, the company added brands like Simon Carter and Ted
Baker to its luxury portfolio. Moreover, it bought the existing chain of 12
stores of Forever 21, which like Zara, specialises in womens fast fashion
segment. With these acquisitions, Madura has strengthened its brand
offerings across the premium category. The company is also targeting
value customers by introducing shirts at lower price points under Allen
Solly and Peter England. Madura intends to address the white spaces and
enrich its portfolio across all product, price and consumer segments.
Exhibit 19: Products across price-points

Recently
added

Luxury

>| 5000
Super
premium

Premium

| 1500 to | 5000
Sub-
Premium

Fast
Fashion

| 500 to | 1500
Mass

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 8

 Pantaloons redefined FY19E revenues to multiply by 1.4x...
Post-acquisition, ABFRL has aggressively restructured Pantaloons making
several strategic investments. Appointment of a merchandise team, store
rationalisation and streamlining working capital were prerequisites. The
management has flagged completion of its restructuring and now intends
to aggressively open new stores across Tier-II and Tier-III cities. Revival of
LTL growth to 6% levels (vs. flattish earlier) also reflects it is nearing
resolution of integration issues. We expect revenues of Pantaloons to
grow at 19% CAGR to | 3594 crore by FY19E vs. | 2552 crore in FY17.
Subsequently, the contribution of Pantaloons to total revenues is
expected to increase 300 bps to 41% vs. current 38%.
Exhibit 20: Pantaloons expected revenue trend

4000.0 3593.5
3500.0 3112.6
3000.0 2552.0
2500.0 2157.0
| cr

2000.0
1500.0
1000.0
500.0
0.0
FY16 FY17 FY18E FY19E

Pantaloons revenues

Source: Company, ICICIdirect.com Research

One of the largest loyalty bases Further aiding LTL growth...

Exhibit 21: Loyalty members - Aiding the LTL The refreshed merchandise coupled with store optimisation has led the
customer base of Pantaloons grow at a CAGR of 16% from 3.8 million
8 7.0
customers in FY13 to 7 million customers as on FY17. The loyalty
7
6 5.0 programme enables Pantaloons client stickiness, which contributes
5
4.3 4.5 ~80% of total revenues for Pantaloons. We expect newer brands offered
3.8
4
to existing customers to improve LTL across existing stores. We believe
3
the LTL would improve 500 bps in FY17-19E to 8% (vs. current 3.3%). LTL
2
in FY17 was impacted by demonetisation coupled with renovations and
1 temporary closure of certain stores.
0
Exhibit 22: LTL growth for Pantaloons - Revival on the cards
FY13 FY14 FY15 FY16 FY17
Members (in mn)
10 Gradual improvement in LTL
backed by loyal customers and
Source: Company, ICICIdirect.com Research
8 refreshed merchandise
8
6 7
5.5 5.9
4
(%)

2 3.3

0
FY14 FY15 FY16 FY17 FY18E FY19E
-2
-1.6
-4
LTL growth

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9

 Integration strategy - Core to its revival
Pantaloons combined with Madura fortified ABFRLs pole position in the
fashion retail industry. For Maduras core menswear premium brands,
Pantaloons forte of women's centric value fashion was a strategic fit in its
portfolio. The integration strategy for Pantaloons involved a four-year
roadmap evolving around creating a sustainable business model.

Exhibit 23: Pantaloons - four year roadmap

Source: Company, ICICIdirect.com Research

FY14 - Managing the Transition:

The year of acquisition allowed the assessment of existing business and
executing the changeover. The execution defined across four key tasks
included evaluating existing network, refurbishment and renovation of
existing profitable stores, setting up a merchandise team and building a
separate professional team for its management.

Exhibit 24: Course of action over FY13-14

Source: Company, ICICIdirect.com Research

The consequence of the same was evident. This led to the slowest store
addition with the addition of a mere 12 stores, negative impact of 300 bps
on EBITDA margins to 2% and LTL of -2% in FY14.

ICICI Securities Ltd | Retail Equity Research Page 10

 FY15 & FY16 - Laying the foundation & journey of growth
Post the successful completion of the transition phase, in FY15-16,
Pantaloons experienced steady expansion. Higher emphasis on store
expansion resulted in addition of 114 stores in FY15-17. Moreover, 10
new brands (three each for men & women, two for kids and two for
Denim and Plus size) were launched over FY15 and FY16.

Exhibit 25: Transition of Pantaloons in phases

Launched ~30 store p.a; implied runrate of 1 store every two weeks
Store expansion as compared to 1 store every two month prior to acquisition

Cost effeciences, pricing improvement and change in product mix

Margin expansion resulting gross margin improvement of 300 bps

Launched 10 new brands addressing the white spaces in the product

Merchandise creation portfolio. Positioning Pantaloons as one stop shop for customers

Appointing new vendor network (~35% new). Defining quality,

New vendor network availability and cost targets across 240+ vendor network

Recruited ~280 people at HO. Laid down key business processes all
Built the organisation well defined KRA's for key functional positions

Source: Company, ICICIdirect.com Research

Subsequently, the share of private labels over the years increased from
52% in FY13 to 61% in FY17. A tight sourcing network coupled with
higher share of private labels resulted in a 300 bps revival in EBITDA
margins to 5% in FY17 vs. 2% in FY14. We expect the share of private
labels to further improve resulting in a margin expansion of 100 bps to
6% and EBITDA of | 215 crore by FY19E.

Exhibit 26: Transition of Pantaloons in numbers

50 Laying the foundation & 7.0

45 Journey of growth 6.0
40 46
5.1 4.9 5.0
35 4.8
30 4.0
3.9
25 29
27 27 3.0
20
15 2.0 2.0
10 Managing the
12 1.0
5 transition
0 0.0
FY13 FY14 FY15 FY16 FY17
No. of new stores EBITDA margins (%)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

 Ante up in store additions on back of sorted business model
Madura: Continued focus on retail channel
ABFRL, post sorting out issues around Madura and Pantaloons, is
expected to ramp up store additions. We expect Madura to add 110
stores annually (100 stores & 10 value stores) over the next two years
(FY18, FY19). The additions would be directed towards higher penetration
in Tier 2, Tier 3 cities, aiming towards capitalising on higher discretionary
spending. With these additions, Maduras exclusive brand outlets (EBOs)
are expected at 1959 stores with average store size of 1250 sq ft entailing
coverage of ~3 mn sq ft. For multi brand outlets (MBOs) and shop in
shops (SIS), we expect additions to continue to grow at existing CAGR of
7% to ~9000 touch points in FY19 vs. the current 7800.

Exhibit 27: Madura expected expansion

No. of stores
CAGR 7%
CAGR 7%
10000 9009
7800
8000 6800
CAGR 5%
6000 CAGR 1%
4000
1959
1735 1759
2000

0
FY15 FY17 FY19E FY15 FY17 FY19E

EBO's MBO's & SIS

Source: Company, ICICIdirect.com Research

Given ABFRLs aspiration to replicate the success of Zara in India, the

expansion plans of Fast Fashion (mainly Forever 21) are aggressive. We
expect addition of ~15 stores each in FY18 and FY19, respectively,
tallying to a total count of 46 stores by FY19 vs. current 16 stores.
Expansion under People would remain subdued at two stores each over
FY18 and FY19. Subsequently, there are expected to be 141 stores under
Fast Fashion by FY19E with a total estimated coverage of 0.6 mn sq ft
compared to the current 0.4 mn sq ft.
Exhibit 28: Fast Fashion expected expansion

160 0.70
0.58
140 0.60
0.49
120
0.50
mn. sq feet coverage

0.40
100
No of stores

0.40
80
0.24 0.30
60
0.20
40
20 0.10
111 107 124 141
0 0.00
FY16 FY17 FY18E FY19E

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12

 The revenue mix is expected to be in favour of its fast fashion business,
which is expected to contribute 10% of total revenues by FY19E
compared to the current 8%. Moreover, introduction of brands like Simon
Carter and Ted Baker would continue to accrue core revenues from MBOs
and EBOs of 51% and 37%, respectively, by FY19E. As online orders are
fulfilled from nearest EBOs/MBOs, current contribution of 3.5% is
expected to double to 7% by FY19E. Clearance and other sales are
expected at 2% of FY19E revenues.

Exhibit 29: MBOs, EBOs to continue to remain core to Madura

120
0 2 2 2
100 4
8 9 10
80 40
% contribution
38 37 37
60

40
56 52 52 51
20

0
FY16 FY17 FY18E FY19E
MBO's EBO's Fast Fashion Other brands

Source: Company, ICICIdirect.com Research

Focus on brand building had led the majority of the current stores to
operate on the basis of company owned-company operated (COCO)
model. As these brands have already scaled up, ABFRL now plans to
scale up the newer stores on the franchisee route. The model facilitates
ABFRL to scale up swiftly with lower capex while managing only the
inventory risk. Approximately 80% of the phased expansion of 100 EBOs
is expected through the franchisee route.

Exhibit 30: Asset light franchisee model to form core for expansion

% of stores Location Capex Inventory risk Lease & operations

Company Owned Metros &
30 Madura Madura Madura
Company Operated Prime locations
Company Owned Franchisee
40 Tier 1 cities Madura Madura
Franchisee Operated Owner
Store expansion under FOFO model to
Franchisee Owned Smaller towns & Franchisee Madura or Franchisee
result in lower capital expenditure for 30
Franchisee Operated cities Owner Franchisee Owner
newer stores
Source: Company, ICICIdirect.com Research

The southern and western regions of India across Tier I & II cities remain
the core coverage for ABFRL deriving ~60% of total revenues. Enhanced
coverage is expected across the northern and eastern region coupled
with higher focus within tier III & IV cities.

ICICI Securities Ltd | Retail Equity Research Page 13

 Pantaloons: Store count to grow 1.5x by FY19E
Pantaloons, post being repositioned as a value fashion store, is expected
to continue its aggressive store additions. Post acquisition in FY13,
Pantaloons nearly doubled its store count from 95 stores in FY13 to 209
Unlike the earlier COCO model, in FY17, ABFRL adopted stores in FY17. We expect the total store count at 300 stores by FY19E
the franchisee based expansion model for Pantaloons.
Out of total expansion of 46 stores in FY17, Pantaloons
(20% CAGR). Right sizing of stores to an average store size of 14000 sq ft
franchisee network was at 28 stores vs. 17000 sq ft per store earlier would result in lower expansion in
coverage (11% CAGR) to 4.2 mn sq ft vs. 3.4 mn sq ft.
Exhibit 31: Pantaloons expected expansion
91 new stores to be
added by FY19E 4.2
350 4.5
114 new stores added over 3.8
300 3.4 4.0
FY13 to FY17
3.5
250 2.9
No. of stores 3.0
2.3

mn. Sq.ft
200 2.0 2.5
1.7
150 2.0
1.5
100
1.0
50 0.5
95 107 134 163 209 253 300
0 0.0
FY13 FY14 FY15 FY16 FY17 FY18E FY19E
No of stores Coverage (mn sq.ft)

Source: Company, ICICIdirect.com Research

Exhibit 32: Increasing share of own labels
Realising that the kidswear market is adjacent to the womens market,
Gradual increase in share of private labels on Pantaloons has renewed its strategy to diversify its product mix and focus
the back of new brands launched
on both these fast growing segments. The company launched speciality
70% 62% 61% small box format stores (<10000 sq ft) dedicated to women and kids. As
60%
50% 48%
52% on FY17, Pantaloons has 16 women stores and nine kids speciality stores.
% share in revenues

50%
We believe this expansion will continue with the constant addition of five
40% stores every year in the womens category and two or three stores under
30% kidswear segment. Total store count is expected at 300 stores, including
20% 26, 12 womens, kids stores, respectively. A slew of brands across all
10% categories would position Pantaloons as one stop shop for apparel
0% requirements of the family. The in-house merchandise team enables
FY13 FY14 FY15 FY16 FY17 Pantaloons to launch own brands and churn its new designs at faster rate
Share of private labels
keeping store inventory afresh. This has led share of own brands increase
Source: Company, ICICIdirect.com Research from 50% in FY13 (in acquisition) to 61% in FY17.
Exhibit 33: Own brands to continue dominate the Pantaloons portfolio

Pantaloons is present across 78 cities/towns and

retails over 200 licensed and international brands.
The launch of six new brands in FY15, Pantaloons
markets 24 exclusive brands.

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 14

 Consumption theme to benefit ABFRL
We believe that ABFRL, with its strategies, commands a leading position
Exhibit 34: Largest network compared to peers
in the apparel business. The now combined entity is poised to take
2500 2052 Strong EBO network provides advantage of the theme around higher disposable income and increased
a competitive edge to ABFRL discretionary spending. A steady rise in income levels, favourable
2000 benefiting from consumption demographics and GST led penetration in organised retail bode well for
theme
1500
the branded apparel business. ABFRL, with its strong brands, a
1080 1014
distribution reach and product offering across various categories/price
1000 points is poised to exploit these growth opportunities.
331
500 132
Exhibit 35: Maintain, consolidate leadership position as Indias leading apparel business

0
Madura Raymond Arvind KKCL Indian
Terrain
No. of Stores

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Global apparel consumption is expected to increase from $1700 billion in

2015 to $2600 billion by 2025. Market addition of $900 billion over the
next decade provides a huge opportunity to players in the apparel sector.
Majority of the addition in market is expected to happen in China ($378
billion) and India ($121 billion). Growth in developed countries is likely to
be in single digits while the Indian domestic apparel market is expected to
register highest average growth rate of 12% in CY15-25 with Chinese
domestic apparel growing at an average rate of 10% over the period.
Apparel consumption in top eight economies (considering European
Union as single entity) constitutes ~70% of global consumption. Brazil,
Russia, India and China (BRIC countries) comprise ~23% with China
having a major share of 14% and India following with share of 3.5%. Over
the next decade, Indias share in apparel consumption is expected to
nearly double to 6.9% with Chinas share expected to increase to 23.7%.

Exhibit 36: Global apparel consumption to grow at a CAGR of 4.4% over FY15 to FY25...

3000
2495 2600
2298 2395
2500 2206
2031 2117
1871 1950
2000 1796
1685
US$ Bn

1500

1000

500

0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Global Apparel Consumption

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 15

 Exhibit 37: Indian apparel market to grow at CAGR of 12% in FY15-25
Percentage
Absolute Global Global
Countrywise Apparel of
2015 2025 CAGR % increase in Market Market
Market Size (US$ Bn) incremental
market size Share 2015 Share 2025
market
EU-28* 350 390 1 40 4.4 20.8 15.0
USA 315 385 2 70 7.7 18.7 14.8
China 237 615 10 378 41.3 14.1 23.7
Japan 93 105 1 12 1.3 5.5 4.0
Indias share in the global market to nearly double India 59 180 12 121 13.2 3.5 6.9
to 6.9% compared to 3.5%. This provides Brazil 56 90 5 34 3.7 3.3 3.5
enormous opportunity for apparel players like
Russia 40 59 4 19 2.1 2.4 2.3
ABFRL
Canada 25 30 2 5 0.5 1.5 1.2
Rest of World 510 746 4 236 25.8 30.3 28.7
Total 1685 2600 4 915 100

Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity

Consumer spending has a strong correlation with various product

categories and the economic status of the consumer. Initially, a consumer
is more focused on spending on basic necessities like food, clothing and
housing. As disposable income increases, the consumer tends to spend
more on discretionary items like consumer durables, entertainment,
recreation, travel, etc. Though absolute expenditure on clothing does not
go down its growth rate in comparison to increase in other expenses is
slower. Hence, apparel consumption is likely to increase at a faster pace
in developing countries like India, China, Brazil, etc while for the
developed nations it would be slower.
Though developed regions like EU, US have a population of ~11% of
world population, they still drive 40% of global apparel consumption,
which is mainly on account of high per capita expenditure on apparel
(PEAP). However, growth in PEAP for developed countries like US, EU is
expected to be flattish with marginal average annual growth of 1% in the
next decade. Contrary to developed nations, developing countries have
low per capita expenditure on apparel. However, the expected annual
growth in PEAP is likely to be higher.

Exhibit 38: Global apparel consumption to grow at CAGR of 4.4% in FY15 to FY25...
Countrywise Per Capita expenditure
2015 2025 CAGR %
on Apparel (US$)
EU-28 693 766 1.0
USA 978 1116 1.3
China 172 435 9.7
Japan 736 835 1.3
India 45 123 10.6
Brazil 270 404 4.1
Russia 282 390 3.3
Canada 683 768 1.2

Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity

India is expected to have the highest annual growth rate in PEAP of ~11%
over the next decade while Chinas PEAP is expected to grow at an annual
growth rate of 10%. Even with expectations of registering the strongest
growth over the next decade, Indias PEAP would increase from $45 in
2015 to $123, which would be still be only 11% of US PEAP, which is
expected to be ~$1123 in 2025 while Chinas PEAP would be around 3.5x
of Indias PEAP in 2025.

ICICI Securities Ltd | Retail Equity Research Page 16

 Womens category to outpace mens category
The Indian apparel market is expected to grow from $59 billion (bn) in
2015 to US$180 bn. The branded apparel market is expected to grow at a
faster annual average growth rate of 13.5% and is expected to touch $41
bn by 2025. On the other hand, the unbranded apparel market is expected
to grow at a comparatively slower pace with average growth of ~11%
over the period.

Exhibit 39: Branded apparel to grow at CAGR of 13.5% in FY15-25...

190 Branded apparel market to become ~4

times to $41 billion as compared to current
With close to | 6633 crore (~$1 billion) of revenues, 160
market size of $ 11.5 billion
ABFRL commands a significant share of 9-10% of the 130
organised branded apparel market share
139.0
US $ bn 100

70
83.1
40 47.5
28.5 41.0
10 6.5 11.5 19.9

-20 2010 2015 2020 2025

Branded Apparel Mkt Size Unbranded Apparel Mkt Size

Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity

Segment wise, the womens segment is expected to grow faster than the
mens segment. The womens apparel market is expected to grow at an
average annual growth rate of 16.4% in CY14-25 while mens apparel is
expected to grow at an average annual growth rate of 14% over the same
period. Further, mens casual wear is expected to grow at an average
annual growth of 22% in CY14-25, while mens formal wear is expected to
grow at an average annual growth of 10% over the period. Among
womenswear, western wear is expected to grow at an average annual
growth of ~24% in CY14-25 while womens ethnic wear is expected to
grow at an average annual growth rate of 11%.

Exhibit 40: Global apparel consumption to grow at CAGR of 4.4% in FY15-25...

15 CAGR 9% CAGR 22% CAGR 24% CAGR 11% CAGR 9%

12.5
12
9
9 7.5 7
US$ Bn

6 5 5 5.2 4.7
3.6
2.5 2.8 2.7
3 1.4 1.7
0.7
0
Mens Formals Mens Casuals Women's Western Women's Ethnic Kids
2014 2020 2025

Source: Wazir Advisors, ICICIdirect.com Research, * Considering EU-28 as single entity

ICICI Securities Ltd | Retail Equity Research Page 17

 Pantaloons Leveraging on womens product portfolio
Exhibit 41: Category wise Revenue-break-up (FY17)
Pantaloons product portfolio targets primarily two segments -
womenswear and fast fashion. Unlike Madura, which derives majority of
Non-Apps, the revenues from mens wear, Pantaloons is targeting the fragmented
10% womenswear segment. Pantaloons is one of the largest retailers (by
Men, 35%
revenue), selling women branded apparels. Approximately 44% (23%
Kids, 11%
western; 21% ethnic) i.e. ~| 1123 crore of Pantaloons total revenues is
derived from womenswear portfolio. On the back of higher throughput
Women coupled with client stickiness, womenswear is considered to be the more
Ethnic, 21% profitable segment vs. menswear on gross profit per square foot basis.
Women The higher relevance and importance of designs in womenswear helps
Western,
increase the propensity of brand-owners to price up these apparels,
23%
which also helps boost their margin profile. Subsequently, the
womenswear segment contributed ~50% of Pantaloons gross profit.
Source: Company, ICICIdirect.com Research Successful transition from discount store to value fashion
Experiencing a successful transition from a discount store to value
retailer, Pantaloons uniquely leverages its own private brands labels. In
order to tap the underlying opportunities for mens casual wear, the
company recently launched various brands like Byford, San Francisco and
Urban Eagle. Menswear contributes 35% of revenues. Kids apparel
contributes 10% of revenues whereas remaining 14% comes from non-
apparels.
Exhibit 42: Changing image of Pantaloons From discount store to value fashion

No. of stores
250

209
200
163

150 134

107
95
100
64 68
60
47
50 34 38
28
15 19
4 6 6 10 10
2 2 2
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014 2015 2016 2017

Pre-acquisition Post-acquisition

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 18

 Financials
Consolidated revenues likely to grow at 15% CAGR in FY16-19E
ABFRLs consolidated revenues are expected to grow at a CAGR of 15%
to ~| 8840 crore by FY19E compared to | 6633 crore in FY17. While
majority of incremental growth is expected to be driven by Pantaloons,
network expansion and brand extensions coupled with newer brands like
Forever 21, Ted Baker and Simon Carter are expected to further
accelerate the incremental revenues.

Exhibit 43: Consolidated revenues to realise inclusive growth

Fast fashion to boost revenues
8840

6633 200 1059

| crore 553
395
Core business to resume its
growth trajectory

FY17 EBO's MBO's Newer Brands Pantaloons FY19E

Source: Company, ICICIdirect.com Research

EBOs are expected to contribute ~18% of incremental revenues. MBOs

are expected to contribute 25% of incremental revenues. Revenues from
fast fashion which includes People and Forever 21 are expected to
contribute 9% of incremental revenues. Pantaloons is expected to capture
the lions share of incremental growth, contributing ~48% to incremental
revenues.

Exhibit 44: Consolidated revenues to grow at CAGR of 15% over FY17-19E

5000 4702
4500 4232
4000 3729 3736 3593
3500 3113
3000 2552
| cr

2500 2157
2000
1500
1000 545
345 439
500 149
0
FY16 FY17 FY18E FY19E

Lifestyle Brands Pantaloons Newer brands - Forever 21/People

Source: Company, ICICIdirect.com Research

Maduras revenues are expected to be largely driven by a revival in LTL

growth. However, store/footprint expansion over EBO and MBO format
are expected to further add to the topline. Expansion of its presence
across Tier-II and Tier-III cities along with brand extensions would
expedite Maduras revenues. Revenues from Madura Lifestyle brands
(MBOs + EBOs) are expected to grow at a CAGR of 6% in FY17-19E to
| 4702 crore vs. | 3736 crore in FY17. Revenues from Madura fast fashion
business (People + Forever 21) are expected to grow 1.5x (25.7% CAGR)
to | 545 crore in FY19E compared to | 345 crore in FY17. Pantaloons
revenue is expected to grow at a CAGR of 18.7% in FY17-19E to | 3593
crore compared to | 2552 crore in FY17.

ICICI Securities Ltd | Retail Equity Research Page 19

 Brand extensions, Pantaloons turnaround to aid margin expansion
We believe brand extensions would yield higher realisation per sq ft
resulting in improved margins. In addition to the same, increased
contribution of private labels in Pantaloons portfolio would further
facilitate margin improvement. Stabilisation of fast fashion brands would
take some time. Subsequently, we expect EBITDA margins to expand 140
bps in FY17-19E to 8% from the current 6.6%. Likewise, consolidated
EBITDA is expected to grow at a CAGR of 27% CAGR in FY17-19E to
| 703 crore in FY19E from | 438 crore in FY17.
Exhibit 45: Consolidated EBITDA margins expected to improve 140 bps over FY17-19E

800.0 9.0
8.0
700.0 7.7 8.0

600.0 7.0
6.6
6.3 6.0
500.0

% to sales
5.0
| cr

400.0
4.0
300.0
3.0
200.0 2.0
100.0 1.0
378.4 437.5 598.9 703.1
0.0 0.0
FY16 FY17 FY18E FY19E
EBITDA EBITDA Margin %

Source: Company, ICICIdirect.com Research

PAT growth driven by better operating performance

Inclusive growth across all segments is expected to bring in robust
revenue growth. Moreover, with margin expansion, PAT is expected to
more than quadruple to | 261.5 crore by FY19E compared to | 53.5 crore
in FY17. PAT for FY16 was impacted by one-time depreciation adjustment
of | 100 crore, resulting in a loss of | 109.7 crore. EBIT margins of
Pantaloons for FY17 were at -1% in FY17 compared to -7% in FY16,
indicating a turnaround. Higher emphasis on franchisee based store
openings would not result in a dent in P&L as the company only manages
inventory, which practically does not impact below the line expenses
(depreciation and interest).

Exhibit 46: PAT expected to quadruple over FY17 to FY19E

300.0 3.5
3.0
250.0 3.0
2.3 2.5
200.0
2.0
| cr

150.0
1.5
100.0
0.8 1.0
50.0 0.5
11.4 53.5
0.2 181.7 261.5
0.0 0.0
FY16* FY17 FY18E FY19E

PAT PAT margin (%)

Source: Company, ICICIdirect.com Research, FY16 adjusted PAT

ICICI Securities Ltd | Retail Equity Research Page 20

 Return ratios to ramp up on improving financials
The asset light expansion of Pantaloons and Madura would drastically
improve return ratios. However, return ratios would be moderated by
expansion of Forever 21. The RoE is expected to more than treble to
18.7% in FY19E compared to current 5.6%. The impact of inventory
would, to an extent, moderate RoCE expansion, which is expected to
double by FY19E to 14.6% vs. current 7.5%. Enhanced operational
performance coupled with profitable growth would drive the expansion
plans from internal accruals.
Exhibit 47: Return ratios trend

20.0
18.7

15.9
15.0 14.6
12.3
10.0
(%)

5.6 7.5
5.0

2.4
1.3
0.0
FY16 FY17 FY18E FY19E
RoE RoCE

Source: Company, ICICIdirect.com Research, FY16 adjusted RoE

Higher FCF to reduce debt, improve financial leverage

Replicating Maduras capital efficiency in Pantaloons, ABFRLs
consolidated conversion cycle is expected to reduce from 110 days in
FY17P to 70 days in FY19E. The improvement in cash conversion cycle
coupled with accelerated revenue generation is expected to lead to an
improvement in cash flow from operation (CFO), which is expected to
grow 2.2x to ~| 605 crore in FY19E (vs. ~| 268 crore in FY17P). Improved
fundamentals with major thrust on franchisee model is expected to result
in lower capex and higher free cash flow (FCF) generation, which is
expected at | 240 crore in FY19E. Subsequently, net debt is expected to
reduce to | 1589 crore by FY19E compared to | 2116.2 crore in FY17
resulting in an improved financial leverage ratio (debt/equity) of 1.2x in
FY19E compared to 2.3x in FY17.
Exhibit 48: FCF generation to result lowering of debt

2500.0 2.25 2.5

2.04
2000.0 2.0
1.64
Debt to equity ratio (x)

1500.0 1.18 1.5

Debt

1000.0 1.0

500.0 0.5
1830.6 2116.2 1803.6 1559.8
0.0 0.0
FY16 FY17P FY18E FY19E

Source: Company, ICICIdirect.com Research, FY16 adjusted RoE

ICICI Securities Ltd | Retail Equity Research Page 21

 Risk & Concerns
Increasing competitive intensity from other western brands
In any market globally there co-exists top three fast fashion brands. The
rationale of customers choosing these brands includes: Uniqlo for better
quality, Zara for better designs and H&M for better prices. These brands
have aggressive plans for India. Zara has continued to leverage the Indian
markets with better designs and better fits. However, GAP and Forever 21
have embarked on their growth strategy from FY17. The entry of H&M has
caught on well in the price conscious Indian market. This has resulted in
pricing pressure across the fast fashion industry within well established
brands like Zara slashing its prices to bring them closer to H&M. The body
shop and GAP also reduced their prices to the extent of 15-30% to stay
competitive.
Exhibit 49: Slew of fashion brands in Indian market

Source: Company, ICICIdirect.com Research

ABFRL has also moderated prices of its key brands to the extent 5% in
FY17, impacting growth in Madura. Moreover, growth rates for
Pantaloons and Forever 21 could negatively surprise if the competitive
intensity widens with newer brands entering and disrupting the market.
Aggressive store expansion at invariably high rental expenses
Rent expenses currently forms 16% of overall revenues. With ~80% of
the presence in metro and mini-metro, our estimates include store
expansion in non-metros and smaller cities with major thrust on
franchisee based model. Any variation on above assumptions would
impact our margin estimates in accordance to sensitivity provided below:

Exhibit 50: Sensitivity of EBITDA margins to rent expenses

Change in Rent per sq.ft (varition to current estimates)
EBITDA 0.0% 5.0% 10.0% 15.0% 20.0%
margins FY17E 9.0 8.4 7.7 7.0 6.4
FY18E 10.5 9.3 8.0 6.6 5.1

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 22

 Valuations
Considering the strong franchisee coupled with future growth prospects,
we believe ABFRL would continue to trade at a premium to its peers.
Keeping the structural story intact, which evolves around rising
disposable income and shift of consumer preferences, ABFRL is well-
poised to capture the Indian growth story. We believe the dynamics of
both segments are similar and, hence, value ABFRL on a consolidated
basis. ABFRL (post restructuring) has traded at a two-year historical
average of 2x EV/sales multiple. We ascribe the same to FY19E sales of
| 8840.5 crore and arrive at a target price | 210 with a BUY rating.
Exhibit 51: Historical price trend valuing ABFRL on EV/sales

400

350

300

250
(|)

200

150

100

50

0
Jun-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

Oct-15

Dec-15

Feb-16

Apr-16

Jun-16

Oct-16

Dec-16

Feb-17

Apr-17

Jun-17
Aug-14

Aug-15

Aug-16

Price 2.6x 2.4x 2.3x 2.1x 1.9x 1.7x 1.5x

Source: Company, ICICIdirect.com Research

Exhibit 52: Valuation compared to peers

Figures (| crore) FY17 EV/Sales
Company Price Sales EBIDTA OPM PAT PAT % FY18E FY19E
ABFRL 170.0 6,633.0 437.5 6.6 53.5 0.8 2.0 1.7
Arvind 370.0 9,236.5 943.4 10.2 320.1 3.5 1.2 1.0
Trent 255.0 3,140.5 250.5 8.0 141.9 4.5 2.2 1.9
Raymond 821.0 5,391.3 317.2 5.9 76.1 1.4 1.1 1.0
Average EV/Sales 1.6 1.4

Valuation metrics
Target EV/Sales multiple 2.0
2019E Sales 8,840.5
2019E EV 17,788.0
2019E Debt 1,654.6
2019E Cash 44.5
2019E Market Cap. 16,177.8
No. of shares 77.1
Target Price 210.0

CMP 170.0
Upside/(Downside) 23.5
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 23

 Retail & Textile Peer Comparison

Exhibit 53: Retail peer valuations

Mcap/Sales EV/EBITDA EV/Sales
Mkt Cap
Company
(INR cr) FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E

Coverage Companies
Aditya Birla Fashion 13378.3 2.0 1.7 1.5 34.8 24.9 20.8 2.3 1.9 1.7
Arvind 9558.7 1.0 0.9 0.8 13.0 10.8 8.8 1.3 1.2 1.0
Kewal Kiran 2163.0 4.5 3.9 3.4 21.7 18.5 15.5 4.4 3.9 3.3
Trent 8474.1 4.3 2.0 1.7 69.4 26.1 21.4 4.4 2.2 1.9
Shoppers Stop 2903.0 0.6 0.5 0.5 20.2 16.8 13.3 0.7 0.7 0.6
Siyaram Silk 2081.0 1.3 1.2 1.1 12.3 10.1 8.4 1.5 1.4 1.2
Rupa & Co. 4022.7 3.7 3.3 3.0 29.5 24.1 20.8 3.7 3.4 3.0
Page Industries 18992.6 9.2 7.2 5.8 47.8 38.2 32.6 9.3 7.2 5.8
2.8 1.9 1.6 25.6 21.3 18.1 3.0 2.1 1.8
3.3 2.6 2.2 31.1 21.2 17.7 3.5 2.7 2.3
Brands & Retail
Monte Carlo 1208.3 2.1 2.1 1.7 11.5 10.6 9.2 1.4 1.5 1.0
Raymond 5033.8 0.9 0.9 0.8 21.0 20.1 13.2 1.0 1.0 0.8
Indian Terrian 786.5 1.9 2.0 1.6 16.1 16.4 12.7 1.5 1.6 1.1
Future Lifestyle 5856.0 1.5 1.5 1.3 17.5 17.0 14.4 1.5 1.5 1.1
Future Retail 18662.6 1.1 1.1 0.9 33.7 38.6 27.2 0.8 0.8 0.7
1.5 1.5 1.3 17.5 17.0 13.2 1.4 1.5 1.0
1.5 1.5 1.3 20.0 20.6 15.3 1.2 1.3 0.9

Mkt Cap Mcap/Sales EV/EBITDA EV/Sales

Global brands & Speciatliy retail
(USD bn) FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E FY 17 FY 18E FY 19E
USA
VF Corp 22.5 1.9 1.9 1.8 12.9 12.6 11.4 2.0 1.9 1.8
Lululemon Athletica Inc 7.9 3.4 3.1 2.8 14.2 13.0 11.8 2.7 2.3 2.1
PVH Corp 8.6 1.1 1.0 1.0 10.6 10.1 9.4 1.3 1.2 1.2
Gap Inc 9.0 0.6 0.6 0.6 4.5 4.6 4.5 0.7 0.6 0.6
Ralph Lauren 5.7 0.9 1.0 1.0 5.3 5.7 5.6 0.9 1.0 0.9
Carter's Inc 4.2 1.2 1.2 1.1 8.9 8.4 7.9 1.5 1.3 1.2
The Children's Place 1.9 1.0 1.0 1.0 7.9 7.1 6.6 1.0 1.0 0.9
Nike 94.4 2.8 2.6 2.4 17.1 16.2 14.5 2.5 2.2 2.0
Fossil 0.5 0.2 0.2 0.2 4.7 4.2 7.1 0.4 0.4 0.0
Abercrombie & Fitch 0.8 0.3 0.3 0.3 3.3 3.8 3.8 0.2 0.2 0.2
Hanesbrands Inc 8.2 1.3 1.3 1.2 11.1 10.6 10.3 1.9 1.7 1.6
1.1 1.0 1.0 8.9 8.4 7.9 1.3 1.2 1.2
1.3 1.3 1.2 9.1 8.7 8.5 1.4 1.3 1.2
Europe
LVMH 127.0 2.7 2.5 2.4 11.9 10.9 9.8 2.4 1.9 1.7
Inditex 119.3 4.5 4.0 3.6 19.2 16.9 15.1 4.4 3.5 3.1
H&M 41.8 1.7 1.6 1.4 10.4 9.4 8.6 1.8 1.4 1.3
Next PLC 7.2 1.3 1.4 1.4 6.8 7.5 7.6 1.5 1.6 1.5
2.2 2.0 1.9 11.1 10.2 9.2 2.1 1.7 1.6
2.5 2.4 2.2 12.1 11.2 10.3 2.5 2.1 1.9
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 24

 Financial Summary (Consolidated)
Exhibit 54: Profit & Loss
(Year-end March) FY 16 FY 17P FY 18E FY 19E
Gross Revenue 6,034.6 6,633.0 7,782.7 8,840.5
Growth (%) 9.9 17.3 13.6
Net Revenue 6,034.6 6,633.0 7,782.7 8,840.5
Growth (%) 9.9 17.3 13.6
Cost of Sales 2,751.8 3,008.7 3,829.8 4,352.0
Employee Costs 620.5 705.8 773.1 850.4
Operating Expenses 903.2 1,087.1 1,128.0 1,320.7
Op. Expenditure 697.4 707.1 807.0 880.6
EBITDA 378.4 437.5 598.9 703.1
Growth (%) 420.5 15.6 36.9 17.4
Depreciation 338.1 242.5 271.3 304.0
EBIT 40.3 195.0 327.6 399.1
Interest 176.5 179.7 155.8 137.6
Other Income 26.4 38.2 42.0 46.2
PBT (109.7) 53.5 213.7 307.7
Growth (%) (51.9) (148.7) 299.5 44.0
Tax - - 32.1 46.2
Reported PAT (109.7) 53.5 181.7 261.5
Exceptional Items 121.1 - - -
Adjusted PAT 11.4 53.5 181.7 261.5
Growth (%) 371.3 239.5 44.0
EPS 0.1 0.7 2.4 3.4
Source: Company, ICICIdirect.com Research

Exhibit 55: Balance Sheet

(Year-end March) FY 16 FY 17P FY 18E FY 19E
Source of Funds
Equity Capital 768.8 770.5 770.5 770.5
Reserves & Surplus 132.9 184.9 366.5 628.1
Shareholder's Fund 905.5 958.2 1,139.8 1,401.3
Secured Loan 677.2 1,271.0 1,271.0 1,271.0
Unsecured Loan 1,172.7 889.6 602.9 383.6
Total Loan Funds 1,849.8 2,160.6 1,873.9 1,654.6
Deferred Tax Liability 14.8 20.0 20.0 20.0
Minority Interest - - - -
Source of Funds 2,876.6 3,272.9 3,167.8 3,210.1
Application of Funds
Gross Block 1,330.7 1,635.7 1,830.4 2,051.1
Less: Acc. Depreciation (847.0) (1,089.5) (1,360.8) (1,664.8)
Net Block 483.7 546.2 469.6 386.2
Capital WIP 25.4 25.0 30.0 36.0
Total Fixed Assets 509.1 571.2 499.6 422.2
Goodwill 1,839.5 1,940.8 1,940.8 1,940.8
Investments - - - -
Inventories 1,410.5 1,431.3 1,599.2 1,695.4
Debtors 312.4 453.9 383.8 436.0
Cash 19.2 44.5 70.3 94.8
Loan & Advance, Other CA 491.7 594.2 701.1 797.9
Total Current assets 2,233.8 2,523.8 2,754.4 3,024.1
Creditors 1,429.8 1,551.1 1,836.2 1,967.3
Other Current Liabilities 276.0 211.9 190.7 209.8
Provisions - - - -
Total CL and Provisions 1,705.8 1,763.0 2,026.9 2,177.1
Net Working Capital 528.0 760.8 727.4 847.0
Miscellaneous expense - - - -
Application of Funds 2,876.6 3,272.9 3,167.8 3,210.1
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 25

 Exhibit 56: Cash Flow
(Year-end March) FY 16 FY 17P FY 18E FY 19E
Profit after Tax 11.4 53.5 181.7 261.5
Less: Dividend Paid (176.5) (179.7) (155.8) (137.6)
Add: Depreciation 338.1 242.5 271.3 304.0
Add: Others - - - -
Cash Profit 525.9 475.6 608.8 703.2
Increase/(Decrease) in CL 1,273.7 57.1 264.0 150.2
(Increase)/Decrease in CA (1,596.8) (260.5) (200.8) (241.0)
CF from Operating Activities 137.1 268.0 668.0 608.1
(Add) / Dec in Fixed Assets (468.5) (304.6) (199.7) (226.7)
Goodwill (635.1) (101.3) - -
(Inc)/Dec in Investments 81.9 16.6 - -
CF from Investing Activities (1,021.7) (389.4) (199.7) (226.7)
Inc/(Dec) in Loan Funds 539.0 310.8 (286.7) (219.3)
Inc/(Dec) in Sh. Cap. & Res. 675.5 1.7 - -
Others (318.0) (166.0) (155.8) (137.6)
CF from financing activities 896.6 146.5 (442.5) (356.9)
Change in cash Eq. 12.0 25.2 25.8 24.6
Op. Cash and cash Eq. 7.2 19.2 44.5 70.3
Cl. Cash and cash Eq. 19.2 44.5 70.3 94.8

Source: Company, ICICIdirect.com Research

Exhibit 57: Ratios

(Year-end March) FY 16 FY 17P FY 18E FY 19E
Per share data (|)
Book Value 11.8 12.4 14.8 18.2
EPS* 0.1 0.7 2.4 3.4
Cash EPS 0.3 0.6 0.9 1.2
DPS - - - -
Profitability & Operating Ratios
EBITDA Margin (%) 6.3 6.6 7.7 8.0
PAT Margin (%) 0.2 0.8 2.3 3.0
Fixed Asset Turnover (x) 2.2 2.1 2.6 2.9
Inventory Turnover (Days) 55.6 78.2 75.0 70.0
Debtor (Days) 9.7 21.1 18.0 18.0
Current Liabilities (Days) 115.5 180.8 175.0 165.0
Return Ratios (%)
RoE* 1.3 5.6 15.9 18.7
RoCE 2.4 7.5 12.3 14.6
RoIC 4.1 15.4 29.1 35.1
Valuation Ratios (x)
PE NM NM 72.1 50.1
Price to Book Value 14.4 13.7 11.5 9.3
EV/EBITDA 39.4 34.8 24.9 20.8
EV/Sales 2.5 2.3 1.9 1.7
Leverage & Solvency Ratios
Debt to equity (x) 2.0 2.3 1.6 1.2
Interest Coverage (x) 0.2 1.1 2.1 2.9
Debt to EBITDA (x) 4.9 4.9 3.1 2.4
Current Ratio 1.3 1.4 1.3 1.3
Quick ratio 0.5 0.6 0.5 0.6
Source: Company, ICICIdirect.com Research, * FY16 adjusted EPS & RoE

ICICI Securities Ltd | Retail Equity Research Page 26

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Head Research pankaj.pandey@icicisecurities.com

Pankaj Pandey

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research Page 27

 Initiating Coverage

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RATING
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Strong Buy:
The information >15%/20%
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have been caps/midcaps,
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are subject to change without high conviction;
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Buy: >10%/15%
prior written for large
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ICICI Securities Ltd | Retail Equity Research