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RETAIL

June 2020

Disaccounting/
Inventory
Write-off

High Fixed Low


Cost footfalls

Perfect storm
Research Analysts:
Ritesh Gupta, CFA
ritesh.gupta@ambit.co
Tel: +91 22 6623 3242

Ashish Kanodia, CFA


ashish.kanodia@ambit.co
Tel: +91 22 6623 3264

amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06


Consumer Discretionary

CONTENTS

Perfect storm …………………………………………………………………………..3

Narrative in charts …………………………………………………………………….4

Credit and jobs under pressure, consumer behavior may change ……………6

We expect recovery to be gradual …………………………………………………11

Valuations ignore uncertainty; downgrade PVR, ABFRL, RELAXO, DMART ….16

COMPANIES

Jubilant Foodworks (BUY) …………………………………………………………..31

Titan (BUY) ……………………………………………………………………………37

Trent (BUY) ……………………………………………………………………………43

Avenue Supermarts (SELL) ………………………………………………………….47

Aditya Birla Fashion and Retail (SELL)……………………………………………. 53

Page Industries (SELL) ……………………………………………………………….59

PVR (SELL) …………………………………………………………………………….65

Bata (SELL) …………………………………………………………………………….69

Relaxo (SELL) ………………………………………………………………………….73

June 24, 2020 Ambit Capital Pvt. Ltd. Page 2


Retail
NEGATIVE
THEMATIC CONSUMER DISCRETIONARY June 24, 2020

Perfect storm Key Recommendations


Company Rating TP
Upside/
(downside)
Covid drives multiple uncertainties for the richly valued, high-fixed-cost,
Titan BUY 1,150 15%
metro-centric Retail sector. Change in consumer behavior/priorities,
lower credit availability and loss of jobs/income cuts would hit low- JUBI BUY 1,950 11%
ticket discretionary category too. Slow demand recovery will aggravate Trent BUY 725 10%
cost pain for companies. Strong growth case built on both store ABFRL SELL 125 -9%
expansion and LTL growth will pause. Over a longer period, industry
consolidation will benefit stronger players though Covid could PVR SELL 900 -16%
potentially wipe out next 2 years’ earnings growth (decline in FY21 and Relaxo SELL 600 -8%
barely creep back to FY20!). Given long earnings pain, valuations seem Bata SELL 900 -33%
rich; we advise awaiting correction. Titan, Jubilant followed by Trent are Page Ind. SELL 15,500 -19%
relative BUYs. We downgrade ABFRL, PVR, Relaxo and DMart to SELL.
DMart SELL 2,000 -15%

Macro pain would aggravate post Covid Source: Ambit Capital research, Bloomberg

Consumption growth had started to slow down even pre-Covid. While job
creation was slow, increase in credit (cards, personal loans) supported Titan ranks lowest while ABFRL and PVR
rank highest on our risk framework
consumption. Banks have already started to cut credit card limits; lifestyle
spends accounted for 12% of overall CC spends. Pay cuts and job losses have Earnings Balance Valuation
Company
risk sheet risk risk
accelerated and retail credit availability has been squeezed. Cost cutting and
broader slowdown will also impact various SMEs and self-employed. Top 10 Titan Low Low Low

cities (50%+ of revenues) are slowest to recover, delaying recovery and pain. Trent Moderate Low High
JUBI Moderate Low Moderate
Covid will have an impact across the board ABFRL High High Moderate
Impact on various discretionary categories may not be very different: limited PVR High High Moderate
social interactions and increased WFH trends may hit apparel, QSR and Relaxo Low Low High
footwear players. Ability to cater to limited footfalls in peak hours due to social
Bata Moderate Low High
distancing would also hit throughput for DMart and PVR. We expect 1QFY21 to
Page Ind. Moderate Low High
be largely a washout with gradual recovery from 2HFY21; absolute revenue
growth to be weak until 2HFY22. Higher costs of sanitization and staggered DMart Low Low High
store timings would increase operational cost. Cut in rentals/employee & other Source: Ambit Capital research
costs may not be good enough to turn green in FY21. Slower store rollouts and
even slower retail space developments would hurt medium-term growth.

Market share gains would be delayed for two years; focus on survivors
Lower rental and employee cost inflation imply better store expansion potential
beyond FY22 for Titan/Trent/Jubilant/DMart and drive market share gains. But
near-term earnings pain and rich valuations drive us to downgrade DMart.
Titan remains our top pick given rise in gold prices typically tends to support
profitability growth, and valuations have turned reasonable. We prefer Trent for
strong store economics, loyal customer base and rapid store scale-ups (50%
store count growth over FY19-21).

PVR and ABFRL will survive but damage to RoE irreparable


PVR (~6% dilution) and ABFRL (~9% dilution) need cash infusion to survive
these tough periods. ABFRL (17x EV:normalised EBITDA, ~45% discount) and
PVR (9x EV:normalised EBITDA, ~40% discount) appear attractive vs historical
Research Analysts
levels but it could be a long wait before earnings normalize and RoE may be
structurally pressured due to cash burns. Relaxo (slowing volume growth, 51x Ritesh Gupta, CFA
FY22 P/E), Bata (downtrading risks, 49x FY22 P/E) and Page (softness in ritesh.gupta@ambit.co
consumption, 49x FY22 P/E) are also SELLs. Tel: +91 22 6623 3242
Ashish Kanodia, CFA
ashish.kanodia@ambit.co
Tel: +91 22 6623 3264

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Consumer Discretionary

Narrative in charts
Consumer confidence index is at decade low Spending on grocery has increased the most while
lifestyle/apparel have been worst affected
Spends before Spends during
Spend Category
Current Situation Index Future Expectations Index lockdown lockdown
150 Grocery/Stores 30.7% 47.5%
Fuel/Cab 13.4% 7.4%
130 Lifestyle/Apparels 11.7% 3.7%
Telecom/Utilities/Education 10.0% 14.2%
110 Wallet Load 9.8% 6.9%
Health/Insurance 8.2% 12.4%
90 Travel 4.4% 0.3%
Dining/Food Delivery 3.5% 1.1%
70 Durables 3.3% 2.9%
Hotel 1.4% 0.3%
50
Entertainment 1.5% 2.4%
Aug-11

Aug-18
Mar-12
Oct-12
May-13

Nov-16
Jun-17

Mar-19
Oct-19
May-20
Jan-11

Dec-13
Jul-14
Feb-15
Sep-15
Apr-16

Jan-18

Cash/Quasi Cash 1.4% 0.0%


Others 0.6% 0.9%
Total 100.0% 100.0%
Source: Ambit Capital research, RBI Source: Ambit Capital research, RBL Bank

Consumer debt on credit cards has grown at 29% CAGR Consumer debt on personal loans has grown at 24% CAGR
over FY15-20 over FY15-20

Credit cards (Rs bn) Growth (RHS) Other personal loans (Rs bn) Growth (RHS)
1,200 45% 8,000 35%
40%
1,000 7,000 30%
35%
6,000 25%
800 30%
5,000
25% 20%
600 4,000
20% 15%
400 15% 3,000
2,000 10%
10%
200 5%
5% 1,000
0 0% 0 0%
FY15

FY16

FY17

FY18

FY19

FY20

FY15

FY16

FY17

FY18

FY19

FY20

Apr'20
Apr'20

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Decline in income levels would be steep due to Covid- Job losses across start-ups are significant
related pay cuts; table below is for a relatively insulated
industry with only 10% salary cut – we fear the cuts have
Layoffs from March 25 - May 20, 2020
been much higher in other industries
FY20 FY21 FY22 Oyo*** 5000

Pre-Covid 100 110 121


Udaan** 3000
Ola 1400
Fixed 90 99 109
Swiggy 1100
Variable 10 11 12
Curefit* 800
Post-Covid 95 85 99 Paytm* 700
Fixed 90 81 89 Zomato 520
Variable 5 4 10 Livesp… 450
Decline in income -5% -23% -18% Sharec… 101

Source: Company, Ambit Capital research, Numbers are based to 100. Source: Economic Times, Ambit Capital research, * media reports; **
contract workers; *** since Jan’20

June 24, 2020 Ambit Capital Pvt. Ltd. Page 4


Consumer Discretionary

Covid impact screen - Relaxo and Titan have better defensibility to demand
Earnings risks due
Exposure to top -10 Share of Threat of
Gross margin risks to slowdown in
cities malls online
store rollout
Avenue Supermarts Limited High (due to weaker mix) Low Medium High
Titan High No (some discounting possible though) Medium Medium Low
Bata Medium High (due to downtrading) Medium Low High
Relaxo Low Low (RM benefits) Low Low Low
Page Medium Medium (due to downtrading) Low Low Medium
ABFRL High High (due to inventory risks) High High High
Trent High High (due to inventory risks) Medium High Medium
Jubilant Foodworks Medium Low Medium Medium Low
PVR High Low High High Medium
Source: Company, Ambit Capital research

Recovery would have three key elements: Reopening of stores, psychological sentimental revival for consumers and
economic revival
Phase 2: Psychological barrier (Jun – Dec Phase 3: Economic Slowdown (Dec 2020 –
Phase 1: Reopening (May - Aug 2020)
2020) Dec 2021)

As cities get opened up gradually, while there


As we enter CY21, job losses and weaker
Store closures at most of the places until May end. may be initial spike in consumption due to pent-
economic outlook would drive meaningful
Gradual stores re-opening initiates but at a slow up demand, but would gradually subside as
slowdown in consumption.
pace as most of the Metros remain in lockdown. number of corona cases spike up meaningfully.
Stores to gradually re-open from May. Consumers may question excess consumption of
The consumer mood may remain gloomy as SMEs
the past and may reduce spends in some
As more areas turn into green zones, we will start businessmen and white collar professionals both categories, such as apparels, fine dining, etc.
seeing revival in stores. Malls would be last ones to continue to face risks to their earnings.
open and initially may operate only for limited Until Corona vaccine comes in (unlikely before Some stronger players may start benefiting a bit
hours. from market-share gains as weaker players call it
1HCY21), footfalls may remain muted delaying
quits or cut their size.
oxygen to severely critical retailers.
Source: Ambit Capital research. This analysis doesn’t even include risk of a second wave.

Overall Framework: Titan, Jubilant, Avenue Supermarts, Trent and Relaxo are the businesses we like; unfortunately most
of them haven’t seen much correction barring Titan
Short Term Longer Term Valuation
Overall
disruption attractiveness correction/attractiveness
Avenue Supermarts Medium High Low Medium
Titan Medium High High High
Bata High Medium Low Low
Relaxo Medium High Low Medium
Page High Medium Low Low
ABFRL High Low High Low
Trent High High Medium Medium
Jubilant Foodworks Medium High Medium Medium
PVR High Low High Low
Source: Company, Ambit Capital research

Looking at discretionary stocks in four broad baskets


Theme Companies
Survivors and consolidation beneficiaries but at rich valuations Avenue Supermarts, Relaxo
Consolidation beneficiaries at reasonable valuations Titan, Trent, Jubilant Foodworks
Survival candidates but attractive valuation vs. history PVR*, ABFRL*
Good business, not major consolidation beneficiary but expensive given
Page, Bata
relatively lower growth rates vs. other peers
Source: Company, Ambit Capital research. *They would need balance sheet support in the interim and also there will be a dent to their business for 2-3 years as
some habit changes here can cause damage; they will have to entice footfalls. RoE too would face pressure

June 24, 2020 Ambit Capital Pvt. Ltd. Page 5


Consumer Discretionary

Credit and jobs under pressure, consumer


behavior may change
We expect retail consumption demand to get badly hit by Covid disruption.
Loss of jobs and weakened credit availability would impact consumption. The
impact on jobs will be profound with job losses across travel, hospitality,
aviation and retail. New job creation in IT (pre-Covid headcount growth at 5-
6%) and BFSI may also be muted for 1-2 years. Pre-Covid consumption
growth was also supported by consistent rise in credit availability besides
new job creation. SME pain (impacting consumption) and cash crunch
(reduced availability of product, inventory destocking) too are very well
understood now through multiple expert calls that we did over the last 2
months. Our fear is not just Covid impact but also the ensuing slowdown in
economy which may last until FY22-end.

Consumer confidence on a decline


We note that consumer confidence has been on a decline as employment
opportunities reduce and pay cuts are rolled out across industries. Decrease in retail
credit with cut in credit cards limits may hit spending of younger population of India.
60-65% of credit card spends in India either go on revolver credit or EMI. SMEs/self-
employed incomes too will suffer as recovery of the economy post Covid will be only
gradual.

Exhibit 1: Consumer confidence index is at decade low

Current Situation Index Future Expectations Index


140
130
120
110
100
90
80
70
60
50
Aug-15
Jun-11
Nov-11

Sep-12

May-14
Oct-14
Mar-15

Jun-16
Nov-16

Sep-17

May-19
Oct-19
Mar-20
Dec-18
Jan-11

Apr-12

Feb-13

Dec-13
Jul-13

Jan-16

Apr-17

Feb-18
Jul-18

Source: Ambit Capital research, RBI

Growth in retail credit goes away


Growth had started to slow for discretionary names even before Covid. This was
despite consistent rise in consumer debt as reflected in growth of credit cards and
personal loans. According to RBL Bank’s credit card data, 12% of credit card
consumption goes into lifestyle purchases such as footwear, apparel, etc. With banks
cut credit card rollouts as well as limits, liquidity pumping as a lever to boost
consumption just goes away.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 6


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 2: Spending on grocery has increased the most while Exhibit 3: The formal job market has witnessed steep
lifestyle/apparels have been impacted the most decline in job creation
Spends before Spends during
Spend Category
lockdown lockdown
40%
Grocery/Stores 30.7% 47.5%

Naukri jobs speak index


Fuel/Cab 13.4% 7.4%

(YoY change, in%)


Lifestyle/Apparels 11.7% 3.7%
Telecom/Utilities/Education 10.0% 14.2% 0%
Wallet Load 9.8% 6.9%
Health/Insurance 8.2% 12.4%
Travel 4.4% 0.3% -40%
Dining/Food Delivery 3.5% 1.1%
Durables 3.3% 2.9%
Hotel 1.4% 0.3%
-80%
Entertainment 1.5% 2.4%

Aug-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19

Sep-19
Oct-19

Dec-19
Nov-19

Jan-20
Feb-20
Mar-20
Apr-20
May-20
Cash/Quasi Cash 1.4% 0.0%
Others 0.6% 0.9%
Total 100.0% 100.0%
Source: Ambit Capital research, RBL Bank Source: Infoedge, Ambit Capital research

Exhibit 4: Consumer debt on credit cards has grown at 29% Exhibit 5: Consumer debt on personal loans has grown at
CAGR over FY15-20 24% CAGR over FY15-20

Credit cards (Rs bn) Growth (RHS) Other personal loans (Rs bn) Growth (RHS)
1,200 45% 8,000 35%
40% 7,000 30%
1,000
35% 6,000 25%
800 30% 5,000
25% 20%
600 4,000
20% 15%
3,000
400 15% 10%
2,000
10%
200 1,000 5%
5%
0 0% 0 0%
FY15

FY16

FY17

FY18

FY19

FY20

Apr'20
FY15

FY16

FY17

FY18

FY19

FY20

Apr'20

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

June 24, 2020 Ambit Capital Pvt. Ltd. Page 7


Consumer Discretionary

Exhibit 6: Total retail credit to GDP has risen to 17% Exhibit 7: Households financial liabilities to GDP rose
steeply in the last few years

Total Banks NBFCs (Right scale)


18% 7% 3.8%

(3-year moving average)


HH fin. liabilities to GDP
NBFC retail credit to GDP
Retail credit to GDP

16%
6% 3.4% 3.4% 3.4% 3.4%
3.3% 3.3%
14% 3.2%
5%
3.0%
12% 3.0%
4%
10%

8% 3%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19
Source: RBI, Company, CEIC, Ambit Capital research Source: CEIC, Ambit Capital research

Consumption was anyways driven more by debt


While unemployment rates increased (see charts below), households increased debt
to consume as job growth faltered. Reduced availability of retail credit is taking place
at a time when employment situation in both organised and unorganised sectors is
looking grim (see exhibits below).
Exhibit 8: Overall unemployment rate Exhibit 9: Jobs growth within the listed Exhibit 10: Job losses are happening
has been highest in last 4 decades companies too has been tepid across key employer segments

7% 40% 5.8
Employee growth for NSE

6.1%
Unemployment rate

5.8%
5.8% Job loss/additions in
April 2020 (in mn)
6% 30%
500 (YoY change)

5.2% 5.3% -18.2 -17.8


5.2%
(in %)

5% 20%

3.8% -91.3
10%

Farmers
Salaried
and Labourers

Entrepreneurs
3.7%
Small Traders

4%

0%
3%
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY18
FY74
FY94
FY00
FY05
FY10
FY12
FY18
FY19

Source: NSSO, Ambit Capital research Source: Ace equity, Ambit Capital research Source: CMIE, Ambit Capital research

Exhibit 11: Investment engine has been slow to grow, Exhibit 12: Private consumption growth has been slowing
leading to pressure on jobs creation over past few years despite rise in household debt

Consumption to GDP (Left scale) GDP Private consumption Investments


Investment to GDP (Right scale)
62% 35% 20%
Investments to GDP

60%
Nominal YoY growth
Consumption to GDP

33%
60% 59% 15%

58% 31%
58% 10%
29%
56%
56% 5%
55% 27%

54% 25% 0%
FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20

Source: CEIC, Ambit Capital research Source: CEIC, Ambit Capital research

June 24, 2020 Ambit Capital Pvt. Ltd. Page 8


Consumer Discretionary

If that wasn’t grim enough, a barrage of job cuts now coming up


Job cuts are much worse at the entry level, which could impact lower-ticket
discretionary consumption. The IT industry which used to grow its employee count at
5-6% every year is unlikely to see any headcount growth over the next two years. We
may actually see multiple job cuts in Tier 3/Tier 4 IT companies. CMIE estimates ~27
million young people have lost jobs in April. Media, Aviation, Travel, Hospitality,
Startups and Restaurants will see meaningful job cuts as well. Many categories such
as pizza/apparel/footwear are “good mood” products and fear of a pandemic along
with weaker economic situation may repel consumers from ‘splurging’.
Exhibit 13: Job losses, furloughs are likely to be talk of the town for entire FY21; numbers are staggering
Articles Details
27 million youth in age
group of 20-30 years lost “They will have to compete with the new cohorts joining the labour force after them, for fewer jobs,” it said, adding
jobs in April: CMIE young India will not be able to build the savings it will require later in life.

The crisis has engulfed even top players, such as The Times Group, the Indian Express Group, Hindustan Times Media
Limited, Business Standard Limited and the Quintillion Media Private Limited, which runs the website, The Quint.
Job losses, pay cuts, editions The Times Group announced salary cuts for its print publication Times of India, The Economic Times and Navbharat
shut — coronavirus triggers Times. It said there will be a salary reduction between 5% and 10% from 1 April.
new crisis for Indian media Later, news channel NDTV too announced salary cuts between 10% and 40% from April 1 for three months. The pay cut
is applicable for employees earning more than Rs50,000 per month.
The Hindustan Times has made changes to the salary component of its employees by diverting a percentage of fixed pay
to the variable component, which is linked to the company’s performance.
Job Loss From Covid To Be
‘Much Worse’ Than In 2008: Only 19,500 companies in India have a paid-up capital of more than Rs100mn, Sabharwal said. Out of the 63mn
TeamLease’s Manish enterprises, only 12 million are registered for Goods and Services Tax and only 1 million pay social security, he added.
Sabharwal Lockdowns would clearly impact the ability of these organizations to pay salaries consistently.

Retailers Association of India (RAI) had conducted a survey of 768 retailers, which employ 3,92,963 people across India,
Covid Lockdown: Retailers to gauge their view on the impact of Covid on their business and manpower.
expect around 80,000 job "Small retailers are expecting to lay-off 30 per cent of their manpower going forward, this number falls to 12 per cent for
losses, says survey medium (sized) retailers and 5 per cent for large retailers. On the whole, retailers who responded to the survey expect
layoff of about 20 per cent of their manpower,"
Zomato is also laying off 13% of their staff. They will pay half salaries for next 6 months for employees laid off.
On the jobs front, about 52% of the companies surveyed foresee job losses, in their respective sectors. While the
52% of firms expect job losses
proportion of jobs that are expected to be cut are quite staggered, 47% expect less than 15% job loss and 32% of the
due to Covid, finds CII poll
companies expect to shed 15-30% of jobs once the lockdown ends.
Multiple internet businesses — including Oyo, BlackBuck, Treebo, Acko, Fab Hotels, Meesho, Shuttl, Capillary, Niki.ai,
Swiggy and Fareportal — have on average cut workforce by 30%, including temporary staff, in the past one month.

Many others, such as Ola, Zomato, Zoomcar, MakeMyTrip, Chaipoint, Cashify, and Livspace, have reduced pay by as
Flood of pink slips coming, much as 50%, while a few have withdrawn job offers.
warn start-ups Technology start-ups are likely to cut hundreds of jobs over the next 6-8 months, as demand stutters amid tight funding,
top venture capitalists and founders told ET.

Much of the layoffs will stem from distress sales and company closures, the people said. “We are going to see a
continuous layoff for the next 12 months... Most companies have done one round of layoffs already
The Indian tourism and hospitality industry is staring at a potential job loss of around 38 million, which is 70% of the total
India’s Covid lockdown may workforce,” due to Covid, a report by KPMG, said.
cause 38 million job losses in If this trend continues as the Covid crisis progresses, it will be a setback for national employment. The sector accounts for
the travel and tourism industry 12.75% of employment – 5.56% of it is direct and 7.19% indirect. Over 87 million people were employed in the tourism
industry in 2018-’19, according to the ministry of tourism’s annual report for 2019-’20.
Airlines staring at 2.9mn job With the coronavirus crisis bringing the global aviation industry to a grinding halt, India could witness a drop of 47%
losses, 47% drop in demand passenger demand in a year. This will put 2.9 million jobs at risk as per IATA.
1.5 lakh employees in India's IT industry might lose their jobs over the next three-to-six months. Majority of these layoffs
1.5 lakh IT professionals might
will happen in small IT firms, said HR experts. The industry employs about 450-500mn, of which smaller firms account for
lose jobs due to Covid
about 100-120mn.
Source: Company, Ambit Capital research

Job losses and salary cuts endured by Indians in 2008 could look like a “minor hiccup”
compared to what Asia’s third largest economy will have to face if disruptions caused
by the Covid pandemic continue.
 Manish Sabharwal – CEO of Teamlease, India’s largest staffing company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 9


Consumer Discretionary

Exhibit 14: Decline in income levels would be steep due to Exhibit 15: Job losses across start-ups are significant
Covid-related pay cuts; table below is for a relatively
insulated industry with only 10% salary cut – we fear the
cuts have been much higher in other industries
FY20 FY21 FY22
Pre-Covid 100 110 121 Layoffs from March 25 - May 20, 2020
Fixed 90 99 109 Oyo*** 5000
Variable 10 11 12
Udaan** 3000
Post-Covid 95 85 99
Ola 1400
Fixed 90 81 89
Variable 5 4 10
Swiggy 1100
Decline in income -5% -23% -18% Curefit* 800
Source: Company, Ambit Capital research, Numbers are based to 100. Paytm* 700
Zomato 520
Livespace 450
Sharechat 101

Source: Economic Times, Ambit Capital research, * media reports; ** contract


workers; *** since Jan’20

Fortune Magazine published a survey of CEOs of Fortune 500 companies on post-


Covid business environment and how they are adapting for the future. While there
are caveats of “pre-mortem”, “loss aversion”, “recency bias” and other forms of
behavioural biases in play, given the survey was conducted in the midst of a still-
developing situation, there are some interesting insights.

Fortune 500 CEO Poll conducted between week of 23rd April and 4th May 2020
Some interesting insights worth highlighting
 L shaped recovery seems to be consensus (77.4% feel recovery is beyond
1Q2022)
 26% feel at least 10% of the workforce may “never” return to the “workplace”,
51% feel business travel may “NEVER” return to pre-Covid levels
 ~44% have laid off employees, 7% have been hiring, 50% of CEOs have agreed
to a compensation cut
 43% feel capex spending may not return to 2019 levels before 2022 (~5% feel We believe the economic pain
“NEVER”) would aggravate over FY21 as
normalcy gets delayed and we
expect FY22 vs FY20 MoM growth
Exhibit 16: Retail SSGs accelerated over FY16-19, but had already started to moderate rates to start reporting positive
a bit in 9MFY20 barring Trent as broader consumption started to slow down growth only from mid of FY22
SSG FY15 FY16 FY17 FY18 FY19 9MFY20
Trent- Westside 11% 8% 9% 9% 9% 12%
Madura 1% 0% -5% 9% 5% 8%
Pantaloons 5% 6% 5% -3% 1% 6%
FLFL- Central 8% 10% 18% 10% 6% 6%
FLFL- Brand Factory 17% 16% 14% 4%
Shoppers Stop 5% 9% 3% 2% 4% 2%
Titan- Jewellery 1% -7% 19% 25% 16% 7%
Jubilant 0% 3% -2% 14% 16% 5%
Westlife- McDonalds -6% 2% 4% 16% 17% 8%
TCNS 18% 27% 9% 8% -3% 2%
DMart 22% 21% 21% 14% 18% NA
Source: Company, Ambit Capital research. We have taken 9MFY20 numbers to exclude the impact of Covid.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 10


Consumer Discretionary

We expect recovery to be gradual


Most key metros and top 10 cities are badly hit by Covid. India continues to
witness spike in Covid cases, indicating likelihood of further shutdowns in
these cities. A large part of our coverage is exposed to metro cities with 70-
80% revenues coming from top 60 cities. We believe revenue growth recovery
will have three distinct phases: a) all metro stores do not open before
Jul/Aug, leading to much longer store closure period vs estimated; b)
footfalls remain 30-40% lower than pre-Covid levels, leading to lower sales
despite re-opening of stores; and c) consumer slowdown even post-Covid
fears settle. We believe apparels/footwear/multiplexes will be impacted the
most given limited social and work interactions. Multiplexes will be the last
ones to recover as consumers will avoid crowded places. Footwear/apparel
may not see much need for customer visits as need to dress up has declined
meaningfully.
Exhibit 17: Top 15 cities account for 60%/62% of total confirmed/active cases in India
City Confirmed Active
Mumbai 90,876 43,414
Delhi 59,746 24,558
Chennai 41,172 17,687
Ahmedabad 18,837 3,893
Pune 15,881 6,658
Kolkata (including Howrah) 6,738 2,474
Hyderabad 5,512 5,184
Gurgaon 4,427 1,838
Surat 3,233 789
Jaipur 2,857 460
Nagpur 1,325 479
Bengaluru 1,319 831
Kanpur 962 400
Lucknow 813 321
Visakhapatnam 300 126
Source: Ambit Capital research, data as on 22nd June, 2020

Exhibit 18: Retail and recreational activity at Top-15 states are at below 50% pre-
Covid level (barring Bihar) as per Google mobility data
Maharashtra
Telangana
Karnataka

Rajasthan

Pradesh
Madhya
Pradesh

Pradesh
Andhra

Gujarat

Odisha
Bengal

Punjab

Kerala
Uttar

West
Nadu
Tamil

Delhi
Bihar

0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
Retail and recreation mobility changes
-90%
Source: Ambit Capital research, google, Note - Mobility trends are for places such as restaurants, cafés,
shopping centres, theme parks, museums, libraries and cinemas.

We expect only a gradual re-opening of retail stores in India. We model recovery to


be in three phases:

June 24, 2020 Ambit Capital Pvt. Ltd. Page 11


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 19: Recovery would have three key elements: Reopening of stores, psychological sentimental revival for consumers
and economic revival.
Phase 2: Psychological barrier (Jun – Dec Phase 3: Economic Slowdown (Dec 2020 –
Phase 1: Reopening (May - Aug 2020)
2020) Dec 2021)

As cities get opened up gradually, while there


As we enter CY21, job losses and weaker
Store closures at most of the places until May end. may be initial spike in consumption due to pent-
economic outlook would drive meaningful
Gradual stores re-opening initiates but at a slow up demand, but would gradually subside as
slowdown in consumption.
pace as most of the Metros remain in lockdown. number of corona cases spike up meaningfully.
Stores to gradually re-open from May. Consumers may question excess consumption of
The consumer mood may remain gloomy as SMEs
the past and may reduce spends in some
As more areas turn into green zones, we will start businessmen and white collar professionals both categories, such as apparels, fine dining, etc.
seeing revival in stores. Malls would be last ones to continue to face risks to their earnings.
open and initially may operate only for limited Until Corona vaccine comes in (unlikely before Some stronger players may start benefiting a bit
hours. from market-share gains as weaker players call it
1HCY21), footfalls may remain muted delaying
quits or cut their size.
oxygen to severely critical retailers.
Source: Ambit Capital research. This analysis doesn’t even include risk of a second wave.

Exhibit 20: Companies with higher share of high street and non-metros would benefit: With the national lockdown and work-
Avenue Supermarts, Trent, and Relaxo may recover faster from-home, people will order more
Number of cities Share of high street online, keep off from malls and the
high street stores for a certain short
Presence in ~69 cities but cities present in is a High (Most of the stores are on
Avenue Supermarts
good mix of Metros and non-Metros high street) term period. It may take some time for
people to feel comfortable again with
Titan Tanishq has presence in ~ 200 cities Mixed (Nearly Equal)
visiting public spaces. As such, e-
Jubilant Foodworks Jubilant Foodworks has presence in 282 cities High (Malls are less than 30%) commerce will emerge and come to
Trent Westside has presence in 76 cities High (Malls are 40%) the forefront for fashion retailers.
Madura is present across 750 cities while
ABFRL Malls’ share is high
Pantaloons is present in 130 cities
Sandeep Kataria, Bata India CEO
Bata Present in ~450 cities High street share is high
Presence across most of the towns in North and High street/Traditional multi
Relaxo
West; South and East they are building up brand footwear stores
PVR Presence in 69 cities Mall-based completely

Page Present across the country High street/Usual hosiery stores


Source: Company, Ambit Capital research

Exhibit 21: Store expansions would get delayed and net store additions may turn out
to be negative hurting growth for retailers across the board
SSG Store expansion
Company
FY17 FY18 FY19 FY17 FY18 FY19
Avenue Supermarts 21% 14% 18% 19% 18% 14%
Titan (Tanishq) 19% 25% 16% 8% 22% 12%
ABFRL (Lifestyle) -5% 9% 5% 1% 7% 10%
ABFRL (Pantaloons) 5% -3% 1% 28% 32% 12%
Trent (Westside) 9% 9% 9% 15% 17% 20%
Jubilant Foodworks -2% 14% 16% 9% 2% 8%
PVR 8% 16% 13% 12% 8% 22%
Westlife Development 4% 16% 17% 9% 7% 7%
Source: Company, Ambit Capital research

June 24, 2020 Ambit Capital Pvt. Ltd. Page 12


Consumer Discretionary

Recovery faster for some but growth revival may take Sandeep Kataria, Bata India
CEO
similar time across categories It is inevitable that stores that had
We believe apparels/footwear/multiplexes will be impacted the most given limited lower performance during the pre-
social and work interactions. Multiplexes will be the last ones to recover as consumers Covid period will feel the impact of
will avoid crowded places. Footwear/apparel may not see much need for customer lower footfalls post-Covid, and we
will evaluate these stores case by
visits as need to dress up has declined meaningfully. Most continue to work from
case. The good news for a company
home (WFH) or reduce their visits to office and continue to cut casual social like Bata is that we have a very
interactions. This category would also be most exposed to higher shift to online, broad portfolio and are in a unique
which already has 10% overall market share. Grocery retailers like DMart may face position to service the consumer
difficulty in accommodating the same number of footfalls as before Covid until the needs. However, owing to the
situation normalizes. Shift to online is a risk here too. Food ordering can current situation, there is certainly a
meaningfully increase and share of trusted food/QSR brands is bound to go up vs need for us to revisit our expansion
random mom-pop restaurants that may not be able to assure hygiene. However, out- plan.
of-home eating and loss of ordering at office/social interactions may not be made up
by such shifts for the shorter term.

Talks with experts’ signal multiple behavior changes


Shift to online is a big risk
Covid has forced many offline customers to try online channel (especially in grocery)
for the first time and are able to appreciate the convenience. That said, we have
noticed that traditional brick and mortar retailers like Walmart and Target have seen
a similar traction on their online channels. Would DMart be able to do the same and
grow its ecommerce channel faster is a question mark? Share of online channel in
grocery is 3% while in apparels/footwear it is already 10%. Online food ordering too
will pick up though customer may stick to their favorite QSR brands due to hygiene
and trust concerns.
Companies with weaker store economics may face higher pressure
With the acceleration of e-com in the new world of Covid there would be some
consumers shifting partially or completely to the E-com shopping. With this transition
there would a few stores which would become unviable. Companies with weaker
store economics will have to close down many tail stores which aren’t profitable.
Companies with relative better track record of establishing store economics
Increased work from home Dominos Global con-call excerpt
Increased work from home may lead to lower apparel sales for formals. Our Also what we're seeing is, we are
conversations with many managers seem to suggest meaningful productivity gains as getting new digital customers as
employees adopt WFH. Many companies (1, 2, 3) have been looking to shift their well. The digital percentage of our
employees permanently to WFH partially or fully. We believe this may lead to business has ticked up pretty
meaningful impact on sale of formals/casuals. significantly in the last several
weeks. I think I reported to you, for
A new survey of CFOs by Gartner revealed that a higher number of CFOs are looking the fourth quarter, we touched
to shift more of their previously on-site employees to remote on a permanent basis. 70% digital. In recent weeks, we're
74% said they intend to move at least 5% of their on-site workforces to remote positions running 75%, and we've had at
after the Covid crisis is resolved. least one week where we were
Minimalism, anti-credit-card and anti-leverage attitudes over 80% digital. So that's also
another benefit we're seeing as the
Another impact is reduced consumption excesses which may reduce dining out, customers are coming to that
apparels and footwear. Multiplexes would continue to be thronged by most people digital channel as we go into this
though it may have to wait until mass adoption of vaccine. While apparel and contactless space that we're in.
footwear would be the fastest growing categories along with QSR, we don’t see large
dominant winners in apparels (barring Trent) and footwear given varied tastes and
sub-segmentation of the market. In QSR, JUBI is already exploring more cuisines like
Biryani and Chinese and has been the only player so far able to establish scalability,
profitability and technology back-end to manage stronger shift to delivery.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 13


Consumer Discretionary

Old habits would return over a 12-month period as things normalise


Coming to consumer behavior changes, while we believe old habits would gradually
return, this may take a few months/quarters. Viswanathan Anand’s article in TOI is
very interesting:
I too have been stranded in Bad Soden, Germany since March, unable to get back to my family in India. While it has been
difficult to be alone in such times, it has also given me a chance to reflect upon many things – how our modern lifestyles
focus on our demands more than our needs, what we value as success in today’s world, and how our education system
prepares us for life.

Just yesterday, I received a series of promotional SMSs from various clothing brands in India, announcing that they were now
delivering online orders nationwide. This was followed by messages from food joints declaring safe and contactless delivery
to your doorstep. In that moment, I was pleasantly surprised to realize that I hadn’t once thought of or missed online
shopping, or dining out in the last 3 months – an activity which is otherwise a regular indulgence in today’s lifestyle.
Far from home, my only thought and desire has been to reunite with my family and enjoy simple home cooked meals. This
realization got me thinking, how many such things has been part of my everyday life just because they’re easily available,
but not something I really needed? Today’s modern lifestyle is centred around consumerism and we’ve all fallen prey to it.

Buying that is focused on luxury rather than need; availing services like hospitality, entertainment, spas because they’re
accessible and affordable; opting for international brands over locally made products; the list is endless. During the
lockdown, my family and I have been happy and content in living with only the essentials. Back home, my wife and son have
even found ways of using groceries and ration more efficiently since procuring them is not as easy in these times.

Same was echoed by marketing Guru Phillip Kotler:


https://sarasotainstitute.global/the-consumer-in-the-age-of-coronavirus/
Shift to online would be a key imperative
We believe for Trent and DMart it would be critical to shift online from a long-term
standpoint. While we still don’t anticipate a major consumer behavioral change but
clearly Covid will accelerate online shift of grocery and apparels/footwear category.
US experience suggests that Walmart and Target have been the biggest beneficiaries
of online shift. However, we note DMart has very limited play here and has always
maintained that its gross margins in online are always a challenge (due to lower
share of higher margin merchandise sales).
Haves and Have-nots will behave differently; even low-ticket discretionary
behavior may vary
While a large section of society would cut discretionary spends, priorities within those
spends too may change. As they reduce social interactions, going out, and look to
reduce other support interactions (maids, taxi/cabs etc.), this can have profound
impact on spending mix. While low-ticket discretionary spends may not go down for a
large section of the society (given saving elsewhere) but the bottom 10-15% of
consumers (self-employed, people losing jobs) may still find such spends to be a big
burden with lower income levels.
The mid-rung 20-30% of consumers who may suffer only a marginal 15-20% cut in
earnings may prioritise their earnings and hence buy larger ticket items such as two-
wheelers/cars or dishwashers/robo cleaners or other home improvement categories
to make their living at home more comfortable.
Exhibit 22: Covid and economic pain both together are a deadly combination
Haves Have-nots
Monthly income of INR 40k to 80k
Monthly income of INR 80k to 200k.
Witness a salary cut and most of the discretionary
Witness a salary cut but base earnings still strong.
surplus is gone.
Likely to be more aged, may not like to venture out to
Would cut spending or down-trade to lower-priced
buy stuff, may shift online, may prefer to buy more
articles.
household goods like dishwashers, robo cleaners, etc.
Source: Company, Ambit Capital research

Footwear and Apparels are most vulnerable. Not only will these segments see
inventory write-offs/mark-downs over FY21 but also continue to witness shift to
online. In addition, growing share of work from home and reduced social interaction
may continue to impact both formals and casual wear products.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 14


Consumer Discretionary

Exhibit 23: Covid will have impact on consumption across the categories
Positives Negatives
 Higher discounting to liquidate inventories
 Long-term opportunity to shift from
 Work from Home/lesser trends of going out-of-home trends to reduce
Apparels unorganised to organised and potential for
formal wear purchases
double-digit market growth to continue
 Prone to online shift
 Long-term opportunity to shift from
unorganised to organised  Higher share of EOSS due to unsold inventories
Footwear
 Considerable opportunity given average  Reduced purchases of closed footwear
number of pairs held is only 2 as of now
 Pent-up demand as product continues to get  People may postpone their purchases for some time
Innerwear
used even within lockdown period  Down-trading too is a possibility

Grocery Retailing  Down-trading may reduce basket sizes


 Footfalls into physical stores would get impact due to social distancing
norms

 Delivery-focused models to gain share


 Reduced occasions of social interactions will impact the demand in-
QSR store as well as at home and office
 Gain from unorganised competition
 Pizza isn’t a staple in India and hence is still discretionary unlike US
 Higher gold prices to drive better sales growth
despite weaker volumes
Jewellery  High-ticket discretionary spends may reduce
 Wedding spends may benefit from higher
share of wallet
 Multiplexes may revive back as usual once  Lower utilisation rates until Covid lasts
Film Exhibition
Covid threat goes off  Operational losses likely to continue for a long time
Source: Company, Ambit Capital research

Strong organized players will eat weaker organized


and unorganized eventually
Not all is lost though. We expect the recovery to gradually start from 2HFY22. Over
the longer term: a) shift from unorganized to organized will continue to play out and
benefit stronger retail players and b) revival in white collar salary growth would
continue to drive higher discretionary spends towards grocery, QSR, apparels,
footwear, etc. Over the longer term, we expect Titan/Avenue
Supermarts/Trent/Jubilant to expand leadership in their categories. We also expect
them to benefit from ongoing stress as multiple peers may have to significantly cut
growth aggression. Rental and employee cost inflation may also moderate beyond
FY22 as weaker retailers struggle to survive.
Exhibit 24: Grocery retailing followed by Jewellery and QSRs are larger longer-term
opportunities; for apparel consolidation may be the theme within organised market
Overall market Share of Market share of our Market share
Category
(Rs bn) Organised (%) coverage companies in organised
Apparels 4,606 33.0% 2.6% 7.9%
Footwear 769 45.0% 7.1% 15.7%
Innerwear 373 22.3% 7.9% 35.3%
Grocery Retailing 44,352 6.3% 0.4% 6.8%
QSR 1,092 55.2% 3.4% 6.2%
Film Exhibition 121 50.9% 29.1% 57.2%
Jewellery 3,025 32.0% 5.5% 17.1%
Source: Company, Ambit Capital research

June 24, 2020 Ambit Capital Pvt. Ltd. Page 15


Consumer Discretionary

Valuations ignore uncertainty; downgrade


PVR, ABFRL, RELAXO, DMART
We believe valuations need to reflect the reality of two years of pain for
these retailers. While the street has been more focused on near-term
implications, we fear pain may be elongated given: a) long period to get out
of Covid situation, reducing footfalls meaningfully across brick & mortar
retailers and b) continuing consumer slowdown led by weaker economic
activity, rise in white collar unemployment, increasing paucity of new jobs for
younger population (IT, internet, aviation, travel, lifestyle and retail,
hospitality). Our estimates across coverage names are 20-30% below
consensus for FY22. We think multiples may get de-rated as earnings
disappointment extends from next 1-2 quarters to next 7-8 quarters. Given
these are high fixed cost businesses, even small changes in consumer
behavior can have long-term implications for profitability.
While we expect pain across various discretionary names, we prefer Titan, JUBI and
Trent as they have ability to better benefit from eventual consolidation in respective
categories. Relaxo and DMART have similar tailwinds but rich valuations prevent us
from doing so. For ABFRL and PVR, balance sheet constraints and consumer behavior
changes will hit growth, profitability and RoE. For Bata and Page, we see a mismatch
between valuation and long term growth case (~10-12%).

Earnings pain to last for next 24 months


We cut our estimates by 20-30% keeping in mind four phases: a) closure of stores
with most of them not operating except for one month (in 1QFY21), b) gradual
reopening of stores with 50-60% utilisation (end-1QFY21 to 2QFY21), c) ramp-up of
utilisation to 80-90% should take 5-6 months (3QFY21-4QFY21), d) ramp-up from
return to 80-90% of pre-Covid sales to growth (1HFY22). While companies will be
able to get rental waiver for store closure period (50-100%), we aren’t sure if retailers
would be able to move on a variable model for entire FY21. Covid spread continues
to increase in Metro towns as the lockdowns get opened, we believe this may drive
further delays in psychological barrier recovery for consumers to visit offline stores.
Lower store network rollouts would impact FY22 earnings too
We also build in slower network rollout, which further hurts overall growth for most of
these businesses. We expect most of these companies to cut employee cost by ~30%
for the entire FY21 while rental cost (building in the best possible outcome for
retailers) is likely to be cut ~40% and trend closer to overall sales decline. Multiple
discretionary costs like advertising, travelling, and store refurbishment would be
delayed and cut by 50-60%. To a large extent, we believe even a 10% mismatch in
cost decline and revenue decline drives a sharp EBITDA reduction. Higher interest
costs drive further bigger losses for leveraged balance sheets. We would also be wary
of too much cut in staff salary as this may impact employee morale and can lead to
compromises in customer experience in difficult times. This can hurt the brand
reputations more severely and may drive them to lose key talent (especially at store
level).
Exhibit 25: Break-up of costs for companies in our coverage - Rental and employee are key items; rentals are likely to be
shared for the closure period between mall and store owners, employee costs may get rationalized by 20-30% across
various heads
Ad and Professional Freight/ Contract
Gross Employee Rent Power Franchisee/ Packing Selling and Other EBITDA
FY19 Repairs sales and delivery processing
margin cost cost & fuel royalty Material distribution expenses margin
promotion legal fees Charges & handling
Titan 27% 5% 1% 0% 0% 3% NA NA NA NA NA 3% 4% 11%
Trent 51% 10% 13% 2% 3% 2% NA NA 2% 3% NA NA 7% 9%
ABFRL 52% 11% 14% 1% 2% 4% NA NA 1% 1% NA NA 9% 7%
Page 58% 16% 1% 1% 0% 4% 5% NA NA 1% 5% 1% 2% 22%
PVR 70% 11% 15% 5% 8% 1% NA NA 1% NA NA NA 9% 19%
Relaxo 53% 11% 2% 3% 1% 3% NA NA 2% 4% 10% NA 3% 14%
Bata 56% 11% 13% 2% 1% 2% 1% NA NA 2% NA 2% 6% 16%
DMart 15% 4% 0% 1% 0% NA NA NA 0% NA NA NA 1% 8%
JUBI 75% 19% 10% 5% NA 5% 4% 3% 1% 3% NA NA 9% 17%
Source: Ambit Capital research, Company. We use FY19 as FY20 annual reports which give detailed break-up of costs aren’t yet out.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 16


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Consumer Discretionary

Rental costs may not be a straightforward waiver


While retail companies have been gunning for a rental waiver for lockdown period
and variable rental for the entire year, it may not be so easy given financial
compulsions for malls too. We wouldn’t be surprised if such forgone rentals are
merely a moratorium too. Many mall owners have taken lease rental discounting
(LRD) from banks for 9-10 years. If rentals decline, mall owners may need to top it up
to avoid bank defaults or ask banks to spread/extend the discounting tenure. This too
is complicated as RBI intervention may be needed to restrict it for classification as
NPA.
Prestige Group, which had waived off rentals till May, said long-term rental waiver is
not possible. “We are not liable to waive off any rentals for the retailers for longer
durations as there are financial obligations towards banks,” said Irfan Razack, MD at
Prestige Group. “Financial institutions have only given three months moratorium (on
loan repayments) and not waivers.” “Financial institutions have only given three
months moratorium (on loan repayments) and not waivers.”
Our recent checks suggest that most mall owners (such as DLF) have given 50-100%
waiver for the lockdown period from March to May, 75% for Jun/Jul, 50% for Jul/Aug
and 25% for Sep/Oct. Rentals are likely to be usual for the last 5 months. This implies
an overall reduction of 30-40% in rentals. For high street, rental reduction depending
on locations, would be anywhere between 20-60%.
Media articles suggest rental waivers for lockdown months have been behind
expectations that they will be able to get full waivers for lockdown period.
 Inorbit Malls, said the company was giving a 50% discount on rent to tenants
from April to August.
 Rahul Malhotra, marketing head at Brigade Group, which owns the Orion Mall in
Bengaluru, said the company had agreed to give a rent waiver of 50% to retailers
during the lockdown months.
 Phoenix Mall is talking about a moratorium rather than a waiver.

Expect limited earnings growth over FY20-22


We believe earnings growth for most of the retail players to remain range-bound
over FY20-22. First Covid and then its induced economic pain would mean two lost
years from an earnings growth standpoint. Some companies which have balance
sheet challenges would further face issues in driving growth expansion and hence
face earnings slowdown even in FY23. For companies which have better balance
sheets such as Trent, Titan and DMart may use this opportunity to expand
aggressively and acquire prime properties.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 17


Consumer Discretionary

Exhibit 26: We have materially cut our FY21 estimates to incorporate the impact of
lockdown
FY21E FY22E
Rs mn
New Old Change New Old Change
Rating BUY BUY UNCHANGED
Target price (Rs) 725 640 13%
Revenue 21,373 37,444 -43% 41,198 48,799 -16%
EBITDA 1,895 5,960 -68% 7,752 9,506 -18%
Trent
EBITDA margin 8.9% 15.9% -700bps 18.8% 19.5% -70bps
PBT -1,053 2,501 -142% 3,478 5,629 -38%
PAT -788 1,872 -142% 2,602 4,212 -38%
EPS (Rs) (2.2) 5.3 -142% 7.3 11.9 -38%
Rating SELL BUY DOWNGRADED
Target price (Rs) 125 211 -41%
We turn SELLers on ABFRL on
Revenue 56,724 93,086 -39% 79,769 108,507 -26%
account of earnings risk given
EBITDA 1,909 1,891 1% 7,308 10,654 -31%
ABFRL
EBITDA margin 3.4% 2.0% 140bps 9.2% 9.8% -60bps
high fixed cost and potential
PBT -2,300 -1,956 18% 3,737 6,811 -45%
consumer behavior changes post
PAT -1,721 -1,467 17% 2,797 5,108 -45% Covid. Balance sheet will remain
EPS (Rs) (2.0) (1.9) 7% 3.3 6.6 -50% stretched with net debt: EBITDA at
Rating SELL SELL UNCHANGED ~3.5x post rights issue as well.
Target price (Rs) 15,500 15,150 2%
Revenue 20,988 28,209 -26% 31,941 33,437 -4%
Page EBITDA 2,288 4,309 -47% 6,799 5,968 14%
Industries EBITDA margin 10.9% 15.3% -440bps 21.3% 17.8% 350bps
PBT 1,456 3,928 -63% 5,958 5,568 7%
PAT 1,089 2,939 -63% 4,459 4,167 7% We turn SELLers on PVR due to
EPS (Rs) 97.7 263.5 -63% 399.7 373.5 7%
balance sheet risk and poor
Rating SELL BUY DOWNGRADED
visibility of revenue over the 12-
Target price (Rs) 900 2,220 -59%
18 months. RoE will fall to 9% in
Revenue 7,987 43,690 -82% 30,032 50,563 -41%
FY23 (post normalization of
EBITDA -889 14,477 -106% 9,758 16,854 -42%
PVR Covid) due to cash burns
EBITDA margin -11.1% 33.1% -4420bps 32.5% 33.3% -80bps
PBT -8,548 3,386 -352% -422 4,766 -109%
PAT -5,727 2,203 -360% -316 3,566 -109%
EPS (Rs) (104.7) 45.9 -328% (5.8) 74.4 -108%
Rating SELL BUY DOWNGRADED
Target price (Rs) 600 700 -14%
Revenue 17,264 27,047 -36% 26,971 32,349 -17%
We turn SELLers on Relaxo on
EBITDA 2,120 4,718 -55% 5,253 6,100 -14%
Relaxo account of expensive valuations
EBITDA margin 12.3% 17.4% -510bps 19.5% 18.9% 60bps
and near-term threat to volume
PBT 949 3,562 -73% 4,149 4,902 -15%
PAT 710 2,666 -73% 3,105 3,668 -15%
growth
EPS (Rs) 2.9 10.7 -73% 12.5 14.8 -15%
Rating SELL BUY DOWNGRADED
Target price (Rs) 2,000 2,300 -13%
Revenue 246,820 325,003 -24% 341,772 401,358 -15%
We turn SELLers on DMart on
EBITDA 15,289 26,182 -42% 29,175 33,838 -14%
DMart account of expensive valuation
EBITDA margin 6.2% 8.1% -190bps 8.5% 8.4% 10bps
and near-term risks of lower
PBT 11,628 22,693 -49% 24,372 29,543 -18%
PAT 8,701 16,981 -49% 18,238 22,107 -18%
earnings led by lower throughput
EPS (Rs) 13.4 27.2 -51% 28.2 35.4 -21%
per sq ft due to social distancing
Rating BUY BUY UNCHANGED
measures
Target price (Rs) 1,950 2,000 -3%
Revenue 31,279 42,179 -26% 45,174 54,673 -17%
Jubilant EBITDA 5,870 9,757 -40% 11,041 13,776 -20%
Foodworks EBITDA margin 18.8% 23.1% -430bps 24.4% 25.2% -80bps
PBT 1,841 4,706 -61% 6,290 8,403 -25%
PAT 1,377 3,522 -61% 4,707 6,288 -25%
EPS (Rs) 10.4 26.7 -61% 35.7 47.6 -25%
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 18


Consumer Discretionary

DCF-based valuations
We continue to believe that earnings growth over FY19-23 period would be slower
than seen over the last decade given weaker economic growth impacting overall
consumer sentiment, income growth and discretionary spends. While we build in the
best for most of these companies, we believe the next few years’ growth challenges
may bring these stocks closer to their fair value.
Exhibit 27: Key assumptions for our coverage companies: Revenue CAGR over FY19-23 to be weak vs previous decade
Revenue CAGR EBIT CAGR TV as % of
Ambit estimate overall
FY09-19 FY19-23 FY23-33 FY33-40 FY23-40 FY09-19 FY19-23 FY23-33 FY33-40 FY23-40 value
ABFRL NA 2% 9% 8% 9% NA 20% 14% 10% 12% 34%
Trent (Standalone) 18% 19% 15% 11% 13% NA 44% 21% 13% 18% 45%
Page Industries 27% 7% 15% 11% 13% 29% 5% 17% 11% 14% 42%
Titan 17% 12% 16% 14% 15% 23% 9% 20% 17% 19% 55%
Bata 11% 2% 12% 9% 11% 20% 6% 18% 10% 15% 38%
Relaxo 19% 8% 15% 13% 14% 24% 19% 19% 13% 17% 38%
DMart 42% 21% 18% 13% 16% 45% 20% 19% 13% 16% 71%
PVR 23% 4% 15% 11% 14% 24% 10% 22% 13% 18% 47%
JUBI 29% 10% 14% 11% 13% 40% 21% 17% 12% 15% 42%
Source: Ambit Capital research, Company, Bloomberg

Exhibit 28: Reverse DCF: Relaxo, Jubilant and Trent appear to be the most mispriced stocks
Revenue CAGR EBIT CAGR TV as % of
Reverse DCF overall
FY09-19 FY23-33 FY33-40 FY23-40 FY09-19 FY23-33 FY33-40 FY23-40 value
ABFRL NA 10% 7% 9% NA 15% 9% 12% 32%
Trent (Standalone) 18% 14% 10% 13% NA 20% 12% 17% 45%
Page Industries 27% 17% 13% 16% 29% 19% 13% 17% 46%
Titan 17% 17% 13% 15% 23% 21% 15% 19% 53%
Bata 11% 16% 11% 14% 20% 22% 12% 18% 43%
Relaxo 19% 15% 10% 13% 24% 19% 11% 15% 32%
DMart 42% 21% 17% 19% 45% 22% 17% 20% 76%
PVR 23% 16% 12% 14% 24% 22% 13% 19% 47%
JUBI 29% 14% 10% 12% 40% 17% 11% 14% 39%
Source: Ambit Capital research, Company, Bloomberg

Exhibit 29: We are BUYers on Titan, Trent and Jubilant Foodworks


Company Rating CMP TP Upside/ (downside)
Titan BUY 1,000 1,150 15%
JUBI SELL 1,760 1,950 11%
Trent SELL 660 725 10%
ABFRL SELL 137 125 -9%
PVR SELL 1,065 900 -16%
Relaxo SELL 655 600 -8%
Bata SELL 1,345 900 -33%
Page Industries SELL 19,161 15,500 -19%
DMart SELL 2,356 2,000 -15%
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 19


Consumer Discretionary

Cross-cycle valuations rich and ripe for correction


We believe in the next two years earnings would remain volatile and focus more on
TTM multiples. Given the Covid disruption and ensuing consumer slowdown, there
may not be much difference between FY22 and FY20 valuations. With FY20 earnings
more certain, we prefer to use that to benchmark relative and cross-cycle multiples.
Given high debt, we look at ABFRL and PVR on EV/EBITDA while for other companies
we continue to focus on P/E. We believe TTM multiples should have corrected given
the weakest two years forward earnings vs what we have seen in the past. To that
extent Bata, DMart, Jubilant, Page and Relaxo appear expensive. For Jubilant, we
believe correction in rentals over a longer period creates a better narrative for the
future growth. Additionally company is on the right side of online channel shift
disruption accelerated by Covid. Titan, Trent, PVR and ABFRL are the ones which have
seen the maximum correction.
Valuations are very attractive for both PVR and ABFRL (compared to their history)
though the uncertainties on the balance sheet, equity dilution and risks of disruption
(ABFRL for formal/casual wear, PVR for reduction in footfalls) in a difficult
environment keep us on the sidelines. The challenge also is how well they are able to
keep their debt under control as they come out of the Covid disruption. Store
economics or profitability of these two was not too differentiated pre-Covid.

Exhibit 30: Jubilant has undergone multiple re-rating Exhibit 31: …GM improvement and expectations on
which was led by… improvement in SSG

140 TTM P/E 3yr avg SSG (LHS) Gross margin


120 40% 77%
35%
100 76%
30%
80 25%
75%
60 20%
15%
40 74%
10%
20 5% 73%
0 0%
-5% 72%
Jun-10
Feb-11
Oct-11
Jun-12
Feb-13
Oct-13
Jun-14
Feb-15
Oct-15
Jun-16
Feb-17
Oct-17
Jun-18
Feb-19
Oct-19
Jun-20

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company

Exhibit 32: Titan’s earnings multiple re-rating is led by… Exhibit 33: …improvement in jewellery EBIT margin
90
TTM P/E 3yr avg LTL growth EBIT Margin (RHS)
80
70 80% 16%
60 60% 14%
50 40% 12%
40 10%
20%
30 8%
0%
6%
20 -20% 4%
10 -40% 2%
0 -60% 0%
Aug-11

Aug-18
Jun-10

Oct-12
May-13

Nov-16
Jun-17

Oct-19
May-20
Jan-11

Mar-12

Dec-13
Jul-14
Feb-15
Sep-15
Apr-16

Jan-18

Mar-19

2QFY12
4QFY12
2QFY13
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
4QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19
2QFY20
4QFY20

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 20


Consumer Discretionary

Exhibit 34: DMart’s TTM valuations should correct given Exhibit 35: …led by strong LTL growth and improving
weaker earnings growth (vs. past) over next two years; its sales per sq ft (barring FY20)
valuation has remained rich…

Sales per sq ft YoY growth LTL growth


140 TTM P/E
25%
120
20%
100
15%
80
10%
60
5%
40 0%
Aug-17

Aug-18

Aug-19
Jun-17

Jun-18

Jun-19

Jun-20
Oct-17
Dec-17
Feb-18
Apr-18

Oct-18
Dec-18
Feb-19
Apr-19

Oct-19
Dec-19
Feb-20
Apr-20
-5%
FY15 FY16 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company

Exhibit 36: Trent has traded at rich multiple and has de- Exhibit 37: …led by increase in losses from subsidiaries
rated in the last 3 years… and JVs and profit normalization of core business

90 TTM EV/EBITDA 3yr avg Share of loss from subsidiaries and JVs
80
0
70
60 (100)
50
40 (200)
Rs mn

30 (300)
20
10 (400)
0 (500)
Jun-15
Oct-15

Jun-16
Oct-16

Jun-17
Oct-17

Jun-18
Oct-18

Jun-19
Oct-19

Jun-20
Feb-16

Feb-17

Feb-18

Feb-19

Feb-20

(600)
FY16 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Share of loss from subsidiaries
and JVs = Consolidated PAT – Standalone PAT

Exhibit 38: ABFRL EV/EBITDA multiple has normalized back Exhibit 39: …led by concerns around leverage
to its previous valuations

Net debt:EBITDA (LHS) Interest coverage ratio


55 TTM EV/EBITDA 3yr avg
9 3.5
45 8 3.0
7
35 2.5
6
5 2.0
25
4 1.5
15 3
1.0
2
5 0.5
1
Mar-16

Nov-16
Mar-17

Nov-17
Mar-18

Nov-18
Mar-19

Nov-19
Mar-20
Jul-16

Jul-17

Jul-18

Jul-19

0 -
FY19 FY20 FY21E

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 21


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 40: Page’s P/E multiple has remained Exhibit 41: …led by poor volume growth
rangebound...

120 TTM P/E 3yr avg Volume (mn pcs) Volume growth
200 30%
100
25%
80 150 20%
60 15%
100
40 10%

20 50 5%
0%
0
0 -5%
Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

Exhibit 42: PVR’s EV/EBITDA multiple has de-rated Exhibit 43: …led by lower occupancy rate and increasing
significantly… leverage

30 TTM EV/EBITDA 3yr avg Occupancy rate Net Debt/EBITDA (x) - RHS
39% 6
25 37% 5
20 35%
4
15 33%
3
31%
10
2
29%
5 1
27%
0 25% 0
Jun-10
Feb-11
Oct-11
Jun-12
Feb-13
Oct-13
Jun-14
Feb-15
Oct-15
Jun-16
Feb-17
Oct-17
Jun-18
Feb-19
Oct-19
Jun-20

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

Exhibit 44: Bata’s P/E multiple has re-rated significantly… Exhibit 45: …led by improving gross margin

Gross margin EBITDA margin (RHS)


90 TTM P/E 3yr avg
58% 19%
75 57% 17%
56% 15%
60
55%
13%
45 54%
11%
53%
30 9%
52%
15 51% 7%
50% 5%
0
FY15

FY16

FY17

FY18

FY19
CY10

CY11

CY12

CY13

FY20 (LTL)
Jun-10

Oct-11
Jun-12

Oct-13
Jun-14

Oct-15
Jun-16

Oct-17
Jun-18

Oct-19
Jun-20
Feb-11

Feb-13

Feb-15

Feb-17

Feb-19

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 22


Consumer Discretionary

Exhibit 46: Relaxo’s P/E multiple has re-rated Exhibit 47: …led by volume growth and improving gross
significantly… margin

100 Gross margin Volume growth (RHS)


TTM P/E 3yr avg 60% 25%
80
20%
55%
60 15%

40 50% 10%

5%
20
45%
0%
0
40% -5%
Jun-10
Feb-11
Oct-11
Jun-12
Feb-13
Oct-13
Jun-14
Feb-15
Oct-15
Jun-16
Feb-17
Oct-17
Jun-18
Feb-19
Oct-19
Jun-20

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

Ambit vs Consensus: We find consensus estimates to be overoptimistic


Given our forward looking estimates are well behind consensus estimates, we believe
consensus estimate correction will drive the double whammy of earnings as well as
multiples correction.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 23


Consumer Discretionary

Exhibit 48: Ambit vs consensus - We continue to be well behind consensus estimates


FY21 FY22
Rs mn, unless specified
Ambit Consensus Ambit vs Consensus Ambit Consensus Ambit vs Consensus
Revenue 56,724 73,899 -23% 79,769 94,415 -16%
EBITDA 1,909 6,465 -70% 7,308 11,004 -34%
EBITDA margin 3.4% 8.7% -530bps 9.2% 11.7% -250bps
ABFRL
PBT -2,300 -2,037 13% 3,737 1,959 91%
PAT -1,721 -1,826 -6% 2,797 1,651 69%
EPS (Rs) -2.0 -2.4 -17% 3.3 1.9 69%
Revenue 19,240 26,191 -27% 29,254 33,127 -12%
EBITDA 3,778 6,134 -38% 8,063 8,612 -6%
EBITDA margin 19.6% 23.4% -380bps 27.6% 26.0% 160bps
Bata
PBT 868 3,356 -74% 4,662 5,380 -13%
PAT 649 2,455 -74% 3,489 4,006 -13%
EPS (Rs) 5.1 21.7 -77% 27.1 33.7 -20%
Revenue 246,820 285,979 -14% 341,772 376,911 -9%
EBITDA 15,289 22,799 -33% 29,175 33,139 -12%
EBITDA margin 6.2% 8.0% -180bps 8.5% 8.8% -30bps
DMart
PBT 11,628 19,283 -40% 24,372 29,380 -17%
PAT 8,701 15,078 -42% 18,238 22,099 -17%
EPS (Rs) 13.4 23.4 -43% 28.2 34.4 -18%
Revenue 31,279 38,510 -19% 45,174 47,702 -5%
EBITDA 5,870 7,822 -25% 11,041 10,988 0%
Jubilant EBITDA margin 18.8% 20.3% -150bps 24.4% 23.0% 140bps
Foodworks PBT 1,841 3,632 -49% 6,290 6,325 -1%
PAT 1,377 2,892 -52% 4,707 4,828 -3%
EPS (Rs) 10.4 21.9 -52% 35.7 36.2 -2%
Revenue 20,988 30,901 -32% 31,941 36,723 -13%
EBITDA 2,288 5,995 -62% 6,799 7,513 -10%
Page EBITDA margin 10.9% 19.4% -850bps 21.3% 20.5% 80bps
Industries PBT 1,456 5,494 -73% 5,958 7,032 -15%
PAT 1,089 4,178 -74% 4,459 5,281 -16%
EPS (Rs) 97.7 339.0 -71% 399.7 455.2 -12%
Revenue 8,034 20,167 -60% 30,249 38,656 -22%
EBITDA -870 2,074 -142% 9,859 10,156 -3%
EBITDA margin -10.8% 10.3% -2110bps 32.6% 26.3% 630bps
PVR
PBT -8,555 -4,113 108% -359 2,430 -115%
PAT -5,804 -3,455 68% -341 1,772 -119%
EPS (Rs) -0.7 -67.8 -99% -0.0 35.1 -100%
Revenue 17,264 25,381 -32% 26,971 30,461 -11%
EBITDA 2,120 3,810 -44% 5,253 4,722 11%
EBITDA margin 12.3% 15.0% -270bps 19.5% 15.5% 400bps
Relaxo
PBT 949 2,626 -64% 4,149 4,408 -6%
PAT 710 1,965 -64% 3,105 3,299 -6%
EPS (Rs) 2.9 9.2 -69% 12.5 13.0 -4%
Revenue 162,767 187,523 -13% 223,044 247,631 -10%
EBITDA 15,841 20,050 -21% 27,188 29,714 -9%
EBITDA margin 9.7% 10.7% -100bps 12.2% 12.0% 20bps
Titan
PBT 12,876 17,367 -26% 23,818 26,571 -10%
PAT 9,635 12,984 -26% 17,823 19,856 -10%
EPS (Rs) 10.9 16.0 -32% 20.1 23.6 -15%
Revenue 21,373 30,030 -29% 41,198 43,610 -6%
EBITDA 1,895 4,008 -53% 7,752 6,654 17%
EBITDA margin 8.9% 13.3% -440bps 18.8% 15.3% 350bps
Trent
PBT -1,053 1,260 -184% 3,478 3,572 -3%
PAT -788 222 -455% 2,602 3,057 -15%
EPS (Rs) -2.2 3.7 -159% 7.3 9.7 -25%
Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 24


Consumer Discretionary

We prefer Titan/Trent/Jubilant in our retail coverage


While we believe Jubilant, Trent, DMart, Titan and Relaxo have more resilient
business models and are doing most things right from an execution point of view,
earnings growth over FY20-22 is likely to be much more muted than in the past.
Good organized retailers would benefit the most from an eventual consolidation post
Covid as market share gains play out from both a) gains from unorganized market to
organized and b) gain in share from weaker organized players who will gasp for
breath as balance sheets get stretched beyond repair. Additionally, rental inflation is
likely to go down meaningfully over the next few years, benefiting stronger retail
brands. To that extent, the above mentioned retailers would witness long-term
benefits. We seek better entry points for Relaxo and DMart and downgrade them to
SELL as valuations factor in most of the positives. We maintain our positive bias on
Jubilant, Trent and Titan though absolute upsides remain limited while turning
SELLers on the rest of our coverage.
Exhibit 49: ABFRL and PVR are highly leveraged while all other players have
no/insignificant leverage
FY19 Net debt: equity Net debt: EBITDA
ABFRL* 1.9X 4.5X
Trent (standalone)* -0.2X -1.9X
Page Industries 0.1X 0.1X
Titan 0.1X 0.2X
Bata* -0.5X -1.9X
Relaxo 0.1X 0.3X
DMart* 0.0X 0.0X
PVR 0.9X 1.8X
JUBI* -0.5X -1.1X
Source: Ambit Capital research, Company, * For FY20 and excluding the impact of IND-AS 116

Exhibit 50: We like Titan, Trent and Jubilant Foodworks


EV/EBITDA (x) P/E (x) LTL CAGR (FY17-19) CAGR (FY20-22) ROCE
Mcap
Companies FY22
($ mn) FY20E FY21E FY22E FY20E FY21E FY22E Sales EBITDA EPS Sales EBITDA EPS FY20 FY21E FY22E
P/E
DMart 20,057 72 100 52 113 175 84 84 29% 31% 32% 18% 17% 16% 15% 7% 14%
Titan 11,247 36 56 33 57 90 49 50 21% 34% 34% 6% 5% 8% 17% 9% 14%
Jubilant
2,884 26 39 21 70 162 47 43 17% 58% 113% 8% 12% 21% 29% 11% 25%
Foodworks
Page Industries 2,657 36 87 29 61 199 49 49 16% 22% 22% 4% 11% 12% 43% 14% 42%
Trent 2,456 36 108 26 136 NA 81 70 21% 39% 9% 14% 17% 30% 8% -1% 9%
Bata 2,202 21 45 21 53 266 49 49 9% 31% 44% -2% -1% 3% 15% 3% 11%
Relaxo Footwears 2,169 40 78 31 70 224 51 51 19% 19% 19% 6% 13% 17% 20% 5% 20%
ABFRL 1,349 27 65 17 NA NA 41 41 11% 13% 145% -4% 25% NA 7% -1% 9%
PVR 679 9 NA 10 197 NA NA NA 21% 37% 38% -6% -5% NA 8% -5% 5%
Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 25


Consumer Discretionary

Exhibit 51: Page, Jubilant and Titan have best-in-class Exhibit 52: …however, reinvestment opportunity remains
RoE/RoCE… limited for Page

60% FY19 RoE FY19 RoCE (post tax)


50%
50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%

DMart
Relaxo

Relaxo
Foodworks
Bata

Bata

ABFRL
DMart

Trent

Trent
Titan

PVR

Titan

PVR
Industries

Industries
Foodworks

ABFRL

Jubilant
Jubilant
Page

Page
Source: Ambit Capital research, Company, Trent’s RoE appears lower due to Source: Ambit Capital research, Company. Trent’s RoCE appears lower due
investments in other Tata group companies, Star Bazaar and Zara India. to investments in other Tata group companies, Star Bazaar and Zara India.

Titan would benefit from higher gold prices and its positive impact on profitability.
Higher wedding share drives better pent-up demand in 2HFY21. Wallet share gains
within wedding budgets + better investment demand due to gold being a better asset
class would further boost sales recovery. In addition, two third of stores are on a
franchisee model, which reduces pressure on near-term profitability. The company
may also be able to gain market share from unorganized players that may not be
able to provide a similar hygiene assurance and digital convenience as Titan.
Jubilant would be able to protect itself from rising online order penetration (60% of
Jubilant’s sales) and consolidation in the food delivery market. Though, we believe
near-term growth would be surprise street expectations negatively given both dine-in
(35% of sales) and in-office consumption (nearly 25-30% of overall sales) would see
pressure. Lower high-street rentals would ensure better economics for new stores.
Fortressing strategy would further benefit overall customer satisfaction and gain share
from unorganized players who would face hygiene concerns from new customers.
Trent has been rapidly scaling up its offline stores before Covid happened, cracking
the profitability code for both Westside and Zudio (both provide attractive value price
points to its customers). The company has accelerated store expansions meaningfully
across all three fashion formats (Westside, Zudio, Utsa), adding about half of their
~250 fashion stores over FY19 and FY20. Attractive LTL for Westside (12.6% in pre-
Covid FY20) indicates the ability of older stores to support profitability despite rapid
expansion in a tougher period. While overall offline apparel market will face
challenges, we expect Trent to emerge stronger through this period given strong store
economics and well-funded balance sheet. Strong economics of Zudio and Westside
will only get better as rental inflation takes a hit beyond FY22.
Relaxo will benefit from raw material deflation tailwinds and recent price hikes taken
across the portfolio, which would still drive better earnings growth over FY20-22.
High exposure to open footwear (~80% of the overall sales) and a value offering
(ASP of Rs130) will support overall growth during 2HFY21/FY22 after witnessing
supply-side setbacks in 1HFY21. Relaxo also has better presence in online channel.
The company’s value offerings are popular on Amazon and account for top 10 out of
the top 20 high selling SKUs in footwear. However, valuations at 52x FY22 EPS are
rich and already factor in 18% EPS CAGR for the company over the next decade.
ABFRL, we believe, may witness sales pressure on Pantaloons and higher priced
products across Madura. Decline in sales over a high fixed cost base would drive
much lower profitability. ABFRL may emerge winner through this Covid period if it is
able to rationalize its high cost structure (heavy A&P spends, expansion into multiple
non-profitable lines of business such as fast fashion, innerwear, ethnic (Nikhil &
Shantanu, Jaypore), etc.). It has fixed/variable costs of ~ Rs40bn in FY20 on a
Rs45bn gross profit base. With revenues gone for nearly a quarter and likely to

June 24, 2020 Ambit Capital Pvt. Ltd. Page 26


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

decline throughout the year, the extent of cash losses can be meaningful given higher
operational (as discussed earlier) as well as interest costs (~Rs21bn in FY20). The
risks of a high cash burn (~9% dilution for Rs10bn rights issue) still remain
reasonably high till the time we see concrete actions on costs reduction. Assuming
cash burn of ~Rs10bn, we believe even if the company were able to retain its net
debt at similar level as FY20, it would mean a net debt to normalised pre-Covid
EBITDA of ~4x. At cash burn of ~Rs5bn, net debt: EBITDA would still be ~3.3x
unless underlying EBITDA improves meaningfully over and above pre-Covid levels.
Page: Struggle on volume growth continues. 4Q/FY20 volumes declined 18%/3%
partly also to do with COVID. Sales declined 11% in 4QFY20 (4% after Rs900mn
mgmt. estimated COVID impact, 4QFY19 was flat YoY). Growth is largely led by
realization/mix changes 7%/ 12% for 4Q/FY20 which may peak out at some point in
time. Gross margin drop of 480bps YoY was a bit worrisome for 4QFY20 despite
lower incentives (down 20% YoY). While Page will benefit from higher sales of
outerwear (aided by increased WFH) and increased consumer preference for MBO
channel (where Page is strong), annual pricing growth of 3-5% may be difficult to
come by and volume challenges on innerwear side may continue amidst
economically weak environment. We build in 6%/11%/14% sales/EBITDA/PAT growth
CAGR over FY20-FY22 implying valuations of 48x FY22 EPS at CMP. Reducing
productivity of incremental MBO outlets, consistent stretching of pricing power and
limited success in recently incubated new categories are challenges to volume growth
and the valuations. Reiterate SELL.
Bata: We believe margin levers which drove sharp earnings growth over FY16-20
are largely coming into the base. We expect sales growth of 8-10% over the next
decade (nearly half of other discretionary peers) which should drive the valuation
discount for the business.
DMart: We like everything about the business as discussed in our Jan-15 thematic.
The only problem is valuations (stock has run up ~25% since our thematic despite the
sharp earnings cut we had to make due to Covid) which are rich at 84x FY22E EPS
and build in 22% EBIT CAGR over FY23-33. Either the stock corrects or DMart
demonstrates faster ability to expand number of stores.
PVR: While we don’t believe that OTT is a credible threat to PVR in the medium term,
we are incrementally worried about the burn that PVR would have to take to survive
this storm and uncertainty around return to normalcy. Two consecutive money raises
mean that RoE has come down to 8% in FY23 even when EBITDA normalises back to
pre-Covid levels.

Exhibit 53: Covid impact screen - Relaxo and Titan have better defensibility to demand
Earnings risks due
Exposure to top-10 Share of Threat of
Gross margin risks to slowdown in
cities malls online
store rollout
Avenue Supermarts Limited High (due to weaker mix) Low Medium High
Titan High No (some discounting possible though) Medium Medium Low
Bata Medium High (due to downtrading) Medium Low High
Relaxo Low Low (RM benefits) Low Low Low
Page Medium Medium (due to downtrading) Low Low Medium
ABFRL High High (due to inventory risks) High High High
Trent High High (due to inventory risks) Medium High Medium
Jubilant Foodworks Medium Low Medium Medium Low
PVR High Low High High Medium
Source: Company, Ambit Capital research

June 24, 2020 Ambit Capital Pvt. Ltd. Page 27


Consumer Discretionary

Exhibit 54: Long-term benefit screen - Trent, Jubilant, and Titan would be the long-term beneficiaries
Degree of
Balance sheet Market growth Market share Store Valuation
operating/financial
strength tailwinds growth potential economics attractiveness
leverage
Avenue Supermarts High Medium High High Medium Low
Titan High Low High Low (2/3 stores are franchisee) High Medium
Bata High High Low High Medium Medium
Relaxo High High High Low High* Low
High
Page High Medium Medium High* Low
(due to manufacturing staff)
Low (due to male
ABFRL Low Medium High Medium Medium
formals/casuals)
High (in female
Trent High High High Medium Low
fashion)
High (large through
Jubilant Foodworks High High entry into other High High Low
cuisines)
PVR Low Medium Medium High Medium High
Source: Company, Ambit Capital research. * They don’t have much retail footprint

Exhibit 55: Overall Framework - Titan, Jubilant, Avenue Supermarts, Trent and Relaxo are the businesses we like;
unfortunately most of them haven’t seen much correction barring Titan
Short Term Longer Term Valuation
Overall
disruption attractiveness correction/attractiveness
Avenue Supermarts Medium High Low Medium
Titan Medium High High High
Bata High Medium Low Low
Relaxo Medium High Low Medium
Page High Medium Low Low
ABFRL High Low High Low
Trent High High Medium Medium
Jubilant Foodworks Medium High Medium Medium
PVR High Low High Low
Source: Company, Ambit Capital research

Exhibit 56: Looking at discretionary stocks in three broad baskets


Theme Companies
Survivors and consolidation beneficiaries but at rich valuations Avenue Supermarts, Relaxo
Consolidation beneficiaries at reasonable valuations Titan, Trent, Jubilant Foodworks
Survival risk candidates but attractive valuation vs. history PVR, ABFRL*
Good business, not major consolidation beneficiary but expensive given
Page, Bata
relatively lower growth rates vs. other peers
Source: Company, Ambit Capital research. They would need balance sheet support in the interim and also there will be a dent to their business for 2-3 years as
some habit changes here can cause damage; they will have to entice footfalls.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 28


Consumer Discretionary

Catalysts and Risks to our negative view on the sector


Catalysts
Delay in easing of lockdown
Government has already rolled out a plan to open up malls across India over
Jun/July. We believe lockdown opening would only be gradual in top tier cities such
as Mumbai and Delhi where case load is high and is likely to happen with limited
number of hours of operations. A second wave of Covid infections can be another
key challenge.
Consumption slowdown
We expect consumption slowdown to hit growth rates as lockdowns are eased. While
the street believes in a 2HFY21 recovery, we believe full recovery would be 6-12
months delayed. While costs will come back to normal in FY22, demand won’t come
back to that extent, leading to FY22 earnings cut.

Risks
Sharp cut in costs
Retailers typically have high amount of retail costs. An average retailer has 50% gross
margins but 12% employee costs, 12-13% rental costs and ~25% other variable/fixed
costs. We are building in a 30-40% reduction in overall costs though better-than-
expected cost control can surprise our estimates.
Sharper than expected recovery
Fast recovery in the economy led by rapid revival in consumer sentiment is a key risk
to our estimates.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 29


Consumer Discretionary

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June 24, 2020 Ambit Capital Pvt. Ltd. Page 30


Consumer Discretionary

Titan
(TTAN IN, BUY, TP: `1,150, 15% upside)
Titan is our top pick in consumer discretionary space given (a) gross margin
benefit from higher gold prices; (b) reducing discounts in jewellery (as visible
in 4QFY20) would further aid margins improvement; and (c) higher share of
franchisee model (65% of revenues) reduces impact of store-level losses due
to lower utilization. Demand impact too may be limited vs. other peers given:
(a) pent-up demand from delayed weddings in 2HFY21; (b) better consumer
sentiment to purchase gold given recent outperformance as an asset class;
and (c) initiatives to strengthen lower-priced products aid in increasing total
addressable market. Liquidity challenges and inability to allay customer’s
hygiene-related concerns may reduce unorganised players’ ability to
compete and would further aid Tanishq in gaining market share. Remain
BUYers on Titan with TP of `1,150 implying 15% upside. Key risks: Delay
caused by prolonged lockdown and social distancing measures in demand
for non-discretionary (wedding) purchase.
The good…
Benefitting from the big fat Indian wedding: Jewellery demand in India is largely
occasion based; wedding jewelry purchases make up 50% of the entire Indian jewelry
market while festivals/occasions (Dhanteras, Akshay Tritiya, anniversary, etc.) make
up a large part of the balance 50%. Both are largely non-discretionary in nature and
will be impacted the least despite the current scenario and slowdown in consumption.
In fact the consistent rise in gold prices may actually benefit the overall volume/sales
growth. Titan has low single digit market share in wedding segment; market share
gains here can help jewellery segment beat slowdown better. Wedding demand Kalyan Jewellers
continues to provide defensiveness; 1HFY21 would be a washout but things may start “We found that people were busy
improving from 2HFY21 as pent-up demand and delayed weddings normalize. in wedding-related purchases
GHS and gold exchange: Given growing interest in gold as a safe haven in these while at home. Expenses on
uncertain times alongside healthy returns in gold over last 12-18 months, GHS (gold outdoor activities, venue, feasts
investments SIP) has continued to gain traction (21% of sales already). Given lower and photoshoots, were almost zero
purchasing power in some consumer segments, gold exchange is also likely to be because of the lockdown, but they
strong lever for Tanishq given the consumer trust (linked to fair and transparent terms had the budgeted money and were
on exchange) enjoyed by the brand. Titan gets ~45% of its revenues from gold spending it on jewellery,"
exchange (33% third party gold and 10-12% Tanishq exchange).
Demand delayed but not denied: Demand for wedding and occasions to a large
extent will be postponed rather than completely lost. We also believe that the share
of jewelry as % of overall wedding expense can rise as people will cut decor/ wedding
venue rental/guests hospitality costs to meet social distancing norms, but they may
gift more in terms of gold.
Profitability levers are intact with gold price increase
 Titan is likely beneficiary from a consistent rise in gold prices: While first
phase of gold prices makes consumers wait, prolonged period of gold price
increase drives volume demand improvement. Titan’s EBITDA was weak during
FY14-16 largely due to gold prices being weak/flattish. However, FY05-12 and
FY17-20, EBITDA growth has been structural amidst rising gold prices.
 Recent gold price run-up benefits Titan’s revenue growth (decline in
grammage due to Covid impact would be mitigated by gold price growth) and
margins (as making charges are a % of sales).
 More than 60% of stores are franchised, hence operational losses due to
poor absorption of fixed cost wouldn’t hurt Titan’s margin. Higher making
charges may support overall margins unlike other retailers where margins may
be impacted by inventory discounting.
 Market share gains from FY21 as smaller jewelers face operational challenges
(hygiene concerns, limited offering on digital showcasing of product) may further
drive another period of topline outperformance as seen post GST. Government
focus on hallmarking (likely from FY22; implementation already delayed by a
year) too should drive better market share gains.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 31


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 1: Jewellery strategy for FY21 would be to also focus on grammage growth
(grow the core initiative)

Source: Company

Exhibit 2: EBIT margin for Jewellery division is closely co-related to gold price and its
rising prices; EBIT margin tends to be better albeit with some lag

Gold price growth (LHS) EBIT Margin (RHS)


30% 15%
25%
13%
20%
15% 11%
10%
5% 9%
0%
7%
-5%
-10% 5%
2QFY13

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

2QFY19

4QFY19

2QFY20

4QFY20

Source: Ambit Capital research, Company’

Given purchasing for Jewellery is less impulsive and more planned, Tanishq is inviting
customers by prior appointment for the recently reopened ~50 stores in 35 cities (out
of 328 stores). Management also stated (link) that they will not roll out any fresh
offers as they resume operations. Demand stimulation will need to happen only once
a large number of stores are open.
Exhibit 3: Jewellery division’s EBIT growth is closely co-related to gold price as well
though with some lag

Gold price growth (LHS) EBIT growth YoY


30% 100%
25% 80%
20% 60%
15% 40%
20%
10%
0%
5% -20%
0% -40%
-5% -60%
-10% -80%
2QFY13

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

2QFY19

4QFY19

2QFY20

4QFY20

Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 32


Consumer Discretionary

…the bad
Luxury spends would get impacted: Non-discretionary spending on jewellery will
be severely impacted as conserving cash would take a toll on spending on luxury
items.
1HFY20 to be washout: Led by impact of lockdown during 1QFY21and 2QFY21
being seasonally the weakest quarter, we expect 1HFY21 to be washout for Titan.
Franchise may be under pain: Titan may need to support the franchisee partners
in terms of higher margin/schemes, higher ad spends and elongated credit period so
as to keep them afloat and their business running. This will impact Titan’s margins as
well as RoCE but will aid in better relationship building between Titan and franchisee
owners.
Exhibit 4: As gold price rises, volume tends to decline sharply

Gold price growth (LHS) Volume growth (RHS)


30% 100%
25% 80%
20% 60%
15%
40%
10%
20%
5%
0% 0%
-5% -20%
-10% -40%
2QFY13

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

2QFY19

4QFY19

2QFY20

4QFY20

Source: Ambit Capital research, Company

…and the ugly


Moderation on pace of store expansion: Titan’s market share in the overall
jewellery industry is still in mid-single digit, implying large headroom to expand and
grow. However, with slowdown in the economy and consumption remaining weak,
we believe pace of store expansion will moderate over the next 12-18 months and in
turn will moderate the growth rate for Titan.
Watch and Eyewear: Drag on the performance of the watch and eyewear division
would be much steeper than that of jewellery division. While eyewear may see faster
rebound due to it being more necessity/non-discretionary in nature but it has been
making losses. Watches, while still a profitable venture, is more discretionary in
nature and hence may take time to recover.
Exhibit 5: Eyewear continues to be a drag on overall Exhibit 6: Watch’s EBIT margin has been volatile
profitability

15% Eyewear EBIT Margin 20% Watch EBIT Margin

10% 15%
5%
10%
0%
5%
-5%

-10% 0%
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20

1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 33


Consumer Discretionary

RoCE may be impacted in the near term: Higher gold prices (implying higher Titan is our top pick in consumer
inventory) along with lower sales during FY21 will result in moderation in RoCE. discretionary given: a) consistent
Exhibit 7: High gold prices impact RoCE as well due to higher capital employed
rise in gold prices supports overall
revenues for Tanishq while making
charges move in line with
4,500 Gold price (Rs/gm) (LHS) Jewellery RoCE (pre tax) 50% revenues; b) pent-up weddings
would strongly support 2HFY21
4,000 40% growth; c) two-third of Tanishq
3,500 30% stores are franchised and hence
the higher operational costs
3,000 20% wouldn’t hit Titan’s P&L much. A lot
of costs in Titan’s books (such as
2,500 10% advertising) are discretionary and it
2,000 0% remains better positioned for
margin management.
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
Source: Ambit Capital research, Company

Where do go from here?


We remain BUYers on Titan led by (a) ~50% of its demand being non-discretionary
(wedding/festival/occasion driven); (b) decrease in competitive intensity as smaller
players will find it tough to survive in the current scenario; and (c) benefits of better
margin arising out of higher gold prices. Titan is trading at an attractive valuation of
57x TTM P/E. Titan’s TTM PE has corrected to the lowest levels seen over the last five
years, which has ranged from 50-100x. While next 2-3 quarters would remain
uncertain, we do believe profitability growth challenges would start normalizing from
2HFY21.
During 2011-14, Titan’s P/E derating was led by a series of regulatory movements
like Pan card requirement, banning gold on lease for domestic usage, increase in
gold import duty etc. Till that time wedding jewellery too hadn’t clicked for Tanishq to
a large extent. With Tanishq now gaining both momentum and market share in
wedding jewellery (non-discretionary), we believe Titan is poised for a re-rating.

Exhibit 8: Titan’s earnings multiple re-rating is led by… Exhibit 9: …improvement in jewellery EBIT margin

90 TTM P/E 3yr avg LTL growth EBIT Margin (RHS)


80
70 80% 16%
60 60% 14%
50 40% 12%
10%
40 20%
8%
30 0%
6%
20 -20% 4%
10 -40% 2%
0 -60% 0%
2QFY12
4QFY12
2QFY13
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
4QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19
2QFY20
4QFY20
Aug-11

Aug-18
Jun-10

Mar-12
Oct-12
May-13

Nov-16
Jun-17

Mar-19
Oct-19
May-20
Dec-13
Jan-11

Jul-14
Feb-15
Sep-15
Apr-16

Jan-18

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 34


Consumer Discretionary

Exhibit 10: We expect Titan to report profit in all scenarios in FY21 and FY22
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 163,016 187,468 138,563 222,514 255,891 189,137
CAGR over FY20 -19% -7% -31% 11% 27% -6%
EBITDA 15,735 20,155 11,127 25,952 32,406 19,271
EBITDA margin 9.7% 10.8% 8.0% 11.7% 12.7% 10.2%
PAT 9,183 12,490 5,735 16,435 21,265 11,436
EPS (`) 10.3 14.1 6.5 18.5 24.0 12.9
Source: Ambit Capital research, Company

Risk to our thesis: Prolonged lockdown and social distancing measures may further
delay weddings and delay demand for non-discretionary purchase – a key risk to our
BUY stance on Titan.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 35


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amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Jubilant Foodworks
(Jubilant IN, BUY, TP: `1,950, 11% upside)
Jubilant will be the biggest beneficiary of consolidation of the food services
industry, improved share of online ordering and focus on more trusted
brands on hygiene concerns. Fortressing strategy will also get accelerated
given improved availability of better high street locations with lower
rentals/sales post Covid-led consolidation. Fortressing drives lower delivery
time and better customer experience, improving share. That said, near-term
earnings may continue to see pain of limited occasions of ordering and
Indians preferring to cook at home rather than ordering. Once the sentiment
revives, pace of revenue growth for Jubilant will outpace other discretionary
players. Remain BUYers on Jubilant with revised TP of `1,950 (`2,000 earlier),
implying 11% upside. We cut FY21/FY22 revenue and EPS by 26%/17% and
61%/25% respectively to incorporate impact of Covid-19 and now build in
8%/12%/21% revenue/EBITDA/EPS CAGR during FY20-22. Key risk:
Prolonged weakness in consumer sentiment; delay in pickup of eating out
habit on account of hygiene concerns

The good….
Lower rentals post Covid to accelerate fortressing strategy: Apart from the
near-term pain, we believe Covid-19 brings in positive narrative from a fortressing
strategy perspective (deepening store depth) driving 20 minutes delivery (vs 30
minutes now). We believe unorganized competition and other cloud kitchens (which
arose due to Zomato/Swiggy) will likely see more closures. This would lead to more
attractive rental deals (rent/sales) as well as improved store economics for Domino’s,
driving economic feasibility for deepening fortressing strategy. A fortressing strategy
will: a) reduce delivery times for customers, leading to higher share of wallet; and b)
better customer satisfaction as Pizza is delivered fresher, again leading to higher
share vs other cuisines. We expect store expansions to accelerate without being a
drag on margins as seen over FY15-17.
Will not only survive but will thrive: Jubilant will be the biggest beneficiary of the
current situation within the restaurant space given well-known brands like Domino's
would be preferred over smaller restaurants/cloud kitchens as hygiene will play an
important role over discounting.
 Better control over hygiene given own supply chain and control over
delivery: With Jubilant's own supply chain (sourcing as well as delivery) in play, it
has a better control over hygiene standards. Third party delivery providers such as
Zomato and Swiggy don’t have a similar control over delivery staff as Dominos.
Similarly, hygiene trust over mom and pop restaurants listed on these delivery
apps may be lesser during and post Covid-19 driving share gains for JUBI.
 Competition drying up: Jubilant will also benefit from the decrease in
competition from food aggregators as they have curtailed discounting (link) as
they focus on cutting their cash burn. Food aggregators are also likely to face
challenge in terms of liquidity as funding from investors may dry up on the back
of recent change in FEMA which requires approval from the Ministry of Home
Affairs for investment from countries like China and Pakistan. We also note that
(link) cloud kitchens have also started downsizing their business due to demand
as well as supply side challenges being faced by them. Additionally, earnings
pain during Covid period may lead to a lot of smaller restaurants disappearing.
 Beneficiary of increased consumption through online ordering: It is
relatively well positioned given higher share of delivery (~65%) vis-a-vis dine-in
(~35%).
Continue to operate albeit at lower capacity: Unlike other retail and discretionary
businesses which were completely shut down (barring grocery), Jubilant is still
operating its Domino’s chain in India. This would reduce cash burns vs. other peers.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 37


Consumer Discretionary

Exhibit 11: Domino’s India is running campaign on social media to promote about its
hygiene and sanitization process (Link)

Source: Ambit Capital research, Company

…the bad
Dine-in would suffer: QSR chains were the first to get hit as malls were shut down
even before the general lockdown started. While delivery for QSR chains will see a
faster recovery vs other players, dine-in QSR (~35% of JUBI’s revenues) may continue
to suffer more due to their presence being largely in high crowded places like malls
and high streets.
Exhibit 12: Pizza consumption both dine-in and in-office delivery will suffer; street
expectation that Jubilant would do well like its US counterparts may not turn out to be
true

At home, In-store,
35% 35%

In fact in India, we do see higher


trends of people starting to make
food on their own rather than
ordering from outside at all. In fact
local players like Mozo Pizza have
started to provide packed
ingredients for people to make
At work,
30%
Pizza at home.

Source: Company, Ambit Capital. Pie denotes % contribution to JUBI revenues from various points of consumption

June 24, 2020 Ambit Capital Pvt. Ltd. Page 38


Consumer Discretionary

Comparing to US may not be right: Unlike US, where pizza is a reasonably cheap
product from a purchasing power point of view, pizza is relatively expensive product
in India ($2-3 in India vs. $6-7 in US). In fact in India, we do see higher trends of
people starting to make food on their own rather than ordering from outside. In fact
local players like Mozo Pizza have started to provide packed ingredients for people to
make Pizza at home.
Occasions of consumption may go down during Covid-19 period: Pizza is a
good mood product. When the sentiment is weak, we may see fewer occasions of
usage. Pizza parties are the most common things in offices to celebrate
occasions/favorite working lunch item, watching sporting events with friends/family;
all such event-based demand will likely go way for the time being. While home
delivery may rise, weaker dine-in and lower office and event-driven consumption will
impact SSGs intermittently.
Levers on employee cost may be limited: While Jubilant has noted that it is
moving all its store employees to flexi-pay, we believe this business is a very high
employee motivation business. Any mistakes or disgruntled employee can impact the
reputation of the brand. Chances that any employee catches the virus and delivers
too may create reputation damage despite all the precautions taken by management.
Short-term pain: Loss of sales, no absorption of high fixed costs, and delay in
store rollouts
 Loss of sales due to ~20 days of disruption in March 2020 and another 90 days
of disruption due to lockdown in 1QFY21 (our base case view) will result in
negative SSG during FY21.
 Impact of negative operating leverage due to lower absorption of high rental
and employee cost will likely impact margins.
 Delay in new store rollouts as well as closure of unprofitable store to pick up
as companies will focus on conserving cash alongside malls closures that would
delay fit-out works. We note Jubilant’s topline growth in FY20 was 10% while
store addition too was ~120 (~10% of existing population)
 Higher rental/employee costs: Jubilant may not be able to rationalize rentals
for large dine-in stores where demand may drop given the uncertainty on Covid-
linked recovery while it has to add people to do more deliveries.

…and the ugly


Brace for the loss: Led by closure of stores, zero dine-in and decrease in delivery
orders, Jubilant is likely to report loss during 1QFY21 on EBITDA (~`492mn) and PAT
(~`1bn). Under our BEAR case scenario, Jubilant can report loss of ~`400mn in FY21
against profit of `1.4bn in our BASE case scenario.
Exhibit 13: We expect Jubilant to report negative SSGs in FY21; long-term margins to Jubilant is not the only player
benefit from lower rental and other cost reductions
going through the pain; orders on
food aggregators like Swiggy and
50% SSG (LHS) EBITDA margin (RHS) 30% Zomato have dropped 60% amid
40% the pandemic. As per media
25%
30% articles, Restaurants are also facing
20% difficulty in procuring supplies,
20% forcing a lot of them to shut shop.
10% 15% Our quick checks seem to suggest
0% sales are still down ~50% vs. pre
10% Covid levels.
-10%
5%
-20%
-30% 0%
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 39


Consumer Discretionary

Slowdown in store expansion: One of the key growth drivers for Jubilant has been
store expansion, which under the current scenario will face headwinds and impact
overall revenue growth. In the last 5 years, revenue CAGR of 13% was driven more
by store CAGR (of 9%) than SSG average growth (of 7%). We expect pace of store
expansion to moderate to 3%/4% in FY21/FY22 (vs. pre-Covid estimate of 10%/9%).
High operational leverage: Jubilant is currently trading at 47x on FY22 EPS (43x
on LTL pre Ind-AS EPS estimates). Jubilant’s degree of operating leverage (basis
FY19) at 3.5x implies high fixed costs and hence higher impact on PBT for every 1%
change in revenue.

Trend we see in the global QSR business


Exhibit 14: Global QSR chains reported significant decline in SSGs during March and a recovery in SSGs during April; JUBI
is likely to behave worse than global peers
Company Commentary
 In the US business, SSGs were up 7.1% during the first four weeks of 2Q
 In our international business, SSGs were down 3.2% during the first three weeks of 2Q
Domino's Pizza US
 In China, we did see a pattern early on in the pandemic where China sales were pressured, but we have seen positive sales in
China and improvement in the latter part of the first quarter and in here into the early weeks of the second quarter
 Global SSGs were up 7.2% through February and were down 22% in the month of March.
 International operated market SSGs were down 35% for the month of March. In the second half of March, SSGs were down
roughly 70% and several markets like France, Italy, Spain and the UK temporarily closed all restaurants and other markets like
Australia, Canada, and Germany had Drive-Thru delivery and takeaway only for limited hours and menus. SSGs have continued
to be down about 70% through April in this segment, as many of the fully-closed markets are now just beginning to reopen.
 In the US, SSGs were negative 13% for the month of March. Beginning in mid-March and continuing through mid-April, US SSGs
McDonald's US
were consistently down about 25%. However, we have begun to see some improvement in the last couple of weeks. We expect
April SSG to be down about 20%.
 In China, approximately 25% of restaurants were closed in early February. By the end of March, substantially all restaurants had
reopened. However, the market continues to experience a reduced level of demand as consumers have not fully returned to their
pre-Covid routines, resulting in negative comparable sales since the initial outbreak in late January. SSGs were down over 20% in
the first quarter and trends have improved in April to negative mid-teens.
 Cadence of monthly SSG during the quarter was: January +12.1%, February +17.1% (including 4.3% benefit of leap day), and
March -16.0%.
Chipotle Mexican  “During the month of March, weekly SSG progression was +12% for the week ending March 8, -4% for the week ending the
Grill 15th, and -34% to -35% for the weeks ending March 22 and the 29th.
 Sales improved to around -30% in early April and then improved again over the past week with SSG adjusted for Easter in the
down high-teens range.”
 In the first week of March, our global SSG was approximately flat. We then saw a rapid decline in the following week seeing
same-store sales drop to approximately negative 10%.
YUM Brands
 The decline continued with Yum!'s global same-store sales falling to beyond negative 30% on average across the second half of
March and into April. This includes the impact of approximately 20% of our stores being closed.
Source: Ambit Capital research, Company, Bloomberg

Exhibit 15: Barring Burger King, all the other QSR players have increased payout to their employees; on the contrary,
Jubilant has reduced the payouts to employees
Company Commentary

Have committed to pay additional bonuses to our corporate store and supply chain hourly team members over a 10-week period
Domino's Pizza US
from mid-March through at least the last pay period in May.

Chipotle Mexican Labour costs were elevated as company accommodated crew needs, shifted hours to support the growing digital business, and made
Grill additional employee investments in the form of extra assistance pay (10% increase in hourly rates) and elevated quarterly bonuses.

At our 1,200 company-owned restaurants around the world, we are paying scheduled hours to team members who are required to
stay at home due to Covid-19. Recognizing the vital role our Restaurant General Managers continue to play in these 1,200 stores, we
YUM Brands
have provided $1,000 one-time bonuses to our RGMs in addition to committing to pay their second quarter bonuses, even if their
restaurant sales performance would not normally qualify.

Burger King All the restaurant employees have been put on temporary unemployment. Headquarter is closed and the majority of their employees
France have also been put on temporary unemployment.
Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 40


Consumer Discretionary

Exhibit 16: Global chains are taking various initiatives to help franchisees mitigate liquidity risks
Company Commentary

We have deferred the collection of rents and royalties earned in March and April in most markets around the world. Other thing
McDonald's US that's happened is essentially we've converted our rent to variable rent based on sales. So the restaurants that have been closed
effectively aren't paying rent because they don't have sales.

Chipotle Mexican
Chipotle is in discussions with its landlords about rent deferrals and abatements.
Grill

To help our franchise partners, we are providing assistance to those who are in good standing and need more access to capital,
YUM Brands including grace periods for certain near-term payments and deferring certain asset obligations. These grace periods provide those
franchisees with cash flow constraints, an additional 60 days to pay two of their royalty payments.

Have retained future rents payment and initiated discussions with their main suppliers (including landlord) on new payment terms
Burger King France
and rebates.
Source: Ambit Capital research, Company, Bloomberg

Exhibit 17: All the companies have withdrawn their previous guidance due to uncertainty
Company Commentary

Have withdrawn their two- to three-year outlook for global retail sales growth, US same-store sales growth, international
Domino's Pizza US
same-store sales growth and global net unit growth.

Company has withdrawn their previous FY20 guidance related to comparable restaurant sales growth, new restaurant
Chipotle Mexican Grill
openings, and effective full-year tax rate.

YUM Brands The company has withdrawn its previous guidance.


Source: Ambit Capital research, Company, Bloomberg

Where do go from here?


Within the entire consumer discretionary universe, Jubilant Foodworks will be the
biggest beneficiary of formalization led by consumers moving towards well-known
brands like Domino’s as hygiene will play an important role over discounting.
Increased comfort with online ordering across categories too would drive new
customers for Dominos. While revenue as well as earnings momentum will remain
bleak over the next 6-12 months led by tepid consumer sentiment and consumers
avoiding eating out, we believe once the sentiment revives, pace of revenue growth
for Jubilant Foodworks will outpace other discretionary players.
Over a longer period, Jubilant would also benefit from success in other QSR formats
(Chinese and Biryani already introduced; a few more to be tried) given its strong
learning on technology, supply chain, brand building and expanding retail footprint
across the country while maintaining overall store economics.
Owing to its large scale, strong supply chain and superior product/brand, Jubilant
commands highest gross margin in the QSR industry. Remain BUYers on Jubilant
Foodworks with revised TP of `1,950 (vs `2,000 earlier), implies 11% upside. We cut
our FY21/FY22 revenue and EPS by 26%/17% and 61%/25% to incorporate the
impact of Covid-19 and now build in 8%/12%/21% revenue/EBITDA/EPS CAGR
during FY20-22. JUBI is trading at FY22 P/E of 47x.
Exhibit 18: We remain BUYers with revised TP of `1,950
FY21E FY22E
New Old Change New Old Change
Target price (`) 1,950 2,000 -3%
Revenue (` mn) 31,279 42,179 -26% 45,174 54,673 -17%
EBITDA (` mn) 5,870 9,757 -40% 11,041 13,776 -20%
EBITDA margin 18.8% 23.1% -430bps 24.4% 25.2% -80bps
PBT 1,841 4,706 -61% 6,290 8,403 -25%
PAT 1,377 3,522 -61% 4,707 6,288 -25%
EPS (`) 10.4 26.7 -61% 35.7 47.6 -25%
Source: Ambit Capital research, Company

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amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 19: Expect Jubilant’s PAT to decline by ~57% in FY21 to `1.4bn


FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 31,279 35,971 26,587 45,173 51,949 38,397
Gross margin 74.5% 75.0% 74.0% 74.5% 75.0% 74.0%
CAGR over FY20 -20% -7% -32% 8% 16% -1%
EBITDA 5,870 8,285 3,502 11,041 14,587 7,529
EBITDA margin 18.8% 23.0% 13.2% 24.4% 28.1% 19.6%
PAT 1,378 3,185 (394) 4,706 7,360 2,079
EPS 10.4 24.1 (3.0) 35.7 55.8 15.8
Source: Ambit Capital research, Company

Risk to our thesis: Prolonged weakness in consumer sentiment delaying demand


and hygiene concerns around ordering food remains key risk to our BUY stance.

Exhibit 20: Jubilant has undergone multiple re-rating Exhibit 21: …GM improvement and expectations on
which was led by… improvement in SSG

140 TTM P/E 3yr avg SSG (LHS) Gross margin


120 40% 77%
35%
100 76%
30%
80 25%
75%
60 20%
15%
40 74%
10%
20 5% 73%
0 0%
-5% 72%
Jun-10
Feb-11
Oct-11
Jun-12
Feb-13
Oct-13
Jun-14
Feb-15
Oct-15
Jun-16
Feb-17
Oct-17
Jun-18
Feb-19
Oct-19
Jun-20

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 42


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Consumer Discretionary

Trent
(TRENT IN, BUY, TP: `725, 10% upside)
Trent’s Westside format scores best in terms of operating matrix (SSG,
revenue/sq ft, EBITDA margin) amongst all the apparel players but lags at
company-level profitability led by losses and cash-burn in grocery (through
its subsidiaries). Business may struggle in the near term due to Covid as
footfalls into physical stores may remain challenged even as lockdown opens
up gradually and new purchases are reduced given limited social
interactions. Trent has accelerated its store expansions meaningfully across
all three fashion formats (Westside, Zudio, Utsa), adding ~50% of their ~250
fashion stores in the last 2 years (FY19 and FY20) as it gained comfort on
store economics for each format. While pace of store rollouts in FY21 would
get hit, it would recover back to pre-Covid pace in FY22 given balance sheet
strength. Remain BUYers with revised TP of `725 (`640 earlier), implying 10%
upside. Trent is trading at 40x EV/EBITDA on TTM basis vs last 3-year
average of 51x EV/EBITDA. Key risks: Increase in losses incurred under
various grocery formats and decrease in the pace of store expansion under
Westside/Zudio.

The good…
Best-in-class store operating matrix: Westside has been one of the best apparel
retailers in the country, delivering some of the best operating metrics in terms of
SSSG, sales/sq ft, store expansion and margins. Trent also benefits from being a
focused player in the female and kids wear category; organized female/kids branded
apparel market is growing at ~32% CAGR vs 12-14% for the overall branded apparel
market.
Exhibit 22: Westside’s superior product assortment and supply chain drive better
SSSG, sales per sq ft and EBITDA margin
Revenue Revenue Store
Company/ EBITDA No of Area Sales per
(` mn) growth SSSG added in
Format margin stores (mn sq ft) sq ft (`)
FY19 (FY19) FY19
Westside 23,670 17% 11.0% 9.0% 150 27 2.70 10,225
Shoppers
44,280 6% 6.0% 3.9% 83 2 4.25 10,419
Stop*
FLF 56,240 27% 9.8% 8.7% 339 59 6.77 8,307
Raymond (Branded
16,470 16% 3.7% 335 67 dna dna
Apparel)
Pantaloons 31,940 12% 7.2% 1.4% 308 40 40.16 7,953
Madura# 50,320 13% 8.0% 5.3% 1,980 167 dna dna
Source: Company, Ambit Capital research; * data pertaining to store and cities are for Shoppers Stop outlets
only, # LTL growth, Stores and areas is only for Lifestyle brands, dna denotes data not available
Trent has perfected women wear and fast fashion formats: India’s US$40bn
fashion market has had many formats but few sustainable and scalable ones. They
vary from low-range, distribution heavy to wide-range, retail-heavy models. Lower
costs help distribution-heavy brands achieve high RoCE but wide-range and own
stores offer better NPV over long periods. Trent’s focus on private labels, store
experiences, higher focus on back end and fast fashion supply chain should drive
US$2bn in apparel revenues over next decade.
Market consolidation: Covid will accelerate consolidation in the market (weaker
organized players as well as unorganized) which would lead to better growth
opportunities for Trent increasing the opportunity to open new stores with better store
economics (due to lower rentals and employee cost inflation).
Fine tuning the back-end: Trent recently raised `9.5bn equity by way of
preferential issue to Tata Group to invest in back-end (technology, supply chain) and
acquire high street properties in tier2/3 markets. Trent views trendiness as its main
advantage over competitors and to that extent it is working to make its fast fashion
supply chain even faster.
Liquidity position remains strong with cash of ~`440mn, current investment of
~`6.8bn and no major debt repayment obligations over the next one year.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 44


Consumer Discretionary

…the bad
Shift to online: Globally, online apparel players are emerging as the winners of the
current crisis as consumers are purchasing online rather than going out even as
stores start to reopen. This can be corroborated from the fact that Europe's biggest
online-only fashion retailer Zalando has said it expects full-year sales growth of 10-
20% while H&M, the world's second-biggest fashion retailer, said local currency sales
had tumbled 57% in 1 March to 6 May, while online sales grew almost a third during
the same period. We expect a similar trend in India as well with apparel retailer like
Trent witnessing revenue decline in FY21.
Store expansion to moderate over near term: One of the key growth drivers for
Trent has been store expansion under Westside as well as Zudio. However, with
slowdown in the economy and consumption weak, pace of store expansion will
moderate over the next 12-18 months and in turn moderate revenue growth for
Trent.
Inventories discounting: The biggest challenge fast fashion brands like Trent will
face is in terms of inventory becoming obsolete, driving the need to sell on higher
discounting which would lead to inventory write-off.

…and the ugly


Subsidiaries’ losses could become meaningful: Salience of loss from subsidiaries
may increase in overall profitability as standalone profit will decline, impacting
overall profit of the company.
Exhibit 23: Subsidiaries continue to be a drag on overall profitability
Standalone PAT Consol PAT Consol PAT as % of standalone PAT
1,800 80%
1,600 70%
1,400 60%
1,200
50%
1,000
` mn

40%
800
30%
600
400 20%
200 10%
0 0%
FY16 FY17 FY18 FY19 FY20
Source: Ambit Capital research, Company

Where do go from here?


Our longer term view
We continue to like Trent within the ambit of all the apparel players in India given the
quality of business. This is evident from its industry-leading SSSG, EBITDA margin
expansion and faster ramp-up of stores in new towns. Westside continues to be the
key driver of valuations as it occupies a small share of the USD18bn women’s wear
market. Whilst Zara returned to its routine of delivering revenue growth, Star Bazaar
continues to establish proof of concept and may remain a struggle as competition
builds up in grocery. We believe Zudio would better the legacy that Max (owned by
Lifestyle) has carved in the value fashion market. Moreover, reducing losses of Star as
the format gathers scale and steady performance of Zara will drive higher RoIC as
against generating treasury income.
Shorter term view
We believe the business may struggle in the near term due to Covid as footfalls into
physical stores may remain challenged even as lockdown eases. Inventory risks over
the near term too would be a challenge where discounting would be necessary to
clear inventories in 2Q/3Q as lockdowns are lifted, however, the same would have
lower impact on Trent vs other apparel players given Trent’s efficient supply chain
(lower inventory) and 12 season model.

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Consumer Discretionary

Trent has accelerated its store expansions meaningfully across all three fashion
formats (Westside, Zudio, Utsa) adding ~50% of their ~250 fashion stores in the last
2 years. While pace of store rollouts in FY21 would get hit, it would recover back to
pre-Covid pace in FY22. Remain BUYers with revised TP of `725 (`640 earlier),
implying 10% upside. The stock now trades at 40x EV/EBITDA (post Ind-AS where we
add both lease liability into EV and compare it to Ind-AS FY20 EBITDA) on TTM basis
vs. last 3-year average of 51x EV/EBITDA (pre Ind-AS) on TTM basis. We build in
30%/38%/42% revenue/EBITDA/PAT CAGR over FY20-22 led by 10/30 and 15/55
store additions in FY21/FY22 for Westside (170 store in FY20) and Zudio (81 store in
FY20).

Exhibit 24: We remain BUYers on Trent with revised TP of `725


FY21E FY22E
` in mn
New Old Change New Old Change
Target price (`) 725 640 13%
Revenues 21,373 37,444 -43% 41,198 48,799 -16%
EBITDA 1,895 5,960 -68% 7,752 9,506 -18%
EBITDA margin 8.9% 15.9% -700bps 18.8% 19.5% -70bps
PBT (1,053) 2,501 -142% 3,478 5,629 -38%
PAT (788) 1,872 -142% 2,602 4,212 -38%
EPS (2.2) 5.3 -142% 7.3 11.9 -38%
Source: Ambit Capital research, Company

Exhibit 25: We expect Trent to report loss under our base case in FY21 and turn
profitable in FY22
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 21,373 24,579 18,167 41,198 47,378 35,018
CAGR over FY20 -33% -23% -43% 30% 49% 10%
EBITDA 1,894 3,172 699 7,751 9,610 4,750
EBITDA margin 8.9% 12.9% 3.8% 18.8% 20.3% 13.6%
PAT (788) 168 (1,683) 2,602 3,993 357
EPS (2.2) 0.5 (5.1) 7.3 12.0 1.1
Source: Ambit Capital research, Company

Risk to our thesis: Increase in losses incurred under various grocery formats and
decrease in the pace of store expansion under Westside/Zudio are key risks to our
SELL thesis.

Exhibit 26: Trent has traded at rich multiple and has de- Exhibit 27: …led by increase in losses from subsidiaries
rated in the past 3 years… and JVs

90 TTM EV/EBITDA 3yr avg Share of loss from subsidiaries and JVs
80
0
70
60 (100)
50
(200)
40
` mn

30 (300)
20
(400)
10
0 (500)
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-17
Jun-17
Oct-17
Feb-18
Jun-18
Oct-18
Feb-19
Jun-19
Oct-19
Feb-20
Jun-20

(600)
FY16 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Share of loss from subsidiaries
and JVs = Consolidated PAT – Standalone PAT

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Consumer Discretionary

Avenue Supermarts
(DMART IN, SELL, TP: `2,000, 15% downside)
While we continue to like the business and the large opportunity for
retail/grocery players, DMart’s profitability is highly dependent on: (a)
throughput per sq ft which should be hit by lower footfalls (social
distancing)/inability to cram multiple people into the same amount of space
as in pre-Covid period; and (b) gross margin will be hit by lower mix of non-
essential/general merchandise and apparel. Turn SELLers on DMart with
revised TP of `2,000 (`2,300 earlier), implying 15% downside, given over the
next 12-18 months kirana store and e-commerce players will outpace growth
and gain market share as consumers avoid crowded places like shopping
malls/large-format stores and chase convenience of home
delivery/neighborhood store over discount/pricing. Current valuation of 122x
TTM P/E seems expensive for a stock with 18%/17%/16%
revenue/EBITDA/EPS CAGR in FY20-22E. Key risks: Increase in the pace of
store expansion and better GM led by faster-than-expected recovery in
general merchandise and apparels category.

The good…
Benefiting from stress in real estate: DMart’s business model of owning rather
than renting real estate is will aid in (a) keeping the operating cost lower given no
rental expense; and (b) acquiring real estate at cheap prices on the back of distress in
the price of real estate.
Cash-rich balance sheet: DMart recently raised ~`41bn by fresh issue of shares.
This would aid in store expansion and benefit from distress in the real estate sector.
Grocery least impacted: Demand for grocery has not been impacted and DMart
continued to operate more than 50% of its outlets even in lockdown period. Led by its
efficient supply chain, DMart did not face challenges of stock-outs like other grocery
players.
Exhibit 28: Benchmarking grocery distribution: DMart remains the best business
model in the grocery space

Sourcing advantage Operational Costs


Control on
B&M MT Convenience customer
Product
Rental Experience
FMCG mix Logistics
costs
staples
B2B (Metro) High Low Medium Medium Medium Medium

B2C (DMart) High High Low High High High

Trad. Retail (GT) Low Medium High Low High Medium

Ecommerce
B2C Marketplace High Low High Low Medium Medium

Kirana via B2B High High Low Low High Low

Hybrid
B2B2C High High High Low High Low
Source: Company, Ambit Capital research. Examples in brackets. Kirana via B2B is Jumbotail/Udaan etc. B2B2C
is hyperlocal kirana model where customer orders through an app and a local kirana fulfils it. Kirana also sources
from the app owner. B&M means brick & mortar. Green shows low impact

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Consumer Discretionary

Exhibit 29: Buying deferment by customers and challenges for selling of non-essential items are key challenges in the Covid
period

Source: Ambit Capital research, Nielsen

…the bad
In the near term, local kirana to be back in flavor: As consumers avoid crowded
places and move back to local kirana stores for their daily needs, DMart will be worst
hit. We believe the trend of purchasing from local kirana stores will continue for the
next 12-18 months; hence LTL growth of DMart would be severely hit.
Exhibit 30: Online and Kirana stores are gaining traction

Source: Ambit Capital research, McKinsey survey

Online delivery players providing convenience: Amazon, Big Basket has started
to see new customer additions as customers look for convenience. This can increase
competitive intensity in the grocery space and can act as a catalyst in driving higher
growth in e-commerce space at the cost of modern trade. Moreover, competition
from other offline players too has increased who have launched their own online
grocery ventures.

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Consumer Discretionary

Exhibit 31: E-commerce is gaining traction in grocery/FMCG

Source: Ambit Capital research, Economic Times

…and the ugly


SSG to be hit: While DMart stores continue to operate for longer hours and demand
scenario remains unaffected due to social distancing norms, DMart currently allows
limited number of people to enter the store due to social distancing measures. Thus
throughput per store will reduce. This can be corroborated from the fact that DMart’s
revenue for April was down more than 45% YoY.

Exhibit 32: While bill cuts witnessed 25% CAGR over FY15- Exhibit 33: …LTL growth slowed in FY20 primarily due to
20 partially aided by store expansion… the impact of lockdown in Mar’20

Bill cuts (LHS - in mn) Bill size (RHS - in Rs)


LTL growth
250 1,300
25%

200 1,200
20%
1,100
150 15%
1,000
100 10%
900
50 800 5%

- 700 0%
FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Margin to take a hit: DMart’s EBITDA margin is based on 2 key factors: (a)
throughput per sq ft; and (b) share of general merchandise and apparel. DMart has
closed its general merchandise and apparel segments (high gross margin and higher
ticket size), impacting both GM and throughput per sq ft. Throughput per sq ft has
taken a hit also due to lower capacity utilization (lower footfalls).

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Consumer Discretionary

Exhibit 34: GM declined 120bps YoY in 4Q due to inferior Exhibit 35: …leading to YoY decline in EBITDA margin as
product mix (lower share of general merchandise and well
apparels)…

EBITDA margin (%) (LHS)


Revenue (Rs bn) (LHS) Gross margin (%) (RHS)
Other expenses as % of sales (RHS)
80 17% 12% 7%
70 10% 6%
60 15%
8% 5%
50 13% 4%
40 6%
30 11% 3%
20 4% 2%
9%
10 2% 1%
- 7%
0% 0%
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20

4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Where do go from here?


We turn SELLers on DMart with revised TP of `2,000 (`2,300 earlier), implying 15%
downside. DMart is trading at a premium valuation of 122 TTM P/E led by recent run-
up in the stock price. While we continue to like the business and the large opportunity
for retail/grocery players, DMart’s operating matrix is highly dependent on
throughput per sq ft which we believe will be impacted severely due to lower footfalls
due to social distancing measures and lower share of general merchandise and
apparels.
Also, over the next 12-18 months, we believe kirana store and e-commerce players
will gain market share as consumers avoid crowded places like shopping malls and
large format stores and chase convenience of home delivery/nearby store over
discount/pricing. We cut our FY21/FY22 revenue and EPS by 24%/15% and 51%/21%
to incorporate the impact of Covid. We now build in 18%/17%/16%
revenue/EBITDA/EPS CAGR during FY20-22. Sharp cut in TP is led by slowdown in the
pace of store expansion, which has a cascading effect on LT earnings and cash flows.

Exhibit 36: We turn SELLers on DMart with revised TP of `2,000


FY21E FY22E
` mn, unless specified
New Old Change New Old Change
Target price (`) 2,000 2,300 -13%
Revenue 246,820 325,003 -24% 341,772 401,358 -15%
Gross margin (%) 13.4% 14.8% -140bps 15.0% 15.2% -20bps
EBITDA 15,289 26,182 -42% 29,175 33,838 -14%
EBITDA margin (%) 6.2% 8.1% -190bps 8.5% 8.4% 10bps
Other income 860 515 67% 480 513 -6%
PBT 11,628 22,693 -49% 24,372 29,543 -18%
PAT 8,701 16,981 -49% 18,238 22,107 -18%
EPS (`) 13.4 27.2 -51% 28.2 35.4 -21%
Source: Ambit Capital research, Company

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Consumer Discretionary

Exhibit 37: We expect DMart to report profit under our base case in FY21 and FY22
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 246,820 283,843 209,797 341,772 393,038 290,507
CAGR over FY20 0% 15% -15% 18% 26% 9%
Gross margin 13.4% 12.0% 8.0% 15.0% 15.0% 14.0%
EBITDA 15,289 14,808 412 29,175 34,978 20,468
EBITDA margin 6.2% 5.2% 0.2% 8.5% 8.9% 7.0%
PAT 8,701 8,341 (2,431) 18,238 22,580 11,722
EPS 13.4 12.9 (3.8) 28.2 34.9 18.1
Source: Ambit Capital research, Company

Risk to our thesis: Decrease in discounting led by lower competitive intensity, pick-
up in demand for general merchandise and apparels and ramp-up in the pace of
store expansion due to real estate distress are key risks to our SELL stance.

Exhibit 38: DMart’s TTM valuations should correct given Exhibit 39: …led by strong LTL growth and improving
weaker earnings growth (vs. past) over next two years; its sales per sq ft (barring FY20)
valuation remained rich…

TTM P/E Sales per sq ft YoY growth LTL growth


140
25%
120
20%
100
15%
80
10%
60
5%
40 0%
Aug-17

Aug-18

Aug-19
Dec-17
Jun-17

Oct-17

Feb-18
Apr-18
Jun-18

Oct-18
Dec-18
Feb-19
Apr-19
Jun-19

Oct-19
Dec-19
Feb-20
Apr-20
Jun-20

-5%
FY15 FY16 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company

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Consumer Discretionary

Aditya Birla Fashion and Retail


(ABFRL IN, SELL, TP: `125, 9% downside)
Key concerns around ABFRL are on its leverage position which will not
improve in FY21 (despite ABFRL looking to raise `10bn by way of right issue)
led by weaker revenues and profitability. ABFRL’s business is high on
operating as well as financial leverage which makes it highly vulnerable to
higher cash burn due to lockdown and post lockdown economic impact. While
inventory write-off related loss could be lower for ABFRL vis-à-vis other
apparel players (due to 12 season model), structural risk to formal wear (due
to increase in work from home, 25% of ABFRL’s sales) is more prominent. We
turn SELLers on ABFRL with revised TP of `125 (`211 earlier), implying 9%
downside. ABFRL has multiple levers in terms of cost rationalization to reduce
loss and improve margin and its ability to successfully implement such cost
rationalization is a key risk to our SELL thesis.

The good…
Balance of wholesale and direct to customers: Unlike most of the other
retail/apparel players who are either only direct to customers (Trent) or only through
distributors (Page Industries), ABFRL revenue stream is diversified across direct to
customers and through distribution/wholesale model. While structurally there is a
shift from general trade (wholesale/distribution) to modern trade (large format
stores), under the current scenario consumers will avoid going to crowded places like
LFS and would rather stick to general trade for their purchases, which will aid ABFRL
gain market share from apparel players.

Exhibit 40: ABFRL revenue stream is well-diversified across Exhibit 41: Madura’s revenue stream is diversified as
multiple formats; Pantaloons may be disrupted more due well; Retail business will be hurt the most
to Covid

Lifestyle Brands Pantaloons Fast Fashion Other Businesse Wholesale Retail Others
2% 3% 4% 6%
5% 5% 4% 3% 17% 17% 19% 20%

38% 39% 39% 41%


42% 41% 39% 42%

55% 53% 52% 50% 41% 42% 41% 38%

FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

…the bad
Risk of inventory write-off: One of the biggest concerns for apparel players is the
inventory write-down they will need to undertake. We note ABFRL’s shift to the 12
season model (vs 4 season model) allows it to reduce its lead times significantly.
However, we believe most of the apparel players (including ABFRL) would indulge in
heavy discounting to (a) liquidate inventories; (b) benefit from the pent up demand
post lockdown; and (c) generate cash flows to fund operating expenses.
Too many loss-making ventures: ABFRL incurred EBITDA-level loss of `1bn/`1.2bn
in FY18/FY19 and `0.8bn in 9MFY20 from its Fast Fashion (People and Forever 21)
and other businesses (Global brands and Innerwear). It’s recently acquired ethnic
wear businesses, Jaypore and Shantanu & Nikhil, are loss-making as well with
EBITDA loss of `20mn in 3QFY20 and `100mn in 9MFY20.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 54


Consumer Discretionary

Pantaloons and high-end products in Madura portfolio may see challenges:


Pantaloons store economics hasn’t been great even in the pre-Covid period with
multiple changes in format’s value proposition over the years. While clearly
Pantaloons had started to witness a turnaround in FY20, Covid may again de-rail the
process. Unlike Westside which has a loyal customer base, Pantaloons may see an
higher impact of competition from online channel and aggressive discounting by
various other lesser known brands desperate to clear inventories on online/offline
channels. Some of the higher end product range (linked to ethnic, wedding wear,
club wear) may also take a hit in the near term.
Exhibit 42: Pantaloons: small swings in Sales have meaningful impact on profitability
Rs mn 4QFY19 4QFY20 YoY
Sales (1) 6,332 6,260 -1%
EBITDA (2) 130 -380 -392%
Op cost (1-2) 6,202 6,640 7%
Margin (%) 2% -6% 800bps
Source: Company, Ambit Capital research

Structural risk to formal wear: ABFRL’s key brands like Van Heusen, Peter England
and Louis Phillipe are highly skewed towards formal wear. Not only is growth for In 4QFY20, ABFRL Sales declined
formal wear lagging overall apparel growth, given current situation of work from only 5% YoY (5% decline in core
home and likelihood of the trend continuing over the next 6-12 months for some part Madura, 1% decline in Pantaloons)
of the service industry, we see ABFRL impacted more than other apparel players. but caused EBITDA loss of
Rs570mn (pre-Ind-AS) and
Shift to online ecommerce: While ABFRL has a reasonably good online presence increased net debt (partly
(high single-digit share). However, we note that during the middle of 2015-18 increased due to unsold
Madura’s revenue growth de-accelerated due to online and other competition. While inventories) to Rs25bn vs Rs22bn in
growth has accelerated back from FY19/FY20, we may see a reversal as Covid would Q3.
lead to higher online shift.
Exhibit 43: Losses in Fast Fashion and other businesses are rising

Fast Fashion Other business


-

(200)

(400)
` mn

(600)

(800)

(1,000)
FY16 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company

…and the ugly


Financial leverage: ABFRL’s net debt:equity increased from 1.1x in FY19 to 1.6x in
1HFY20 and to 1.9x in FY20. During the period, net debt to EBITDA deteriorated from
3.0x in FY19 to 3.6x in 1HFY20 and 4.5x in FY20. We believe cash burn in FY21 may
absorb most of the cash generated through rights issue.
Inefficiency in cost: ABFRL’s gross margin is better (by 30bps) vis-vis Westside and
revenue is 3.2x that of Trent. Despite benefit of scale and a better gross margin
profile, ABFRL’s EBITDA margin is ~250bps below Trent due to higher A&P spends
and other cost inefficiency. We note despite lower ad-spends, Trent has better SSGs
than Madura/Pantaloons over the years.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 55


Consumer Discretionary

Exhibit 44: ABFRL is unable to benefit from its large scale and better gross margin;
good cost controls if done sustainably can create lot of value for shareholders
Westside ABFRL Westside ABFRL
FY19
` mn ` mn % of sales % of sales
Number of stores
Revenue 25,317 81,177 100.0% 100.0%
Gross profit 12,993 41,928 51.3% 51.6%
Breakup of expense
Employee 2,525 9,130 10.0% 11.2%
Rent 3,180 11,104 12.6% 13.7%
Repairs and maintenance 808 1,829 3.2% 2.3%
Power/fuel/electricity 557 1,295 2.2% 1.6%
Advertisement and Sales Promotion 430 4,415 1.7% 5.4%
Travelling Expenses 156 882 0.6% 1.1%
Professional and Legal Charges 278 940 1.1% 1.2%
Bank Charges 133 373 0.5% 0.5%
Transportation and Handling Charges 743 844 2.9% 1.0%
Security and House Keeping Charges - 2,627 0.0% 3.2%
Information Technology Expenses - 625 0.0% 0.8%
Sourcing Fees 332 - 1.3% 0.0%
Other expenses 750 1,968 3.0% 2.4%
Misc/ general expenses 737 356 2.9% 0.4%
EBITDA 2,366 5,541 9.3% 6.8%
Source: Ambit Capital research, Company

Dilution on the cards: ABFRL’s board has approved rights issue of `10bn; at an
issue price of `130 it implies ~9% dilution. Management has stated that a substantial
part of the rights issue will be used to repay debt. ABFRL has repayments of ~`15bn
due over April to June 2020 (excluding ~`5.3bn of NCD repayment, which was
redeemed on April 20, 2020) and has only ~`2.6bn of cash and liquid investments.

Exhibit 45: ABFRL’s net debt is on the rise… Exhibit 46: …which is adversely impacting the liquidity
ratio

Net debt (LHS) Net Debt:Equity (RHS) Net debt:EBITDA (LHS) Interest coverage ratio

22 2.5 9 3.5
8 3.0
20 2.0 7
2.5
18 6
1.5
Rs bn

5 2.0
16
4 1.5
1.0
14 3
1.0
0.5 2
12 0.5
1
10 - 0 -
FY19 FY20 FY21E FY19 FY20 FY21E

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 56


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Where do go from here?


We turn SELLers on ABFRL with revised TP of `125 (`211 earlier), implying 9% The risks of a high cash burn (~9%
downside. We believe it may witness higher margin pressure on Pantaloons and dilution for ` 10bn Rights issue) still
higher price point products across Madura. We expect -4% revenue CAGR over FY20- remain reasonably high till the time
22. ABFRL may emerge winner through this Covid period if it is able to rationalize its we see concrete actions on costs
high cost structure (heavy A&P spends, expansion into multiple non-profitable lines of reduction. Assuming a cash burn of
business such as fast fashion, innerwear, ethnic (Nikhil Shantanu, Jaypore), etc.). ~`10bn, we believe even if
ABFRL has fixed/variable costs of ~`40bn in FY20 on a `45bn gross profit base. With company is able to retain its Net
revenues disrupted for nearly a quarter, the extent of cash losses can be meaningful Debt at similar level as FY20, it
given likely interest costs of ~` 21bn in FY20. We expect ABFRL to report PAT loss of would mean net debt: normalized
`1.7bn in FY21 and PAT of `2.8bn in FY22. ABFRL’s net debt:equity is 1.9x and its net pre-Covid EBITDA of ~4x. At a
debt:EBITDA is 4.5x. We expect further deterioration in net debt:EBITDA to 8.1s led by cash burn of ~`5bn, the Net Debt:
60% decline in EBITDA in FY21. However, net debt:equity would improve in FY21 to EBITDA would still be ~3.3x unless
0.8x led by right issue of `10bn. underlying EBITDA improves
meaningfully over and above pre-
Covid levels.
Exhibit 47: We turn SELLers on ABFRL with revised TP of `125; ~9% cut in TP is
attributable to dilution on account of rights issue
FY21E FY22E
New Old Change New Old Change
Target price (`) 125 211 -41%
Revenues (` mn) 56,724 93,086 -39% 79,769 108,507 -26%
EBITDA (` mn) 1,909 1,891 1% 7,308 10,654 -31%
EBITDA margin 3.4% 2.0% 140bps 9.2% 9.8% -60bps
PBT (` mn) (2,300) (1,956) NA 3,737 6,811 -45%
PAT(` mn) (1,721) (1,467) NA 2,797 5,108 -45%
EPS (`) -2.0 -1.9 NA 3.3 6.6 -50%
Source: Ambit Capital research, Company

Exhibit 48: We expect ABFRL to report loss under our base case in FY21 and turn
profitable in FY22
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 56,724 65,232 48,215 79,769 91,735 67,804
Gross margin 50.5% 52.0% 50.0% 51.6% 52.0% 50.5%
CAGR over FY20 -35% -25% -45% -9% 5% -22%
EBITDA 1,909 5,729 (1,355) 7,308 11,937 2,057
EBITDA margin 3.4% 8.8% -2.8% 9.2% 13.0% 3.0%
PAT (1,721) 1,137 (4,164) 2,797 6,261 (1,133)
EPS (`) (2.0) 1.3 (4.9) 3.3 7.4 (1.3)
Source: Ambit Capital research, Company

Risk to our thesis: ABFRL has multiple levers in terms of cost rationalization to
reduce loss and improve margin. Its ability to successfully implement such cost
rationalization is a key risks to our SELL thesis.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 57


Consumer Discretionary

Exhibit 49: ABFRL EV/EBITDA multiple has de-rated Exhibit 50: …due to concerns around leverage
significantly…

Net debt:EBITDA (LHS) Interest coverage ratio


55 TTM EV/EBITDA 3yr avg
9 3.5
45 8 3.0
7
35 2.5
6
5 2.0
25
4 1.5
15 3
1.0
2
5 0.5
1
Mar-16
Jul-16

Nov-16
Mar-17

Jul-17
Nov-17
Mar-18
Jul-18

Nov-18
Mar-19
Jul-19

Nov-19
Mar-20
0 -
FY19 FY20 FY21E

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 58


Consumer Discretionary

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June 24, 2020 Ambit Capital Pvt. Ltd. Page 59


Consumer Discretionary

Page Industries
(PAG IN, SELL, TP: `15,500, 19% downside)
Page will benefit from decrease in competitive intensity in male innerwear
and increase in demand for athleisure (led by increase in the workforce
working from home). However, Page may see challenges of: (a) inferior
product mix due to lower sale of premium SKUs as people cut/postpone
holidays and business trips; and (b) impact of negative operating leverage
given heavy manufacturing cost base. More importantly Page has to still find
levers to grow faster than 10% given distribution expansion and incremental
growth from new categories have slowed. We update our FY21/FY22 EPS by -
63% led by declining revenue and impact of operating leverage, building in
8%/11%/14% revenue/EBITDA/PAT CAGR (FY20-FY22). Current valuations of
57x/46x FY20/FY22 P/E factor in future dominance similar or larger than in
the past. Remain SELLers with revised TP of `15,500 (earlier 15,150),
implying 19% downside.

The good…
Business relatively resilient amidst COVID threat: Page will benefit from ~35%
share of outerwear and better presence in MBO channel, both of which are likely to
witness better customer traction in COVID world.
Resilient business: We believe Page will not face immense competition or the risk of
down trading led by (a) demand for innerwear as a category is highly inelastic; (b)
very low wallet share in the overall discretionary spending; (c) loyalty is sticky driven
by comfort factor; and (d) decline in the aggression of competition from VH as
ABFRL’s balance sheet is highly leveraged, so it will need to focus on limiting cash
burn. That said we note that male innerwear business itself
Exhibit 51: Growth of ABFRL’s other businesses (largely VH innerwear) is starting to
come off

Revenue (LHS) Revenue growth (YoY)


1,600 105%
1,400 90%
1,200 75%
1,000
60%
800
` mn

45%
600
400 30%
200 15%
- 0%
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

Source: Ambit Capital research, Company

Well placed in outerwear: Not only does Page have limited risk of revenue loss
(apart from reasons of lockdown), it also has large headroom to grow its athleisure
business (~33% share of revenue) led by increase in demand as a substitute for
formal wear due to increase in the workforce working from home. The challenges
would be growing penetration of online channel which limits benefit of such
advantages.
Beneficiary of transitory reversal in structural shift: While structurally there is a
shift from general trade (mom & pop shops) to modern trade (large format stores),
given the current scenario, consumers will avoid going to crowded places like LFS and
would rather stick to general trade for their purchases. With ~77% of revenue for
Page coming from general trade, it is best-placed in the near term to benefit from the
temporary revival of mom & pop shops.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 60


Consumer Discretionary

Addressing channels discomfort: During our recent interactions with channel


partners we picked up that discomfort amongst the channel has declined given (a)
Jockey for the first time has taken back dead stock (5-year-old inventory) worth
`300mn from distributors (at cost and not at discount); (b) Jockey is working on
another model to provide staff and infra at MBO as well; and (c) regaining faith of
distributors in Page due to weaker tertiary sale for VH. We believe some of these
initiatives may be margin dilutive.

…the bad
Struggle for volume continues: Page’s struggle on volume growth continues.
4Q/FY20 volumes declined 18%/3% partly also to do with COVID. Growth is largely
led by realization and mix changes 12%/ 7% for 4Q/FY20 which may peak out at
some point in time. Gross margin drop of 480bps YoY was a bit worrisome for
4QFY20 despite lower incentives (down 20% YoY). While Page will benefit from
higher sales of outerwear (aided by increased WFH) and increased consumer
preference for MBO channel (where Page is strong), annual pricing growth of 3-5%
may be difficult to come by and volume challenges on innerwear side may continue
amidst economically weak environment.
Limited headroom for expanding reach: Page’s distribution reach is fairly high
with ~63,000 retail touch points spread across 2,600 cities and towns. Incremental
demand for men’s innerwear was led by (a) consumers uptrading from
mass/economy brand (driving volume growth); and (b) existing consumers of Page
moving up the pyramid and opting for more premium products (driving
mix/realisation growth). We believe both these growth drivers will be impacted in the
near term (2-3 years) on the back of weak consumer sentiment. We do not see any
major uptick in demand from uptrading from mass brands to Page; at the same time
we may also witness existing consumers of Page sticking to mass/economy category
within Page rather than premiumising. This will not only limit revenue growth from
Page but will also limit margin expansion.
Exhibit 52: While retail touch point expansion has been robust, volume per store has
been declining

Retail touch points (LHS) Volume per retail store (pcs)


70,000 5,000

60,000
4,000
50,000

40,000 3,000

30,000 2,000
20,000
1,000
10,000

- -
FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Ambit Capital research, Company

Product getting expensive: Price points have become an issue in expanding the
appeal to a wider customer base and deepening retail distribution as well for Page.
While female innerwear product portfolio has clearly improved and investments have
also stepped up on improving the display of the stores, success has been limited so
far. On top of that, due to the high price point of female innerwear offered by Page,
ability to stock and sell such product is limited to only tier1/2 and some large tier 3
retailers.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 61


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 53: With volume growth slowing, realization growth has been a key supporter
of revenue growth; this may be under threat over next few quarters as customers
seek value

30% Volume growth Realization growth

20%
Revenue growth

10%

0%

-10%

-20%
1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20
Source: Ambit Capital research, Company

Long term growth unlikely to be more than 10-12%: Page grew well in the past
led by a) distribution expansion b) success in new categories such as outerwear and
female innerwear which drove ~20%+ sales CAGR for nearly a decade before FY19.
We believe such levers are limited with male innerwear (45% of revenues) likely to
grow at 6-8% while female innerwear (20% of revenues) will grow at ~10% while
outerwear will grow ~12% driving overall growth of ~10% at company level. We
believe such growth makes the stock expensive at 48x FY22 EPS.

…and the ugly


Revenue and margins now lagging industry: As seen in the last 2 years, revenue
growth and gross margin for Page has already started lagging industry instead of
leading the industry like it did during the decade preceding FY19.

Exhibit 54: Page’s revenue growth now mimics that of Exhibit 55: …and gross margin is below industry average
industry…

Page Industries GM Industry GM


Page Industries Industry Growth differential (RHS)
GM differential (RHS)
50% 35% 65% 12%
30% 9%
40% 60%
25% 6%
30% 20% 3%
55%
20% 15% 0%
10% 50% -3%
10% -6%
5%
0% 0% 45% -9%
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

9MFY20
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

9MFY20

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

EBITDA margins to remain under pressure: EBITDA margins for Page will remain
under pressure on account of (a) increase in employee cost led by recent hiring for
kids vertical with no corresponding increase in topline; Page hasn’t taken any salary
cuts for employees (b) higher overhead and capex being incurred for doubling
capacity; (c) inferior product mix due to lower sale of premium SKUs as people cut
/postpone holidays and business trips; and (d) impact of negative operating leverage
due to decline in revenue.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 62


Consumer Discretionary

Where do go from here?


While there has been an improvement in management execution in terms of more
incentives to address dealer discontent, taking back dead stocks, continued expansion
in MBO reach and setting up separate teams for kidswear rollout, from a valuation
perspective the stock needs to adjust to new margins and tepid revenue growth.
Innerwear as a category is abundantly penetrated and any shift from unorganized to
organized will benefit mass market players. Page will benefit largely from uptrading
from mass market brands to premium brands like Jockey, which in the current
environment will be far and less.
Competition from VH is fading in men’s innerwear. However, in female innerwear
and athleisure wear (large opportunity vis-à-vis men’s innerwear) Page has long way
to prove its right to win given product gaps and higher competition from brands like
Enamor, Van Heusen, Decathlon, etc. Page has taken corrective measures to address
issues pertaining to product, distribution and innovation. However, we believe the
impact of such initiatives will only be gradual and in the near term Page will continue
to face headwinds in terms of revenue growth and margins. We cut our FY21/FY22
EPS estimates by -63% led by declining revenue and impact of operating leverage.
We build in in 8%/11%/14% revenue/EBITDA/PAT CAGR (FY20-FY22). Current
valuations of 57x/46x FY20/FY22 P/E factor in future dominance similar or larger
than in the past. Remain SELLers with revised TP of `15,500 (earlier 15,150), implying
19% downside.

Exhibit 56: Remain SELLers on Page Industries with revised TP of `15,500


FY21E FY22E
` mn, unless specified
New Old Change New Old Change
Target price (`) 15,500 15,150 2%
Revenue 22,758 28,209 -19% 34,402 33,437 3%
EBITDA 2,120 4,309 -51% 6,613 5,968 11%
EBITDA margin (%) 9.3% 15.3% -600bps 19.2% 17.8% 140bps
Other income 320 226 42% 345 267 29%
PBT 1,458 3,928 -63% 5,920 5,568 6%
PAT 1,091 2,939 -63% 4,430 4,167 6%
EPS (`) 97.8 263.5 -63% 397.1 373.5 6%
Source: Ambit Capital research, Company

Exhibit 57: We expect Page Industries to report profit under all the scenarios
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 22,758 26,172 19,344 34,402 39,562 29,242
CAGR over FY20 -23% -11% -34% 8% 16% 0%
Gross margin 54.6% 58.0% 55.0% 55.4% 58.5% 56.0%
EBITDA 2,120 4,237 944 6,613 9,875 4,700
EBITDA margin 9.3% 16.2% 4.9% 19.2% 25.0% 16.1%
PAT 1,091 2,675 211 4,430 6,870 2,998
EPS (`) 97.8 239.8 18.9 397.1 615.9 268.8
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 63


Consumer Discretionary

Risk to our thesis: Success in female innerwear, fast-than-expected recovery and


sharp channel revival are key risks to our SELL stance.
Exhibit 58: Page’s P/E multiple has de-rated… Exhibit 59: …led by poor volume growth

120 Volume (mn pcs) Volume growth


TTM P/E 3yr avg
200 30%
100
25%
80 150 20%
60 15%
100
40 10%

20 50 5%
0%
0
0 -5%
Jun-10
Feb-11
Oct-11
Jun-12
Feb-13
Oct-13
Jun-14
Feb-15
Oct-15
Jun-16
Feb-17
Oct-17
Jun-18
Feb-19
Oct-19
Jun-20

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 64


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June 24, 2020 Ambit Capital Pvt. Ltd. Page 65


Consumer Discretionary

PVR
(PVRL IN, SELL, TP: `900, 15% downside)
While the long-term narrative of (a) multiplex being underpenetrated in
India; (b) market share gain from single screens; and (c) multiplex being a
duopoly market eliminates any pricing-based competition remains intact, we
believe multiplex will be one of the worst hit sectors within our consumer
discretionary coverage. The impact would be led by (a) shift of consumers
from multiplex to OTT; (b) lower occupancy led by norms around social
distancing in multiplex; and (c) lower revenue from F&B as consumers may
avoid eating at multiplex on account of hygiene concerns. Proposed rights
issue would further increase valuation (~6%) and would hurt RoE as well.
Turn SELLers on PVR with revised TP of `900 (earlier `2,220), implying
downside of 15% as we expect PVR to report loss of ~`5.7bn in FY21 and
~`0.3bn in FY22 led by lower occupancy and high operating and financial
costs. Key risk: Higher-than-expected occupancy rate.

The good…
Multiplex are underpenetrated in India: In 2018, more than 2,000 movies were
released in India vs ~1,000 in South Korea, China, UK and US. Despite having the
maximum number of releases, screens per million population is still very low at 8
screens per million of population vs 30/40 for China/South Korea and 60/125 for
UK/US.
Single screen still have the lion’s share: India’s multiplex industry is still
dominated by single screens (~69% share of screens in 2018). Within the multiplex
space, PVR and Inox Leisure are predominantly the only two key players driving store
expansion, providing large headroom for both them to grow without any cut-throat
competition.

Exhibit 60: Despite having highest number of movies Exhibit 61: Share of multiplex at ~31% provides large
released, India’s screen per mn of population is the least headroom to grow

No of movies released in CY18 Screen per mn of population (RHS)


Multiplexes Single screens
2,500 140
120
2,000 7,031 6,780 6,651
100
1,500 80

1,000 60
40
500
20 2,750 2,950
2,450
- -
India South China UK US
2016 2017 2018
Korea
Source: Ambit Capital research, Company, Industry Source: Ambit Capital research, Company, Industry

Anchor tenants: Multiplex players are an anchor tenant for all mall owners and
hence provide some leeway to multiplexes to renegotiate rents and reduce the impact
of Covid19. We expect PVR should be able to renegotiate rentals with the property
owners for full/partial waiver of rent and temporarily move to revenue sharing model
which would reduce the drag on profits as well as on cash flows.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 66


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Consumer Discretionary

…the bad
Release of movie on OTT: – Film producers have started releasing movie on OTT;
some of the movies being released on OTT includes Akshay Kumar starrer Laxmi
Bomb, Ayushmann Khurrana and Amitabh Bachchan starrer Gulabo Sitabo, Vidya
Balan starrer Shakuntala Devi. This would act as catalyst for consumers to shift from
big screens to OTT. This practice is being witnessed globally as well with Universal
Pictures’ World, Walt Disney’s Artemis Fowl, Warner Bros’ Scoob, Universal Pictures’
The King of Staten Island, etc. being released on the OTT platform as well.
Customer acquisition and retention costs to accelerate: During the period of
lockdown, while multiplexes were under shutdown, consumers moved to OTT
platforms to keep up with entertainment. This led to an increase in people watching
content online and now poses challenge to multiplex players like PVR to bring them
back to theatres. PVR may need to run offers and promotions to win back the
consumers on its platform which would result in margin contraction. High
operating/financial leverage means the last 5% of footfalls are most critical for entire
profitability.

…and the ugly


Lower occupancy: PVR’s business model is very high on operating as well as
financial leverage and its profitability is highly dependent on occupancy rate. With
social distancing norms being expected to be followed for the next 6-12 months at
the least, PVR will likely take a hit on occupancy rates (~25% loss as per
management). PVR will have to take aggressive price hike to mitigate the impact of
lower occupancy which looks impossible in this environment.
Dilution of stake: Despite the recent QIP of `5bn, PVR has debt of ~`11bn
outstanding with `2bn/`2.2bn being due for repayment in FY21/FY22 (of which
`90.8mn is due in 1QFY21). Cash balance of `3bn would suffice only for 4-6 months
assuming it gets waiver for rental and CAM for April to June. To mitigate the risk of
cash flow for funding operational costs, PVR’s board has approved rights issue of
`3bn; at an issue price of `900 it implies 6% dilution.

Exhibit 62: PVR is likely to burn cash throughout FY21

1,500 40%
Net cash cost (Rs mn) Occupancy (%)
1,000 35%
500 30%
- 25%
(500) 20%
(1,000) 15%
(1,500) 10%
(2,000) 5%
(2,500) 0%
1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22

Source: Ambit Capital research, Company

RoE to remain under pressure: Lower profitability and increase in shareholders


equity led by proposed right issue implies further deterioration in RoE for PVR (8% in
FY23 vs. 15% in FY19).

June 24, 2020 Ambit Capital Pvt. Ltd. Page 67


Consumer Discretionary

Where do go from here?


We turn SELLers on PVR with revised TP of `900 (earlier `2,220), implying downside
of 15%. Sharp cut in TP is on account of (a) dilution in stake led by proposed rights
issue; (b) significantly muted cash flow generation over the next 18-24 months; and
(c) decrease in LT estimates led by delay in opening new screens. We expect PVR to
report loss of ~`5.7bn in FY21 and ~`0.3bn in FY22 led by lower occupancy and
high operating and financial costs. While the long-term narrative of (a) multiplex
being underpenetrated in India; (b) market share gain from single screens; and (c)
multiplex being a duopoly market eliminates any pricing-based competition remains
intact, we believe, multiplex will be one of the worst hit sectors within our consumer
discretionary coverage. The impact would be led by (a) shift of consumers from
multiplex to OTT; (b) lower occupancy led by norms around social distancing in
multiplex; and (c) lower revenue from F&B as consumers may avoid eating at
multiplexes on account of hygiene concerns. We would turn positive on PVR if it is
able to prove its ability to acquire and retain consumers without compromising on its
pricing.
Exhibit 63: We turn SELLers on PVR with revised TP of `900
FY21E FY22E
` mn, unless specified
New Old Change New Old Change
Target price (`) 900 2,220 -59%
Revenue 7,987 43,690 -82% 30,032 50,563 -41%
EBITDA (889) 14,477 -106% 9,758 16,854 -42%
EBITDA margin (%) -11.1% 33.1% -4420bps 32.5% 33.3% -80bps
PBT (8,548) 3,386 -352% (422) 4,766 -109%
PAT (5,727) 2,203 -360% (316) 3,566 -109%
EPS (`) (104.7) 45.9 -328% (5.8) 74.4 -108%
Source: Ambit Capital research, Company

Exhibit 64: We expect PVR to report loss in FY21 across all the 3 scenarios
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 7,987 9,185 6,789 30,032 34,536 25,527
CAGR over FY20 -77% -74% -81% -8% -1% -15%
EBITDA (889) (538) (1,269) 9,758 11,871 7,598
EBITDA margin -11.1% -5.9% -18.7% 32.5% 34.4% 29.8%
PAT (5,727) (6,134) (6,681) (316) 1,265 (1,933)
EPS (104.7) (112.2) (122.2) (5.8) 23.1 (35.3)
Source: Ambit Capital research, Company

Risk to our thesis: Faster than expected pickup in occupancy rate and ability to take
price hike are the key risk to our SELL thesis.
Exhibit 65: PVR’s EV/EBITDA multiple has de-rated Exhibit 66: …led by lower occupancy rate and increasing
significantly… leverage

30 TTM EV/EBITDA 3yr avg Occupancy rate Net Debt/EBITDA (x) - RHS
25 39% 6
20 37% 5
35%
15 4
33%
10 3
31%
2
5 29%
27% 1
0
25% 0
Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 68


Consumer Discretionary

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June 24, 2020 Ambit Capital Pvt. Ltd. Page 69


Consumer Discretionary

Bata
(BATA IN, SELL, TP: `900, 33% downside)
Over the next 12-18 months, value will supersede fashion as a determining
factor for consumer and Bata would be the most impacted player within
footwear category given its focus on fashion product over mass market
segment. Bata’s topline as well as profitability will be impacted more vis-à-
vis Relaxo given: (a) higher share of stores in malls and high street; (b) risk
of downtrading due to slowdown in discretionary spending; and (c) higher
operating cost due to retail distribution model. We are building in -2%/-
1%/3% CAGR in revenue/EBITDA/EPS during FY20-22. Valuation of 49x FY22E
EPS seems expensive for a business that factors in most margin expansion
gains and growing sales in line or lower than the industry; FY22 onwards
earnings growth will mimic sales growth (~12%). Remain SELLers with
unchanged TP of `900 (33% downside).

The good…
Bata has changed: It has widened its appeal from a traditional old-style, comfort
and value-based footwear brand to a stylish and trendy youthful brand. Not only it
has ramped up its product but also upgraded its retailing experience. Product range
has improved across key brands like North Star (casual), Power (Sports), and Bata
(Red Label collection, 9 to 5 collection). The company also upgraded its store
experience meaningfully, refreshing most stores over last 2-3 years. This has
improved revenue growth along with margins and improved longevity of the
business.

…the bad
Trying to be everything for everyone has its own challenges: Being an
“everything for everyone” footwear retailer is a tough ask not only on inventory
management but also on brand positioning front. Customer experience across stores
is inconsistent as Bata tries to please a much wider section of consumers than peers.
Fashion footwear comes with its own challenges: Fashion footwear introduces
inventory management complexities because not only is the number of SKUs higher
but the product churn is also faster as fashion trends keep changing and it is
important for a company to stay on top of the trends. Fashion footwear as ca
category also faces increase in competitive intensity from fast fashion brands like
Zara, H&M, Westside, etc.
Downtrading and lower need of expensive footwear: We note that Bata derives
50% of revenues from SKUs priced at `1000+, where consumers may now choose to
not pay so much. Reduced social outgoings as well as increased trends in WFH may
reduce overall volumes within the closed shoe category. Multiple alternatives may
mean that discounting may be the order of the day in an inventory heavy industry.
Threat from online players may also be high. Bata with ~240days of product
inventory (on COGS) and high fixed costs due to all stores being owned may create
margin challenges.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 70


Consumer Discretionary

Exhibit 67: Bata’s last 10-year revenue CAGR has been Exhibit 68: …and so has been the last 10-year EBITDA
lagging… CAGR

FY09 revenue FY19 revenue Revenue CAGR FY09 EBITDA FY19 EBITDA EBITDA CAGR

35,000 20% 6,000 25%


30,000 5,000 20%
25,000 15%
4,000
20,000 15%
10% 3,000
15,000 10%
2,000
10,000 5%
1,000 5%
5,000
- 0% - 0%
Relaxo Metro Bata Relaxo Metro Bata
Source: Ambit Capital research, Company Source: Ambit Capital research, Company

…and the ugly


Bata’s management turnovers hindered finesse in execution over longer
term: Bata has gone through multiple changes at various key managerial positions
over CY10-FY16. An analysis of the changes in the Executive Committee highlights
that key positions, including head of retail operations, have changed frequently since
CY12. Such frequent changes are undesirable as continuity in strategy and execution
is compromised in a business whose inventory turns are 3x given the seasonality and
complexity in terms of the number of designs and sizes of products.
Exhibit 69: Bata has seen multiple CEOs in the last 2 decades
Date of Date of
CEO Previous role/Background Tenure
appointment cessation
W K Weston Regional executive, South Asia Bata dna 30-Jan-01 NA
Was the Senior VP & Executive Director of
Chandu Morzaria Commercial Services at Bata World 30-Jan-01 31-Oct-01 0.8
Headquarters, Toronto, Canada
Joined the Bata Shoe Organisation (BSO) in
Fernando Garcia 31-Oct-01 11-Sep-02 0.9
1983
Joined Bata Shoe Co. (Bangladesh) as the MD
and Deputy Chairman and during his tenure of
S J Davies 11-Sep-02 11-Feb-05 2.4
2 years in this company, the company achieved
record levels of profitability
Bata veteran with more than 35 years with the
BSO, he was running the operations of one of
Mercelo Villagran 11-Feb-05 30-Sep-11 6.6
the most successful companies, Bata Chile,
before he joined Bata India
He joined the BSO in 1990 and has since been
Rajeev
associated with BSO in various positions in the 1-Oct-11 14-Nov-17 6.1
Gopalakrishnan
organization
Sandeep Kataria Chief Commercial Officer at Vodafone India 14-Nov-17 NA 2.5
Source: Ambit Capital research, Company, dna stands for data not available

Impact of negative operating leverage to be severe: Bata has high fixed cost
owing to its owned retail model (vs distribution model for Relaxo). Lack of volume
growth and pressure on pricing due to downtrading by customer will hurt margins as
well.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 71


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 70: Bata has high operating cost vis-à-vis Relaxo largely on account of owned
retail model vs distribution model for Relaxo
Bata Relaxo Bata Relaxo
FY19
` mn ` mn % of sales % of sales
Revenue 29,284 22,921 100.0% 100.0%
Gross profit 16,441 12,198 56.1% 53.2%

Break-up of expense
Employee 3,311 2,587 11.3% 11.3%
Rent is largely fixed while
Rent 3,793 442 13.0% 1.9% contract processing and
Contract processing and handling - 2,184 0.0% 9.5% handling is variable
Transportation and Handling Charges 627 992 2.1% 4.3%
Advertisement and Sales Promotion 1,199 768 4.1% 3.3%
Power/fuel/electricity 577 709 2.0% 3.1%
Royalty/ technical collaboration fees 711 - 2.4% 0.0%
Repairs and maintenance 158 262 0.5% 1.1%
Travelling Expenses - 206 0.0% 0.9%
Professional and Legal Charges 213 368 0.7% 1.6%
Other expenses 352 311 1.2% 1.4%
Misc/ general expenses 729 127 2.5% 0.6%
EBITDA 4,773 3,243 16.3% 14.1%
Source: Ambit Capital research, Company

Where do we go from here?


Long-term view
Bata has undergone a prolonged restructuring in manufacturing, store addition
strategy, in-store experience, product range, brand image and supply chain. It
executed these satisfactorily, which led to significant rerating in the past 24 months.
But we believe the best is behind us. We highlight the inherent inventory risks as Bata
moves to trendy fashion footwear. Bata is moving away from a loyal but value-
conscious customer to a fashion-oriented younger customer. Bata is still inconsistent
across stores in terms of consumer experience and tries to appease a much wider
band than it can probably manage. While category growth is attractive, it is drawing
competition from everyone – large-format retailers (Reliance Trends, Westside, Future
Group), vertical-focused players (Clarks, Ruosh, Inc 5) and specialty retailers like
Decathlon.
Near-term view
Lockdown in the near term would impact Bata’s topline as well as profitability more
vis-à-vis Relaxo given: (a) higher share of stores in malls and high street; (b) risk of
downtrading due to slowdown in discretionary spending; and (c) higher operating
cost due to retail distribution model. We do not make any change in our estimate as
we have already cut our FY21/FY22 revenue and PAT by 40%/20% and 83%/23%
respectively in the 4QFY20 result note. We incorporated the impact of lockdown and
tepid consumer sentiment post the lockdown along with impact of IND-AS 116.
Revisions in EBITDA/PBT/PAT are not comparable due to change in accounting for
leases (IND-AS 116). We are building -2%/-1%/3% CAGR in revenue/EBITDA/EPS
during FY20-22. Valuation of 49x FY22E EPS seems expensive for a business that
factors in most margin expansion gains and growing sales in line or lower than the
industry; FY22 onwards earnings growth will mimic sales growth (~12%). Remain
SELLers with unchanged TP of `900 (33% downside).

June 24, 2020 Ambit Capital Pvt. Ltd. Page 72


Consumer Discretionary

Exhibit 71: We expect Bata to report profit under our base case in FY21 and FY22
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 19,240 22,126 16,354 29,254 33,642 24,866
CAGR over FY20 -37% -28% -46% -2% 5% -10%
Gross margin 57.5% 58.0% 56.0% 57.8% 58.5% 57.0%
EBITDA 3,778 5,259 2,395 8,063 10,421 5,982
EBITDA margin 19.6% 23.8% 14.6% 27.6% 31.0% 24.1%
PAT 649 1,758 (386) 3,489 5,253 1,931
EPS (`) 5.0 13.7 (3.0) 27.1 40.9 15.0
Source: Ambit Capital research, Company

Risks to our thesis: Better-than-expected revenue growth led by success in Omni


channel presence and further improvement in gross margin and EBITDA margin are
key risks to our SELL thesis.

Exhibit 72: Bata’s P/E multiple has re-rated significantly… Exhibit 73: …led by improving gross margin

Gross margin EBITDA margin (RHS)


90 TTM P/E 3yr avg
58% 19%
75 57% 17%
56% 15%
60
55%
13%
45 54%
11%
53%
30 52% 9%
51% 7%
15
50% 5%
0
CY10

CY11

CY12

CY13

FY15

FY16

FY17

FY18

FY19

FY20 (LTL)
Jun-10

Oct-11
Jun-12

Oct-13
Jun-14

Oct-15
Jun-16

Oct-17
Jun-18

Oct-19
Jun-20
Feb-11

Feb-13

Feb-15

Feb-17

Feb-19

Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 73


Consumer Discretionary

Relaxo
(RLXF IN, SELL, TP: `600, 8% downside)
Relaxo is trading at an expensive FY20/FY22 P/E of 70x/50x and current run-
up in the stock price (up 50% in last 1 year) doesn’t factor in Covid-led
disruption in demand and resultant impact on profitability. Relaxo will also
face a) supply-side challenges in 1HFY21 given limited availability of labour
and application of social distancing in plants causing 30-40% decline in sales
b) impact on sales of closed footwear shoes (20% of sales). We turn SELLers
on Relaxo with revised TP of `600 (`700 earlier), implying 8% downside.
Relaxo’s value proposition of low ASPs (`135 in FY20) makes it relative less
impacted on account of down-trading in the footwear category. While benign
raw material price-led GM improvement is a lever to improve profitability, it
will not be able to recoup the impact of (a) revenue decline in FY21, (b)
unfavourable product mix on account of tepid consumer sentiment, and (c)
impact of negative operating leverage.

The good…
Least impacted footwear retailer: Relaxo’s presence is largely dominated in tier
2/3/4 cities with limited presence in metro and tier-1 cities. Relaxo’s business model
is built around MBOs (~90% of revenue) while only 10% of the total business comes
from modern trade, e-commerce and large format stores. With MBOs expected to
recover faster than LFS and modern trade, Relaxo will not only witness faster recovery
but also increase in demand on temporary shift from modern trade to general trade.
Low ASP, beneficiary of downtrading: While other footwear players are moving
up the value chain in the premium categories, Relaxo has been focused on the
bottom of the pyramid where competition from other branded players is least. Relaxo
will also benefit from people downtrading from higher price points to lower price
points as they cut discretionary spending.
Exhibit 74: Relaxo’s ASP has remained low at ~`135/pair

Realization (Rs) Reliazation growth (%)


160 25%
140 20%
120 15%
100
10%
80
5%
60
40 0%

20 -5%
0 -10%
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Source: Ambit Capital research, Company

Declining competition: In the category where Relaxo operates (primarily MRP of


<`500), it is largely dominated by unorganized and regional brands. Relaxo may
gain market share given unorganized and regional players may find it tough to
survive due to smaller scale, weaker balance sheets and lower demand amidst Covid
period.
Gross margin expansion: Decline in raw material price (crude-linked), recent price
hikes and favorable product mix, will aid in gross margin expansion for Relaxo.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 74


Consumer Discretionary

Exhibit 75: Relaxo’s 4QFY20 gross margin was highest in the last 34 quarters

63% Gross margin (LHS) EBITDA Margins (RHS) 21%


60% 18%
57% 15%
54% 12%
51% 9%
48% 6%
45% 3%
42% 0%
1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20
Source: Ambit Capital research, Company

Penetration and expansion: On distribution side, India is a huge market with


~100k outlets for footwear with category growing anywhere between 12-15% as per
various estimates. Relaxo just has 5% market share and hence there is lot of
opportunity to expand. Relaxo has identified 75k outlets out of which only 40k outlets
are currently reached by the company. Hence there is ample amount of scope for
company to expand distribution.

…the bad
Supply chain disruption: Footwear manufacturing is a labour-intensive process and
Relaxo in its recent press release (link) stated that due to restrictions in manufacturing
operations, fulfilment of demand will be a challenge.
Growth vs margin: Historically, Relaxo has refrained from taking price hikes to keep
the volume growth momentum. However, recently Relaxo took price hikes which
would support overall margins though volume growth may turn benign.
Exhibit 76: During FY17-19, Relaxo refrained from taking price hike which aided in
volume growth but at the cost of gross margins

Gross margin Volume growth (RHS)

60% 25%

55% 20%
15%
50%
10%
45%
5%
40% 0%
35% -5%
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Source: Ambit Capital research, Company

…and the ugly


Valuations remain punchy: Relaxo is currently trading at a punchy valuation of 84x
P/E on TTM, 33% premium to its last 3-year average TTM P/E. GM expansion will
support profitability but will fall short to recoup the impact of loss of revenue caused
by the lockdown and slowdown in consumption.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 75


Consumer Discretionary

Where do go from here?


We turn SELLers on Relaxo with revised TP of `600 (`700 earlier), implying 8%
downside. Relaxo’s re-rating in the last 2 years was backed by topline growth of
18%/13% in FY19/9MFY20 on a strong base of 20% in FY18 which was largely
volume-led as Relaxo refrained from increasing prices. Despite the current correction
in the stock price, Relaxo trades at 83x TTM P/E, ~40% premium to its last 3-year
average TTM P/E. Current run-up in the stock price (up 50% in the last 1 year) doesn’t
factor in the recent Covid-led disruption and resultant impact on profitability.
Relaxo may also face supply-side challenges in 1HFY21 given limited availability of
labour and application of social distancing in plants. While GM improvement remains
a lever to improve profitability, it will not be able to recoup the impact of: (a) revenue
decline in FY21; (b) unfavourable product mix on account of tepid consumer
sentiment; and (c) impact of negative operating leverage. We are building in
6%/13%/17% revenue/EBITDA/EPS CAGR over FY20-22 for Relaxo.
We have liked Relaxo for its ability to drive volume growth (8% volume CAGR over
last decade) and portfolio premiumisation (7% price mix growth). We believe Relaxo
can maintain similar growth rates over the next decade given opportunities to expand
in South and East. Market share of 4-5% means Relaxo still has opportunities to grow
given its value pricing, ability to build strong brands such as Sparx, Flite, Bahamas
and consistently expand distribution reach. With per capita consumption of footwear
at ~1.7 pairs p.a. vs global average of 3 pairs p.a. and developed countries’ average
of 6-7 pairs p.a., long-term structural growth story for Relaxo remains intact. With
organised players’ market share at ~45%, Relaxo is poised to benefit from not only
increase in per capita consumption but also from market-share gain from
unorganised players. However, CMP builds in most of these positives.

Exhibit 77: We turn SELLers on Relaxo with revised TP of `600


FY21E FY22E
` mn, unless specified
New Old Change New Old Change
Target price (`) 600 700 -14%
Revenues 17,264 27,047 -36% 26,971 32,349 -17%
EBITDA 2,120 4,718 -55% 5,253 6,100 -14%
EBITDA margin 12.3% 17.4% -510bps 19.5% 18.9% 60bps
PBT 106 149 -28% 226 178 27%
PAT 949 3,562 -73% 4,149 4,902 -15%
EPS (`) 710 2,666 -73% 3,105 3,668 -15%
Source: Ambit Capital research, Company

Exhibit 78: We expect Relaxo to report profit under our base case in FY21 and FY22
FY21 FY22
` mn
BASE BULL BEAR BASE BULL BEAR
Revenue 17,264 19,854 14,674 26,971 31,017 22,925
CAGR over FY20 -28% -18% -39% 6% 13% -2%
Gross margin 60.0% 58.0% 56.0% 59.0% 58.5% 57.0%
EBITDA 2,120 2,678 577 5,253 6,624 3,268
EBITDA margin 12.3% 13.5% 3.9% 19.5% 21.4% 14.3%
PAT 710 1,128 (444) 3,105 4,131 1,620
EPS 2.9 4.5 (1.8) 12.5 16.6 6.5
Source: Ambit Capital research, Company

Risk to our thesis: Faster-than-expected recovery led by downtrading, uptick in


demand in rural, tier 2/3/4 towns and increase in margins led by declining
competitive intensity remains key risks to our SELL thesis.

June 24, 2020 Ambit Capital Pvt. Ltd. Page 76


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Exhibit 79: Relaxo’s P/E multiple has re-rated Exhibit 80: …led by volume growth and improving gross
significantly… margin

Gross margin Volume growth (RHS)


100 TTM P/E 3yr avg
60% 25%
80 20%
55%
60 15%

40 50% 10%

5%
20 45%
0%
0
40% -5%
Jun-10
Feb-11
Oct-11
Jun-12
Feb-13
Oct-13
Jun-14
Feb-15
Oct-15
Jun-16
Feb-17
Oct-17
Jun-18
Feb-19
Oct-19
Jun-20

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
Source: Ambit Capital research, Company, Bloomberg Source: Ambit Capital research, Company, Bloomberg

June 24, 2020 Ambit Capital Pvt. Ltd. Page 77


Consumer Discretionary

Summary Financials - Jubilant Foodworks


Income statement
Year to March (`` mn) FY18 FY19 FY20 FY21E FY22E FY23E
Net Sales 30,184 35,631 38,858 31,279 45,174 52,258
Growth (%) 17% 18% 9% -20% 44% 16%
Gross Profit 22,524 26,770 29,151 23,303 33,655 39,194
Employee cost 6,140 6,818 7,846 7,006 8,809 9,321
Rent 3,188 3,443 829 765 879 995
Other Operating expenses 8,795 10,512 11,705 9,662 12,926 15,184
Total expenses 18,123 20,773 20,380 17,433 22,614 25,499
EBITDA 4,402 5,998 8,771 5,870 11,041 13,694
EBITDA margin 14.6% 16.8% 22.6% 18.8% 24.4% 26.2%
Other income 231 474 688 759 916 908
Depreciation 1,601 1,575 3,441 3,309 3,799 4,073
EBIT 3,031 4,897 6,018 3,320 8,158 10,529
Interest - - 1,635 1,479 1,868 1,993
PBT 3,031 4,897 4,383 1,841 6,290 8,536
Tax 1,068 1,717 1,181 463 1,583 2,148
Adj PAT 1,963 3,180 3,203 1,377 4,707 6,387
Growth (%) 181% 62% 1% -57% 242% 36%
Execptional Items - - (448) - - -
Reported PAT 1,963 3,180 2,755 1,377 4,707 6,387
EPS (`) 14.9 24.1 24.3 10.4 35.7 48.4
DPS (`) 2.5 5.0 6.0 3.1 10.7 24.2
Source: Ambit Capital research, Company

Balance sheet
Year to March (` mn) FY18 FY19 FY20 FY21E FY22E FY23E
Shareholders' equity 660 1,320 1,320 1,320 1,320 1,320
Reserves & surpluses 9,018 11,302 10,510 11,390 14,396 16,938
Total networth 9,678 12,622 11,829 12,709 15,716 18,258
Debt - - 16,510 17,596 19,013 20,855
Deferred tax liability 549 500 (355) (355) (355) (355)
Total liabilities 10,227 13,122 27,985 29,950 34,374 38,759
Net block 7,892 8,095 21,487 19,631 19,077 19,731
CWIP 142 157 394 394 394 394
Investments 2,631 1,808 512 512 512 512
Cash & equivalents 1,290 4,943 6,392 10,415 16,001 20,043
Debtors 157 274 193 171 248 286
Inventory 642 771 922 686 990 1,145
Loans & advances 2,136 2,239 3,365 2,228 3,218 3,722
Other current assets 77 271 369 369 369 369
Total current assets 4,302 8,498 11,241 13,869 20,826 25,567
Current liabilities 4,576 5,191 5,372 4,285 6,188 7,159
Provisions 164 245 278 171 248 286
Total current liabilities 4,740 5,435 5,650 4,456 6,436 7,445
Net current assets (438) 3,062 5,592 9,413 14,391 18,122
Total assets 10,227 13,122 27,985 29,950 34,374 38,759
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 78


Consumer Discretionary

Cash flow statement


Year to March (`` mn) FY18 FY19 FY20 FY21E FY22E FY23E
PBT 3,031 4,897 3,935 1,841 6,290 8,536
Depreciation 1,601 1,575 3,441 3,309 3,799 4,073
Others (191) (421) 1,399 720 952 (908)
Tax (1,262) (1,779) (1,395) (463) (1,583) (2,148)
(Incr) / decr in net working capital 912 (14) (61) 201 609 311
Cash flow from operations 4,091 4,256 7,320 5,608 10,067 9,863
Capex (1,193) (1,671) (2,828) (2,311) (3,245) (4,727)
(Incr) / decr in investments 33 14 11 - - -
Other income (expenditure) 99 216 390 759 916 908
Others (2,258) (3,134) 1,451 858 - -
Cash flow from investments (3,319) (4,575) (976) (694) (2,329) (3,819)
Net borrowings - - (1,303) 1,085 1,417 1,842
Issuance of equity (150) 230 - - - -
Interest paid - - (1,635) (1,479) (1,868) (1,993)
Dividend paid (197) (397) (1,750) (498) (1,700) (3,845)
Others - - - - - -
Cash flow from financing (347) (167) (4,687) (891) (2,151) (3,996)
Net change in cash 425 (485) 1,658 4,022 5,587 2,048
Free cash flow 2,898 2,585 4,492 3,297 6,822 5,136
Source: Ambit Capital research, Company

Ratio analysis / Valuation parameters


Year to March FY18 FY19 FY20 FY21E FY22E FY23E
EBITDA margin 14.6% 16.8% 22.6% 18.8% 24.4% 26.2%
Net profit margin 6.5% 8.9% 7.1% 4.4% 10.4% 12.2%
Dividend payout ratio 16.8% 20.0% 20.0% 30.0% 30.0% 50.0%
Net debt: equity (x) (0.1) (0.4) 0.9 0.6 0.2 0.0
Cash conversion days (42) (41) (39) (38) (42) (41)
Gross block turnover (x) 2.6 2.7 2.4 1.8 2.3 2.3
RoCE (pre tax) 34% 44% 29% 11% 25% 29%
RoCE (post tax) 22% 29% 21% 8% 19% 21%
RoE 22% 29% 23% 11% 33% 38%
Book value per share (`) 73.3 95.6 89.6 96.3 119.1 138.4
Dividend per share (`) 2.5 5.0 6.0 3.1 10.7 24.2
P/E (x) 113.2 69.9 69.4 161.3 47.2 34.8
P/BV (x) 23.0 17.6 18.8 17.5 14.1 12.2
EV/EBITDA (x) 52.0 38.2 26.1 39.0 20.7 16.7
EV/EBIT (x) 75.5 46.8 38.1 69.0 28.1 21.7
EV/sales (x) 7.6 6.4 5.9 7.3 5.1 4.4
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 79


Consumer Discretionary

Quarterly estimates: We expect Jubilant to report loss of ~``1bn in 1QFY21 in our base-case scenario
BASE CASE (post IND AS) FY21 FY22
` mn, unless specified 1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Total Net Sales 3,748 7,692 9,807 10,032 11,097 11,311 12,004 10,762
% Growth in total net sales -60.1% -22.2% -7.4% 11.7% 196.1% 47.1% 22.4% 7.3%
COGS 956 1,961 2,501 2,558 2,830 2,884 3,061 2,744
Gross Profit 2,792 5,730 7,306 7,474 8,267 8,427 8,943 8,017
Gross Margin % 74.5% 74.5% 74.5% 74.5% 74.5% 74.5% 74.5% 74.5%
Employee cost 1,499 1,538 1,961 2,006 2,164 2,206 2,341 2,099
Employee cost as % of sales 40.0% 20.0% 20.0% 20.0% 19.5% 19.5% 19.5% 19.5%
Rent 159 183 211 213 215 218 221 225
Rent as % of sales 4.2% 2.4% 2.2% 2.1% 1.9% 1.9% 1.8% 2.1%
Other expenses 1,627 2,383 2,804 2,849 3,190 3,235 3,380 3,120
As % of sales 43.4% 31.0% 28.6% 28.4% 28.8% 28.6% 28.2% 29.0%
- Variable Cost 618 1,192 1,520 1,555 1,720 1,753 1,861 1,668
As % of sales 16.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5%
- Fixed cost 402 410 410 410 430 430 430 430
As % of sales 10.7% 5.3% 4.2% 4.1% 3.9% 3.8% 3.6% 4.0%
- Semi fixed cost 607 781 874 884 1,040 1,052 1,089 1,022
As % of sales 16.2% 10.2% 8.9% 8.8% 9.4% 9.3% 9.1% 9.5%
EBITDA (492) 1,626 2,330 2,406 2,698 2,768 3,001 2,574
% Margins -13.1% 21.1% 23.8% 24.0% 24.3% 24.5% 25.0% 23.9%
Other income 180 184 193 202 213 223 234 246
Depreciation 687 790 912 919 929 942 956 972
EBIT (1,000) 1,020 1,610 1,690 1,982 2,049 2,280 1,847
EBIT margin -26.7% 13.3% 16.4% 16.8% 17.9% 18.1% 19.0% 17.2%
Interest 307 353 408 411 457 463 470 478
Profit Before Tax (1,307) 666 1,203 1,279 1,525 1,585 1,810 1,369
Taxes (329) 168 303 322 384 399 456 345
Effective tax rate 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
Profit After Tax (978) 499 900 957 1,141 1,186 1,354 1,025
Net Profit margin -26.1% 6.5% 9.2% 9.5% 10.3% 10.5% 11.3% 9.5%
EPS (`) (7.4) 3.8 6.8 7.3 8.6 9.0 10.3 7.8
Source: Ambit Capital research, Company

Jubilant’s forensic score percentile Jubilant’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Jubilant lies in D2 “Zone of Safety” Jubilant is in the “Zone of Greatness”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 80


Consumer Discretionary

Summary Financials - Titan


Exhibit 81: Income statement
Year to March (`` Mn) FY18 FY19 FY20E FY21E FY22E FY23E
Revenue 156,214 190,700 200,096 162,767 223,044 295,909
Total operating expenses 138,880 169,228 175,666 146,926 195,857 260,259
EBITDA 17,334 21,472 24,430 15,841 27,188 35,650
Net depreciation 1,097 1,389 3,097 3,100 3,573 3,263
EBIT 16,237 20,083 21,333 12,741 23,614 32,386
Interest and financial charges 477 445 1,495 1,508 1,792 2,344
Other income 864 1,785 1,464 1,644 1,996 1,840
PBT 15,708 19,274 21,050 12,876 23,818 31,883
Provision for taxation 4,464 6,020 5,518 3,241 5,995 8,025
Adj PAT 11,629 13,744 15,176 9,635 17,823 23,858
Reported PAT 11,629 13,744 15,176 9,635 17,823 23,858
Reported EPS (`) 13.1 15.5 17.1 10.9 20.1 26.9
EPS diluted (`) 13.1 15.5 17.1 10.9 20.1 26.9
DPS (`) 3.7 5.0 - - 6.0 13.4
Source: Ambit Capital research, Company

Balance sheet
Year to March (` Mn) FY18 FY19 FY20E FY21E FY22E FY23E
Share capital 888 888 888 888 888 888
Reserves and surplus 51,052 60,929 67,361 76,996 88,563 98,464
Sources of funds 68,196 84,779 100,943 113,139 131,803 150,750
Net block 9,739 10,694 20,535 22,308 24,282 24,590
Sundry debtors 1,930 3,582 2,144 3,567 3,666 4,864
Inventories 57,492 67,192 77,406 62,994 74,073 98,452
Current liabilities and provisions 25,770 29,920 30,937 28,178 34,879 42,490
Application of funds 68,196 84,779 100,943 113,139 131,803 150,750
Source: Ambit Capital research, Company

Cash flow statement


Year to March (` Mn) FY18E FY19 FY20E FY21E FY22E FY23E
PBT 15,707 19,274 21,050 12,876 23,818 31,883
Depreciation 1,097 1,389 3,097 3,100 3,573 3,263
Interest paid (net) (159) (583) 549 (135) (204) 504
CFO before change in WC 17,248 21,794 24,257 15,841 27,188 35,650
Change in working capital (9,758) (3,087) (21,767) 13,868 (1,066) (11,078)
Direct taxes paid (4,502) (6,218) (5,372) (3,241) (5,995) (8,025)
CFO 2,989 12,490 (2,881) 26,468 20,127 16,547
Net capex (2,606) (2,254) (3,024) (4,873) (5,548) (3,571)
Net investments 967 (1,676) (744) - - -
Interest received 630 840 689 1,644 1,996 1,840
CFI (1,804) (9,113) 2,423 (3,230) (3,552) (1,731)
Interest & finance charges paid (477) (445) (1,495) (1,508) (1,792) (2,344)
Dividends paid (2,774) (3,974) (5,356) - (5,347) (11,929)
CFF (3,251) (4,418) (2,678) 937 (4,722) (15,556)
Net increase in cash (2,066) (1,041) (3,136) 24,176 11,853 (740)
FCF 383 10,236 (5,906) 21,595 14,579 12,976
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 81


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Ratio analysis / Valuation parameters


Year end March FY18 FY19 FY20E FY21E FY22E FY23E
Revenue growth 20.2 22.1 4.9 (18.7) 37.0 32.7
PAT growth 52.7 18.2 10.4 (36.5) 85.0 33.9
EBITDA margin 11.1 11.3 12.2 9.7 12.2 12.0
EBIT margin 10.4 10.5 10.7 7.8 10.6 10.9
Net margin 7.4 7.2 7.6 5.9 8.0 8.1
RoCE 18.5 18.7 16.6 8.9 14.4 17.2
RoE 24.5 24.2 23.3 13.2 21.3 25.3
P/E (x) 74.8 63.3 57.3 90.3 48.8 36.5
Debt/Equity(x) 0.4 0.3 0.4 0.5 0.5 0.5
Net debt/Equity(x) 0.2 0.2 0.0 0.0 0.0 0.0
EV/Sales(x) 5.6 4.6 4.4 5.3 3.9 2.9
EV/EBITDA(x) 50.4 40.7 36.4 54.8 31.7 24.5
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 82


Consumer Discretionary

Quarterly estimates: While 1HFY21 will be a wash-out period, 2HFY21 will see recovery and margin expansion
FY21 FY22
(`` mn)
1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Jewellery
Tanishq stores 327 328 331 335 340 345 351 357
Stores added during the quarter - 1 3 4 5 5 6 6
Revenue per store 48.2 89.4 159.3 137.0 132.9 130.6 163.1 140.4
Revenue 15,078 28,434 51,923 45,334 44,329 43,930 55,620 48,562
Revenue Growth -62.7% -19.4% -4.0% 20.8% 194.0% 54.5% 7.1% 7.1%
Volume growth -73.3% -35.0% -20.0% 5.0% 180.0% 50.0% 4.0% 4.0%
Cum vol 28 56 76 84 79 84 79 87
Gold price (`/gm) (LHS) 4,700 4,774 4,770 4,905 4,935 4,917 4,913 5,052
Gold price growth (RHS) 39.7% 24.0% 20.0% 15.0% 5.0% 3.0% 3.0% 3.0%
Jewellery revenue 15,078 28,434 51,923 45,334 44,329 43,930 55,620 48,562
YoY Growth -63% -19% -4% 21% 194% 55% 7% 7%
Watches revenue 1,786 3,953 5,315 6,125 5,359 4,744 6,378 7,350
YoY Growth -75.0% -45.0% -15.0% 10.0% 200.0% 20.0% 20.0% 20.0%
Eyewear revenue 372 848 1,133 1,077 1,041 1,272 1,473 1,454
YoY Growth -75.0% -45.0% -15.0% 0.0% 180.0% 50.0% 30.0% 35.0%
Others revenue 181 308 444 456 200 339 489 502
YoY Growth -50.0% -30.0% -10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Total Net Sales 17,418 33,543 58,816 52,992 50,930 50,285 63,960 57,868
YoY Growth -64.7% -24.4% -5.2% 19.7% 192.4% 49.9% 8.7% 9.2%
COGS 13,063 25,157 44,112 38,684 37,179 36,205 47,650 42,822
Gross Profit 4,354 8,386 14,704 14,308 13,751 14,080 16,310 15,046
Gross Margin % 25.0% 25.0% 25.0% 27.0% 27.0% 28.0% 25.5% 26.0%
Employee cost 1,841 2,391 2,702 2,538 2,393 2,630 2,972 2,791
as % of sales 10.6% 7.1% 4.6% 4.8% 4.7% 5.2% 4.6% 4.8%
Advertising 523 939 1,176 1,325 1,273 1,257 1,599 1,447
as % of sales 3.0% 2.8% 2.0% 2.5% 2.5% 2.5% 2.5% 2.5%
Other expenses 1,988 2,743 4,029 3,717 3,651 3,616 4,348 4,022
As % of sales 11.4% 8.2% 6.8% 7.0% 7.2% 7.2% 6.8% 7.0%
Rent 17 34 59 53 51 50 64 58
As % of sales 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Variable Cost 784 1,241 2,059 1,855 1,783 1,760 2,239 2,025
As % of sales 4.5% 3.7% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Fixed cost 106 106 106 106 111 111 111 111
As % of sales 0.6% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Semi fixed cost 1,081 1,363 1,805 1,703 1,706 1,695 1,934 1,828
As % of sales 6.2% 4.1% 3.1% 3.2% 3.3% 3.4% 3.0% 3.2%
EBITDA 4 2,312 6,797 6,728 6,434 6,576 7,391 6,785
% Margins 0.0% 6.9% 11.6% 12.7% 12.6% 13.1% 11.6% 11.7%
Less: Depreciation 721 736 809 834 867 884 902 920
As % of sales 4.1% 2.2% 1.4% 1.6% 1.7% 1.8% 1.4% 1.6%
EBIT (718) 1,576 5,988 5,895 5,567 5,692 6,489 5,865
EBIT margin -4.1% 4.7% 10.2% 11.1% 10.9% 11.3% 10.1% 10.1%
Other income 401 401 401 441 463 486 511 536
as % of sales 2.3% 1.2% 0.7% 0.8% 0.9% 1.0% 0.8% 0.9%
Less: Interest 341 359 394 414 435 444 452 461
as % of sales 2.0% 1.1% 0.7% 0.8% 0.9% 0.9% 0.7% 0.8%
Profit Before Tax (658) 1,619 5,994 5,922 5,595 5,735 6,547 5,940
Taxes (166) 407 1,509 1,490 1,408 1,443 1,648 1,495
Effective tax rate 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
Profit After Tax (493) 1,211 4,486 4,431 4,187 4,291 4,899 4,445
Net Profit margin -2.8% 3.6% 7.6% 8.4% 8.2% 8.5% 7.7% 7.7%
EPS (`) -0.6 1.4 5.1 5.0 4.7 4.8 5.5 5.0
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 83


Consumer Discretionary

Titan’s forensic score percentile Titan’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Titan lies in D5 “Zone of Safety” Titan is in the “Zone of Mediocrity”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 84


Consumer Discretionary

Summary Financials - DMart


Income statement
Year to March (`` mn, unless
FY18 FY19 FY20 FY21E FY22E FY23E
specified)
Net Sales 150,089 199,163 246,750 246,820 341,772 422,954
Gross Profit 23,600 29,363 36,591 33,102 51,266 63,467
Employees cost 2,766 3,350 4,247 5,148 5,925 6,767
Other expenses 7,461 9,591 11,122 12,665 16,166 20,820
EBITDA 13,374 16,422 21,221 15,289 29,175 35,880
Depreciation 1,547 1,988 3,398 3,997 4,671 5,768
EBIT 11,827 14,434 17,823 11,292 24,505 30,112
Non-operating Income 726 514 633 860 480 511
Interest expenditure 594 472 628 524 612 442
PBT 11,959 14,476 17,829 11,628 24,372 30,180
Tax expenses 4,112 5,113 4,330 2,927 6,135 7,596
Adjusted PAT 7,847 9,363 13,499 8,701 18,238 22,584
EPS 12.6 15.0 20.8 13.4 28.2 34.9
Source: Ambit Capital research, Company

Balance sheet
Year to March (` mn, unless
FY18 FY19 FY20 FY21E FY22E FY23E
specified)
Shareholders' equity 6,241 6,241 6,478 6,478 6,478 6,478
Reserves & surplus 40,186 49,704 104,878 113,579 131,817 154,400
Total net worth 46,427 55,945 111,355 120,056 138,294 160,878
Loan funds 4,393 6,952 37 2,000 2,000 2,000
Deferred tax liability 463 641 482 482 482 482
Total liabilities 51,291 63,545 114,303 124,967 143,205 165,789
Gross block 36,042 47,676 59,706 69,545 86,725 106,276
Net block 32,398 42,161 50,719 56,562 69,070 82,853
CWIP 1,471 3,766 3,619 3,619 3,619 3,619
Investments 1,976 2,300 3,038 3,038 3,038 3,038
Inventories 11,470 15,762 19,094 16,395 21,490 25,607
Debtors 334 755 485 586 796 985
Cash and cash equivalents 5,565 2,136 922 8,255 7,098 6,757
Loans & Advances 1,417 1,784 2,421 2,421 3,353 4,149
Other current assets 162 30 - - - -
Total current assets 19,464 20,467 22,923 27,656 32,737 37,499
Creditors 3,159 4,583 4,460 5,270 7,163 8,864
Other current liabilities 1,276 1,454 1,935 1,046 1,335 1,600
Provisions 399 394 143 143 143 143
Total current liabilities & provisions 4,834 6,431 6,538 6,459 8,642 10,607
Net current assets 14,631 14,036 16,385 21,197 24,095 26,892
Total assets 51,291 63,545 114,303 124,967 143,205 165,789
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 85


Consumer Discretionary

Cash flow statement


Year to March (`` mn, unless
FY18 FY19 FY20 FY21E FY22E FY23E
specified)
PBT 11,959 14,476 17,829 11,628 24,372 30,180
Depreciation 1,547 1,988 3,398 3,997 4,671 5,768
(Increase)/Decrease in working capital (2,401) (3,213) (3,730) 2,511 (6,886) (9,142)
Tax 3,965 4,935 4,815 2,927 6,135 7,596
Cash flow from operating activities 7,230 8,528 12,874 14,881 16,155 19,142
Capex (8,968) (13,800) (16,831) (9,840) (17,179) (19,552)
Cash flow from investing activities 4,325 (10,007) (46,996) (8,980) (16,699) (19,041)
Net borrowings (6,579) (206) (5,000) 1,963 - -
Interest paid (799) (509) (679) (524) (612) (442)
Cash flow from financing activities (11,217) 2,040 33,835 1,439 (612) (442)
Net change in cash 338 561 (287) 7,340 (1,156) (341)
Closing cash balance 641 1,202 914 8,255 7,098 6,757
Free cash flow (1,807) (5,353) (4,012) 5,042 (1,024) (409)
Source: Ambit Capital research, Company

Ratio analysis / Valuation parameters


Year to March FY18 FY19 FY20 FY21E FY22E FY23E
Gross margin (%) 15.7% 14.7% 14.8% 13.4% 15.0% 15.0%
EBITDA margin (%) 8.9% 8.2% 8.6% 6.2% 8.5% 8.5%
EBIT margin (%) 7.9% 7.2% 7.2% 4.6% 7.2% 7.1%
Net profit margin (%) 5.2% 4.7% 5.5% 3.5% 5.3% 5.3%
Net debt/equity (x) (0.1) 0.0 (0.0) (0.1) (0.1) (0.0)
Asset turnover (x) 2.9 3.5 2.8 2.1 2.6 2.8
Working capital turnover (x) 16.8 16.9 7.9 5.1 6.8 7.2
Gross block turnover (x) 4.5 4.5 4.3 3.6 4.2 4.2
RoCE (%) 14.9% 16.4% 15.5% 7.2% 14.0% 14.9%
ROE (%) 18.5% 18.3% 16.1% 7.5% 14.1% 15.1%
P/E (x) 189 159 114 177 85 68
P/B (x) 32 27 14 13 11 10
EV/EBITDA (x) 110 90 72 99 52 42
EV/Sales (x) 10 7 6 6 4 4
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 86


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Quarterly estimates: We expect DMart to report loss of `600mn in 1QFY21


BASE CASE FY21 FY22
` mn 1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22
Revenue from Operations 38,971 63,803 75,546 68,500 70,312 86,759 97,481 87,221
YoY -33% 7% 12% 11% 80% 36% 29% 27%
Gross Profit 3,897 7,975 10,954 10,275 10,547 13,014 14,622 13,083
GM (%) 10.0% 12.5% 14.5% 15.0% 15.0% 15.0% 15.0% 15.0%
Employee benefit expenses 1,439 1,183 1,226 1,300 1,400 1,475 1,500 1,550
Employee cost as % of sales 3.7% 1.9% 1.6% 1.9% 2.0% 1.7% 1.5% 1.8%
Other expenses 2,484 3,170 3,630 3,380 3,501 4,084 4,466 4,115
Other expenses as % of sales 6.4% 5.0% 4.8% 4.9% 5.0% 4.7% 4.6% 4.7%
Variable Cost 1,364 1,914 2,266 2,055 2,109 2,603 2,924 2,617
As % of sales 3.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Fixed cost 535 535 561 561 618 618 636 649
As % of sales 1.4% 0.8% 0.7% 0.8% 0.9% 0.7% 0.7% 0.7%
Semi fixed cost 586 721 802 764 774 864 905 849
As % of sales 1.5% 1.1% 1.1% 1.1% 1.1% 1.0% 0.9% 1.0%
EBITDA (26) 3,622 6,098 5,595 5,646 7,455 8,656 7,418
EBITDA margin (%) -0.1% 5.7% 8.1% 8.2% 8.0% 8.6% 8.9% 8.5%
Depreciation 948 975 1,010 1,064 1,099 1,134 1,188 1,250
As a % of sales 2.4% 1.5% 1.3% 1.6% 1.6% 1.3% 1.2% 1.4%
EBIT (974) 2,647 5,087 4,531 4,547 6,320 7,469 6,169
EBIT margin (%) -2.5% 4.1% 6.7% 6.6% 6.5% 7.3% 7.7% 7.1%
Other Income 300 250 200 110 120 120 120 120
As a % of sales 0.8% 0.4% 0.3% 0.2% 0.2% 0.1% 0.1% 0.1%
Finance Costs 124 128 132 139 144 149 156 164
As a % of sales 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
PBT (798) 2,770 5,155 4,502 4,523 6,292 7,433 6,125
PBT margin (%) -2.0% 4.3% 6.8% 6.6% 6.4% 7.3% 7.6% 7.0%
Tax (201) 697 1,298 1,133 1,138 1,584 1,871 1,542
Tax rate 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
PAT (597) 2,072 3,857 3,369 3,385 4,708 5,562 4,583
PAT margin (%) -1.5% 3.2% 5.1% 4.9% 4.8% 5.4% 5.7% 5.3%
EPS (`) (0.9) 3.2 6.0 5.2 5.2 7.3 8.6 7.1
Source: Ambit Capital research, Company

DMart’s forensic score percentile DMart’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

DMart lies in D3 “Zone of Safety” DMart is in the “Zone of Greatness”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 87


Consumer Discretionary

Summary Financials - Trent


Income statement
Year to March (`` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
Revenue 20,663 25,317 31,777 21,373 41,198 50,748
yoy growth 19% 23% 26% -33% 93% 23%
EBITDA 2,014 2,365 5,632 1,895 7,752 10,080
Depreciation 417 465 2,311 2,560 2,851 2,519
EBIT 1,597 1,901 3,321 (665) 4,901 7,561
Interest and financial charges 306 368 2,383 1,501 2,729 2,468
Other income 426 363 1,518 1,114 1,306 1,468
PBT 1,716 1,896 2,455 (1,053) 3,478 6,561
PAT 1,167 1,275 1,546 (788) 2,602 4,909
EPS (`) 3.5 3.8 4.3 (2.2) 7.3 13.8
Source: Ambit Capital research, Company

Balance sheet
Year to March (` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
Share capital 332 332 355 355 355 355
Reserves and surplus 15,839 16,636 24,634 23,847 26,449 31,359
Total Networth 16,172 16,968 24,990 24,202 26,805 31,714
Loans 3,914 3,942 2,997 2,997 2,997 2,997
Lease liability - - 21,471 22,320 24,977 27,101
Deferred tax liability (net) (28) (72) (1,070) (1,070) (1,070) (1,070)
Sources of funds 20,058 20,838 48,389 48,450 53,709 60,743
Net block 5,779 6,271 6,854 6,378 6,377 6,947
Lease assets - - 19,041 19,793 22,150 24,034
Capital work-in-progress 96 850 231 231 231 231
Investments 10,285 8,809 9,556 9,556 9,556 9,556
Cash and bank balances 303 510 441 2,456 3,999 7,758
Sundry debtors 131 141 133 59 113 139
Inventories 3,391 4,894 5,865 4,455 6,791 8,234
Loans and advances 1,547 1,809 1,957 1,034 1,993 2,455
Other current assets 1,583 2,249 8,803 8,147 9,397 9,999
Total Current Assets 6,955 9,603 17,199 16,151 22,293 28,586
Current Liabilities 2,875 4,510 4,275 3,339 6,279 7,849
Provisions 183 186 218 321 619 762
Current liabilities and provisions 3,058 4,696 4,493 3,660 6,898 8,611
Net current assets 3,897 4,907 12,707 12,490 15,395 19,976
Application of funds 20,058 20,838 48,389 48,450 53,709 60,743
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 88


Consumer Discretionary

Cash flow statement


Year to March (`` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
PBT 1,716 1,896 2,455 (1,053) 3,478 6,561
Depreciation 417 465 2,311 2,560 2,851 2,519
Interest paid (net) 77 160 1,912 387 1,423 1,001
CFO before change in WC 2,189 2,419 5,605 1,895 7,752 10,080
Change in working capital (668) (1,356) (1,112) 2,232 (1,362) (821)
Direct taxes paid (491) (781) (807) 265 (875) (1,651)
CFO 1,029 282 3,686 4,392 5,514 7,608
Net capex (1,296) (1,859) (1,050) (2,837) (5,206) (4,973)
Net investments 808 1,203 (6,320) - - -
Interest received 177 177 336 1,114 1,306 1,468
CFI (302) (457) (7,570) (1,724) (3,900) (3,505)
Net borrowings (23) 1,061 (2,726) 849 2,657 2,125
Change in share capital - - 9,498 0 0 0
Interest & finance charges paid (317) (220) (2,437) (1,501) (2,729) (2,468)
Dividends paid (399) (459) (520) - - -
CFF (740) 382 3,815 (652) (72) (344)
FCF (267) (1,577) 2,636 1,554 308 2,635
Source: Ambit Capital research, Company

Ratio analysis / Valuation parameters


Valuation metrics FY18 FY19 FY20 FY21E FY22E FY23E
Revenue growth (%) 19 23 26 (33) 93 23
EBITDA growth (%) 64 17 138 (66) 309 30
PAT growth (%) 9 9 21 (151) (430) 89
EBITDA margin (%) 9.7 9.3 17.7 8.9 18.8 19.9
EBIT margin (%) 7.7 7.5 10.5 (3.1) 11.9 14.9
Net margin (%) 5.6 5.0 4.9 (3.7) 6.3 9.7
RoCE (Pre-Tax) (%) 17.1 17.4 12.8 (1.7) 11.5 15.5
RoCE (Post-Tax) (%) 11.6 11.5 8.0 (1.2) 8.6 11.6
RoE (%) 7.4 7.7 7.4 (3.2) 10.2 16.8
P/E (x) 163.7 149.9 132.2 (259.5) 78.5 41.6
P/B (x) 11.8 11.3 8.2 8.4 7.6 6.4
Debt/Equity (x) 0.2 0.2 0.1 0.1 0.1 0.1
Net debt/Equity (x) 0.2 0.2 (0.2) (0.3) (0.3) (0.4)
EV/Sales (x) 11.0 9.0 7.2 10.6 5.5 4.5
EV/EBITDA (x) 112.9 96.1 40.4 119.9 29.3 22.5
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 89


Consumer Discretionary

Quarterly estimates: We expect Trent to report EBITDA-level loss of `426mn in 1QFY21


BASE CASE (Post IND AS) FY21 FY22
Standalone 1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Total Net Sales 1,918 4,908 6,958 7,589 9,782 10,798 11,132 9,486
YoY Growth -75% -40% -20% 5% 410% 120% 60% 25%
COGS 959 2,601 3,479 4,174 4,695 5,636 5,343 4,980
Gross Profit 959 2,307 3,479 3,415 5,086 5,161 5,789 4,506
Gross Margin % 50.0% 47.0% 50.0% 45.0% 52.0% 47.8% 52.0% 47.5%
Employee cost 450 600 700 750 900 950 1,000 900
as % of sales 23.5% 12.2% 10.1% 9.9% 9.2% 8.8% 9.0% 9.5%
Rent 200 324 459 501 646 713 724 617
as % of sales 10.4% 6.6% 6.6% 6.6% 6.6% 6.6% 6.5% 6.5%
Other expenses 735 1,028 1,228 1,290 1,519 1,633 1,673 1,518
As % of sales 38.3% 20.9% 17.7% 17.0% 15.5% 15.1% 15.0% 16.0%
Variable Cost 119 304 432 471 607 670 690 588
As % of sales 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2%
Fixed cost 289 289 289 289 304 319 325 332
As % of sales 15.1% 5.9% 4.2% 3.8% 3.1% 3.0% 2.9% 3.5%
Semi fixed cost 327 434 508 530 609 645 657 598
As % of sales 17.1% 8.8% 7.3% 7.0% 6.2% 6.0% 5.9% 6.3%
EBITDA (426) 355 1,091 874 2,022 1,865 2,393 1,471
% Margins -22.2% 7.2% 15.7% 11.5% 20.7% 17.3% 21.5% 15.5%
Less: Depreciation 612 630 649 669 702 709 716 723
As % of sales 31.9% 12.8% 9.3% 8.8% 7.2% 6.6% 6.4% 7.6%
EBIT (1,038) (275) 442 205 1,320 1,156 1,676 748
EBIT margin -54.1% -5.6% 6.4% 2.7% 13.5% 10.7% 15.1% 7.9%
Other income 309 278 251 276 303 318 334 351
as % of sales 16.1% 5.7% 3.6% 3.6% 3.1% 2.9% 3.0% 3.7%
Less: Interest 202 328 464 507 653 721 732 624
as % of sales 10.5% 6.7% 6.7% 6.7% 6.7% 6.7% 6.6% 6.6%
Profit Before Tax (931) (325) 228 (26) 970 753 1,279 475
Taxes (234) (82) 57 (6) 244 190 322 120
Effective tax rate 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
Profit After Tax (697) (243) 171 (19) 726 564 957 356
Net Profit margin -36.3% -4.9% 2.5% -0.3% 7.4% 5.2% 8.6% 3.7%
EPS -2.1 -0.7 0.5 -0.1 2.2 1.7 2.9 1.1
Source: Ambit Capital research, Company

Trent’s forensic score percentile Exhibit 82: Trent’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Trent lies in D8 “Zone of Darkness” Trent is in the “Zone of Mediocrity”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 90


Consumer Discretionary

Summary Financials - ABFRL


Income statement
Year to March (`` mn) FY18 FY19 FY20 FY21E FY22E FY23E
Revenue 71,721 81,177 87,425 56,724 79,769 87,456
Total expenses 67,038 75,637 82,771 54,814 72,462 79,443
EBITDA 4,683 5,541 4,655 1,909 7,308 8,013
Net depreciation 2,805 2,823 2,488 2,549 2,549 2,424
EBIT 1,878 2,717 2,167 -640 4,759 5,588
Interest and financial charges 1,716 1,874 2,123 2,167 1,571 1,163
Other income 328 648 522 506 550 525
Adj PBT 490 1,491 565 (2,300) 3,737 4,950
Provision for taxation -688 -1,721 1,361 -579 941 1,238
Adj PAT 1,178 3,212 (796) (1,721) 2,797 3,713
yoy growth 120% 173% -125% 116% -262% 33%
Consolidated reported PAT 1,178 3,212 (796) (1,721) 2,797 3,713
EPS basic (`) 1.5 4.2 (1.0) (2.0) 3.3 4.4
EPS diluted (`) 1.5 4.2 (1.0) (2.0) 3.3 4.4
Source: Ambit Capital research, Company

Balance sheet
Year to March (` mn) FY18 FY19 FY20 FY21E FY22E FY23E
Share capital 7,717 7,735 7,740 8,509 8,509 8,509
Reserves and surplus 3,239 6,534 3,119 10,629 13,425 17,138
Total Networth 10,930 14,289 10,859 19,137 21,934 25,647
Loans 18,614 17,029 23,628 19,628 17,628 11,628
Sources of funds 29,544 31,317 34,487 38,765 39,562 37,275
Net block 25,823 25,555 25,539 23,490 21,441 20,010
Capital work-in-progress 460 224 436 436 436 436
Investments 42.00 42.10 - - - -
Cash and bank balances 726 574 2,651 4,406 4,517 6,956
Sundry debtors 5,518 7,866 8,402 9,324 10,927 9,584
Inventories 16,912 19,213 23,494 18,019 17,062 20,067
Other current assets 491 5,183 5,814 4,538 5,584 5,685
Total Current Assets 27,804 36,368 43,458 37,435 39,238 43,440
Current liabilities and provisions 24,687 32,004 34,937 26,010 25,265 29,737
Net current assets 7,179 11,578 16,703 19,806 23,697 22,942
Application of funds 29,544 31,317 34,487 38,765 39,562 37,275
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 91


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Cash flow statement


Year to March (`` mn) FY18 FY19 FY20 FY21E FY22E FY23E
PBT 490 1,491 (91) (2,300) 3,737 4,950
Depreciation 2,805 2,823 8,768 2,549 2,549 2,424
Others 80 135 44 (506) (550) (525)
Interest paid 1,669 1,846 4,200 2,167 1,571 1,163
CFO before change in WC 5,201 6,409 12,760 1,909 7,308 8,013
Change in working capital 760 (937) (6,082) (4,573) (2,734) 3,295
Direct taxes paid (10) (196) (61) 579 (941) (1,238)
CFO 5,951 5,276 6,617 (2,085) 3,633 10,070
Net capex (3,271) (2,792) (3,075) (500) (500) (993)
CFI (3,252) (2,766) (5,741) 6 50 (468)
Inc./(Dec.) from borrowings (1,832) (1,576) 10,725 (4,000) (2,000) (6,000)
Interest & finance charges paid (649) (1,098) (4,226) (2,167) (1,571) (1,163)
CFF (2,469) (2,664) 1,202 3,833 (3,571) (7,163)
Net increase in cash 230 (154) 2,077 1,755 111 2,439
Source: Ambit Capital research, Company

Ratio analysis / Valuation parameters


Year to March FY18 FY19 FY20 FY21E FY22E FY23E
Revenue growth 9 13 8 -35 41 10
EBITDA growth 7 18 -16 -59 283 10
EBITDA margin 6.5 6.8 5.3 3.4 9.2 9.2
EBIT margin 2.6 3.3 2.5 -1.1 6.0 6.4
Net margin 1.6 4.0 -0.9 -3.0 3.5 4.2
RoCE (pre-tax) 6.3 8.9 6.6 -1.7 12.2 14.5
RoCE (post-tax) 6.3 8.9 6.6 -1.3 9.1 10.9
RoIC 6.4 9.1 6.9 -1.9 13.7 17.1
RoE 11.5 25.5 -6.3 -11.5 13.6 15.6
P/E (x) 87.0 32.0 (129.4) (65.7) 40.5 30.5
P/B(x) 9.4 7.2 9.5 5.9 5.2 4.4
EV/EBITDA(x) 25.7 21.5 26.6 67.2 17.3 14.7
EV/Sales(x) 1.7 1.5 1.4 2.3 1.6 1.3
Debt/Equity(x) 1.7 1.2 2.2 1.0 0.8 0.5
Net debt/Equity(x) 1.6 1.2 1.9 0.8 0.6 0.2
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 92


Consumer Discretionary

Quarterly estimates: We expect ABFRL to report loss of `3bn in 1QFY21 in our base-case scenario
BASE CASE (LTL) FY21 FY22
` mn, unless specified 1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Revenue 5,146 13,913 20,428 17,237 14,587 20,408 24,840 19,935
Revenue growth YoY -75.1% -39.4% -20.3% -5.2% 183.4% 46.7% 21.6% 15.7%
COGS 2,522 7,235 10,214 8,101 6,856 10,204 12,172 9,369
Gross Profit 2,625 6,678 10,214 9,135 7,731 10,204 12,668 10,565
Gross Margin % 51.0% 48.0% 50.0% 53.0% 53.0% 50.0% 51.0% 53.0%
Employee cost 1,800 1,900 2,100 2,100 2,250 2,300 2,500 2,500
as % of sales 35.0% 13.7% 10.3% 12.2% 15.4% 11.3% 10.1% 12.5%
Rent 1,544 2,226 2,656 2,413 2,042 2,857 3,229 2,891
as % of sales 30.0% 16.0% 13.0% 14.0% 14.0% 14.0% 13.0% 14.5%
Other expenses 2,045 2,483 2,886 2,617 2,812 3,361 3,779 3,316
As % of sales 39.7% 17.8% 14.1% 15.2% 19.3% 16.5% 15.2% 16.6%
Variable Cost 257 696 1,021 862 729 1,020 1,242 997
As % of sales 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Fixed cost 548 548 548 548 630 630 630 630
As % of sales 10.7% 3.9% 2.7% 3.2% 4.3% 3.1% 2.5% 3.2%
Semi fixed cost 1,239 1,239 1,316 1,207 1,452 1,710 1,907 1,689
As % of sales 24.1% 8.9% 6.4% 7.0% 10.0% 8.4% 7.7% 8.5%
EBITDA (2,764) 69 2,573 2,005 627 1,686 3,160 1,859
% Margins -53.7% 0.5% 12.6% 11.6% 4.3% 8.3% 12.7% 9.3%
Less: Depreciation 622 653 622 653 622 653 622 653
As % of sales 12.1% 4.7% 3.0% 3.8% 4.3% 3.2% 2.5% 3.3%
EBIT (3,386) (584) 1,951 1,352 5 1,033 2,539 1,206
EBIT margin -65.8% -4.2% 9.5% 7.8% 0.0% 5.1% 10.2% 6.0%
Other income 112 152 121 121 128 134 141 148
as % of sales 2.2% 1.1% 0.6% 0.7% 0.9% 0.7% 0.6% 0.7%
Less: Interest 675 550 495 446 424 402 382 363
as % of sales 13.1% 4.0% 2.4% 2.6% 2.9% 2.0% 1.5% 1.8%
Profit Before Tax (3,949) (982) 1,577 1,028 (291) 765 2,297 990
Taxes (994) (247) 397 259 (73) 192 578 249
Effective tax rate 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
Profit After Tax (2,955) (735) 1,180 769 (217) 572 1,719 741
Net Profit margin -57.4% -5.3% 5.8% 4.5% -1.5% 2.8% 6.9% 3.7%
EPS (`) -3.8 -0.8 1.4 0.9 -0.2 0.7 2.0 0.8
No of Shares 774 874 874 874 874 874 874 874
Source: Ambit Capital research, Company

ABFRL’s forensic score percentile ABFRL’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

ABFRL lies in D2 “Zone of Safety” ABFRL is in the “Zone of Greatness”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 93


Consumer Discretionary

Summary Financials - Page Industries


Income statement
Year to March FY18 FY19 FY20 FY21E FY22E FY23E
Net Sales 25,520 28,522 29,454 22,758 34,402 40,278
Raw materials Cost 10,879 11,967 13,108 10,339 15,341 17,320
Employees cost 4,065 4,675 5,317 5,200 6,000 6,815
Royalty expenses 1,284 1,339 1,382 1,068 1,614 1,890
Advertisement expenses 968 1,050 1,031 683 1,170 1,450
Other Admin, S&D expenses 2,917 3,323 3,290 3,348 3,664 4,661
Total operating expenses 20,112 22,353 24,128 20,638 27,789 32,136
EBITDA 5,408 6,169 5,326 2,120 6,613 8,143
Depreciation 280 311 614 662 679 780
EBIT 5,128 5,859 4,712 1,458 5,935 7,363
PBT 5,177 6,060 4,620 1,458 5,920 7,352
Tax expenses 1,705 2,121 1,188 367 1,490 1,851
Adjusted PAT 3,472 3,939 3,432 1,091 4,430 5,502
EPS (Rs) 311.4 353.2 307.7 97.8 397.1 493.3
Source: Ambit Capital research, Company

Balance sheet
Year to March FY18 FY19 FY20 FY21E FY22E FY23E
Shareholders' equity 112 112 112 112 112 112
Reserves & surplus 8,361 7,638 8,087 9,178 11,393 12,769
Total net worth 8,473 7,750 8,199 9,290 11,505 12,880
Loan funds 685 848 268 - - -
Lease liability - - 1,383 1,383 1,383 1,383
Deferred tax liability 110 125 2 2 2 2
Total liabilities 9,268 8,723 9,853 10,675 12,890 14,265
Net block 2,379 3,006 3,010 3,169 3,344 3,452
Lease assets - - 1,045 1,045 1,045 1,045
Inventories 5,679 7,501 7,186 6,799 8,406 9,016
Debtors 1,480 1,238 738 1,084 1,639 1,919
Cash and cash equivalents 669 440 1,169 983 2,905 4,254
Loans & Advances 866 1,132 329 561 848 993
Creditors 1,363 1,220 938 1,133 1,681 1,898
Total current liabilities 4,855 4,783 5,277 4,618 6,950 8,067
Net current assets 4,123 5,644 5,510 6,174 8,214 9,481
Total assets 9,268 8,723 9,853 10,675 12,890 14,265
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 94


Consumer Discretionary

Cash flow statement


Year to March FY18 FY19 FY20 FY21E FY22E FY23E
PBT 5,175 6,060 4,620 1,458 5,920 7,352
Depreciation 280 311 614 662 679 780
Tax (1,645) (2,056) (1,270) (367) (1,490) (1,851)
Cash flow from operating
4,546 2,297 5,167 965 5,005 6,374
activities
Capex (565) (374) (744) (821) (854) (888)
Cash flow from investing
(2,399) 1,920 (266) (501) (509) (485)
activities
Net borrowings (191) 275 (720) (268) - -
Interest paid (168) (163) (339) (320) (360) (414)
Dividend paid (1,624) (4,545) (2,716) - (2,215) (4,126)
Cash flow from financing
(1,983) (4,433) (3,775) (588) (2,575) (4,540)
activities
Free cash flow 3,981 1,923 4,423 144 4,152 5,486
Source: Ambit Capital research, Company

Ratio analysis / Valuation parameters


Year to March FY18 FY19 FY20 FY21E FY22E FY23E
Gross margin (%) 57.4 58.0 55.5 54.6 55.4 57.0
EBITDA margin (%) 21.2 21.6 18.1 9.3 19.2 20.2
EBIT margin (%) 20.1 20.5 16.0 6.4 17.3 18.3
Net profit margin (%) 13.6 13.8 11.7 4.8 12.9 13.7
RoCE post-tax (%) 42.9 45.6 43.2 15.0 45.2 47.7
ROE (%) 45.9 48.6 43.0 12.5 42.6 45.1
P/E (x) 61.5 54.3 62.3 195.9 48.2 38.8
P/BV (x) 25.2 27.6 26.1 23.0 18.6 16.6
EV/EBITDA (x) 39.1 34.7 40.0 100.3 31.9 25.7
Price/Sales (x) 8.4 7.5 7.3 9.4 6.2 5.3
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 95


Consumer Discretionary

Quarterly estimates: We expect Page Industries to report loss of ~`


`600mn in 1QFY21 in our base-case scenario
BASE CASE FY21 FY22
Rs mn 1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Revenue 3,340 6,591 7,144 5,683 9,352 9,227 9,287 6,536
Growth % -60% -15% -10% 5% 180% 40% 30% 15%
RM Consumed: 1,620 3,032 3,358 2,330 4,302 4,152 4,272 2,614
Gross Profit 1,720 3,559 3,786 3,353 5,050 5,075 5,015 3,921
Gross margin 51.5% 54.0% 53.0% 59.0% 54.0% 55.0% 54.0% 60.0%
-3.6% -2.0% -0.2% 0.2% -1.1% -1.0% 0.8% 1.2%
Employees cost 1,300 1,300 1,300 1,300 1,500 1,500 1,500 1,500
% of NS 38.9% 19.7% 18.2% 22.9% 16.0% 16.3% 16.2% 23.0%
Other expenditure 1,043 1,456 1,401 1,199 1,716 1,699 1,707 1,327
% of NS 31.2% 22.1% 19.6% 21.1% 18.3% 18.4% 18.4% 20.3%
Variable Cost 501 791 714 568 935 923 929 654
As % of sales 15.0% 12.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Fixed cost 209 209 209 209 219 219 219 219
As % of sales 6.3% 3.2% 2.9% 3.7% 2.3% 2.4% 2.4% 3.4%
Semi fixed cost 333 456 477 422 561 556 559 454
As % of sales 10.0% 6.9% 6.7% 7.4% 6.0% 6.0% 6.0% 6.9%
EBITDA (623) 803 1,086 854 1,834 1,876 1,808 1,094
EBITDA Margin % -18.6% 12.2% 15.2% 15.0% 19.6% 20.3% 19.5% 16.7%
Add: Other Income 80 80 80 80 80 80 88 97
Depreciation 163 163 166 170 169.6 169.6 169.6 169.6
EBIT (706) 720 999 764 1,744 1,787 1,727 1,021
EBIT margin -21.1% 10.9% 14.0% 13.5% 18.7% 19.4% 18.6% 15.6%
Interest expenses 80 80 80 80 90 90 90 90
PBT (786) 640 919 684 1,654 1,697 1,637 931
% of NS -23.5% 9.7% 12.9% 12.0% 17.7% 18.4% 17.6% 14.3%
Tax (198) 161 231 172 416 427 412 234
Effective tax rate (%) 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
PAT (588) 479 688 512 1,238 1,270 1,225 697
PAT margin -17.6% 7.3% 9.6% 9.0% 13.2% 13.8% 13.2% 10.7%
EPS (52.7) 42.9 61.7 45.9 111.0 113.8 109.8 62.5
Source: Ambit Capital research, Company

Page Industries forensic score percentile Page Industries greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Page Industries is in D1 “Zone of Safety” Page Industries is in the “Zone of Greatness”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 96


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Summary Financials - PVR


Income statement
Year to Mar (`` mn) FY18 FY19 FY20 FY21E FY22E FY23E
Net revenues 23,341 30,855 34,144 7,987 30,032 36,253
Film exhibition cost 5,377 7,019 7,335 1,891 7,006 8,507
F&B spend 1,591 2,387 2,637 492 2,422 2,791
Rent 4,111 5,059 - - - -
Employee cost 2,541 3,373 3,938 2,400 3,350 4,045
EBITDA 4,019 5,864 10,766 (889) 9,758 11,626
Depreciation 1,537 1,913 5,425 3,855 5,080 4,953
Net Finance Cost (524) (949) (4,440) (3,804) (5,100) (5,315)
Adjusted PBT 1,958 3,002 901 (8,548) (422) 1,358
Tax 704 1,097 627 (2,821) (106) 342
Adjusted net profit 1,254 1,906 274 (5,727) (316) 1,016
Reported net profit 1,248 1,833 273 (5,728) (317) 1,015
Source: Ambit Capital research, Company

Balance sheet
Year to Mar (` mn) FY18 FY19 FY20 FY21E FY22E FY23E
Fixed Assets 16,915 30,216 60,407 57,120 58,240 62,167
Current Assets 5,880 8,315 8,576 6,597 7,917 9,543
Current liabilities 4,416 12,135 10,750 4,634 6,034 7,148
Total Assets 19,067 26,000 63,528 65,925 67,518 74,778
Total networth 10,754 12,395 14,802 12,108 11,792 12,808
Total debt 8,305 11,039 48,723 53,814 55,723 61,967
Total Liabilities 19,067 26,000 63,528 65,925 67,518 74,778
Source: Ambit Capital research, Company

Cash flow statement


Year to March (` mn) FY18 FY19 FY20 FY21E FY22E FY23E
PBT 1,945 2,990 896 (8,548) (422) 1,358
Depreciation 1,537 1,913 5,425 3,855 5,080 4,953
Tax (417) (834) (295) 2,821 106 (342)
Net Working Capital 582 2,984 (2,647) (4,137) 79 (511)
CFO 4,879 9,130 8,165 (5,026) 9,837 11,115
Capital Expenditure (3,400) (4,362) (3,851) (568) (6,200) (8,880)
CFI (4,054) (10,154) (3,903) (387) (5,992) (8,610)
Inc/Dec in Borrowings (895) (3,317) (3,316) 5,091 1,909 6,244
Net Dividends (113) (113) (360) - - -
Interest paid (802) (1,033) (1,151) (3,986) (5,308) (5,585)
CFF (660) 1,424 (2,110) 4,139 (3,399) 659
Net change in cash (251) (434) 1,857 1,548 552 2,822
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 97


Consumer Discretionary

Ratio analysis / Valuation parameters


FY18 FY19 FY20 FY21E FY22E FY23E
EBITDA Margin (%) 17.2% 19.0% 31.5% -11.1% 32.5% 32.1%
Net profit margin (%) 5.3% 5.9% 0.8% -71.7% -1.1% 2.8%
EV/ EBITDA (x) 24.0 16.9 13.3 (171.9) 15.8 13.6
P/E on adjusted basis (x) 70.8 46.5 356.2 (18.1) (328.5) 102.1
EV/Sales (x) 4.1 3.2 4.2 19.1 5.1 4.3
ROIC 9% 12% 8% -5% 5% 7%
RoE 12% 15% 2% -43% -3% 8%
Net debt (cash)/ Eq (x) 0.7 0.9 3.1 4.0 4.3 4.2
P/B (x) 8.2 7.2 6.6 8.6 8.8 8.1
Source: Ambit Capital research, Company

Quarterly estimates: We expect PVR to report loss in all the 4 quarters of FY21 in our base-case scenario
BASE CASE (IND AS 116) FY21 FY22
` mn, unless specified 1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Revenue - 1,271 2,512 4,204 6,089 6,993 8,066 8,884
Revenue growth YoY -100.0% -86.9% -72.6% -44.7% #DIV/0! 450.2% 221.1% 111.3%
- Content Cost - 314 566 1,011 1,431 1,613 1,881 2,081
Content as % of Tickets 41.9% 42.5% 42.5% 42.5% 42.5% 42.5% 42.5% 42.5%
- COGS - 66 140 285 454 569 664 735
COGS as % of F&B 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
Employee cost 600 500 600 700 750 800 850 950
as % of sales NA 39.3% 23.9% 16.6% 12.3% 11.4% 10.5% 10.7%
Other expenses 770 836 1,115 1,372 1,701 1,747 1,947 2,100
As % of sales NA 65.8% 44.4% 32.6% 27.9% 25.0% 24.1% 23.6%
Variable Cost 349 381 628 841 1,096 1,119 1,291 1,421
As % of sales NA 30.0% 25.0% 20.0% 18.0% 16.0% 16.0% 16.0%
Fixed cost 240 240 240 240 264 264 264 264
As % of sales NA 18.9% 9.6% 5.7% 4.3% 3.8% 3.3% 3.0%
Semi fixed cost 181 214 247 291 341 365 393 414
As % of sales NA 16.9% 9.8% 6.9% 5.6% 5.2% 4.9% 4.7%
EBITDA (1,370) (445) 91 836 1,753 2,262 2,725 3,019
% Margins NA -35.0% 3.6% 19.9% 28.8% 32.4% 33.8% 34.0%
Less: Depreciation 691 961 1,041 1,162 1,166 1,170 1,370 1,375
As % of sales NA 75.6% 41.5% 27.6% 19.1% 16.7% 17.0% 15.5%
EBIT (2,061) (1,407) (950) (326) 587 1,093 1,355 1,643
EBIT margin NA -110.7% -37.8% -7.8% 9.6% 15.6% 16.8% 18.5%
Other income 52 42 42 46 48 51 53 56
as % of sales NA 3.3% 1.7% 1.1% 0.8% 0.7% 0.7% 0.6%
Less: Interest 701 994 1,080 1,210 1,214 1,218 1,435 1,440
as % of sales NA 78.2% 43.0% 28.8% 19.9% 17.4% 17.8% 16.2%
Profit Before Tax (2,711) (2,359) (1,989) (1,490) (579) (75) (27) 259
Taxes (894) (778) (656) (492) (146) (19) (7) 65
Effective tax rate 33.0% 33.0% 33.0% 33.0% 25.2% 25.2% 25.2% 25.2%
Profit After Tax (1,816) (1,580) (1,332) (999) (433) (56) (20) 194
Net Profit margin NA -124.3% -53.0% -23.7% -7.1% -0.8% -0.3% 2.2%
EPS -33.2 -28.9 -24.4 -18.3 -7.9 -1.0 -0.4 3.5
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 98


Consumer Discretionary

PVR’s forensic score percentile PVR’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

PVR lies in D3 “Zone of Safety” PVR is in the “Zone of Greatness”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 99


Consumer Discretionary

Summary Financials - Bata


Income statement
Year to March (`` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
Revenue 26,342 29,284 30,535 19,240 29,254 31,989
Total operating expenses 22,828 24,512 22,237 15,462 21,191 23,324
EBITDA 3,514 4,773 8,297 3,778 8,063 8,664
EBITDA Margin (%) 13.3% 16.3% 27.2% 19.6% 27.6% 27.1%
Net depreciation 605 640 2,958 2,409 2,908 3,423
EBIT 2,909 4,133 5,340 1,369 5,155 5,241
Interest and financial charges 42 35 1,177 1,087 1,235 998
Other income 503 685 688 585 742 640
PBT 3,370 4,783 4,851 868 4,662 4,883
Provision for taxation 1,165 1,486 1,582 218 1,174 1,229
Adj PAT 2,205 3,297 3,269 649 3,489 3,654
Reported PAT 2,205 3,297 3,269 649 3,489 3,654
EPS (`) 17.2 25.6 25.4 5.1 27.1 28.4
DPS (`) 4.2 4.8 7.6 - 13.6 14.2
Source: Ambit Capital research, Company

Balance sheet
Year to March (` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
Share capital 643 643 643 643 643 643
Reserves and surplus 14,104 16,776 18,323 18,972 20,717 22,544
Total Networth 14,747 17,418 18,966 19,615 21,359 23,187
Lease liability - - 12,491 13,204 14,814 17,233
Sources of funds 14,747 17,418 31,457 32,819 36,174 40,419
Net block 2,949 3,127 13,605 11,884 10,635 11,588
Capital work-in-progress 121 173 199 199 199 199
Investments 5 - 50 50 50 50
Cash and bank balances 5,912 8,425 9,624 13,224 20,317 21,844
Sundry debtors 894 664 612 791 801 876
Inventories 7,652 8,393 8,737 7,529 6,745 7,835
Loans and advances 2,417 2,459 2,392 2,116 2,559 2,798
Total Current Assets 17,268 20,305 22,316 23,948 30,859 33,831
Current Liabilities 6,363 6,786 5,785 4,109 5,631 6,198
Provisions 304 536 108 333 1,118 230
Current liabilities and provisions 6,667 7,322 5,892 4,442 6,749 6,428
Net current assets 10,601 12,982 16,424 19,506 24,110 27,403
Application of funds 14,747 17,418 31,457 32,819 36,174 40,419
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 100


Consumer Discretionary

Cash flow statement


Year to March (`` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
PBT 3,370 4,777 4,851 868 4,662 4,883
Depreciation 605 640 2,958 2,409 2,908 3,423
Interest paid (net) (451) (629) 493 501 492 358
CFO before change in WC 3,601 4,809 8,346 3,778 8,063 8,664
Change in working capital (844) 52 (679) 518 2,489 (1,766)
Direct taxes (paid)/refund (1,154) (1,410) (1,869) (218) (1,174) (1,229)
CFO 1,603 3,451 5,798 4,078 9,379 5,670
Net capex (754) (822) (857) (689) (1,659) (4,376)
Net investments (763) (2,448) (1,669) - - -
Interest received 398 494 639 585 742 640
CFI (1,119) (2,776) (1,873) (103) (917) (3,736)
Proceeds from borrowings - - (3,379) 713 1,610 2,419
Change in share capital - - - - - -
Interest & finance charges paid (15) (14) (13) (1,087) (1,235) (998)
Dividends paid (541) (618) (969) - (1,744) (1,827)
CFF (556) (631) (4,361) (374) (1,369) (406)
Net increase in cash (72) 43 (435) 3,601 7,093 1,527
FCF 849 2,629 4,941 3,389 7,720 1,293
Source: Ambit Capital research, Company

Ratio analysis / Valuation parameters


Year to March FY18 FY19 FY20 FY21E FY22E FY23E
Revenue growth 6 11 4 (37) 52 9
EBITDA growth 26 36 74 (54) 113 7
PAT growth 39 49 (1) (80) 437 5
EBITDA margin 13.3 16.3 27.2 19.6 27.6 27.1
EBIT margin 11.0 14.1 17.5 7.1 17.6 16.4
Net margin 8.4 11.3 10.7 3.4 11.9 11.4
RoCE (%) 13.6 17.7 14.7 3.2 11.2 10.2
RoE (%) 16.5 20.1 18.6 3.5 17.6 16.9
P/E (x) 78.1 52.2 52.7 265.3 49.4 47.1
P/B(x) 11.7 9.9 9.1 8.8 8.1 7.4
Debt/Equity(x) - - - - - -
Net debt/Equity(x) (0.4) (0.5) 0.2 (0.0) (0.3) (0.2)
EV/Sales(x) 6.3 5.6 5.3 8.3 5.2 4.7
EV/EBITDA(x) 47.3 34.3 19.6 42.1 18.8 17.4
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 101


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Quarterly estimates: We expect Bata to report loss of ~``900mn in 1QFY21 in our base-case scenario
BASE CASE FY21 FY22
` mn, unless specified 1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Total Net Sales 1,764 4,332 6,637 6,507 7,410 6,064 8,296 7,483
YoY growth -80% -40% -20% 5% 320% 40% 25% 15%
COGS 794 1,863 2,788 2,733 3,260 2,608 3,402 3,068
Gross Profit 970 2,469 3,850 3,774 4,150 3,457 4,895 4,415
Gross Margin % 55.0% 57.0% 58.0% 58.0% 56.0% 57.0% 59.0% 59.0%
Employee cost 700 700 750 750 800 800 850 850
as % of sales 39.7% 16.2% 11.3% 11.5% 10.8% 13.2% 10.2% 11.4%
Rent 100 120 120 125 125 125 130 130
as % of sales 5.7% 2.8% 1.8% 1.9% 1.7% 2.1% 1.6% 1.7%
Other expenses 650 929 1,178 1,163 1,289 1,131 1,325 1,298
As % of sales 36.8% 21.4% 17.8% 17.9% 17.4% 18.6% 16.0% 17.3%
Variable Cost 176 347 498 488 556 455 581 561
As % of sales 10.0% 8.0% 7.5% 7.5% 7.5% 7.5% 7.0% 7.5%
Fixed cost 134 134 134 134 141 141 141 141
As % of sales 7.6% 3.1% 2.0% 2.1% 1.9% 2.3% 1.7% 1.9%
Semi fixed cost 339 448 546 541 592 535 603 595
As % of sales 19.2% 10.3% 8.2% 8.3% 8.0% 8.8% 7.5% 8.0%
EBITDA (479) 720 1,801 1,736 1,936 1,401 2,590 2,137
% Margins -27.2% 16.6% 27.1% 26.7% 26.1% 23.1% 31.2% 28.6%
Less: Depreciation 571 583 612 643 675 709 744 781
As % of sales 32.4% 13.5% 9.2% 9.9% 9.1% 11.7% 9.0% 10.4%
EBIT (1,051) 137 1,189 1,093 1,261 692 1,846 1,356
EBIT margin -59.6% 3.2% 17.9% 16.8% 17.0% 11.4% 22.2% 18.1%
Other income 145 124 171 145 160 176 194 213
as % of sales 8.2% 2.9% 2.6% 2.2% 2.2% 2.9% 2.3% 2.8%
Interest cost 266 260 273 287 293 299 314 329
as % of sales 15.1% 6.0% 4.1% 4.4% 4.0% 4.9% 3.8% 4.4%
Profit Before Tax (1,171) 0 1,087 952 1,128 570 1,725 1,240
Taxes (295) 0 274 240 284 143 434 312
Effective tax rate 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
Profit After Tax (876) 0 813 712 844 426 1,291 928
Net Profit margin -49.7% 0.0% 12.3% 10.9% 11.4% 7.0% 15.6% 12.4%
EPS (`) (6.8) 0.0 6.3 5.5 6.6 3.3 10.0 7.2
Source: Ambit Capital research, Company

Bata’s forensic score percentile Bata’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Bata lies in D4 “Zone of Safety” Bata is in the “Zone of Greatness”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 102


Consumer Discretionary

Summary Financials – Relaxo


Income statement
Year to March (`` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
Revenues 19,411 22,921 24,105 17,264 26,971 30,855
EBITDA 3,021 3,243 4,090 2,120 5,253 6,817
Depreciation 543 624 1,094 1,134 1,180 1,497
EBIT 2,478 2,619 2,995 986 4,073 5,320
Interest 86 69 169 144 150 126
PBT 2,436 2,680 2,917 949 4,149 5,348
PAT 1,611 1,754 2,263 710 3,105 4,002
EPS 6.7 7.1 9.1 2.9 12.5 16.1
Source: Ambit Capital research, Company

Balance sheet
Year to March (` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
Share capital 120 124 248 248 248 248
Networth 7,612 11,051 12,724 13,434 15,918 19,119
Debt 393 - - - - -
Sources of funds 8,489 11,632 14,554 15,607 18,155 21,720
Gross block 6,300 10,151 12,574 13,408 13,803 14,799
Net block 5,249 8,481 9,810 9,510 8,726 8,226
Investments 7 2 2 2 2 2
Working capital 2,751 3,909 4,247 7,119 8,951 12,862
Source: Ambit Capital research, Company

Cash flow statement


Year to March (` Mn) FY18 FY19 FY20 FY21E FY22E FY23E
CFO pre WC 3,075 3,416 4,219 2,119 5,253 6,817
WC investments (732) (1,319) (198) 1,998 (1,261) 581
CFO post tax 1,543 1,235 3,189 3,878 2,948 6,051
Capex 1,090 924 1,161 834 396 996
CFI (1,084) (569) (1,157) (727) (170) (842)
Incremental borrowings (217) (416) (914) 1,639 (1,503) (3)
Equity issuance 46 32 32 - - -
CFF (463) (682) (2,026) 1,496 (2,274) (929)
FCF 453 311 2,028 3,045 2,552 5,055
Source: Ambit Capital research, Company

Ratio analysis / Valuation parameters


Year to March FY18 FY19 FY20 FY21E FY22E FY23E
Revenue growth (%) 19% 18% 5% -28% 56% 14%
Net earnings growth (%) 34% 9% 29% -69% 337% 29%
EBITDA margin (%) 16% 14% 17% 12% 19% 22%
EBIT margin (%) 13% 11% 12% 6% 15% 17%
ROCE (pre-tax) (%) 30% 27% 26% 7% 26% 30%
ROCE (post-tax) (%) 20% 18% 20% 5% 20% 23%
ROE (%) 24% 21% 22% 5% 21% 23%
Gross Block turns(x) 3.2 2.8 2.1 1.3 2.0 2.2
Working Capital turns (x) 8.2 6.9 5.9 5.2 9.1 9.3
P/B (x) 20 14 12 12 10 8
P/E (x) 94 89 69 220 50 39
Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 103


Consumer Discretionary

Quarterly estimates: We expect Relaxo to report loss of ~`


`600mn in 1QFY21 in our base-case scenario
BASE CASE FY21 FY22
` mn, unless specified 1QFY21E 2QFY21E 3QFY21E 4QFY21E 1QFY22E 2QFY22E 3QFY22E 4QFY22E
Total Net Sales 1,621 4,352 5,398 5,892 6,483 6,964 6,748 6,776
YoY growth -75% -30% -10% 9% 300% 60% 25% 15%
COGS 648 1,741 2,159 2,357 2,658 2,855 2,767 2,778
Gross Profit 972 2,611 3,239 3,535 3,825 4,109 3,981 3,998
Gross Margin % 60.0% 60.0% 60.0% 60.0% 59.0% 59.0% 59.0% 59.0%
Employee cost 616 696 702 719 746 794 810 813
as % of sales 38.0% 16.0% 13.0% 12.2% 11.5% 11.4% 12.0% 12.0%
Other expenses 898 1,363 1,573 1,671 1,823 1,919 1,876 1,881
As % of sales 55.4% 31.3% 29.1% 28.4% 28.1% 27.6% 27.8% 27.8%
Variable Cost 357 740 918 1,002 1,102 1,184 1,147 1,152
As % of sales 22.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0%
Fixed cost 332 332 332 332 365 365 365 365
As % of sales 20.5% 7.6% 6.1% 5.6% 5.6% 5.2% 5.4% 5.4%
Semi fixed cost 210 292 323 338 356 370 363 364
As % of sales 13.0% 6.7% 6.0% 5.7% 5.5% 5.3% 5.4% 5.4%
EBITDA (542) 552 965 1,145 1,257 1,396 1,296 1,304
% Margins -33.4% 12.7% 17.9% 19.4% 19.4% 20.0% 19.2% 19.2%
Less: Depreciation 279 282 285 288 290 293 296 299
As % of sales 17.2% 6.5% 5.3% 4.9% 4.5% 4.2% 4.4% 4.4%
EBIT (821) 270 680 858 966 1,103 1,000 1,004
EBIT margin -50.7% 6.2% 12.6% 14.6% 14.9% 15.8% 14.8% 14.8%
Other income 32 26 20 29 40 56 62 68
as % of sales 2.0% 0.6% 0.4% 0.5% 0.6% 0.8% 0.9% 1.0%
Interest cost 35 36 36 37 37 37 38 38
as % of sales 2.2% 0.8% 0.7% 0.6% 0.6% 0.5% 0.6% 0.6%
Profit Before Tax (825) 259 664 850 970 1,122 1,024 1,034
Taxes (208) 65 167 214 244 282 258 260
Effective tax rate 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2% 25.2%
Profit After Tax (617) 194 497 636 726 839 766 774
Net Profit margin -38.1% 4.5% 9.2% 10.8% 11.2% 12.1% 11.4% 11.4%
EPS (`) (2.5) 0.8 2.0 2.6 2.9 3.4 3.1 3.1
Source: Ambit Capital research, Company

Relaxo’s forensic score percentile Relaxo’s greatness score percentile

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Relaxo lies in D2 “Zone of Safety” Relaxo is in the “Zone of good, not great”

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

June 24, 2020 Ambit Capital Pvt. Ltd. Page 104


Consumer Discretionary

Institutional Equities Team


Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building / Aviation (022) 66233241 nitin.bhasin@ambit.co
Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 ajit.kumar@ambit.co
Amandeep Singh Grover Mid-Caps / Hotels / Real Estate (022) 66233082 amandeep.grover@ambit.co
Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 ashish.kanodia@ambit.co
Ashwin Mehta, CFA Technology (022) 6623 3295 ashwin.mehta@ambit.co
Basudeb Banerjee Automobiles / Auto Ancillaries (022) 66233141 basudeb.banerjee@ambit.co
Darshan Mehta E&C / Infrastructure / Aviation (022) 66233174 darshan.mehta@ambit.co
Deep Shah Media / Telecom / Oil & Gas (022) 66233064 deep.shah@ambit.co
Dhruv Jain Mid-Caps (022) 66233177 dhruv.jain@ambit.co
Karan Khanna, CFA Mid-Caps / Hotels / Real Estate (022) 66233251 karan.khanna@ambit.co
Karan Kokane Automobiles / Auto Ancillaries (022) 66233028 karan.kokane@ambit.co
Kushagra Bhattar Healthcare (022) 66233062 kushagra.bhattar@ambit.co
Nikhil Mathur, CFA Healthcare (022) 66233220 nikhil.mathur@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 pankaj.agarwal@ambit.co
Prasenjit Bhuiya Agri & Chemicals (022) 66233132 prasenjit.bhuiya@ambit.co
Prateek Maheshwari Cement (022) 66233234 prateek.maheshwari@ambit.co
Ritesh Gupta, CFA Consumer Discretionary / Agri & Chemicals (022) 66233242 ritesh.gupta@ambit.co
Satyadeep Jain, CFA Metals & Mining (022) 66233246 satyadeep.jain@ambit.co
Shreya Khandelwal Banking / Financial Services (022) 6623 3292 shreya.khandelwal@ambit.co
Sumit Shekhar Economy / Strategy (022) 66233229 sumit.shekhar@ambit.co
Udit Kariwala, CFA Banking / Financial Services (022) 66233197 udit.kariwala@ambit.co
Varun Ginodia, CFA E&C / Infrastructure / Aviation (022) 66233174 varun.ginodia@ambit.co
Vinit Powle Strategy / Forensic Accounting (022) 66233149 vinit.powle@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 dhiraj.agarwal@ambit.co
Bhavin Shah India (022) 66233186 bhavin.shah@ambit.co
Dharmen Shah India / Asia (022) 66233289 dharmen.shah@ambit.co
Abhishek Raichura UK & Europe (022) 66233287 abhishek.raichura@ambit.co
Pranav Verma Asia (022) 66233214 pranav.verma@ambit.co
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Singapore
Srinivas Radhakrishnan Singapore +65 6536 0481 srinivas.radhakrishnan@ambit.co
Sundeep Parate Singapore +65 6536 1918 sundeep.parate@ambit.co
Production
Sajid Merchant Production (022) 66233247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 66233183 sharoz.hussain@ambit.co
Jestin George Editor (022) 66233272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 66233273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 66233265 nikhil.pillai@ambit.co
Babyson John Database (022) 66233209 babyson.john@ambit.co

June 24, 2020 Ambit Capital Pvt. Ltd. Page 105


Consumer Discretionary

Relaxo Footwears Ltd (RLXF IN, SELL) Aditya Birla Fashion and Retail (ABFRL IN, SELL)

850 300
750 250
650 200
550
150
450
100
350
250 50

150 0

Jun-17

Mar-18

Jun-18

Mar-19

Jun-19

Mar-20

Jun-20
Sep-17
Dec-17

Sep-18

Dec-18

Sep-19

Dec-19
Sep-17
Dec-17
Mar-18

Dec-18
Jun-17

Jun-18
Sep-18

Mar-19

Jun-19
Sep-19
Dec-19
Mar-20

Jun-20
Relaxo Footwears Ltd Aditya Birla Fashion and Retail Ltd

Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research

Titan Co Ltd (TTAN IN, BUY) Trent Ltd (TRENT IN, BUY)

1,600 900
1,400 800
1,200 700
1,000 600
500
800
400
600
300
400 200
200 100
0 0
Jun-17

Jun-18

Jun-19

Jun-20
Sep-17
Dec-17
Mar-18

Sep-18
Dec-18
Mar-19

Sep-19
Dec-19
Mar-20

Jun-17

Sep-17
Dec-17
Mar-18

Dec-18
Jun-18

Sep-18

Mar-19

Sep-19
Dec-19
Jun-19

Mar-20

Jun-20
Titan Co Ltd Trent Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research

Jubilant Foodworks Ltd (JUBI IN, BUY) Bata India Ltd (BATA IN, SELL)

2,100
2,000
1,900
1,700
1,500 1,500
1,300
1,100 1,000
900
700 500
500
300 0
Jun-17
Sep-17

Mar-18
Jun-18
Sep-18

Mar-19
Jun-19
Sep-19

Mar-20
Jun-20
Dec-17

Dec-18

Dec-19
Jun-17
Sep-17
Dec-17
Mar-18

Dec-18

Dec-19
Jun-18
Sep-18

Mar-19
Jun-19
Sep-19

Mar-20
Jun-20

Jubilant Foodworks Ltd Bata India Ltd


Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research

June 24, 2020 Ambit Capital Pvt. Ltd. Page 106


amedhora@everstonecapital.com 2020-07-01 Wednesday 10:48:06
Consumer Discretionary

Avenue Supermarts Ltd (DMART IN, SELL) PVR Ltd. (PVRL IN, SELL)

3,000 2,500
2,500 2,000
2,000
1,500
1,500
1,000
1,000
500 500

0 0

Jun-17

Jun-18

Jun-19

Jun-20
Sep-17
Dec-17
Mar-18

Sep-18
Dec-18
Mar-19

Sep-19
Dec-19
Mar-20
Mar-18

Mar-19

Mar-20
Jun-17

Jun-18

Jun-19

Jun-20
Sep-17
Dec-17

Sep-18
Dec-18

Sep-19

Avenue Supermarts Ltd Dec-19 PVR Ltd

Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research

Page Industries Ltd (PAG IN, SELL)

40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Mar-19
Jun-17

Mar-18
Jun-18

Jun-19

Mar-20
Jun-20
Sep-17
Dec-17

Sep-18
Dec-18

Sep-19
Dec-19

Page Industries Ltd

Source: Bloomberg, Ambit Capital research

June 24, 2020 Ambit Capital Pvt. Ltd. Page 107


Consumer Discretionary

Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark
Investment Rating Expected return (over 12-month)
BUY We expect this stock to deliver more than 10% returns over the next12 months
SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months
UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being
NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.

Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. Ambit Capital Private Ltd. research is disseminated and available
primarily electronically, and, in some cases, in printed form. The following Disclosures are being made in compliance with the SEBI (Research Analysts) Regulations, 2014 (herein after referred to as the
Regulations).

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June 24, 2020 Ambit Capital Pvt. Ltd. Page 108


Consumer Discretionary

Additional Disclaimer for UK Persons


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June 24, 2020 Ambit Capital Pvt. Ltd. Page 109

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