Motilal Oswal Financial Services

Retail | Thematic

Contents: The Land of Opportunities

Summary: The Land of Opportunities

.................................................................................

Infographics

.........................................................................................................................

Burgeoning opportunity in organized retail market

...................................................12-22



Focus on measured growth.................................................................................... 12



Levers of organized retail growth .......................................................................... 17

Ecommerce – more a friend than foe

..........................................................................23-39



New ecommerce policy to support offline retail ................................................... 23



Online retail market gaining scale.......................................................................... 24



Operating models: E-tailing in India ....................................................................... 29



Next stop: Food and Grocery foray of e-tailers ...................................................... 33



Logistics cost - a big burden ................................................................................... 37

Modern retail has huge potential

................................................................................40-44



Organized retail – Huge runway of growth ............................................................ 40



Format forte .......................................................................................................... 42

Balanced scorecard – what wins, who loses

.....................................................................

Valuation summary

...........................................................................................................

Companies

.................................................................................................................

58-241

Aditya Birla Fashion and Retail............................................................................. 59

Avenue Supermarkets .......................................................................................... 84

Future Lifestyle Fashions ...................................................................................... 99

Future Retail ...................................................................................................... 128

Shoppers Stop .................................................................................................... 158

Spencers Retail................................................................................................... 176

Trent .................................................................................................................. 193

V-Mart ............................................................................................................... 212

Reliance Retail ................................................................................................... 231

April 2019

Retail | Thematic

Retail

The Land of Opportunities

Biz models rightly evolving to suit ‘New-age Retail’

Huge runway for growth

The Indian organized retail market appears set for a stellar run, with its size likely to

triple by FY25. While the industry is undergoing constant disruption, one thing has

remained steady – consumers’ affordability is on the rise and aspirations are

growing more than ever. This trend particularly bodes well for food & grocery (F&G)

and apparel categories, which are likely to deliver a strong CAGR (FY17-21) of 27%

and 22%, respectively. To cater to robust demand, ~4,000 new store additions will

likely be required over the next eight years (2017-25), offering a huge runway of

15% CAGR in retail footprint over the next eight years. Household retail spends, too,

are shifting from traditional kirana shops to modern retail formats, which are

gaining share due to better price offerings and greater convenience of shopping.

E-commerce – more a friend than foe

We believe the Indian retail industry is at the crossroads. The rising base of tech-

savvy millennials, the improving internet ecosystem in India and the inherent

benefit of convenience are undoubtedly fuelling demand for e-commerce. On one

hand, this is creating cracks in the traditional brick-and-mortar business, but on the

other, almost all companies are premising their growth strategies on developing

their online channels – more so on building an omni-channel model. Many retailers

and e-commerce firms are coming together to build a blended distribution network.

Retailers appear to have ascertained that e-commerce is more of a friend than a foe.

E-commerce also has its own restrictions. It has largely penetrated standardized

categories like electronics, and to some extent, lifestyle and branded apparel.

However, its relevance in F&G is limited due to factors like varied quality,

customization, supply logistics and product perishability. Further, online shopping

has plateaued, with maturing of sales in top 10-15 cities, which contribute 75% of

total sales. To drive incremental growth, e-commerce companies need to expand to

smaller cities, which will trigger a significant rise in their already high logistics costs.

The new ecommerce policy also supports offline retail by disallowing online players

to offer deep discounts, cash backs and exclusive product sale.

Blended distribution

network (physical +

online) is the way

forward

RETAIL: THE LAND OF

OPPORTUNITIES

Measured growth with focus on profitability and RoCE

Indian retailers have seen healthy expansion in their store footprint, driving revenue

and earnings growth. Unlike the previous cycle in the early 2000s when euphoric

expansion in retail footprint led to a sharp fall in store profitability and eventual

rationalization and downsizing, the existing retail expansion is far more measured

and primarily fueled by internal accruals and not leveraged expansion. To reduce

operating cost and drive an efficient working capital cycle, we see most companies

focusing on (a) leaner store layouts, (b) cluster-based growth, (c) private labels and

(d) membership-based model. This has led to an improvement in per store

economics and an expansion in the EBITDA margin across retail companies over the

last 2-3 years. The outlook on the returns profile has also improved significantly.

Aliasgar.shakir@MotilalOswal.com

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April 2019

Retail | Thematic

Rich valuations – paying premium for growth

In the rally over late

1990s to early 2000s,

US retailers garnered

1.5-2x higher P/E v/s

long-term average

Retail stocks have shown an excellent performance over the last two years, led by

healthy earnings growth coming from impressive SSSG and measured expansion.

The higher earnings multiple the industry commands now highlights the improving

investor confidence in India’s retail models that earlier looked vulnerable, operating

on wafer-thin margins and incapable of competing with the large e-commerce

platforms.

We draw an inference from the global rally of retailers in the late 1990s and early

2000s, when US retailers garnered nearly 30x one-year forward multiples, 1.5-2x the

long-term average. Given the strong and secular growth potential in India’s retail

market for the next 8-10 years, retail stocks may remain expensive, partly capturing

the growth beyond one year. We prefer stocks with healthy growth/RoCE, and

valuation buffer.

We initiate coverage with Buy on Aditya Birla Fashion and Retail, Future Retail,

Future Lifestyle, Trent, Spencers Retail, and Neutral on Shoppers Stop and V-Mart.

We maintain Sell on Avenue Supermarts. We do not have a rating on Reliance Retail.

Prefer stocks with

healthy growth/RoCE

and valuation buffer

Exhibit 1: Valuation comparison

MCap CMP

Company

DMART

ABFRL

FRETAIL

FLFL

VMART

TRENT

SHOP

SPENCER

Upside

(%)

19%

30%

22%

25%

13%

22%

Reco

Sell

Buy

Neutral

Buy

EPS (INR)

FY19E FY20E FY21E

15.3

2.6

13.7

8.6

4.2

9.9

0.04

19.7

4.0

15.4

10.6

49.0

5.9

13.3

0.4

26.1

5.8

17.5

14.1

60.2

7.8

16.6

0.9

EPS CAGR

FY19-21

(%)

RoE (%)

P/E (x)

EV/EBITDA (x)

FY21E

(INR b) (INR) (INR)

904

169

224

117

219

447

478

353

458

164

260

580

585

440

520

200

FY19E FY20E FY21E FY20E FY21E FY20E

424

179

168

1,446 1,300 -10%

2,653 2,880

Neutral 41.6

Source: MOFSL, Company

April 2019

Retail | Thematic

ABFRL – Ready for take off

THE OFFERINGS

1. Aditya Birla Fashion

and Retail

2. Avenue Supermarts

3. Future Retail

4. Future Lifestyle

5. Shoppers Stop

6. Spencers Retail

7. Trent

8. V-Mart

Reliance Retai

ABFRL holds a healthy and diversified portfolio mix consisting four leading

menswear brands, Pantaloons in the value-fashion retail format, men/women’s

innerwear through Van Heusen’s brand extension, and women’s fast-fashion

venture – Forever 21. Pantaloons has undergone revamp over the years post its

acquisition to tap the lucrative value-fashion format. We expect strong SSSG and 65

store additions to drive 17%/24% revenue/EBITDA growth over FY19-21. Recently

launched men’s innerwear under the well-known Van Heusen brand should see

robust ~2x revenue growth and lower EBITDA losses by FY21 driven by distribution

ramp-up. The lifestyle segment consisting four marquee brands and product

extensions should achieve moderate growth over FY19-21. We expect healthy

overall revenue/EBITDA CAGR of 14%/23% over FY19-21. Overall EBITDA margin

should expand ~125bp to 8.7% by FY21 on the back of (a) break-even in the

innerwear and fast-fashion businesses, (b) steady uptick in Pantaloons’ private label

mix (70-75%) and (c) the company’s strategy of franchisee-led store additions, which

should provide an impetus to RoCE. We initiate with a

Buy

rating and an SOTP-based

TP of INR260. We ascribe 23x FY21 EBITDA of INR6.7b for the lifestyle segment given

its strong brand value. We expect Pantaloons to drive earnings growth for ABFRL

and ascribe 18x FY21 EBITDA of INR3.9b for this segment. We ascribe 1x FY21 sales

for the fast-fashion and other businesses. This implies ~10% premium to the target

EV/EBITDA multiple for our apparel coverage.

Avenue Supermarkets – well-oiled growth engine

Avenue Supermarkets (DMART) has consistently outperformed its peers, as its low-

cost structure driven by (a) better product assortment, scale and vendor mix, and (b)

cost savings from supply chain efficiencies and owned stores (no rentals) provides

an edge in a highly competitive market. As nearly one-third of its stores are still in

the early growth phase, productivity should inch up, though recent management

commentary on SSSG has been cautious, given the rising scale. This, coupled with

judiciously targeted underserved store locations, bodes well for SSSG. We expect

25% revenue CAGR over FY19-21, driven by 22% SSSG and healthy 26 store additions

annually. Management cited that it will cap incremental margin expansion to gain

competitive edge in pricing. We build in a steady EBITDA margin over FY19-21,

driving EBITDA/PAT CAGR of 27%/31%. We maintain

Sell

(considering rich

valuations) with a target price of INR1,300, ascribing 30x (~35% discount to two-year

average of 45x, since IPO) FY21E EBITDA of INR27b.

Brand Factory –

discount store has a

differentiated value

proposition

Future Lifestyle – integrated play on brand and retail

FLF’s unique business model – a combination of branded apparel and large-format

retailing – gives it a competitive edge over peers. Increasing revenue share of

private labels with a thrust on power brands, and burgeoning demand for fashion

should provide impetus to gross and EBITDA margins, allowing it to earn 200-300bp

higher EBITDA margin than the pure retail or brand formats. FLF’s combination of

owned/licensed brands along with retail format also allows better inventory control.

We expect healthy 18% CAGR in consolidated revenue over FY19-21, driven by

robust SSSG and store additions in both Central and Brand Factory. We expect 21%

EBITDA CAGR and 28% PAT CAGR over FY19-21. We recommend

Buy

with a target

April 2019

Retail | Thematic

price of INR585, ascribing 15x (~20% premium to three-year average) EV/EBITDA,

given its strong performance over the last two years.

Future Retail – scaling new heights

Multi-format approach

with a focus on private

labels and apparels

FRL operates under a multi-format pattern (Big Bazaar – Hypermarket, Easyday –

Daily) and has a balanced product category portfolio (food & grocery, apparel, and

general merchandize). We expect a CAGR of 10% in large format (incl. Big Bazaar)

revenue and 30% in small format (incl. Easyday) revenue over FY19-21, driven by

healthy SSSG and store additions. This, along with the increasing share of margin-

accretive private labels and apparel products, should lead to 80bp EBITDA margin

expansion over FY19-21. Further, recently announced of INR20b promoter warrants

issue should be utilized in releasing FRL assets from FEL, a move that will clean FRL’s

asset ownership structure, turn EPS accretive, and yet garner 12% RoCE with further

improvement potential. We recommend

Buy

on FRL with a target price of INR580,

ascribing 20x (at three-year average) FY21E EBITDA of INR15b. FRL trades at ~50%

discount to DMART. With growth levers in place and return ratios set to take off, the

valuation gap should reduce, in our view.

Shoppers Stop –

rejigging private labels

Shoppers Stop – balance sheet cleaned up, at cusp of revival

After a sluggish performance over the last three years, Shoppers Stop completed its

clean-up in FY18, consolidating stores, selling off loss-making Hypercity, and

deleveraging its balance sheet. With all growth levers in place – rationalization of

stores, thrust on core business and rejig of private label brands – we believe SHOP’s

growth trajectory is at the cusp of revival. We expect increased pace of store adds,

revival of SSSG, hive off of loss-making non-core business and efficiency measures to

drive consolidated revenue CAGR of 9% and EBITDA/PAT CAGR of 18%/30% over

FY19-21. Internally funded capex and zero gearing should drive RoIC. We believe

earnings revival and RoIC improvement are not fully captured. We recommend

Neutral

with a TP of INR520, assigning 13x (~40% discount to target EV/EBITDA

multiple of our apparel coverage) EV/EBITDA to Shoppers Stop and 1x EV/sales to

Crosswords on an FY21E basis.

Spencer – well

capitalized for growth

Spencer’s Retail – turned profitable

Spencer’s Retail has turned EBITDA-positive (FY19E), with the closure of loss-making

dailies, after suffering a disconcerting FY18 impacted by liquor ban on highways, key

store renovation and GST rollout. Management plans to (a) accelerate the pace of

store additions, (b) increase the share of private labels and apparel with the recently

launched value apparel brand 2Bme and (c) ramp up omni-channel presence. We

expect Spencer’s to clock 14% revenue CAGR and improve EBITDA margin by 140bp

as store rationalization and inherent operating leverage drive profitability. Though

the business is yet to attain a steady state, we believe (a) proven execution with

recent turnaround and (b) measured growth targets with right store size would

improve RoIC to 6% by FY21. We recommend

Buy,

valuing Spencer’s Retail at

INR200/share (0.5x FY21E sales).

April 2019

Retail | Thematic

Trent – value format

Zudio could turn

sizeable in three years

Trent – Westside, a steady path; Zara, Star Bazaar could give upside kicker

Trent has created a strong brand Westside, with a thrust on women-centric fashion

and private labels. Furthermore, rejig in the operational strategy of Star Bazaar and

Zudio stores have put Star at an inflection point – we expect EBITDA losses to trim

down to 4% by FY21 (from 7% FY19E). We expect consolidated revenue CAGR of

19% over FY19-21, primarily driven by Westside. Healthy private label mix and

operating efficiency should drive 100bp margin expansion to 10% by FY21. We

recommend

Buy

with a TP of INR440, ascribing (a) Westside and Zara 25x (~20%

premium to the target EV/EBITDA multiple of our apparel coverage) FY21E EBITDA

and (b) THPL 1x FY21E sales. Trent has a healthy business portfolio, but current

valuations fairly capture the earnings. Faster-than-expected recovery in THPL and

accelerated SSSG in Westside could result in further upside.

VMart – playing the

shift from unorganized

to organized in tier 2-3

cities

V-Mart Retail – play on rural India’s modern retail shift

V-Mart Retail (VMART) is capitalizing on the shift from the unorganized to the

organized segment in apparel retailing. It has consciously targeted tier-2 and tier-3

cities (~80% presence) of India, offering 25-30% lower prices than most

national/regional apparel chains. It’s small (~8.4ksf) store size and high 65% private

label share have enabled healthy productivity growth to INR9k/sf (FY19E) and an

enviable ~10% EBITDA margin. Given the strong growth opportunity and VMART’s

measured expansion through internal accruals, we expect 17% revenue CAGR and

EBITDA/PAT CAGR of 21%/20% over FY19-21. Healthy RoIC of 22% by FY21 and

strong earnings growth favor rich valuations. We ascribe 25x (~40% premium to

three-year average) to FY21E EBITDA, arriving at a TP of INR2,880. Recommend

Neutral.

Reliance Retail –

reaping gains from the

deepest network

Reliance Retail –

consistent growth + increasing scale

Reliance Retail has the largest organized F&G and fashion business in India, with a

widespread core network of ~4,300 stores (FY19E). Over the last 3-4 years, the

company has aggressively expanded across verticals. Rapid expansion and

consequent healthy growth have brought scale benefits, with the core EBITDA

margin expanding 260bp YoY to 6.9% over FY16-19E. We expect the company to

grow its core (ex-petro/connectivity) revenue/EBITDA by 28%/34% over FY19-21,

driven by its expanding footprint across businesses. Reliance Retail has been

undertaking various omni-channel initiatives, including (a) the launch of its online

fashion portal (AJIO.com) and F&G portal (Reliancesmart.in), (b) the integration of

stores for online order fulfillment and (c) operationalization of kiosks across fashion

stores. We, thus, believe that Reliance Retail is well positioned to tap India’s large

and expanding retail market, given its (a) vast physical presence across multiple

product categories, (b) strength of Jio’s digital/distribution platforms and subscriber

base, (c) foray in payment banks and (d) support from deep-pocketed promoter

group.

April 2019

THE OFFERINGS

1. Aditya Birla Fashion

and Retail

2. Avenue Supermarts

3. Future Lifestyle

4. Future Retail

5. Shoppers Stop

6. Spencers Retail

7. Trent

8. V-Mart

9. Reliance Retail

The Land of

Opportunities

Huge runway

for growth

E-commerce –

more a friend

than foe

Measured

growth with

focus on

profitability

and RoCE

Rich

valuations –

Paying

premium for

growth

Biz models rightly evolving to

suit ‘New-age Retail’

Organized Retail Industry

13%

2012

(USD b)

Unorganised

Retail

Organised

Retail

2017

(USD b)

2021E

144

(USD b)

Unorganised

Retail

Organised

Retail

643

Unorganised

Retail

Organised

Retail

962

370

PENETRATION

Significant room for increasing penetration in organized F&G (%)

2021E Organised retail (USD b)

2017 Organised retail (USD b)

2021E organised retail penetration (%)

2017 organised retail penetration (%)

CAGR over CY17-21E

Food & Grocery

Jewellery &

Watches

Apparel &

Accessories

Consumer

Electronics

Home & Living

18%

16%

27%

Food & Grocery

Jewellery &

Watches

Apparel &

Accessories

Consumer

Electronics

Home & Living

32%

28%

37%

24%

35%

27%

13%

11%

15%

13%

11%

31%

27%

10%

20%

30%

40%

22%

23%

Others

Pharmacy &

Wellness

Footwear

14%

17%

Others

Pharmacy &

Wellness

Footwear

16%

F&G e-tail penetration at near zero

28-41%

FY17

FY20E

Expect high store adds over next few years

No of stores

Store adds

2,454

19%

14-20%

8-14%

Home &

Living

1,438

6,017

3,563

2,125

2017

2021E

2025E

0.1%

0.5%

Food &

Grocery

4-6%

Electronics

Apparel &

Lifestyle

Overall

Market

Ecommerce – Hybrid model evolving

PRO’S AND CON’S OF ONLINE RETAIL

PRO’S AND CON’S OF OFFLINE RETAIL

WEAKNESS

No touch and feel of

product

STRENGTH

Easy access to

market for suppliers

STRENGTH

Touch and feel of

product

WEAKNESS

Limitation in

expansion

Require customer’s

physical presence

High capex/

inventory

High Logistic cost

Convenience

Recommended only

for standardized

products

Delivery at doorstep

High customer

satisfaction with

wider product

experience

Low capex/

inventory

Low Logistic Cost

STRENGTH

Easy access to

market for suppliers

STRENGTH

Touch and feel of

product

Convenience

Delivery at doorstep

High customer

satisfaction with

wider product

experience

Low capex/

inventory

Low Logistic Cost

Balanced scorecard – what wins, who loses

MEMBERSHIP

RIGHT

STORE SIZE

ACCELERATED

STORE COUNT

APPAREL MIX

PRIVATE

LABEL MIX

CLUSTER

APPROACH

LEAN

CAPITAL

EBITDA

MARGIN

REVENUE

HIGH

REVENUE

PER STORE

HIGH

EBITDA

MARGIN

HIGH

ROCE

HIGH

PRODUCTIVITY

Balanced scorecard

FY18

Formats

Big Bazaar

D-Mart

EasyDay

Star bazaar

Spencer

Central

Shoppers Stop

Westside

Brand Factory

Pantaloons

V-Mart

Store

Productivity

Efficient

store size

Pvt label

mix

Apparel

mix

Cluster

approach

Accelerated

store count

Membership

programme

Result

●

●●

●

●●

●

Store

Productivity

●

Efficient

store size

●

●●

●

●●

●

Pvt label

mix

●

N.A.

●

N.A.

FY21

●

●●

●

●●

Cluster

approach

●●

●

●●

●

Accelerated

store count

●

●●

●

●●

Membership

programme

●

Result

Formats

Big Bazaar

D-Mart

EasyDay

Star bazaar

Spencer

Central

Shoppers Stop

Westside

Brand Factory

Pantaloons

V-Mart

Apparel

mix

●

●●

●

●●

●

●●

●

●●

●

●●

●

N.A.

●

N.A.

●

●●

●

●●

●

●●

●

●●

●

●●

●

●●

●

IMPACT:

Lowest

●●

Low

●

Average

●

High

●

Highest

●●

Retail | Thematic

Burgeoning opportunity in organized retail market



The Indian organized retail market appears set for a stellar run, with its size

likely to grow by nearly 3x by FY25.

The sector remains in a sweet spot owing to favorable demographics and an

attractive tier-2 opportunity. The target market to tap into is now bigger than

ever.

Measured growth with a focus on profitability and RoCE by players creates

sustainable growth opportunity.

Prioritizing profitability over

growth

Focus on measured growth

In the past, ambitious growth by retailers had severely dented profitability, given

the wafer-thin EBITDA/PAT margins. Retailers aggressively added new stores to tap

the huge opportunity in the organized retail market, and in the process, bit off more

than they could chew. With aggressive capex, high inventory cycles and ballooning

leverage position, most retailers had to reverse the trend by downsizing and

rationalizing loss-making stores. However, retailers are now taking a measured

approach to expansion, with a strong focus on a lean cost structure, low inventory

days and an efficient operating structure. All this provides comfort on the

sustenance of profitable growth. On the flip side, the retail industry offers a huge

runway for growth. The organized retail industry is likely to grow at 21% over the

next four years, supported by an accelerated shift from unorganized to organized

trade.

Exhibit 2: Focus on growth by unreasonable expansion impacted profitability for the sector in the past (ex-D-Mart)

Revenue (INR b)

500

375

250

125

PAT (INR b, RHS)

443.0

18.0

14.4

0.4

8.7

1.9

86.6

12.0

6.0

0.0

-6.0

Includes ABFRL, FEL, FLFL, FRETAIL, FCON, VMART, TRENT, SHOP, SPENCER from their listing date

Source: Bloomberg, MOFSL

April 2019

Retail | Thematic

Exhibit 3: Profitability has been on an uptrend over the past three years

Revenue (INR b)

PAT (INR b, RHS)

641.7

479.5

290.3

2.9

315.8

3.4

9.3

543.4

23.9

20.5

Includes ABFRL, FLFL, FRETAIL, DMART, VMART, TRENT, SHOP, SPENCER from their listing date

Source: Bloomberg, Company, MOFSL

Expect organized retail CAGR of 21% over FY17-21…

Organized retail CAGR of

19% over last five years

India’s retail market size is pegged at ~USD710b (~INR46t), of which the organized

segment accounts for USD66.6b (INR4.3t), 9.4% of the overall retail market as of

CY17, according to Technopak. This share is expected to increase to 13% over the

next four years (CY17-21), with the organized retail market registering a CAGR of

21% to reach a size of USD144b (INR9.4t). Notably, over the last five years (CY12-

17), the organized retail market grew at 19%, with its penetration increasing from

7% to 9.4%.

…as trade shifts away from unorganized segment

Within the overall retail market, the penetration of the organized segment has

increased to mid-20s in four categories – Jewelry & Watches, Footwear, Consumer

Electronics and Apparel. These together contribute 23% of the organized retail

market. F&G is the least penetrated, with share of the organized segment at 3.4%.

However, given the size of F&G, which is two thirds of the retail market, even with

its miniscule share, F&G contributes 67% of the overall organized market at USD67b

(INR4,422b).

F&G is projected to drive the share of organized retail within the total retail market

over the next four years. In 2021, the F&G organized segment should witness robust

27% growth and reflect 6% organized retail penetration. In addition to the demand

equation, investments across the entire ecosystem of food processing, cold storage,

logistics & distribution and product development would lend significantly to driving

the penetration of F&G in organized retail.

Increased focus from general merchandise players would also drive offtake of

Apparel and Footwear in the value segment, resulting in further increase of

organized penetration in the category. Together, the above factors should result in

13% organized retail penetration (USD144b) in CY21.

April 2019

Retail | Thematic

Exhibit 4: Organized retail penetration to increase to 13% by CY21

Overall retail (USD bn)

Organised Retail

Organised Retail Penetration

13%

398

2012

710

2017

144

1,106

2021E

Source: Technopak Report 2017, MOFSL

Exhibit 5: Significant room for increasing penetration of F&G in organized retail consumption (%)

2012

26 28

2017

2021E

Food and

Grocery

Apparel &

Accessories

Footwear

Jewellery &

Watches

Pharmacy &

Wellness

Consumer

Electronics

Home & Living

Others

Source: Technopak Report 2017, MOFSL

Exhibit 6: F&G expected to grow fastest at 27% CAGR over CY17-21 (USD b)

2012

2017

2021E

Consumer

Electronics

Food and

Grocery

Others

Apparel &

Accessories

Footwear

Jewellery &

Watches

Pharmacy &

Wellness

Home & Living

Source: Technopak Report 2017, MOFSL

Exhibit 7: Key retailers across categories in organized retail (USD b)

Categories

Food and Grocery

Apparel & Accessories

Footwear

Jewellery & Watches

Pharmacy & Wellness

Consumer Electronics

Home & Living

Key Retailers



Big Bazaar, Easy Day, Heritage, Nilgiris, DMart, Reliance Fresh, More

Central, Brand Factory, FBB, Shoppers Stop, Lifestyle, Westside

Bata India, Metro Shoes, Adidas, Clarks

Kalyan Jewellers, Tanishq, Malabar

Apollo, MedPlus

eZone, Samsung, Vijay Sales, Croma, Reliance Digital

Home Town, Home Centre, Home Stop

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Metros, tier-1 cities contribute highest share, but new clusters emerging in

lower-tier towns

Value retail gaining

prominence, offering bridge

between unorganized and

branded apparel

The top-24 cities (metros, mini-metros and tier-I cities) account for 29% of total

retail spending, with the Delhi and Mumbai clusters contributing about 9%. Even the

top-72 cities account for 38% of total retail consumer spending, which highlights the

strength of rest of India that has 71% share. Major expansion in terms of retail

consumer spending is expected to come from India’s tier-2 cities. This should benefit

the value apparel category, which is a much attractive option for customers. Pricing

difference between unbranded and branded apparel is ~4x, but value category

products come with just 2x higher pricing. Thus, more apparel players are

increasingly expanding into tier-2 cities to tap this opportunity.

Exhibit 9: Top-74 cities account for ~38% of total retail

consumer spending (%)

Exhibit 8: Share of retail consumer spending in cities

(USD b, 2017)

438

710

62%

10%

Top 2 cities

Next 6

Next 16

Next 50

Rest of India

Delhi and

Mumbai

Next 6

Next 16

Next 50

Rest of

India

Total

Source: Technopak Report 2017, MOFSL

Next 6 Cities:

Bangalore, Chennai, Hyderabad, Ahmedabad, Pune, Kolkata

Next 16 Cities:

Surat, Jaipur, Lucknow, Nagpur, Patna, Indore, Coimbatore,

Vadodara, Ludhiana, Bhopal. Kochi, Vishakapatnam, Madurai, Nashik, Jamshedpur,

Guwahati

Exhibit 10: Size of retail spending in key clusters

(USD b, 2017)

Retail opportunity among aspiration class (USD bn)

26%

20%

Cluster 1

Cluster 2

Cluster 3

13%

20%

Cluster 4

Cluster 5

Clusters 6-12

Exhibit 11: Top-5 clusters account for ~75% of the total 12

clusters’ retail spend (%, 2017)

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

CLUSTER 1:

Greater Mumbai, Pune, Nashik, Solapur, Aurangabad, Bhiwandi

CLUSTER 2:

Delhi, Gurgaon, Noida, Faridabad, Ghaziabad

CLUSTER 3:

Kolkata, Asansol, Guwahati, Bhubaneswar, Cuttack

CLUSTER 4:

Bangalore, Chennai, Mysore, Hubli-Dharwad, Mangalore, Belgaum, Pondicherry

CLUSTER 5:

Hyderabad, Visakhapatnam, Vijayawada, Warangal, Guntur

CLUSTER 6:

Ahmedabad, Surat, Vadodara, Rajkot, Jamnagar, Bhavnagar

CLUSTER 7:

Kanpur, Lucknow, Varanasi, Agra, Meerut, Bareilly, Aligarh, Moradabad, Dehradun,

Gorakhpur

CLUSTER 8:

Jaipur, Jodhpur, Kota, Bikaner

CLUSTER 9:

Ludhiana, Amritsar, Chandigarh, Jalandhar

CLUSTER 10:

Kochi, Coimbatore, Madurai, Trivandrum, Kozhikode, Tiruchirapp, Tiruppur

CLUSTER 11:

Ranchi, Jamshedpur, Dhanbad, Patna

CLUSTER 12:

Gwalior, Indore, Bhopal, Jabalpur, Durg-Bhilai, Raipur, Amravati

Exhibit 12: Size of retail spending of SEC-A and SEC-B across

states (USD b)

2012

2017

311

Exhibit 13: 8 states account for ~55% of total retail spend

(2017, %)

Maharashtra

15%

Tamil Nadu

Karnataka

Gujarat

West Bengal

Delhi

Rajasthan

Others

108

159

31 51

25 46 27 45 21 33 16 30 19 30

44%

SEC - Socio-economic classification Source: Technopak Report 2017,

MOFSL

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Levers of organized retail growth



Millennial population driving attractive target market

Growing middle class and rising disposable income

Increasing urbanization

Growing nuclearization

GST supporting organized market growth

Over 440m millennials –

34% of the population

Millennial population driving attractive target market

In absolute terms, India is blessed with the largest millennial population (age

bracket of 18-35 years) globally. With a population of over 440m, the group

constitutes ~34% of the country’s total population. Further, with a median age of

~26 years, India is one of the youngest major economies and is expected to stay so

in the foreseeable future. This is in contrast to other countries such as the US, large

European countries, China, etc, where the median age of population is higher and an

imminent situation of declining working-age population looms the markets.

Exhibit 15: Millennials account for nearly half of the working

age population for India

15-17

18-35

36-49

50-64

19%

30%

Exhibit 14: Millennial population as a % of country’s total

population

34%

33%

31%

26%

16%

28%

14%

47%

43%

2027E

India

Brazil

China

USA

2017

Source: Trend-setting millennial report 2018, MOFSL

Exhibit 16: Perceived financial spending ability

Able to spend freely

Live comfortably, and able to spend basis the want

Have money just for food, shelter and basics

20%

14%

50%

56%

40%

Latin America

16%

North America

China

India

72%

36%

35%

24%

51%

46%

54%

28%

52%

14%

Global

59%

40%

17%

Asia-Pacific

Europe

41%

13%

Africa/Middle

East

Source: Trend-setting millennial report 2018, MOFSL

April 2019

Retail | Thematic

Exhibit 17: Monthly expenses for millennial (%)

Monthly Necessities

Education

Utilities

Personal Grooming

Discretionary/Lifestyle

Savings

Property rent/ EMI

11%

12%

14%

11%

29%

Exhibit 18: Expenses from incremental income for millennial

(%)

Entertainment including eating out

Apparel and accessories

Mobile and computer

Home Appliances

Vehicle ownership

17%

Leisure travel

Savings

Property

Source: Trend-setting millennial report 2018, MOFSL

11%

21%

33%

Source: Trend-setting millennial report 2018, MOFSL

Millennials driving consumption

Millennials spend heavily on

entertainment, apparels

and electronics

The Indian millennials stand out from the rest of the population in terms of better

education, lifestyle choices, consumption pattern, significant need for convenience,

and brand preferences. Millennials spend a high proportion of their incremental

income towards eating out and entertainment (32.7%), apparel and accessories

(21.4%), and electronics (11.2%) among others. Savings account for ~10% of the

income. This indicates a shift towards a consumption economy rather than a savings

economy, which was a predominant feature of the preceding demography.

Millennials, with their low inclination towards savings and increasing spending

capacity, provide brands with vast growth opportunities. With a high and growing

millennial population, modern retail, organized apparel sector should get a push.

Exhibit 19: Median age: Key emerging and developed economies (2012)

Median Age (Years)

India

China

USA

Singapore

Russia

Korea Canada

Source: Technopak Report 2017, MOFSL

Exhibit 20: Age-wise breakup of population in India (2011)

16%

14%

10%

Male

Female

Exhibit 21: Dependency ratio in India

% of working age population

77%

79%

75%

72%

64%

59%

8% 8%

52%

49%

5% 5%

4% 4%

1960

1970

1980

1990

2000

2010

2016 2020P

0-14

15-24

25-34

35-44

45-54

55-70

70+

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

India’s per capita crossed

USD2,000, triggering high

discretionary spends

Growing middle class and rising disposable income

Households with annual earnings of USD5,000-10,000 have grown at a CAGR of 17%

over FY11-16 and are projected to grow at a CAGR of 12% to reach 109m in FY20.

Households with annual earnings of USD10,000-50,000 have also grown at a CAGR

of 20% over the last five years. Increase in the number of households with annual

earnings of USD10,000-50,000 will lead to an increase in indulgence spending by the

group. This will lead to an increase in expenditure on consumption categories such

as Food, Fashion, Luxury Products, and Consumer Durables. It is estimated that 23%

of the global middle class will be from India by FY30.

Exhibit 22: As GDP/capita crosses USD2000, retail sales grow 2-4x

Source: Future Retail, MOFSL

India’s average per capita income has crossed USD2,000. Global examples highlight

that as per capita income crosses USD2,000, retail sales magnify, driven by higher

share of discretionary spends towards better lifestyle and upgrade in quality of

living.

Exhibit 23: Thailand: As GDP per capita grew ~2x,

neighborhood stores grew ~3x

GDP per capita (USD)

5.8k

Exhibit 24: Indonesia: As GDP per capita grew ~2.6x,

neighborhood stores grew ~4.4x

GDP per capita (USD)

3.3k

Neighbourhood stores

22k

Neighbourhood stores

15k

2.8k

1.3k

2005

2015

2005

2015

2005

2015

2005

2015

Source: Future Retail, MOFSL

Exhibit 25: Malaysia: As GDP per capita grew ~1.7x,

neighborhood stores grew ~3x

GDP per capita (USD)

9,8k

5,6k

Neighbourhood stores

~3k

Exhibit 26: India: GDP per capita at an inflection point

GDP per capita (USD)

2,500

1,800

729

2,000

2005

2015

2005

2015

2005

2016

2018E

2021E

Source: Future Retail, MOFSL

April 2019

Retail | Thematic

Exhibit 27: As country’s per capita GDP nears ~USD2,000, its fashion industry sees

exponential growth

China

Russia

Brazil

South Korea

Singapore

Source: Future Lifestyle Fashions, MOFSL

Exhibit 28: India’s consumption opportunity is well-distributed

Per Capita Income

No of States / UT

States

State GDP: FY17($bn)

Contribution to National GDP

Growth rate (5Y Historical)

No. of Districts

Urban Population (mn)

Below $1,300

Assam, Bihar,

Jharkhand,

MP, Manipur,

Meghalaya, Odisha, UP

500

21%

12.0%

278

$1,300 -$2,000

AP, Chattisgarh, J&K,

Nagaland, Rajasthan,

Tripura, WB

460

19%

13.2%

135

$2,000 – $2,500

Arunachal Pradesh,

Gujarat, HP, Karnataka,

Mizoram, Punjab, TN,

Telangana

752

32%

12.7%

192

108

More than $2,500

Goa, Haryana, Kerala,

Maharashtra, Sikkim,

Uttarakhand, Delhi,

Chandigarh

674

28%

12.0%

107

Source: Future Retail, MOFSL

India represents a well dispersed opportunity

Exhibit 29: Increase in number of households with higher annual earnings should lead to

higher spending (in m)

HHs (in mn) with annual earnings between $5,000 to $10,000

HHs (in mn) with annual earnings between $10,000 to $50,000

103

FY2009

FY2012

FY2014

FY2015

FY2018

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Every sixth person getting

urbanized globally is an

Indian

Increasing urbanization

India has the 2nd largest urban community in the world after China, with an urban

population of about 435m in FY16. However, at 33%, India’s urban population as a

share of total population is still lower than the global average of 54%, highlighting

the potential growth opportunity. According to a McKinsey Study, urbanization in

India is happening at fast pace, with every sixth person getting urbanized globally

being an Indian. It is estimated that by FY20, 35% of India’s population will be living

in urban centers, contributing 70-75% of India’s GDP. The urbanization trend is

expected to continue, and by FY50, half of India’s total population is likely to stay in

urban areas, accounting for well over 80% of GDP. Government initiatives like smart

cities to create new ‘urban clusters’ will also expedite urban development /

urbanization in India. This indicates that India’s retail growth has a long runway –

higher income, more working women in urban centers, and better standards of

living should fuel growth for better quality products.

Exhibit 30: Urban population is expected to reach 37% of the total population by 2025 (%)

2000

2010

2015

2020E

2025E

Source: Technopak Report 2017, MOFSL

Growing nuclearization

Fall in the average household size coupled with rising disposable income is likely to

lead to higher percentage of discretionary spending. About 74% of urban

households have five or fewer members according to the census data in 2011

compared to 65% in 2001.

Exhibit 31: Age-wise breakup of population in India

Avg HH Size

Total No. of HHs (mn)

247

148

187

Avg Urban HH Size

Exhibit 32: Dependency ratio in India (%)

Decadal Growth Rate of HHs

Decadal Growth Rate of Population

119

5.5

5.4

5.5

5.3

5.1

4.9

1981

1991

2001

2011

1981

1991

2001

2011

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Exhibit 33: Global comparison of private final consumption

expenditure (2015, USD b)

69% 68%

2015

63% 63% 60%

57% 56% 55% 55%

51%

36%

Exhibit 34: Trend in total private final consumption

expenditure for India (USD b)

67 66

PFCE (in $ bn)

% of GDP

61 60 60

59 60

59 58

59 58 59

57 57

Source: Technopak Report 2017, MOFSL

No more warehouses

needed in every state – this

reduces cost

GST supporting organized market growth

GST has allowed business owners to start their business faster through a centralized

registration process in which they do not have to worry about individual state

requirements. With the implementation of GST, the movement of goods across

states is becoming easier due to a standardized set of rules in place. Warehouses are

not needed in every state and this will help companies reduce costs. Organized

players with an all-India presence should benefit and inflows to the formal economy

should increase. Digitization should allow businesses access to a larger market.

Exhibit 35: GST will promote the hub-and-spoke model, leading to higher outsourcing and thereby benefit logistics

companies

Source: KPMG, MOSL

April 2019

Retail | Thematic

Ecommerce – more a friend than foe



Ecommerce has grown at a rapid pace, threatening to derail growth in offline retail.

However, ecommerce has grown largely in standardized products and yet to gain

traction in groceries and apparels.

A new policy is now in place which seeks to ensure that ecommerce platforms are

impartial marketplaces. The policy is a major support to offline retail as it restricts

online players from offering deep discounts, cash backs and exclusive product sale.

Moreover, ecommerce has plateaued in top cities and obstructed by high logistics cost

in smaller cities. Thus, there is a strong need for omni presence – i.e. a hybrid (online +

offline) model.

New ecommerce policy to support offline retail

Bringing parity between

online and offline playing

field



Some of the key highlights of the new ecommerce policy are: (a) it does not

allow cash back, exclusive product sale or any form of influencing sale price

directly or indirectly, (b) it does not allow ecommerce companies to own

inventory or purchase more than 25% of any vendor’s inventory and (c) it puts

accountability on the sellers for products sold in the marketplace and requires

companies to furnish RBI compliance annually.

Offline players – which had come under threat because of rampant discounts,

cash back and exclusive product sale by online players – may now have a level-

playing field. Also, ecommerce companies may neither be able to control

inventory or promote in-house products.

However, it is yet unclear about how the government will be able to force online

players to comply with norms related to discounts and inventory, which could

be housed in other entities.

No to steep discounting, exclusive offerings

According to the new guidelines for foreign direct investment in the e-commerce

sector, platforms such as Flipkart and Amazon will no longer be allowed to influence

the sale price of goods or service, directly or indirectly. Cash back provided by group

companies of the marketplace entity to buyers shall be fair and non-discriminatory.

Provision of services to any vendor on such terms which are not available to other

vendors in similar circumstances will be deemed unfair and discriminatory.

Moreover, ecommerce marketplace cannot mandate any seller to sell any product

exclusively on its platform only.

No control over inventory

Ecommerce marketplaces cannot own or control inventory (i.e. goods purported to

be sold). Such an ownership or control over inventory including any equity

participation will render the business into an inventory based model (FDI is not

allowed in the inventory model). Inventory of the vendor will be deemed to be

controlled by ecommerce marketplace entity if more than 25% of purchases of such

vendors are from the marketplace entity or its group companies.

April 2019

Retail | Thematic

Accountability to sellers

Sellers will be accountable for warrantee/ guarantee of products sold via the

ecommerce marketplace. It has become mandatory for marketplace to provide

name, address and other contact details of the seller to the customer. All post-sale

activities will be the responsibility of sellers – right from delivery of goods to the

customers and customer satisfaction.

RBI compliance

Ecommerce companies will be required to furnish a certificate along with a report of

statutory auditor to the RBI, confirming compliance of guidelines by 30

September

of every year for the preceding financial year.

Payments

E-commerce marketplaces can initiate payments for sale in conformity with the

guidelines of the RBI.

Online retail market gaining scale

Currently, the e-tail market in India is 2.3% (USD16b) of the overall retail market and

is projected to be 4-6% of the overall retail market (USD40b-60b) by CY20, according

to Technopak – a CAGR of 46% over FY17-20.

Exhibit 36: E-tail penetration in food & grocery is near zero (%)

28-41

FY17

FY20E

14-20

8-14

Home & Living

0.5

4-6

Electronics

Apparel & Lifestyle

Food & Grocery

Overall Market

Source: Technopak Report 2017, MOFSL

Standardized categories seeing shift to online

Electronics market has seen

biggest damage due to

online

Consumer Electronics constitute the major portion of e-tail in India, being a highly

standardized category. This is followed by Apparel and Lifestyle. These two

categories will continue to lead the online space even in CY20; however, the share

of electronics may decline and newer categories like Home and F&G are likely to

gain penetration. In CY12, the e-tail pie was only USD0.6b, with the key categories of

Electronics, Books, Stationery, and Music catering to ~50% of the pie.

April 2019

Retail | Thematic

Exhibit 37: E-tailing in India – category dynamics

Description

High Impact

E-tail will drive significant

Indian urban incremental

demand in the next 5 years

E-tail will complement the

sales through the existing

channels of commerce

E-tail will have limited

impact in the next 5 years

Eg. Of categories

Books & DVD’s

Small Electronics

Fashion & Lifestyle

Home improvement

White goods

Kids, Jeweller, eyewear

Food & grocery

Home improvement

(eg. Large furniture)

High value jewellery

Rationale



Greater standardisation

Low value, low involvement

Discretionary/range-brands

Low standardisation and High involvement categories

Longer product life/low frequency of purchase

High ticket price and experience factor

Need based

In-adept logistics capabilities

Quality consistency

Source: Technopak Report 2017, MOFSL

Medium impact

Low impact

Some of the key issues in ecommerce market are

Supply chain & logistics



Perishability



Cyclicity



Installation



Service support



Customization

Among the above factors, ecommerce players have addressed issues like

installation, service support and supply chain/logistics, which has led to higher

penetration in electronics, lifestyle and home products. The growth in F&G has so

far remained lackluster and will depend on how ecommerce players manage supply

chain and perishability issues.



Exhibit 38: Evolution of e-tailers

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Exhibit 39: Growth drivers of e-tailing in India

Source: Technopak Report 2017, MOFSL

Millennials driving online consumption

Data ecosystem driving

online consumption

In the last 5-7 years, the internet ecosystem in India has improved drastically,

driving up data usage exponentially. This is backed by (a) availability of smartphones

with high configuration at low price, (b) improvement of data network coverage and

speeds, and (c) reduction in data pricing. Being a young country, India has seen

strong data penetration among younger people – the millennials. Over the next few

years, millennials are expected to redefine the consumer story owing to their

deeply-tied mobility and connectivity practices. Based on a survey of urban

millennials across India by Deliotte, almost all millennials own a smartphone with

nearly 84% 3G/4G penetration, implying mobile phones being the primary devices

used to access the internet. Further, the traffic towards ecommerce websites,

banking transactions and online purchases too has seen strong growth. This

attractive target market should continue driving up penetration of ecommerce in

India.

To attract millennials, companies are:



Investing in Omni Channel to fill a key distribution gap used by millennials.

Emphasizing on greater mix of value for money products like Value apparels

segment which fills the gap between Branded apparel and unorganized

products.

Focus on social media including product launch campaigns to reach out to

millennials.

April 2019

Retail | Thematic

Exhibit 40: Smartphone base likely to grow 1.9x in three

years

Wireless data subs (m)

4G smartphone users

695

322

223

401

292

105

450

359

200

546

424

350

541

470

Net smartphone users (m)

793

680

580

Exhibit 41: Penetration of mobile broadband subscribers has

been on an uptrend

Wireless broadband subs (m)

Mobile Broadband subs penetration (%)

283

140

123

235

360

493

Source: Industry estimates, MOFSL

Source: TRAI, MOFSL

Exhibit 42: Significant shift expected in India’s internet

penetration (%)

Exhibit 43: Expect shopper penetration growth in next 5-10

years (%)

Source: Industry estimates, MOFSL

Exhibit 44: Indian online retail market to reach 12% of total market by CY27

Particulars

Total internet users (m)

Internet penetration (%)

Total online shoppers (m)

Online shoppers as a % of total internet users

Total online retail market size including food delivery (USD b)

Total online retail as % of total retail (%)

CY17

432

CY27

915

475

200

Source: Industry estimates, MOFSL

Exhibit 45: Comparison of operating and financial metrics of e-commerce players

Metrics

Registed Users (mn)

Active Users (mn)

Monthly Unique Visitors (mn)

Sellers (‘000)

GMV (US$ mn)

Product listed (mn)

Warehousing Space (mn cubic feet)

Key Categories

Captive Payment Options

Amazon

115

N/A

154

~300

(FY17 ) ~4,800

168

13.5

Smartphones/Electronics,

Fashion, FMCG

Amazon Pay

Flipkart

>100

110

>100

(FY18) ~7,500

Mobile/Electronics,

Fashion, Large appliances

Phone Pe

Paytm Mall

N/A

~75

(Annualized FY18) ~3,000

N/A

Electronics, Grocery, Fashion

Paytm

Source: Industry estimates, MOFSL

April 2019

Retail | Thematic

Exhibit 46: UPI payment ecosystem

Phone pe

Flipkart,Walmart,

Tiger Global,

Naspers, Microsoft, Tencent,

Steadview Accel India

Aug-16

75m

Yes

Yes Bank

0.06m

Tez

Alphabet

Sep-17

16m

ICICI Bank, Axis Bank,

SBI, HDFC bank

0.5m

Paytm

Softbank,

Alibaba Group,

SAIF partners,

Silicon Valley bank

Nov-17

330m

Yes

Facebook

Amazon Pay

Feb-18

160m

Yes

N/A

0.3m

Key Stakeholders

UPI launch date

Users/Engagement

Digital wallet

Payment service provider

Merchant partners

Feb-18

250m

ICICI Bank, Axis Bank,

Paytm payments bank

SBI, HDFC bank

N/A

Source: Industry estimates, MOFSL

Exhibit 47: Overview of online spends in Latin America

(USD b)

2017

2027E

Exhibit 48: Overview of online retail penetration in Latin

America (%)

2017

2027E

Brazil

Colombia

Mexico Argentina

Chile

Other

LatAm

Brazil

Mexico Argentina

Chile

Colombia

Other

LatAm

Source: Industry estimates, MOFSL

Exhibit 49: Global credit card penetration (%)

India

S.korea

Japan

France

Germany

Brazil

Argentina

Chile

China

Colombia Mexico

Source: Industry estimates, MOFSL

Exhibit 50: Australia – online sales as % of total retail sales

7.1

7.8 8.1

8.8

Exhibit 51: Korea – online retail penetration (%)

6.5 6.4

3.8

3.0 3.3 3.4

4.9 5.1

Source: Industry estimates, MOFSL

April 2019

Retail | Thematic

Exhibit 52: Online retail as a % of country’s total retail

Source: Trend-setting millennial report 2018, MOFSL

Operating models: E-tailing in India

Currently, there are broadly three operating models followed by e-tailers.



Inventory-led:

The e-tailer stocks products and sells directly to the consumer.

This again could be an outright purchase model, where the e-tailer owns the

stocks, or a consignment model, where the e-tailer does not own the stock, but

simply warehouses the inventory and returns unsold inventory.



Managed marketplace:

The e-tailer is a listing platform for the seller, but the

logistics, product quality and packaging are managed/controlled by the e-tailer

to maintain quality and delivery standards.



Pure marketplace:

The e-tailer is only a listing platform for sellers. The logistics

are managed by the sellers.

Consolidation in online

marketplace

The e-tailing landscape in India is presently dominated by web-only e-tailers,

particularly by marketplace players. The top players – Flipkart, Amazon, Paytm and

Snapdeal – have >80% of the total market. Several other marketplace players such

as Shopclues, E-bay, Indiatimes, Home Shop 18, etc, have 10% of the total e-tailing

market. The niche players focusing on specific categories are estimated to be

contributing to around 10% of the e-tailing market and should consolidate as the

marketplace players expand their wings in similar product categories.

Exhibit 53: Big players account for >80% of the market

Players

Flipkart, Amazon, Paytm and Snapdeal

Shopclues, E-bay, Indiatimes, Home Shop 18, etc

Others

Market share (%)

More than 80

~10

Less than 10

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 54: E-tail models operating in India

Source: Technopak Report 2017, MOFSL

Ecommerce sales plateauing in top cities

Geographically, online shopping activity has not been broad-based. The top 10-15

cities still account for over 75% of total sales. Even in the large cities, to drive growth

and customer stickiness, e-tailers are using cashback offers, fast delivery, flexible

return policy, and low delivery charges through subscription model to drive growth.

Growth will slow down in the top cities, as they are already highly penetrated and

players need to move to the next level of tier-II and tier-III cities to sustain growth.

Presently, smaller ticket size and logistical complexity have restricted growth of e-

tailers in tier-II, tier-III cites and beyond.

High logistics cost of online

players pushing

convergence with offline

Advent of Multichannel – Omni Presence

On the one hand, ecommerce players need to increase depth of coverage. On the

other, brick and mortar players are looking to tap online distribution to bridge the

gap of offline and online demands.

Presently, ecommerce sales of brick and mortar companies contribute 1-2% of the

ecommerce market. This space makes logical sense for brick and mortar chains, as

their existing stores can work as fulfilment centers, giving them advantage of both

hyper-local and inventory-led models, reducing the logistics cost, which remains the

biggest cost burden for e-tailers. Additionally, they can tap consumers preferring to

shop from the comfort of their homes. In the last one year, we have seen multiple

instances of e-tailers initiating physical presence, and of brick and mortar retailers

expanding online presence.

April 2019

Retail | Thematic

Exhibit 55: ECOMMERCE – HYBRID MODEL EVOLVING

Source: MOFSL

April 2019

Retail | Thematic



Reliance Fresh has piloted its online grocery business in Mumbai and is looking

to scale up to other large cities

Spencer’s Retail has acquired Meragrocer.com for its online foray

Godrej’s Nature’s Basket has acquired EkStop to enter online grocery

Amazon has tied up with Shoppers Stop; media reports indicate Amazon is in

talks with other retail groups for similar tie-ups

The Tata group has started Tata Cliq with minority investment from Trent

Some regional players like SRS Grocery with a strong presence in the National

Capital Region have also forayed into the e-commerce space

As consumer demand grows for both online and offline distribution, we believe

more online and offline players will either merge or expand reach progressively

through both mediums, reducing the difference between each type of player.

US/China online user spend

nearly 3-4x v/s India

Taking cues from US and China market

US and China’s ecommerce market penetration is at 17% and 18%, respectively. In

US/China, 30%/70% of the market is covered by Amazon/Alibaba, which has

primarily driven the growth in respective markets. However, both US and China

have a strong online user ecosystem, with online population base of 251m and

720m, respectively, that is, a strong 77% and 54% penetration rate.

On an average, a US online user spends USD1,777 annually, while a Chinese online

user spends USD1,316 annually on retail. This is significantly higher than Indian

online users, spending ~USD500 annually, with an annual market size of USD16b – 2-

3% of US/China’s online market. As internet users accelerate on a healthy data

ecosystem, the retail industry in India should also grow in line with US and China.

Exhibit 56: Ecommerce penetration is rising in US & China, %

2017

2022E

Exhibit 57: China’s retail & online spends are expected to

grow faster than US

2017

Population online (m)

Retail spend (USD b)

Retail spend per capita (USD)

Online spend (USD b)

251

2,654

8,135

446

2022

268

2,845

8,011

796

China

2017

720

5,323

3,973

947

2022

802

8,403

5,994

2,112

Source: Industry estimates, MOFSL

China

Source: Industry estimates, MOFSL

April 2019

Retail | Thematic

Exhibit 58: Increasing footprint of Amazon in India

Period

Jun-13

2014

2016

July-16

Dec-16

Particulars



Launched Amazon market place

Pledged USD2b investment

Increased the pledged investment to USD5b

Launched Amazon prime

Launched Amazon video

Built 60+ sortation and fulfilment centres

Prime, Video, producing local content

Partner with offline retailers (over 6k stores)

Source: Industry estimates, MOFSL

Exhibit 59: Increasing footprint of Alibaba in India

Period

Aug-15

Mar-17

Feb-18

Particulars



USD200m investment in Snapdeal

USD177m investment in Paytm

USD146m investment in Bigbasket

Expanding Paytm into eCommerce w/ Paytm Mall

Source: Industry estimates, MOFSL

Next stop: Food and Grocery foray of e-tailers

Penetration of online food

& grocery segment stands

at >1%

The online grocery segment, which had a handful of players two years ago, has

lately seen an uptick in the number of players as well as investor interest. In the

overall food retail industry, the penetration of online food and grocery (F&G)

segment stands at a miniscule ~0.1%, indicating significant growth potential. Major

players such as Big Basket and Grofers, as well as new entrants such as Amazon,

Flipkart, and Reliance are sharpening focus, resulting in an increase in investments

in the high-volume, low-margin segment by over 7x from ~INR3b in FY17 to ~INR20b

in 9MFY18.

Exhibit 60: New players raising the heat

Players

Amazon

Flipkart

Reliance Jio

Starquik

D-Mart

Description



Received FDI approval in 2017 to invest around Rs 35 billion into food and grocery business over the next five years

Did a soft launch of online grocery delivery service Supermart in Bengaluru in 2017

The company is undertaking an online-to-offline pilot study to create an operational model that will allow consumers

to buy at neighbourhood shops using digital coupons through its Jio Money platform or text messages

Launched in December 2017, this is an omni-channel foray by the Tata Group

Apart from offline, the company is also offering groceries online

Source: CRISIL report, MOFSL

Food & Grocery e-tailing yet to determine a sustainable model

Juggling between inventory

and hyperlocal model

F&G is the largest category in retail (commanding ~2/3rd share). Also, online

penetration in the F&G category is small at <1%, given that it is a more recent and

challenging category than others in the online space.

The Indian grocery e-tailing story started in 2011-12, when players like Big Basket,

EkStop, Zopnow and LocalBanya entered the market with different operating

models. The segment gained traction with the entry of hyperlocal players, Grofers

and Peppertap in 2013-14, as well as heightened investor interest. At the same time,

several others have shut / scaled down operations or got acquired. E-tailing bigwigs

like Amazon, Flipkart and Paytm also entered in the market in 2015.

Inherent structural and operational challenges in selling grocery online



Low demand in smaller cities

Wider SKU offerings, albeit at low margin: City-specific, local, multiple categories

and brands

April 2019

Retail | Thematic



Ubiquitous neighborhood formats

Sub-optimal logistics

Handling perishables

High volume game

High quality and delivery targets

Manpower: High attrition increasing minimum wages

The category has evolved to get segmented into players with distinct

business models:



Inventory-led

Hyper-local

B&M online

Exhibit 61: Evolution of F&G e-tailing in India

Source: Technopak Report 2017, MOFSL

Exhibit 62: Inventory-led model

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Exhibit 63: Hyper-local model

Source: Technopak Report 2017, MOFSL

Exhibit 64: Multi-channel model

Source: Technopak Report 2017, MOFSL

Exhibit 65: Comparison between business models in food & grocery e-tail

Inventory led

Inventory heavy model

as it involves outright

purchase of inventory

Capital intensive

High

Hyper local

Inventory light model as it

involves only providing infra

& logistics support

Capital light

Low

Multi-channel

Hybrid model combining features

of inventory led

and hyper local model

Moderate capital

Moderate

Source: Technopak Report 2017, MOFSL

Inventory storage

Capital requirement

SKU's

Lead Time

Margin potential

Changing business model in food e-tailing

Most players that experimented with the inventory model either shut down got

acquired or shifted to other models. While the inventory model allows stringent

quality checks and faster delivery timelines, it is difficult to sustain, given the

perishable nature of the product and vast number of SKUs. Some of the players that

shut down or scaled down operations after testing inventory models are EkStop,

LocalBanya, Zopnow, and Grofers.

April 2019

Retail | Thematic

Low margin, high logistics

cost key obstruction for

online players

Hyper-local model could be difficult

The hyper-local model may not be an answer to F&G due to low margin and quality

adherence/delivery. A combination of inventory-led dark store and multi-channel

model may eventually succeed; this model may lead to a firm handle on inventory as

well as relatively higher margins to sustain the business. We believe the future e-tail

market is likely to see growth from omni-channel players, as the interlink of brick-

and-mortar with online present becomes prominent.

Omni presence a good solution for F&G

F&G online is being chased by players like Amazon and Big Basket. However,

logistics management, particularly due to high number of SKUs and perishable

product portfolio makes it a difficult business to manage. Further, the F&G market in

India is influenced by regional preferences.

We believe F&G online may have a complementary existence to organized brick-

and-mortar players. Organized F&G players may explore a play of multi-channel

distribution. This may solve issues related to logistics, perishability and regional

preferences. Having physical presence close to the delivery location could reduce

logistics cost and also allow fresh produce, particularly of food products, which have

low shelf life. There is also scope for private label players to enhance margins.

We believe online players could adopt any of the following options: (a) acquire

existing retail stores, (b) operate a mix of designated and dark stores/distribution

centers, or (b) open own retail outlets for food and use private brand play (single

brand) for non-food retail, which could have low scalability or turnaround time.

Globally, F&G has seen

limited online success

Globally, search for sustainable model for F&G continues

Ecommerce, the world over and in India, continues to work on the sustainable

model for Food and Grocery (F&G). In 2016, F&G comprised less than 4% of the total

share of the world’s ecommerce size. In India as well, the share of F&G in

ecommerce is ~2.5%. Online penetration of the F&G category is <1% and is expected

to remain below 1% even in 2020. Globally, in UK, US and other Asian countries like

China, Japan, the penetration of online F&G remains in single digit despite strong

penetration of the overall online retail market.

Exhibit 67: China – online v/s offline sales across categories

(USD b)

Offline retail

Online retail

Exhibit 66: China – B2C ecommerce penetration (2017, %)

35%

24%

17%

28%

1,025

Food &

beverage

Tissue &

hygiene

Cosmetics & Apparel &

skincare

footware

Home

appliances

Food &

beverage

Tissue &

hygiene

100

220

130

Home

appliances

10 50

Cosmetics & Apparel &

skincare

footware

Source: Industry estimates, MOFSL

April 2019

Retail | Thematic

Exhibit 68: Comparison of online penetration for food

category (%)

2017

Exhibit 69: Korea: Online penetration only 11% for food

category (%)

Food

Non food

China

Korea

Source Industry estimates, MOFSL

2012

2013

2014

2015

2016

2017

Source: Industry estimates, MOFSL

Logistics cost - a big burden

High last mile cost a big

hindrance

Transportation cost remains the major factor in ecommerce logistics cost

The ecommerce business incurs logistics cost primarily towards four segments:

transportation, warehousing, freight forwarding, and value-added logistics.

Transportation alone holds 60% share of the logistics cost and the rest 40% is

contributed by warehousing, freight forwarding, and value-added logistics among

others. In-house logistics arms of large e-retailers execute over 70% of the

deliveries. Within the transportation cost, the two segments that cater to the

majority of the cost are:

a. Line haul, supporting the movement of freight between distant cities (by land,

air or waterways), contributes a sizeable 40-45% of the transportation cost.

~40% of line haul is by air due to time sensitivity and service commitments. This

is unsustainable in the long run and a shift to rail/road is inevitable.

b. Last mile, supporting movement of goods from transportation hub to the final

delivery destination, contributes the balance 45-50% in India. This compares

with 25-30% in the developed economies.

Exhibit 71: E-tail logistics shipments split by zone (2018,%)

Exhibit 70: Ecommerce retail transportation cost split (%)

Processing

First mile

45-50

40-45

Line Haul

Last Mile

Local

45-50

40-45

Zonal

National - air

National - ground

Source: E-commerce-retail-logistics - May-18, MOFSL

Forward logistics cost remains 10%, about 3x that in China

Low order value increases

logistic cost burden

In India, e-commerce forward logistics cost constitutes 10% of the average order

value (AOV), which is ~USD2/order. This should be less than 5% for sustainability.

The comparable logistics cost per order in China is USD2.2/order, but with 3x higher

AOV, that is, USD2.2/order for an AOV of USD60, 3-4% cost/delivery.

April 2019

Retail | Thematic

Delivery failures, returns and COD pushes logistics cost

If we include the cost of reverse pick (R) and cash on delivery (COD), the overall

cost/order rises to 28%. On a portfolio basis, including (a) returns, (b) non-delivered

products, and (c) cash on delivery sales, transportation commands 22% of the total

order value. This makes it unviable, especially in the retail business, which operates

on low gross margins. Addition of warehousing, freight forwarding and other value-

added logistics could stretch the overall logistics cost/order to 30-35%. Typically, of

the overall online orders, 30% are returned due to (a) return by the consumer – 10%

of sales, and (b) not reaching the destination – 20% of the portfolio. COD constitutes

50-55% of the orders and this costs 150% above the forward fulfillment cost.

Exhibit 72: Share in total volume of shipments (%)

Forward

fulfillment

Return to

origin (RTO)

Reverse pick-

Cash on

up (RVP)

delivery (COD)

Neither COD

nor R

COD but no R No COD but R

COD and R

Exhibit 73: Summary logistics cost working (%)

% of Order Value

Source: E-commerce-retail-logistics - May-18, MOFSL

Exhibit 74: Detailed logistics cost working

Opted

Opted for COD

Cost = INR150

(100+50)

Forward Logistic

(FLC)

Cost = INR100

(10% of order value

of INR1,000)

Cash on delivery

(COD)

Cost = INR50

(50% of FWC)

Return logistic

Not opted for COD

Cost = INR100

Cost = INR130

(~30% higher than

FWL)

Return logistic

Cost = INR130

(~30% higher than

FWL)

Cost = INR280

(100+50+130)

Not opted

Cost = INR150

Opted

Cost = INR230

(100+130)

Not opted

Cost = INR100

Source: E-commerce-retail-logistics - May-18, MOFSL

First attempt delivery strike rate remains a dismal 75%. The average number of

delivery attempts per shipment is estimated to be as high as 1.4x, contributing to

the inefficiencies. COD, on the other hand, increases the settlement period,

lengthens the cash conversion cycle, and also increases the risk of rejection and

returns. These challenges associated with COD have added to the complexities.

April 2019

Retail | Thematic

Trend is reversing – cutting cost on line haul, COD and returns

Ecommerce players are shifting line haul from air to road transport, helping cut

costs by almost half. Also, with the implementation of GST, e-tailers are spreading

their footprint of fulfillment centers (FCs) pan-India, reducing travel time and

distance, and saving costs. Traditionally, e-tailers established FCs in locations where

they enjoyed tax benefits, resulting in larger number of national shipments. This is

not required any more, as they get input tax credits. They are making significant

efforts to reduce COD and returns to cut transportation cost to 6-7%, which will

make the ecommerce model more viable.

Reversal of era of ‘heavy loss funding’ driving e-tail market

With an eye on profitability,

only a handful getting

incremental funding

In the last few years, frenzied discounting on retail websites ended badly for many

investors, who saw their equity getting wiped out. About 26 prominent start-ups

have shut down in the past two years. Investors are now putting money into just a

handful of players holding dominant market share and showing sustainability of

business. Overall funding increased by more than INR250b in 9MFY18 as compared

to entire fiscal 2017, but the number of players funded reduced by ~30%,

underscoring the caution and sharper focus after the losses. As per CRISIL Research,

of the total amount invested over FY14-16 in 11 major e-tailers, almost 45% of

>INR400b was wiped off due to losses.

Funding for the top-3 players has increased from 40-45% of overall investments in

FY14 to 75-80% in 9MFY18 out of 30 e-tailers, as per CRISIL Research.

Exhibit 75: Thriving three pull money (INR b)

Total fundiing

Share of top 3 players in funding

81%

53%

Exhibit 76: How they bled (losses/funding, %)

43%

2013-14

215

2015-16

503

2017-18 (Apr-Dec)

2013-14

2014-15

2015-16

Source Industry estimates, MOFSL

Source: Industry estimates, MOFSL

With an eye on profitability, the industry, which is now 8-10 years old, is moving

from the initial start-up phase to a more consolidated phase. We believe, going

forward, funding will only get more concentrated with big ticket players getting the

bulk of the pie. Players in niche segments will get limited funding.

Instead of aggressive discounting to drive up GMV, this funding will be used to

explore new segments to enter, apart from growing existing business. We expect a

level playing field to evolve in the retail market between brick & mortar and online

players.

April 2019

Retail | Thematic

Modern retail has huge potential



Over the next eight years, 3,900 new stores are required to cater to growth in the

organized retail market, highlighting the huge opportunities for all retailers to tap

into.

To meet operational efficiency requirements in smaller cities, bigger formats like

hypermarkets are rationalizing their store size by 10-20% to 20,000-30,000sf.

Organized retail – Huge runway of growth

1,000 new stores required

over next three years to

cater to organized retail

growth in India

Presently, the organized general merchandise players in India occupy 40-45msf area

of retail space as per Technopak. This is estimated to grow to 60-65msf by CY20,

that is, 14% CAGR over CY17-20 to cater to 21% organized retail growth, indicating

7% SSSG. Assuming a blended store size of 20,000, overall 1,000 new stores will be

required over the next three years to cater to the growth in the organized retail

market.

One of the key positives of the retail market growth is that it offers a strong and

long runway for growth. With a high single-digit GDP growth, the retail space should

continue to grow at 14% until FY25. This is assuming (a) overall retail market grows

at 12%, at a pace of 1x nominal GDP growth, (b) organized segment continues to

grow at 1x overall retail growth, and (c) SSSG is 6%. At 20,000sf blended store size,

over the next eight years, to cater to the growth in the organized retail market,

3,900 new stores are required, highlighting the huge scope of growth for all

retailers. This implies organized retail penetration of a meager 17% in 2025,

highlighting the huge demand in the organized retail market.

Exhibit 77: Expect high store adds over next few years

No of stores

Store adds

2,454

1,438

2,125

2017

3,563

6,017

2021E

2025E

Source: MOFSL

Key formats across modern retail

Key formats in the organized market on the basis of store size and category mix are



Hypermarket



Supermarket



Hybrid supermarket



Modern convenience stores

April 2019

Retail | Thematic

Exhibit 78: Comparison of revenue mix across key formats

F&G

2-6%

10-14%

20-25%

15-20%

60-65%

35%

Hypermarkets

Supermarkets

45-50%

Non Food FMCG

7-10%

10-15%

20-25%

Apparel

General Merchandise

10-25%

10-15%

20-25%

65-70%

Others

5-10%

20-25%

Hybrid Supermarkets

Modern Convenience

Stores

Source: Technopak Report 2017, MOFSL

Exhibit 79: Key formats in organized general merchandise play

Format

Hypermarkets

Average Store

30,000-60,000 Sq. Ft.

Size

F&G: 30-35%

Non Food FMCG: 15-20%

Focus Category

General Merchandise: 10-14%

Mix

Apparel: 20-25%

Furniture & Furnishing: 2-6%

Supermarkets

3,000-6,000 Sq. Ft.

F&G: 60-65%

Non Food FMCG: 20-25%

General Merchandise: 10-15%

Others: 7-10%

Hybrid Supermarkets

20,000-30,000 Sq. Ft.

F&G: 45-50%

Non Food FMCG:20-

25%

General

Merchandise:10-15%

Others: 10-25%

Modern Convenience Stores

1,500-3,000 Sq. Ft.

F&G: 65-70%

Non Food FMCG: 20-25%

General Merchandise: ~10%

Destination format for planned

visits



Emphasis on shopping

experience and wide

Key

variety of products

Differentiating



Destination format for

Factors

planned visits



Emphasis on shopping

experience and wide

variety of products

Key Players

Big Bazaar, Spencer’s etc.

Situated near a residential



area in order to be

convenient to consumers

Emphasis on smart

efficiencies with shopping

experience and relatively low

price points



Hybrid between

hypermarkets and

supermarkets in

terms of

retail space and



category mix

Similar to supermarkets

but the focus is more on

fast moving products with

emphasis on neighbourhood

requirements

Have low inventory

levels as compared to

supermarkets

Spencer’s etc.

D’Mart, Q’Mart etc.

Easy Day, Heritage,

Nilgiris, M.K. Retail,

Ratandeep and other

regional players

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Exhibit 80: Player-wise comparison of growth in store count and average store size

Group

Future Group

Reliance Retail

Aditya Birla Retail

Tata group/Trent

Brands

Big Bazaar

Easy Day

Nilgiris

Reliance Smart

Reliance Fresh

More Megastore

Star Bazaar

Star Market

Star Daily

Spencer's Hyper

Spencer's Super

Spencer's Daily

Hypercity

D'Mart

Stores

2012

160

188

453

489

2017

235

538

170

465

503

131

CESC Ltd

K Raheja Corp

Avenue Supermarkets

Area ('000 sqft)

2012

2017

45-50

7-20

3-5

1.5-3

70-80

40-45

2-5

2-2.5

55-60

40-50

3.5-4.5

90-100

28-32

Source: Technopak Report 2017, MOFSL

Format forte

Right store size holds key to

profitability

Hypermarkets and supermarkets driving organized retail growth

Growing consumption and availability of retail area will be instrumental in the

growth of hypermarkets and supermarkets. Technopak projects that the share of

these formats will rise from 47% in 2016 to 51% by 2020. Currently, dailies with

typical store size of ~2,000sf comprise nearly half of the organized pie, with

hypermarkets taking 7% and supermarkets the balance 40% in terms of store count.

However, convenience stores have seen limited profitability, and therefore, most

players are focusing on larger store size.

Hypermarkets garner high gross margins

Star, DMart, Spencer

restricting store size to 20k-

30ksf to drive profitability

Though revenue/sf of hypermarkets is lower than supermarkets, gross margin is

higher. The higher gross margin is a factor of category mix, which is a healthy

combination of F&G, fashion & apparel, non-food FMCG, accessories, etc. Moreover,

the average ticket value is higher for hypermarkets compared to supermarkets, as

the former give customers an option to purchase a larger selection of margin-

accretive non-food & grocery items. This is evident from Big Bazaar - 40-50% of the

revenue mix from non-F&G products, offering 2x gross margin earned from F&G

category.

Smaller stores drive productivity but cater to low margin products

Among the formats focusing on food and general merchandise, supermarkets tend

to garner higher levels of productivity. The store productivity of a supermarket is

typically 20-25% higher than that of a hypermarket, given the high frequency of F&G

purchases (F&G occupies a higher share in the supermarket format). Though

efficiencies are higher for supermarkets, margins are lower due to high presence of

F&G (margins in F&G are lower). The productivity of daily stores like Easy Day is

higher than hypermarket stores.

April 2019

Retail | Thematic

Hybrid supermarkets gaining prominence in cities

To meet the operational efficiency requirements in smaller cities, bigger formats like

hypermarkets are rationalizing store size by 10-20% to 20,000-30,000sf. This

rationalization is giving rise to a new format in retailing – hybrid supermarket.

Players like D-mart, Star Market and Spencer’s reducing store size or are opening

smaller stores to improve store productivity and cut wastages.

Premium niche retailer

Increasing number of

consumers prefer modern

retail over traditional

grocery

To satisfy customers’ growing need for premium products, some retailers have

launched specialty stores, for example: Food Hall and Nature’s Basket. Moreover,

retailers are also stocking a higher number of organic / gourmet products to provide

customers a larger selection of premium products.

Modern retail eating into the share of traditional grocers

Clearly, modern retail has been gaining share from the traditional grocer in the last

few years, which is evident from the growth in organized retail. In 2017, modern

retail has seen an increase in both the frequency of shopping and the amount spent

compared to the traditional grocery stores, which have seen a dip in spending

compared to 2016. In a recent survey done by Spencer’s, in 2017, out of the total

sample size, about 63% of the shoppers visited a modern retail store in 2017 v/s

50% in 2016. Also, in terms of the amount spent, 37% of the shoppers mentioned

that majority of their grocery spending was through modern retail v/s 30% in 2016.

Within modern retail, the hypermarket format saw a strong improvement in the

frequency of shopping by consumers (31% of the consumers v/s 16% in 2016

mentioned that they shopped at a hypermarket during the last four weeks). This led

to an increase in the percentage of shoppers who did most of their spending in

hypermarkets from 4% in 2016 to 10% in 2017.

Modern retail continues to be predominantly chosen for stocking up regular

grocery. This is evident from a recent survey by Spencer’s, highlighting regular

grocery stock-up as the top shopping mission of modern retail shoppers (at 30%) in

2016. However, it has fallen from 34% in 2015. The other three factors that have

gained share in driving shopping in modern retail are (a) daily shopping (non-meal

preparation), (b) shopping to take advantage of promotional offers, and (c) shopping

on occasions. 18%/11%/9% of modern retail shoppers mentioned these as the key

reason for their visit compared to 13%/7%/4% in 2015.

April 2019

Retail | Thematic

Exhibit 81: Supermarket stores to reach 5k count by 2021

2016

2021E

~5,160

~4,240

~3,200

~840

~5,880

Exhibit 82: Share of supermarkets expected to increase

Modern Convenience Stores

Supermarkets

Hypermarkets

53%

40%

49%

43%

2021E

Source: Technopak Report 2017, MOFSL

~560

Hypermarkets

Supermarkets

Modern Convenience

Stores

2016

Source: Technopak Report 2017, MOFSL

Exhibit 83: F&G accounts for ~2/3 of revenue and margin

mix for supermarket stores (%)

Supermarket stores Sales mix

Supremarket stores Margin mix

Exhibit 84: Apparel the key margin driver in hypermarket

stores (%)

Hypermarket stores Sales mix

Hypermarket stores Margin mix

Food & Grocerry

Non Food FMCG

Others

Food &

Grocerry

Non Food

FMCG

Apparel

Others

Source: Technopak Report 2017, MOFSL

Exhibit 85: Average gross margins for retailers across different categories (%)

30-50

12-35

25-30

20-45

30-55

30-40

23-27

7-16

12-25

Food and

Grocery

Apparel*

Non-Food

FMCG*

General

Merchandise

Accessories

Furniture &

furnishing

Footwear*

Smart

Electronics

Others

* Gross margin range depicts both the brand and private level mix in the product offering.

Source: Technopak Report 2017, MOFSL

April 2019

Retail | Thematic

Balanced scorecard – what wins, who loses

Focus on high store

throughput and efficiency

to drive profitable growth



Our balance scorecard metrics assess each player’s efforts to improve store

throughputs, efficiency and product mix to achieve profitable growth.

Right store size is seen as a key factor by most players to achieve healthy store

throughput.

In order to improve gross margins, retailers are increasing the mix of private label

products and apparels.

Players operating in hypermarket or apparel formats are venturing into value format

category, which is seen as the next growth driver in the apparel space, as it bridges the

2-3x pricing gap between premium brands and unorganized market products.

Typically, our workings indicate that players that add store footprint of 15-20% are

able to ensure low leverage and sustainable growth.

Retailers are increasingly venturing in the omni-channel formats, leveraging their deep

network to reduce delivery time and logistics cost – a key burden for e-commerce

players.

Given the high growth potential in the organized retail market, retailers are looking

to increase footprint. However, the wafer-thin margins and high inventory levels

required leave limited room for error. Currently, the EBITDA margin for retailers is in

the range of 3-8%. To enhance growth and margins, retailers are looking at

streamlining their business in terms of store size, product mix to bring operational

efficiencies and edge in the market. We compare retailers on the basis of key

parameters that should determine the sustainability of pace and quality of future

growth and profitability.

Exhibit 86: KEY PARAMETER THAT DETERMINE SUSTAINABILITY OF PACE AND QUALITY OF FUTURE GROWTH

Source: MOFSL, Company

1) Productivity, efficient store size

Most players are looking to restrict unused space to improve store productivity. In

F&G value retail, 20,000-30,000sf is seen as the most productive store size. D-mart

(store size: 30,000sf; revenue/sf: INR37k) and Star Market (store size: 17,500sf;

revenue/sf: INR25k) are among the most productive stores. In fashion apparel,

Westside (store size: 17,500sf; revenue/sf: INR10k) has the most productive stores.

Central, with store size of 100,000sf, offers a good shopping experience at 15%

April 2019

Retail | Thematic

lower productivity than Westside, but its productivity still remains at par with other

value fashion apparel stores like VMart, Shoppers Stop, and Brand Factory and

garners healthy profitability.

Efficient store size garners better productivity

Exhibit 87: D-Mart outperforms Big Bazaar in productivity

(FY19E)

Avg. store size ('000 sqft)

Revenue/sqft (INR'000)

37.6

12.7

31.8

D-Mart

2.0

EasyDay

9.9

Star bazaar

9.1

Spencer

Source: MOFSL, Company

48.7

24.7

16.6

17.7

Exhibit 88: Star leads in neighbourhood stores category in

terms of productivity (FY19E)

Avg. store size ('000 sqft)

Revenue/sqft (INR'000)

35.3

Big Bazaar/FBB

3.7

Reliance (core)*

Source: MOFSL, Company

Exhibit 89: Westside outperforms peers in productivity

(FY19E)

Avg. store size ('000 sqft)

Revenue/sqft (INR'000)

Exhibit 90: Value retailers garner better productivity on the

back of smaller store size (FY19E)

Avg. store size ('000 sqft)

Revenue/sqft (INR'000)

7.3

9.9

10.7

9.4

8.3

8.8

91.7

Central

47.9

Shoppers Stop

17.5

Westside

Source: MOFSL, Company

28.6

Brand Factory

13.2

Pantaloons

8.4

V-Mart

Source: MOFSL, Company

…Thus, players are judiciously reducing avg. store size

Exhibit 91: Big Bazaar’s average store size is expected to

come down

FY18 ('000 sqft)

FY19E ('000 sqft)

36.7

35.3

31.6

31.8

3.7

2.3

3.7

Big Bazaar

D-Mart

Reliance (core)*

Source: MOFSL, Company

2.0

EasyDay

Star bazaar

Spencer

Source: MOFSL, Company

Exhibit 92: Star is rationalizing average store size to garner

better productivity

FY18 ('000 sqft)

10.9

9.2

9.9

9.1

FY19E ('000 sqft)

April 2019

Retail | Thematic

Exhibit 93: Central is reducing average store size to garner

better productivity

FY18 ('000 sqft)

FY19E ('000 sqft)

Exhibit 94: Value apparel players planning to reduce average

store size for higher productivity

FY18 ('000 sqft)

28.6

FY19E ('000 sqft)

92.5

91.7

47.9

15.9

17.5

13.7

13.2

8.4

Central

Shoppers Stop

Westside

Source: MOFSL, Company

Brand Factory

Pantaloons

V-Mart

Source: MOFSL, Company

2) Private labels

Private labels and apparel

mix improve store margin

With 5-10% lower pricing than branded products, private labels allows gross margin

improvement by 100-200bp. This also aids better working capital management, as

retailers are able to squeeze producers with relatively higher creditor days. In the

F&G space, Future Retail-led Big Bazaar has the best portfolio of private labels with

40% contribution, supporting pricing in a cutthroat competitive market and yet

aiding margin expansion.

In the apparel space, Westside is by far the best player, with 96% private labels,

earning a healthy 10% EBITDA margin. VMart, Central and Brand Factory, with a

healthy blend of 40-50% private labels, attract customers looking for branded as

well as private label products and are also gaining margin leverage.

Private labels act as key catalyst for higher gross margin

Exhibit 95: Private label mix for Big Bazaar stands at 40%

Pvt label mix (%)

Mgmt target (FY21)

60%

40%

Big Bazaar

(incl.FBB)

For FY18

D-Mart

Reliance (F&G)

Source: MOFSL,

Company

EasyDay

For FY18

10%

Exhibit 96: Private label mix for Easy day stands at 70%

70%

Pvt label mix (%)

Mgmt target (FY21)

20%

14%

Star bazaar

Spencer

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 97: Westside leads peers in private label mix

Pvt label mix (%)

50%

20%

Mgmt target (FY21)

96%

Exhibit 98: Private label mix across value retailers at

healthy 40-60%

Pvt label mix (%)

50%

Mgmt target (FY21)

65%

60%

40%

80%

65%

40%

Central

For FY18

10%

Shoppers Stop

96%

Westside

Source: MOFSL, Company

Brand Factory

For FY18

Pantaloons

V-Mart

Source: MOFSL, Company

3) Value apparel

Bridging the gap between

branded apparel and

unorganized market

The key value proposition is that value apparel bridges the 2-3x price gap between

premium brands and the unorganized market products, accelerating the shift from

consumption of low-quality unorganized market products to organized market

products. Value apparel is a category that has been strongly attracting customers in

the last 3-5 years. Value apparel retailers like FBB, Pantaloons and Trends in the

urban markets and VMart in the semi-urban markets are witnessing aggressive

growth.

To increase wallet share and bill size, and improve store profitability, all F&G value

retailers are expanding their product portfolio, with a higher mix of apparel. Apparel

garners ~40% gross margin compared with 20-25% for F&G. Big Bazaar has the

healthiest apparel mix of 35%, higher than Star Bazaar, Spencer’s, and other players.

This has allowed it to garner better EBITDA margin than peers.

Apparel assist in garnering better gross margin v/s pure play F&G

Exhibit 99: Apparel mix for Big Bazaar stands at healthy 35%

(FY19E)

Apparel mix (%)

35%

28%

16%

Exhibit 100: Super markets stores have meager apparel mix

(FY19E)

Apparel mix (%)

Big Bazaar

(incl.FBB)

D-Mart

Reliance*

Star bazaar

Spencer

Source: MOFSL, Company

D-Mart apparel mix includes other general merchandise

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 101: Apparel mix for Westside stands at strong ~80%

(FY19E)

Apparel mix (%)

75%

63%

79%

Exhibit 102: Apparel mix for value retailers stands at healthy

80-90% (FY19E)

Apparel mix (%)

90%

80%

Central

Shoppers Stop

Westside

Source: MOFSL, Company

Brand Factory

Pantaloons

V-Mart

Source: MOFSL, Company

4) Cluster approach

Most F&G retailers are now focusing on expanding through the cluster approach, as

it helps to (a) reduce backend cost (logistics, warehousing), (b) optimize marketing

cost, and (c) leverage store footprint and customer loyalty. D-mart has strongly

followed the cluster approach, which has allowed it to optimize cost and enhance

customer loyalty. Future Retail’s Easy Day, Spencer’s, Star Market and VMart’s

growth targets too are focused on the cluster approach to enhance profitability.

Exhibit 103: Cluster approach visible in store network

Format

D-Mart

Easy Day

V-Mart

Spencer

Strategy of cluster approach



Maharashtra and Gujarat account for ~60% of total store network

Four markets (Ludhiana, NCR, Hyderabad and Lucknow) account for ~68% of

total store network

UP and Bihar account for ~63% of total store network

Concentrated mainly in Eastern and South-Eastern India

Source: MOFSL, Company

5) Accelerated store count

Adding 15-20% new

footprint ensures low

leverage and sustainable

growth

In the last decade, we saw many players chasing growth with aggressive store

rollouts, in the bargain adding up (a) huge operating costs, (b) loss-making stores,

and (c) debt. However, in the last 3-5 years, most players have taken a measured

approach to growth. Their intent has been to capture the huge opportunity in the

organized retail space while at the same time ensuring that high growth does not

take away the focus from store economics, especially in a market characterized by

wafer-thin margins. Most retail chains have added 15-20% new area, annually. This

ensures that the retailers’ new store growth is maintained. At the same time, on the

back of a healthy 40-50% of the portfolio being 3-4 years old, SSSG also remains

upbeat. Star, Shopper’s Stop, and Spencer’s have seen patchy growth in the last few

years, as they consolidated their position and pared loss-making stores. We expect

healthy growth momentum, going forward.

April 2019

Retail | Thematic

Players are ramping up store additions

Exhibit 104: Reliance retail leads the pack in store adds

FY18

FY19E

Total Stores (FY19E)

384

179

120

Reliance (core)

Source: MOFSL, Company

128

4302

566

-6

Star bazaar

150

Exhibit 105: Easyday’s store additions on a spree

FY18

1,100

434

FY19E

Total Stores (FY19E)

Big Bazaar/FBB

D-Mart

EasyDay

Spencer

Source: MOFSL, Company

Exhibit 106: Westside adding healthy 18-20 new stores

FY18

FY19E

Total Stores (FY19E)

Central

Westside

Source: MOFSL, Company

145

Exhibit 107: Pantaloons to outperform peers in store adds

FY18

FY19E

Total Stores (FY19E)

320

214

Shoppers Stop

Brand Factory

Pantaloons

V-Mart

Source: MOFSL, Company

So as to drive same store sales growth (SSSG, %)

Exhibit 108: DMART to outperform Big Bazaar in SSSG front

(%)

FY18

FY19E

20%

13%

14%

Exhibit 109: Expect Star to outperform on SSSG front (%)

FY18

FY19E

-1%

Big Bazaar (ex-FBB)

D-Mart

Source: MOFSL, Company

Star bazaar

Spencer

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 110: Central/Westside to garner 7-8% SSSG (%)

10%

FY18

FY19E

Exhibit 111: Brand Factory to lead the value retail format

pack in terms of SSSG (%)

FY18

16%

FY19E

-3%

Central

Shoppers Stop

Westside

Source: MOFSL, Company

Brand Factory

Pantaloons

V-Mart

Source: MOFSL, Company

6) Membership program

Membership programs are a good medium to create sticky customers, especially in

an industry with single-digit profit margins. Such programs allow retail chains to (a)

reduce customer acquisition cost, (b) create loyal customers, which improves bill

size, store economics, (c) support customer analytics, which in turn allows the retail

chains to improve store offerings, inventory management, sales velocity, and profit

margins. In the hypermarket format, Big Bazaar and Spencer’s have been the most

focused on membership programs. In the apparel segment, Shopper’s Stop has a

strong member program, with 75% revenue share coming from it. Future Retail’s

aggressive rollout plans in the neighborhood store format, Easyday are focused on

membership-led growth to attract loyal kirana store customers.

7) Omni channel

Using network strength to

reduce delivery time and

logistics cost

In contrast to the period of hyper-competition from ecommerce companies, most

companies (ecommerce, retailers) are revisiting their strategy towards omni-

channel presence. Amazon’s tie-up with Shoppers Stop and Wal-Mart’s acquisition

of Flipkart are recent large investments on the same lines. Most retailers now

understand that their wide retail network can be used as a key strength to bridge

the biggest concern for ecommerce – logistics cost. Retailers can use outlets as

storage and delivery hubs, reducing delivery time and logistics cost, and creating a

strong value proposition in comparison to pure play ecommerce companies.

Shopper’s Stop, with its collaboration with Amazon, and most other hypermarket

players are taking advantage of this unique strength and planning to expand in the

ecommerce segment. It can also attract less tech savvy offline consumers.

April 2019

Retail | Thematic

Exhibit 112: PANTALOONS SHOPPERS STOP, BIG BAZAAR LIKELY TO MAKE STRONG IMPROVEMENTS

Source: MOFSL, Company

High store adds drive revenue growth

Exhibit 113: Reliance Retail has grown at a robust pace over

FY17-19E

1000

750

500

250

Revenue (INR b)

29%

CAGR FY17-19E

64%

Exhibit 114: FLF has outperformed peers on revenue growth

Revenue (INR b)

100

-14%

21%

CAGR FY17-19E

18%

19%

12%

Source: MOFSL, Company

April 2019

Retail | Thematic

Apparel companies garner higher gross margin

Exhibit 115: Higher F&G revenue mix drags gross margin for

DMART (FY19E)

Gross margin (%)

27%

21%

15%

14%

36%

41%

33%

Exhibit 116: Apparel players command higher gross margin

than F&G players (FY19E)

Gross margin (%)

51%

FRL

D-Mart

Spencer

Reliance (blended)

Source: MOFSL, Company

FLF

SHOP

Trent

ABFRL

V-Mart

Source: MOFSL, Company

…and thus higher EBITDA margins as well

Exhibit 117: DMART leads the pack on EBITDA margin

(FY19E)

EBITDA margin (%)

FRL

D-Mart

Spencer

Reliance (core)

Source: MOFSL, Company

FLF

SHOP

Trent

ABFRL

V-Mart

Exhibit 118: V-Mart leading the pack on EBITDA margin

(FY19E)

EBITDA margin (%)

10%

Source: MOFSL, Company

Player-wise comparison of Inventory days (FY19E)

Exhibit 119: Inventory days for F&G players are lower…

(FY19E)

Inventory days

Exhibit 120: …compared to that of apparel players (FY19E)

105

Inventory days

FRL

D-Mart

Star Bazaar

Spencer

FLF

SHOP

Westside

ABFRL

V-Mart

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 121: Player-wise comparison of cash conversion

cycle (FY19E)

Cash conversion cycle (days)

Exhibit 122: Player-wise comparison of asset turnover

(FY19E)

Asset turnover (x)

6.1

3.4

4.2

3.3

4.0

2.4

3.2

1.2

2.6

-12

Source: MOFSL, Company

Player-wise comparison of capex (as a % of revenue) (FY19E)

Exhibit 123: Capex as a % of revenue for F&G players

(FY19E)

Capex (as a % of revenue)

Exhibit 124: Capex as a % of revenue for apparel players

(FY19E)

Capex (as a % of revenue)

FRL

D-Mart

Spencer

Source: MOFSL, Company

FLF

SHOP

Trent

ABFRL

V-Mart

Source: MOFSL, Company

Return ratios yet to move up (FY19E)

Exhibit 125: Return ratios for F&G players (FY19E)

RoE (%)

20% 20%

RoCE (%)

Exhibit 126: Return ratios for F&G players (FY19E)

RoE (%)

RoCE (%)

20% 20%

17%

10% 11%

13%

8% 8%

19% 18%

FRL

D-Mart

FLF

SHOP

Trent

ABFRL

V-Mart

Spencer

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 127: Store-wise payback and RoCE comparison

Big Bazaar/

FBB

0.7

499

125

25.0

6.1

99.8

D-Mart

248

305

3.2

1,051

168

15.9

9.0

19.1

Easyday

-2

2.0

15.5

-1

-3.0

-1

Central

324

385

4.4

833

325

39.0

236

10.6

6.5

Brand

Factory

4.2

286

29.2

7.5

9.3

V-mart

2.4

32.1

10.9

24.4

Shoppers

Stop

-13

2.3

462

177

38.4

150

5.9

21.4

Westside Pantaloons

4.2

171

53.6

9.7

5.9

16.8

4.3

118

48.0

6.0

3.0

Capex

Net Working Capital

Total

Payback (in years)

Revenue

Gross margin

Gross margin (%)

Other operating cost

EBITDA

EBITDA margin (%)

Depreciation

Depreciation rate (%)

EBIT

RoCE (Tax - 30%)

Source: MOFSL, Company

April 2019

Retail | Thematic

Valuation summary

Healthy profit growth driving stocks

Retail stocks in India have outperformed the overall market over the last 2-3 years,

with their market cap increasing by a significant 50%+. Investors are seen flocking

toward retail stocks, as evident from the huge success of IPOs, particularly Avenue

Supermart (and the stock post listing). This is not surprising given the improving

profitability of the retail companies.

Exhibit 128: Revised focus on store economics/profitability has led to stupendous growth in sector market cap

(ex-D-Mart, INR b)

800

600

400

200

SHOP listing

(May-05)

Retail market cap (INR b)

Listing of:

1. VMART ( Feb-13)

2. FLFL (Oct-13)

FRL re-listing

(Aug-16)

Birth of ABFRL

(Jan-16)

Includes ABFRL, FEL, FLFL, FRETAIL, FCON, VMART, TRENT, SHOP, SPENCER from their listing date

Source: Bloomberg, MOFSL

Exhibit 129: Sector market cap witnessed a huge fillip with the listing of D-Mart

2,000

1,500

1,000

500

Retail Market cap (INR b)

DMART listing

(Mar-17)

Rally in retail stocks

Includes ABFRL, FLFL, FRETAIL, DMART, VMART, TRENT, SHOP, SPENCER from their listing date Source: Source: Bloomberg, Company, MOFSL

Rich valuations on account of huge runway of growth

Until strong growth is

sustained, premium

valuations would persist

The organized retail market is expected to grow at over 20% for a consistently long

period of 8-10 years, backed by 6-7% SSSG and expansion of footprint. This provides

a strong runway for growth. With sector growth potential already in place,

companies that have shown consistent earnings growth, improving return profile,

and limited leverage are commanding rich valuations. However, in some cases, the

market might have factored earnings of the next 2-3 years in advance, given the

strong earnings visibility in the respective companies. This might leave limited

incremental upside. Yet, until the companies sustain the strong growth, we believe

the premium valuations would persist.

April 2019

Retail | Thematic

US players in the high-

growth period of late

1990s-early 2000s were

rewarded with ~2x higher

valuation multiples v/s last

20-year cycle

Drawing parallels with global players in high growth period

In the 1990s, the US retail market witnessed strong earnings growth – consistently

by players like Walmart and Home Depot, and inconsistently by players like Target.

Subsequently, Walmart and Home Depot were rewarded with far higher valuation

multiples during the period with average EV/EBITDA and P/E of 2x during the peak

cycle than in the last 20 years. The average PEG ratio still remained 1.1x for Walmart

over FY85-95 and 1x for Home Depot over FY85-00, which highlights the key point

that the rich P/E was supported by robust earnings growth.

In India too, we believe companies that deliver healthy EBITDA/EPS growth of over

20% consistently for the next 10 years could garner about 2x EV/EBITDA and P/E

multiples compared to the average valuations. Given the sustainability of earnings

growth in India’s retail market, rich valuations could be justified.

Exhibit 130: P/E trend of Walmart Inc chasing EPS growth…

(15)

EPS growth(%)

P/E (x, RHS)

Exhibit 131: …with average PEG remaining closer to 1-1.5x

(4)

(14)

(24)

PEG (x)

Source: MOFSL, Bloomberg

Exhibit 132: P/E trend of The Home Depot Inc chasing EPS

growth

EPS growth(%)

110

-10

-50

P/E (x, RHS)

Exhibit 133: …with average PEG remaining closer to 1x

5.0

2.5

0.0

-2.5

-5.0

PEG (x)

Source: MOFSL, Bloomberg

April 2019

Retail: The Land of Opportunities

Ready for take off

Healthy portfolio mix to help sustain growth

Retail | Thematic

Well-oiled growth engine

But limited room for re-rating

A play on India’s fashion market

PAT to grow at 28% CAGR over FY19-21

Pg59

Scaling new heights

Expect 13% adj. PAT CAGR over FY19-21,

healthy RoCE

Pg84

Pg99

Earnings revival in place

SSSG, store adds and private label share

improving

Pg128

Pg158

Pg176

Pg193

Pg212

Pg231

Turned profitable

Hive-off to bring focus on growth and

profitability

Revenue set for steady uptick

Potential valuation upside from Zara and Star

market

Play on rural India’s modern retail

shift

Rich valuations factor in high earnings growth

Unlocking India’s retail potential

Consistent growth + increasing scale =

A Juggernaut

April 2019

April 2019

Initiating Coverage

Retail | Thematic

| Sector: Retail

Aditya Birla Fashion and Retail

BSE SENSEX

38,862

S&P CNX

11,666

CMP: INR219

TP: INR260 (+19%)

Buy

Ready for take off

Healthy portfolio mix to help sustain growth



Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

ABFRL IN

772

169.1 / 2.4

236 / 132

-9/9/31

233

40.8



Financials Snapshot (INR b)

FY19E FY20E FY21E

Y/E MARCH

Sales

82.3

93.4 106.5

EBITDA

6.2

7.6

9.3

2.0

3.1

4.5

EPS (INR)

2.6

4.0

5.8

EPS Gr. (%)

70.3

54.7

44.0

BV/Sh (INR)

16.8

20.8

26.6

P/E (x)

84.1

54.4

37.8

P/BV (x)

13.0

10.5

8.2

EV/EBITDA (x)

30.2

24.3

19.4

EV/Sales (x)

2.3

2.0

1.7

RoE (%)

16.8

21.4

24.5

RoCE (%)

12.7

15.2

18.0

Shareholding pattern (%)

As On

Dec-18 Sep-18 Dec-17

Promoter

59.2 59.2

59.2

DII

18.9 19.0

14.2

FII

9.5

11.6

Others

12.3 12.2

14.9

FII Includes depository receipts

Stock Performance (1-year)



ABFRL holds a healthy and diversified portfolio mix consisting four leading menswear

brands, Pantaloons in the value-fashion retail format, men/women’s innerwear

through Van Heusen’s brand extension, and women’s fast-fashion venture – Forever 21.

Pantaloons has undergone revamp over the years post its acquisition. The strategy

has been to tap the lucrative value-fashion format with small store size. Accordingly,

213 new Pantaloons stores were added over FY14-19. We find comfort in these

efforts, and thus, expect earnings to revive with revenue/EBITDA CAGR of 17%/24%

over FY19-21.

The recently launched men’s innerwear segment under the well-known Van Heusen

brand should see robust ~2x revenue growth and EBITDA breakeven by FY21, driven

by ramp-up in distribution. The lifestyle segment consisting of four marquee brands

and product extensions should achieve moderate 11%/11% revenue/EBITDA CAGR

over FY19-21.

We expect overall revenue/EBITDA CAGR of 14%/23% over FY19-21. EBITDA margin

should expand ~120bp to 8.7% by FY21 on the back of (a) break-even in the

innerwear and fast-fashion businesses, (b) steady uptick in Pantaloons’ private label

mix (60%) and (c) the company’s strategy of franchisee-led store additions, which

should provide an impetus to RoCE.

We initiate coverage on ABFRL with a Buy rating and an SOTP-based target price of

INR260. We ascribe (a) 23x FY21E EBITDA of INR6.7b for the lifestyle segment, given

its strong brand value, (b) 18x FY21E EBITDA of INR3.9b to Pantaloons, given its

strong earnings potential and (c) 1x FY21E sales of INR10.2b for the fast-fashion and

other businesses. This implies an EV of 23x on FY21E EBITDA, ~15% discount to its

three-year average.

Fine-tuning its portfolio mix

With a strong two-decade old dominance in the menswear category with deep

distribution across multiple formats, ABFRL is now leveraging its capabilities by

widening its portfolio across other market categories. It has recently ventured into

innerwear, fast-fashion and youth-oriented casuals. We expect ABFRL to see a

strong revival in growth due to (a) a favorable business environment in the

aftermath of demonetization and GST, (b) consolidation of ecommerce websites

and the subsequent discounting draw down, (c) company initiatives like

rationalizing both the lifestyle segment and Pantaloons’ store network by

maintaining healthy store adds and a re-jiggle of Pantaloons’ product price

equation reviving SSSG. The strong traction witnessed in Van Heusen innerwear

may further contribute to growth. Subsequently, we expect a robust 14%/23%/49%

revenue/EBITDA/PAT CAGR for ABFRL over FY19-21.

Lifestyle segment back on a stable growth path

ABFRL owns four leading menswear brands (Louis Philippe, Peter England, Van

Heusen, Allen Solly) which together generate ~INR38.7b revenue. This showcases

its lifestyle segment’s strong brand pull. EBITDA margins, after being impacted by

April 2019

Retail | Thematic

macro factors like demonetization/GST/ aggressive discounting by ecommerce

companies, have now improved to 12.5% in FY19E. With most of the clean-up

behind, we expect 11% revenue CAGR over FY19-21 to be fueled by (a) reach

expansion - 250 net annual store adds over next 2-3 years, (b) increase in mix of

casual and premium products, and (c) increase in ecommerce contribution, which is

currently at 7% and growing at a steady pace. We believe EBITDA margins on a high

base of 12.5% (FY19E) have little room for improvement. Accelerated growth fueled

by the revival in SSSG and growth through the e-commerce channel should drive

11% EBITDA CAGR over FY19-21; expect margin to remain steady at 12.6%.

Revamped Pantaloons set to drive earnings

Typically, branded apparel is 4x costlier than products of unorganized local

counterparts. Under the value-fashion retail format, branded apparels are cheaper

(priced at 2x v/s unorganized local apparel), and therefore, have gained prominence

over the last few years. To target this category, Pantaloons (post acquisition from

the Future Group) was completely revamped from a lifestyle apparel retail chain to

the value fashion format. This was done by (a) curtailing the size of larger (17-18k

sq. ft.) stores as well as new stores to ~10-15k sq. ft., (b) reducing product price

equation from premium product pricing to affordable apparels starting at just

INR699, and (c) increasing proportion of private labels that are attractively priced

and margin accretive (~60%), with a target to further increase it to 70%. With (a)

completion of store restructuring and sizeable new store adds (213 over FY14-19E)

and (b) expectation of adding 60-65 stores annually, Pantaloons is well poised to

witness strong 17%/24% revenue/EBITDA CAGR over FY19-21.

Fast-fashion and innerwear to emerge as future growth engines

The fast-fashion apparel market, particularly the women’s category, is seeing good

traction with the launch of H&M and Zara. The launch of Forever 21, a strong US-

based licensed brand targeting women’s fashion, has enabled ABFRL to expand its

predominantly menswear portfolio of brands to include women’s fashion. However,

since Forever 21’s launch three years ago, ABFRL’s fast-fashion segment has seen

limited traction with revenue/EBITDA of INR3.6b/-INR0.3b (FY19E). We believe

management’s strategy to test smaller sized stores with limited 8-10 stores and

linear cost structures should allow ABFRL to maneuver operating models and build a

base for strong future growth.

On the other hand, revenues of its innerwear segment under the Van Heusen brand

have zoomed to INR1.9b in the last two years, thanks to strong distribution and

marketing push. While the scale is yet small, we expect revenue to reach INR3.4b

over the next two years. Also, the company plans to expand into other similar

products across its stable of brands. We expect fast-fashion, innerwear and its other

brands/formats to witness a turnaround, with revenue/EBITDA of INR10.2b/-

INR0.3b in FY21 from INR7.4b/-INR1.1b in FY19 on the back of accelerated growth in

the innerwear segment and Forever 21 achieving break-even.

April 2019

Retail | Thematic

Healthy balance sheet, growing cash flow

ABFRL sells its menswear brands’ inventory on an outright basis (rare) instead of

Sale or Return (SoR) basis, thus garnering healthy inventory of 86 days and lean net

working capital of merely 18 days. Its lifestyle business predominantly following a

leased exclusive brand outlet (EBO) model allows it to garner about 30% RoCE.

However, store rollout in fast-fashion and other smaller segments, coupled with

EBITDA losses, dragged Madura Fashion’s (Lifestyle +Fast-Fashion + Innerwear +

Other businesses) RoCE to ~15%. We believe that rationalization of stores as well as

turnaround of fast-fashion and other businesses should improve RoCE. Due to

Pantaloons’ aggressive store expansion and modest EBIT, RoCE came in at a meager

1% in FY18. We believe better asset monetization driven by improving asset turns

and EBITDA CAGR of 24% over FY19-21 should improve Pantaloons’ RoCE to double-

digits over the next two years. Subsequently, we expect overall ABFRL’s RoCE to

improve to 18% in FY21. Free cash flows (post interest cost), too, should turn

positive with superior earnings generating OCF CAGR of 21% and stable INR3.3b

overall capex.

Valuation

We believe ABFRL offers secular growth potential with a unique portfolio of

established and leading industry brands and high growth categories of value-fashion

retail chains. Its strong platform of established brands, deep distribution and

management capability allows it to launch multiple products across apparel

categories like innerwear, women’s fast-fashion, casual-wear and luxury retail

chains, which can continue to fuel growth and drive valuations. Further, it is among

the few apparel companies to have garnered a healthy return profile (lifestyle

segment ~30%). We have valued ABFRL on an SOTP basis to arrive at a TP of INR260,

with 19% upside and recommend a

Buy.

We have assigned the lifestyle segment 23x

EV/EBITDA of FY21E EBITDA, given its strong brand value. We have assigned 18x

EV/EBITDA to Pantaloons’ FY21E EBITDA as we believe there is a strong foundation

laid for robust future growth; on delivering strong earnings in the next 1-2 years,

valuations too should improve. The other businesses including fast-fashion and

innerwear are still loss-making as a portfolio, and we thus assign it 1x of FY21E sales.

This implies an EV of 23x on FY21 EBITDA – a ~10% premium to the target

EV/EBITDA multiple for our apparel coverage, but ~15% discount to the three-year

average. Despite the sharp rally over the last six months, we believe it has not fully

captured the secular growth potential, healthy improvement in return ratios and

cash flows.

April 2019

Retail | Thematic

Fine-tuning its portfolio mix

Expect 14%/23% overall revenue/EBITDA CAGR over FY19-21



Strong brand pull of its lifestyle segment’s four leading brands, good hold in the value-

fashion format coupled with robust distribution reach [~4k from large format stores

(LFS), ~5k from multi-brand outlets (MBOs) and 2.1k from exclusive brand outlets

(EBOs)] gives ABFRL a competitive edge over its peers.

ABFRL has strong economic moats that act as a catalyst to up its ante in categories

such as brand extensions, fast-fashion and its recent foray into innerwear, thus

enabling it to tap the burgeoning opportunity in the branded apparel market.

We expect overall revenue/EBITDA to grow at 14%/23% CAGR over FY19-21 and

EBITDA margins to expand 120bp, reaching ~8.7% by FY21.

Healthy mix of brands and retail across categories

Post the merger of Pantaloons with Madura Fashion & Lifestyle (FY16), ABFRL with

its leading fashion brands and deep distribution across multiple formats became

India’s largest lifestyle and fashion conglomerate. It owns (a) four leading menswear

brands in India through its lifestyle segment, (b) a large retail chain- Pantaloons in

the value-fashion format, (c) Forever 21, a strong US-based licensed brand targeting

women’s fashion and (d) Van Heusen innerwear for men and women, among others.

The lifestyle segment operates on a brand-driven business model, targeting the

premium and sub-premium branded apparel market through its four key brands –

Louis Phillip, Van Heusen, Peter England and Allen Solly. In FY19, the lifestyle brands

operated through 2.1k EBOs with a deep network of LFS and MBO, contributing

~52% of AFBRL’s total revenues and a healthy 12.5% EBITDA margin, garnering ~30%

ROCE. Pantaloons contributed ~40% of the overall revenue, operating in the value

fashion format with good 320 stores, providing a healthy mix of brands and retail.

Exhibit 134: Four leading brands under Lifestyle segment (Madura Division)

Source: Company, MOFSL

April 2019

Retail | Thematic

Exhibit 135: ABFRL: Division-wise operational and financial metrics (FY19E)

ADITYA BIRLA FASHION AND RETAIL

REVENUE (INR B)

REVENUE

CONTRIBUTION (%)

EBITDA MARGIN (%)

NO OF STORES

AREA (M SQFT)

AVG. REVENUE/

SQ.FT (INR’000)

50.4

61%

8.5%

2,440

3.9

14.1

32.9

39%

7.7%

320

4.2

8.3

Source: MOFSL, Company

Fueling growth in established businesses

We expect ABFRL to see a strong revival in growth due to (a) a favorable business

environment in the aftermath of demonetization and GST, consolidation of

ecommerce websites and the subsequent drop in discounting, and (b) company

initiatives like rationalization of both the Lifestyle segment and Pantaloons’ store

network in the last two years, maintaining healthy store adds and a rejig of

Pantaloons’ product price equation, which should revive SSSG.

A good platform to launch new growth drivers

The company can now leverage its capability to widen its portfolio across other

market categories as is evident from its venture into innerwear, fast-fashion and

youth-oriented casuals among others. ABFRL’s stable of brands include pure-play

fashion brands (Forever 21, People), casual wear brand American Eagle, innerwear

brand Van Heusen and luxury brands like The Collective, Hackett, Ted Baker, and

Simon Carter, which should provide accelerated growth opportunities over the next

five years, but some brands are likely to see tapering growth (10-12%) even as they

achieve a high revenue scale.

April 2019

Retail | Thematic

Exhibit 136: Emerging brands under the Madura division

Source: Company, MOFSL

In some of these categories, brands like US Polo, Lee Cooper, Levi’s, Jack & Jones

(casual wear) and Zara (fast-fashion) are the industry leaders (generating ~INR10b+

revenue). Two key determinants for ABFRL to bridge this gap are (1) building

distribution reach, and (2) creating a strong brand profile through aggressive

advertisement and marketing promotions.

Reach should be partly supported by ABFRL’s existing business with ~4k LFS’ and ~5k

MBOs. The rollout of EBOs may also be supported by management’s execution

capability of operating across ~2k EBOs, which are predominantly franchisee-led.

Subsequently, we expect a robust 14%/23%/49% CAGR of revenue/EBITDA/PAT for

ABFRL over FY19-21.

Exhibit 137: Overall revenue to grow at 14% CAGR over

FY19-21

Revenue (INR b)

YoY growth (%)

15%

66%

16.6

18.5

60.3

66.0

71.7

82.3

93.4

106.5

14%

36%

Exhibit 138: Pantaloons’ revenue contribution to reach

~42% by FY21 (as a % to gross revenue)

Madura (%)

40%

Pantaloons (%)

39%

40%

41%

42%

62%

61%

60%

59%

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 139: EBITDA margins to expand ~120bp over FY19-21

EBITDA (INR b)

6.3%

3.9%

2.0%

0.3

0.7

3.8

4.4

4.7

6.2

7.6

9.3

6.7%

EBITDA margin (%)

6.5%

7.5%

8.1%

8.7%

Exhibit 140: Pantaloons’ EBITDA contribution to reach ~38%

by FY21 (as a % to gross EBITDA)

Madura (%)

21%

27%

34%

Pantaloons (%)

37%

38%

79%

73%

66%

63%

62%

Source: MOFSL, Company

Exhibit 141: PAT to grow at 49% CAGR over FY19-21

PAT (INR b)

-2%

-11%

-1.9

-12%

-2.3

-1.1

0.6

PAT margin (%)

1.2

2.0

3.1

4.4

Source: MOFSL, Company

Exhibit 142: Geographical spread of ABFRL (Dec-18)

*includes VH innerwear outlets

Source: MOFSL, Company

April 2019

Retail | Thematic

Lifestyle segment back on a stable growth path

Casuals and store addition to act as key catalysts



Madura’s Lifestyle division, which was marred by macroeconomic factors

(demonetization and GST), ecommerce driven discounted pricing and network

rationalization in the past two years, is well poised to regain its lost momentum, in our

view.

We expect revenue to grow at a CAGR of 11% over FY19-21 mainly on the back of (a)

(franchisee-led) robust store addition of around 250 EBOs annually over FY19-21E, (b)

increasing mix of brand extensions, and (c) premiumization of its product offerings.

This coupled with healthy 6% SSSG and increasing contribution from the online

channel (expected to reach 10% by FY21) should lead to steady EBITDA margin (on a

high base of 12.5%), reaching 12.6% by FY21. We expect EBITDA CAGR of 11% over

FY19-21.

Improving consumer sentiment to revive SSSG

The past few years (FY15-18) were painful as management was focused on network

rationalization - involving closure of ~150 loss-making stores leading to net addition

of 78 stores. This was on account of a weak macro-economic environment led by

demonetization and GST implementation coupled with a hyper competitive market

driven by ecommerce sales. However, with headwinds now behind, we believe

Madura EBO’s should register 6% SSSG driven by (a) burgeoning demand for

branded apparels, (b) solid traction for its four key (lifestyle) brands, and (c)

judicious network expansion. Store rationalization led by leaner store size, rental

negotiation, employee rationalization and shut down of loss-making stores has

created a strong base for store additions. Management plans to add net 250 EBOs

(predominantly franchisee-led), thus, limiting capex requirements. Further, uptick in

revenues from ecommerce distribution channel - mainly Flipkart, Amazon and own

its website –should also continue its accelerated growth.

Lifestyle segment generating INR38.7b revenue driven by four established

menswear brands:

1) Louis Philippe (LP)

– LP’s range earlier included formal menswear. Tapping the

premium INR2k+ price point, LP’s offering now extends to semi-formals and other

extension categories such as LP footwear and accessories. The non-formal category

now contributes ~50% to the overall INR10b+ revenue generated during FY18,

making LP the largest and most profitable brand in the industry. It competes with

Raymond, Arrow and Zodiac, which garners about ~INR3-5b revenue.

2) Peter England (PE)

– Similar to LP, PE is a brand focused on menswear with

revenue of INR10b+. However, its attractive price point of INR1-1.2k differentiates

PE from LP.

3) Van Heusen (VH) and Allen Solly (AS)

– Both VH and AS are targeted towards the

INR1.5-2k price point categories and generate revenues of INR10b+ and INR7.5b+,

respectively. Unlike LP, which is focused on menswear, these brands also cater to

women’s wear (formals, casuals, party wear, etc.). Of the two, VH is largely focused

on corporate attire while AS capitalizes on ‘Friday Dressing’.

April 2019

Retail | Thematic

Healthy franchisee-led EBO expansion

ABFRL has a strong network of 2.4k EBOs (FY19E), which contribute ~40% to the

Lifestyle segment’s revenues and ~20% to the overall company’s revenue. The

balance is contributed by LFS and MBOs. This is in contrast to the Future Lifestyle

Fashion’s business model, which garnered ~95% of its revenue from LFS and MBOs,

with a meager 4-5% contribution from (229) EBOs (FY18). ABFRL’s strong brand pull

allows it to operate a franchisee-led deep EBO distribution model, which allows

ABFRL to showcase its complete wardrobe solution.

Exhibit 143: EBOs contribute a healthy 41% to Madura’s

Lifestyle revenue… (as a % of revenue)

LFS/MBO

41%

42%

EBO's

41%

Exhibit 144: …compared to a miniscule 5% of Future

Lifestyle Fashion (as a % of revenue)

LFS/MBO

EBO's

41%

95%

59%

58%

59%

FY16

FY17

FY18

Source: MOFSL, Company

Madura - Lifestyle

Future Lifestyle Fashion

Source: MOFSL, Company

Though network rationalization over FY15-18 led to the closure of ~150 stores, its

judicious operating strategy provides ABFRL a runway for quicker network expansion

and increases traction for its brands in the markets. We expect the company to add

~250 new EBOs (mainly franchisee-led) over FY20/21, providing impetus to SSSG.

Exhibit 145: Overall store count under Madura division to

witness a fillip on the back of franchisee-led expansion

Total Stores Count

234

143

269

290

194

138

New Stores

250

Exhibit 146: Expect the EBO network to grow strong on the

back of franchisee-led expansion

EBO/Stores

Value Stores

Source: MOFSL, Company

Brand extensions to support growth

ABFRL is wisely leveraging the goodwill of its brands to monetize untapped

opportunities from brand extensions, a category it recently forayed into. This

includes casuals, footwear – sports and formal, and other accessories of the (four)

lifestyle brands. Brand extensions acted as a key catalyst to FY18 growth,

contributing ~45-50% to the overall brand revenue; however, it is subtle v/s the fast

growing revenue of the lifestyle brands. We believe that the latent demand for

extensions should provide a fillip to the overall growth.

April 2019

Retail | Thematic

Exhibit 147: Louis Philippe – brand extensions

Exhibit 148: Peter England – brand extensions

Source: MOFSL, Company

Exhibit 149: Van Heusen – brand extensions

Exhibit 150: Allen Solly – brand extensions

Source: MOFSL, Company

Share of online revenue to

reach 10% by FY21E

10%

FY18

FY21E

We expect revenue for the Lifestyle segment to grow at a strong 11% CAGR reaching

INR53b over FY19-21. SSSG is expected at 6% driven by (a) improving macro-

economic conditions and competitive environment in the market, which pulled

down sales in the last 2-3 years, (b) increasing share of brand extensions like casual

wear and accessories, and (c) premiumization of products through higher price

SKUs. Increase in online revenue share (from the current 7% to 10% over the next

three years) and accelerated store expansion by addition of 250 net EBOs annually

should drive the Lifestyle segment growth.

Exhibit 151: Revenue to grow at 11% CAGR over FY19-21E

Lifestyle Brands revenue (INR b)

11%

-2%

YoY growth (%)

10%

12%

Exhibit 152: EBITDA margin to gradually inch up reaching

13% by FY21E

Lifestyle Brands EBITDA (INR b)

EBITDA margin (%)

12.5%

11.6%

4.5

FY18

5.4

FY19E

12.6%

37.3

FY16

36.5

FY17

38.7

FY18

43.0

FY19E

47.3

FY20E

53.0

FY21E

4.2

FY17

6.0

FY20E

6.7

FY21E

Source: MOFSL, Company

April 2019

Retail | Thematic

Revamped Pantaloons set to drive earnings

Expect 100bp margin expansion over FY19-21



Pantaloons’ stands at an inflection point with aggressive store expansion tapping the

prospective value fashion format.

ABFRL undertook a series of restructuring measures to transform Pantaloons from a

premium retail format to a value-fashion format, which included reducing (1) store

size (from ~17-18k sqft to 10-15k sqft), and (2) product pricing (starting from INR699).



We expect the Pantaloons’ division to register strong 17% revenue CAGR over FY19-21

on healthy 5% SSSG and a strong addition of around 65 stores annually.

Uptick in the private label mix (expected to reach 70-75% by FY21), healthy SSSGs and

scale benefits should drive 100bp margin expansion, reaching 9% by FY21.

Tapping the fastest growing value fashion segment

Branded apparels being 4x costlier than unorganized local products, has led to the

value-fashion retail format gaining prominence in the last few years as it is priced at

2x v/s local apparel products. In order to target this category, Pantaloons (post its

acquisition from Future Group), has been completely revamped from a lifestyle

apparel retail chain to value fashion format.

Pantaloons contributed ~40% to the overall revenues of ABFRL (FY19E). Competing

with, FBB, Reliance Trends and Max at the lower end and Westside at the higher

end, it is largely spread across tier-1 and 2 cities with an average selling price of

~INR699. With burgeoning demand, the branded apparel market is expected to

grow at 14% CAGR over CY15-21 and therefore immense growth opportunities exist

for each player in the value fashion category. This is evident from the fact that

Pantaloons/Brand Factory grew at a healthy 16%/28% CAGR over FY15-18 while the

premium and sub-premium formats of Central/Shoppers’ Stop grew at a modest

9%/6% CAGR over the same period.

Exhibit 153: Pantaloons - Healthy revenue mix across all four

regions

South

27%

29%

28%

16%

FY16

West

28%

29%

26%

17%

FY17

East

North

29%

28%

25%

18%

FY18

Source: MOFSL, Company

18%

38%

Exhibit 154: Pantaloons - Revenue mix across women’s

category is witnessing an uptrend

Men

17%

39%

Women

14%

42%

Kids

11%

10%

44%

Non Apps

10%

11%

44%

12%

44%

35%

FY13

35%

FY14

35%

FY15

35%

FY16

35%

FY17

36%

FY18

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 155: Revenue growth for value fashion formats have outpaced the premium

formats

28%

Revenue CAGR over FY15-18

16%

Brand Factory

Pantaloons

Central

Shoppers Stop

Source: MOFSL, Company

Key women-centric brands under Pantaloons’ umbrella include Izabel London,

Anabelle, Candie’s New York, Honey, Akkritim, Rang Manch and Trishaa; menswear

brands include SF Jeans, Richard Parker, Byford, Alto Moda and Ajile.

Last three years of restructuring complete

Post its acquisition in FY13, various restructuring programs were undertaken for

Pantaloons. This involved (a) rationalizing store size for improving productivity;

average size of Pantaloons’ store trimmed to ~13k sqft in FY19E (from 17k sqft in

FY15), and (b) turning Pantaloons into a value-fashion proposition (from a premium

brand under the Future Group). Consequently, the company voluntarily took price

reduction and increased its private label mix (from 40% to 60%), in order to improve

product-price equation, turning it into a value-fashion store.

Improving private label mix

Private label mix for Pantaloons currently stands at 60% (FY18) driven by new

launches and refreshed products. At the time of its acquisition from the Future

Group, private label mix was 40% and management is targeting to further increase

this mix to 70-75% in the next two years.

Exhibit 156: Pantaloons – Rationalization of avg. store size

(sqft’000)…

18.7

17.2

Exhibit 157: …and increasing share of private labels…

Own brands

MFL brands

Other

15.7

15.2

13.7

13.2

12.6

12.3

38%

55%

33%

61%

34%

60%

FY14

FY15

FY16

FY17

FY18

FY19E FY20E FY21E

Source: MOFSL, Company

FY16

FY17

FY18

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 158: …provided impetus to profitability/sqft

Revenue/sqft (INR)

499

EBITDA/sqft (INR)

635

351

208

8,980

8,608

8,835

8,841

8,249

8,262

8,471

8,626

420

437

695

750

Source: MOFSL, Company

Exhibit 159: Private label brands under Pantaloons division

Source: MOFSL, Company

Launch of pantaloons.com to boost ecommerce business

www.pantaloons.com

The company has launched Pantaloons.com – the online platform for Pantaloons

offerings – to quickly boost its presence in the online medium. It is also tying up with

the two online giants – Amazon and Flipkart – to step up the traction for its private

label brands. Since the strategy is similar to that of Madura, management is bullish

about the revenue potential (Madura currently garners ~7% revenues from the

online channel).

Growth levers in place

We expect revenue for the Pantaloons division to grow at 17% CAGR reaching

INR44.7b over FY19-21, mainly on the back of healthy 5% SSSG and steady addition

of 65 new stores.

1) Expect 5% SSSG over FY19-21 led by:

a) Focus on customer loyalty program with ~10m loyal customers contributing

~90% to the total revenue. Higher wallet share from these sticky customers

should further augment growth.

b) Healthy mix of 130 new stores (including franchisee stores) i.e. 40% of the

overall 320 stores (FY19E).

c) Increasing share of private labels from current 60% to 70%.

d) Increasing revenue share from ecommerce channel led by the launch of

pantaloons.com and sale through online medium - Flipkart and Amazon.

2) Store adds run-rate to continue:

We expect 65 store adds annually, with a

combination of 20% franchise stores.

April 2019

Retail | Thematic

Exhibit 160: Pantaloons – healthy 109 store adds…

Total Stores Count

107

134

166

209

275

320

385

450

Exhibit 161: …and increasing stickiness of customers…

Loyalty Base (m)

75%

5.5

75%

6.0

78%

80%

% revenue from loyal customers

93% 92%

90% 91%

New Stores

6.6

7.0

8.0

8.7

9.5

10.2

Source: MOFSL, Company

Exhibit 162: …is expected to drive SSSG (%)

-3%

Source: MOFSL, Company

Expect 100bp margin improvement in two years

EBITDA margin should improve by 100bp over FY19-21E, reaching ~9% by FY21;

subsequently we expect 24% EBITDA CAGR over the same period. This is on the back of

Revival of healthy SSG growth.

Improvement in Private labels contribution,

which garners nearly 55-60% gross

margin v/s ~48% for overall Pantaloons segment.

Scale benefits

as Pantaloons’ revenue is likely to grow at 17% CAGR over FY19-

21E driving operating leverage for non-store cost.

Recent rationalization of Pantaloons’ store cost

including rental, employee and

other costs.

Exhibit 163: Revenue to grow at 17% CAGR over FY19-21E

29%

Exhibit 164: EBITDA margin to expand 100bp, reaching ~9%

by FY21E

EBITDA (INR b)

EBITDA margin (%)

7.7%

8.2%

8.7%

Revenue (INR b)

YoY growth (%)

17%

11%

16.6

18.5

21.6

18%

12%

25.5

28.6

15%

17%

16%

2.3%

4.1%

0.4

0.8

4.8%

4.9%

6.0%

33.0

38.5

44.8

1.0

1.3

1.7

2.5

3.2

3.9

Source: MOFSL, Company

April 2019

Retail | Thematic

Innerwear and Fast fashion – New growth engines

Expect segmental EBITDA to break-even fast, driving overall margins



With just two years since its foray into the innerwear category, revenue from Van

Heusen innerwear has reached INR1.9b (FY19E) led by strong brand pull and

distribution network with 12k channels.



We believe innerwear business thrust on ramping up the distribution reach to 30-40k

channels would not only drive 35% revenue CAGR for ‘Other biz’ segment over FY19-

21 but also lead to fast EBITDA breakeven (INR800m loss FY19E).



Fast Fashion EBITDA loss of INR300m (FY19E) should reach break-even by FY21 led by

renewed focus on rationalizing the store economics through reducing Forever 21 store

size and operating on leaner cost structures.

Innerwear fuelling growth

Branded market remains shallow

In India, the innerwear market stood at a meager 8% (INR250b) of the overall

apparel market in CY16. This is expected to grow at 12% CAGR over CY16-26. The

innerwear segment is mainly categorized into men and women wear - Men’s

innerwear accounts for INR80b (35% of the total innerwear market), while women’s

innerwear category stood at INR163b (~65%); kids’ innerwear market remains

largely unorganized.

Exhibit 165: Innerwear market is expected to grow at 10%

CAGR over CY16-26

Innerwear market (INR b)

Innerwear share (as a % of total apparel market)

11%

35%

Women's innerwear

Men's innerwear

65%

250

2016

801

2026E

Source: Page Industries, MOFSL

Exhibit 166: Men’s innerwear accounts for 35% of the total

innerwear market (%)

Of the massive INR250b industry size, branded (men + women) innerwear market is

miniscule. Though many (international) players like Levi’s, Calvin Klein have forayed

into this category, Jockey continues to rule the market with an annual turnover of

about INR30b (FY19E), out of which ~50% is men’s innerwear. Two key determinants

for Jockey’s monopoly are reach and pricing:

1) Reach:

With a robust distribution network of 50k+ outlets across 1,400+ cities,

Jockey’s offerings are sold predominantly through MBOs, but are also available

across channels of LFS as well as EBOs.

2) Price points:

Jockey offerings are available at attractive price points of ~INR140

in contrast to the premium offerings of Levi’s and Calvin Klein. Thus, the traction

for Jockey’s products continues to increase over the years, which turned ‘Jockey’

into a juggernaut in the innerwear category.

April 2019

Retail | Thematic

Exhibit 167: Spurt in distribution reach led to 19% CAGR in Jockey’s revenue over FY15-18

Distribution channels

30,000

Revenue (INR b)

50,000

FY15

FY18

Source: Page Industries, MOFSL

Reaping benefits of strong brand pull

The innerwear market is massive and largely untapped, and ABFRL forayed into this

category with Van Heusen’s men’s innerwear. With just two years into the sub-

premium category, revenue from the launch of Van Heusen’s men innerwear

reached INR1.9b mark (FY19E). Though the strong 12k distribution channel reach

assisted in generating revenue, the strong brand recall of Van Heusen can’t be

ignored, which is a mainstay for ABFRL with all its brands.

Widening distribution

The company is focused on ramping up its innerwear distribution network to 30-40k

(from the current 12k) channels in the next three to five years in order to compete

with the market leader. Consequently, it is investing heavily in building the

distribution channels offering higher margins to retailers vis-à-vis those provided by

Jockey. Once the ~40k channel network gets ready, we believe that it can introduce

the innerwear category across its other brands too – Louis Philippe, Peter England

and Allen Solly – to leverage the distribution network and strong brand recall.

Management targets to reach INR5b in three years. Overall, we expect the other

segment businesses including Van Heusen innerwear to reach INR6b, 25% CAGR

over FY19-21.

Scale to drive EBITDA growth

Despite the opex heavy investments in the near term, spurt in the revenue from the

category would offset the incremental investments, limiting the EBITDA loss at ~INR0.8b

(FY19E). Further, given the strong brand recall for these brands and the burgeoning

demand for branded innerwear category, as the revenue scales up from the Van Heusen

innerwear offerings, it would only aid in margin expansion. Subsequently, we expect

FY19 EBITDA loss of INR800m to come down to INR300m by FY21.

Exhibit 168: Expect innerwear revenue for ABFRL to grow

~2x over FY19-21E

Innerwear revenue (INR b)

90%

45%

25%

1.0

FY18

1.9

FY19E

2.8

FY20E

3.4

FY21E

YoY growth (%)

Exhibit 169: Expect EBITDA margin for other business

segment to improve from -21% in FY19 to -5% by FY21

Other biz. revenue (INR b)

EBITDA margin (%)

-10%

-28%

1.2

FY17

-26%

2.1

FY18

-21%

3.8

FY19E

4.9

FY20E

5.9

FY21E

-5%

Source: MOFSL, Company

April 2019

Retail | Thematic

Fast-Fashion in WIP

Strong brand pull

Fast Fashion includes ‘Forever 21’ and ‘People’ brands contributing ~5% of overall

revenue.

a) Forever 21:



US-based Forever 21 is a strong fast fashion brand. It was licensed by ABFRL

for 30 years in Jul’16 and is largely run through ecommerce and EBO model.

Globally, Forever 21’s trendy offerings cater to both men and women’s

wear, while in India ABFRL has acquired (offline and online) license

exclusively for women’s wear offerings.



With estimated revenue of ~INR2.5b+ in FY19E, Forever 21 is operated

through 25 EBOs (Mar’19E), with presence across 18 cities (mainly Metro

and Tier I). Though its on-ground presence seems miniscule, Forever 21 has

a strong brand pull in the US, which has driven healthy online demand,

generating ~1/3rd (INR1b) revenue. It operates in the premium price point

of INR800+, competing with Zara (INR12b revenue FY18), among others.

b) People:



With an estimated annual turnover of ~INR1b (FY19), ‘People’ is a fast

fashion brand, targeted towards the youth. It is a homegrown brand with a

network of 98 stores across 48 cities.

Getting the retail model right

Although per store revenue for Forever 21 EBOs was on an uptrend, its profitability

remained muted due to larger-than-required store size and higher operating costs.

Consequently, during 3QFY18, the company kicked off the store rationalization

program for the legacy Forever 21 stores, thus prioritizing the store profitability by

(a) reducing the store size from earlier 10-15k sqft to 6-8k sqft, and (b) closure of the

loss-making stores. Thus, management is focused on getting the per store

economics right, before eying business takeoff.

Moderate store expansion

We believe the company will witness modest annual store adds of sub-10 for

Forever 21 and 10 for ‘People’ brand over FY20/21. This coupled with high single-

digit SSSG should drive 9% revenue CAGR over FY19-21. Furthermore, thrust on per

store economics should result in restricting EBITDA losses and potentially break-

even by FY21E from an EBITDA loss of ~INR300m in FY19E.

Exhibit 170: Expect fast fashion segment to turn EBITDA breakeven by FY21

Fast Fashion revenue (INR b)

EBITDA margin (%)

-6%

-9%

-14%

3.5

FY17

-14%

4.0

FY18

3.6

FY19E

3.9

FY20E

4.3

FY21E

Source: MOFSL, Company

April 2019

Retail | Thematic

Healthy balance sheet, growing cashflow

Franchisee-led store adds to keep balance sheet asset-light



Overall return ratios remained depressed during the past two years due to (a)

profitability of Madura’s Lifestyle business getting partly offset by the loss-making fast

fashion and other categories and (b) ramp-up in store adds impacting Pantaloons’

returns.



Company’s capex requirement remains moderate at ~INR3.3b annually over FY19-21E

driven by Lifestyle’s franchisee model. This should provide impetus to overall FCF,

expected to reach INR4.1b by FY21 v/s INR2b in FY19.



With strong revenue/EBITDA growth and steady capex requirements, we believe the

company is ready to witness a fillip in overall return ratios; expect RoCE to reach 18%

by FY21 (13% FY19E).

Healthy WC terms, asset-light distribution and improving profitability to

garner healthy ROCE

Typically, LFS operates on a Sale or Return basis, thus keeping the inventory on the

books of the brand owner. However, ABFRL due to its revenue scale of INR44.6b,

which is easily 4-5x of other brands, is able to negotiate a sale on an outright basis

instead of an SOR basis. This has allowed it to garner healthy inventory of 86 days.

With account payable of 98 days, the net working capital is merely 18 days, thus

allowing ABFRL a lean working capital.

The lifestyle business being predominantly a lease EBO model allows it to garner

about 30% ROCE. However, the store rollout in fast fashion and other smaller

segments coupled with EBITDA losses pulled down Madura’s (Lifestyle + Fast

Fashion + Innerwear + Other business) ROCE to ~15%. We believe rationalization of

stores as well as turnaround of Fast Fashion and other businesses should improve

ROCE. Further, Pantaloons due to its aggressive store expansion and modest EBIT

has posted meager 1% ROCE in FY18. We believe this should improve to double-

digits in the next two years on better asset monetization driven by improving asset

turns and EBITDA CAGR of 24% in FY19-21E.

FCF generation to improve

Free cash flows (post interest cost) too should turn positive with superior earnings

generating OCF CAGR of 21% and stable overall capex of INR3b. Despite aggressive

targets of 250 EBO adds under Lifestyle and 65 Pantaloons store adds, we believe

growth capex requirements should be maintained at INR3b (INR1b/ INR1.5b/

INR500m for Lifestyle/ Pantaloons/ Other segments, respectively). Lifestyle

segment’s franchisee-led model given its strong brand pull requires limited

maintenance capex. Furthermore, other segment capex of a meager INR500m

driven by about 10-store adds each for Forever 21 and People, and investment in

innerwear would keep the total capex requirements steady at ~INR3b, thus, limiting

the balance sheet from excessive bloating. Thus, strong revenue growth and uptick

in margins coupled with stable capex requirements should result in healthy FCF. We

expect the company to generate INR4.2b FCF by FY21 (INR1.9b FY19).

April 2019

Retail | Thematic

Exhibit 171: Low working capital despite being a brand

owner

Inventory Days

Net WC days

Exhibit 172: Franchisee-led store expansion should limit

capex (INR b)

1.2

2.1

4.5

3.3

3.2

3.3

Source: MOFSL, Company

Exhibit 173: Increase in FCF…

FCF (INR b)

0.6

-1.6

-4.2

1.0

-0.5

-1.5

-0.2

FCF yield (%)

-0.1

1.5

2.7

1.0

1.9

1.7

3.0

2.4

4.2

Exhibit 174: …should lead to a plunge in debt

Net Debt (INR b)

1.7

1.6

1.7

2.1

1.6

Net Debt/Equity (x)

1.3

1.0

0.6

12.2

10.0

16.6

15.2

19.9

17.8

17.3

15.4

Source: MOFSL, Company

Exhibit 175: Return ratios to surge

-15

-30

RoE (%)

RoCE (%)

RoIC (%)

Source: MOFSL, Company

April 2019

Retail | Thematic

Franchisee-led model garners higher RoCE

Lifestyle brands

Franchisee-led store model remains the mainstay for network expansion under the

Madura division. Consequently, majority of the capex and opex requirements get

shifted to the franchisee, thus, amplifying the return ratios – mainly for the Lifestyle

segment’s EBOs. Thus, for an investment of INR4m per store (capex - INR3m per

store (INR2000/sqft) and opex - INR1m per store), store level RoCE for EBOs is ~66%.

Strong brand pull for the four signature brands under the Lifestyle segment coupled

with an attractive ~1.5k sqft average store size acts as a key catalyst driving

productivity - INR17.4k per sqft/INR26m per store. Besides, premium pricing of

brands and lower discounts assist in garnering higher (60%+) gross and (~12%)

EBITDA margins.

Pantaloons

Pantaloons’ stores currently operate on an average store size of ~13k sqft (new

stores at 10k sqft), with an average investment of INR31m/store (capex – INR27m

per store (INR2000/sqft) and opex – INR3m per store). Driven by the value-fashion

business model, each store generates healthy average revenue of INR118m with a

4x asset turn. This provides impetus to higher gross profits of INR57m (48% gross

margin) and EBITDA of INR7m (EBITDA margin of 6%). As the proportion of

franchisee-led store mix increases (currently ~17% of the total stores) and the

incremental capex requirement subsides, these margins would further inch up.

Assuming a depreciation of INR6m, the EBIT/store stands at INR1m, garnering post

tax ROCE of about 3%. Over the next two years, as EBITDA margins improve to 9%,

ROCE (post tax) should improve to about ~14%.

Exhibit 176: Per store analysis for payback and RoCE (INR m)

Particulars (FY18)

Per Store

Capex/store

WC/store

Total

Breakeven (in years)

Revenue

Gross profit

Gross margin (%)

Other operating cost

EBITDA

EBITDA margin (%)

Depreciation

as a % of revenue

EBIT

RoCE (Tax - 0%)

1.1

60.0%

11.6%

3.0%

66%

Lifestyle

Per Sq.ft

2,000

593

2,593

1.3

17,367

10,420

60.0%

8,403

2,017

11.6%

514

3.0%

1,503

58%

Per Store

4.3

118

48.0%

6.0%

5.3%

3.0%

Pantaloons

Per Sq.ft

2,000

242

2,242

4.5

8,249

3,959

48.0%

3,461

499

6.0%

434

5.3%

2.9%

Source: MOFSL, Company

April 2019

Retail | Thematic

10% SSSG can drive more than 100bp margin expansion

During the last two years, network rationalization coupled with macro factors had

impacted growth. However, with headwinds now behind, a modest 10% SSSG for a

Lifestyle/Pantaloons store should drive 132bp/114bp EBITDA margin expansion on a

per store basis, led by the inherent fixed cost business model. As the revenue per

store starts scaling up, the operating leverage starts playing out with ~30% of the

cost remaining fixed.

Exhibit 177: Scenario analysis on per store basis (INR m)

Particulars (FY18)

Per Store

Revenue increases by

Revenue

Gross profit

Gross margin (%)

Other Operating Cost

Fixed (%)

Fixed

Variable (%)

Variable

Other Operating Cost

EBITDA

EBITDA margin (%)

Change in bps

EBIT

Breakeven (in years)

RoCE (Tax - 0%)

30%

70%

12.9%

132

0.9

85.5%

30%

70%

14.0%

242

0.8

105.3%

30%

70%

7.2%

114

3.3

10.2%

30%

70%

8.1%

210

2.7

17.4%

Source: MOFSL, Company

10%

60.0%

Lifestyle

Per Sq.ft

20%

60.0%

Per Store

10%

130

48.0%

Pantaloons

Per Sq.ft

20%

142

48.0%

April 2019

Retail | Thematic

Valuation and view

Recommend Buy with TP of INR260



We initiate coverage on ABFRL with a Buy rating and an SOTP-based TP of INR260. We

ascribe 23x to Lifestyle segment FY21E EBITDA of INR6.7b (given its strong brand

value), 18x to Pantaloons FY21E EBITDA of INR3.9b (expected to drive earnings

growth) and 1x FY21E EV/sales for the fast fashion and other business.



At CMP, the stock is trading at 38x/19x FY21E P/E and EV/EBITDA. We have ascribed

~10% premium to the target EV/EBITDA multiple for our apparel coverage, but ~15%

discount to three-year average, which should reduce with a better performance in

Pantaloons and an uptick in the return ratios.

SOTP of INR260, Buy

ABFRL offers secular growth potential with a unique portfolio of established industry

leading brands and high growth categories like value-fashion retail chain. Its strong

platform of established brands, deep distribution and management capability allow

it to launch multiple products across apparel categories like its recent inroads in the

innerwear segment, women’s fast fashion, casual wear and luxury retail chain which

can continue to fuel growth and drive valuations. Further, it is among the few

apparel companies that have garnered a healthy return profile (Lifestyle ~30%).

We have valued ABFRL on SOTP basis arriving at a TP of INR260, 19% upside,

recommending

Buy.

We have assigned the Lifestyle segment 23x EV/EBITDA of

FY21E EBITDA of INR6.7b, given its strong brand value. We have assigned 18x

EV/EBITDA to Pantaloons FY21E EBITDA of INR3.9b as we believe there exists a

strong foundation for robust future growth; as it delivers strong earnings in the next

1-2 years, valuation should improve. Further, the other business including fast

fashion and innerwear among others is yet loss-making as a portfolio and we

therefore assign 1x EV/sales to FY21E sales. We have ascribed ~10% premium to

target EV/EBITDA multiple for our apparel coverage (ABFRL, FLF, VMART, Trent,

Shoppers Stop), but ~15% discount to three-year average conservatively. Despite

the sharp rally over the last two quarters, this gap can further reduce as Pantaloons

delivers better margins, driving a healthy improvement in return ratios and cash

flows over the next two years.

April 2019

Retail | Thematic

Exhibit 178: FY21 SOTP-based valuation

Particulars

Lifestyle Brands (gross EBITDA)

Pantaloons (gross EBITDA)

Others (gross sales)

Total EV (net)

Less: Net debt

Equity Value

No of Shares (m)

Target Price (INR)

CMP (INR)

Upside (%)

EBITDA/Sales (INR b)

6.7

3.9

10.2

Multiple (x)

Value (INR b)

154

212

200

769

260

219

19%

Source: MOFSL, Company

Exhibit 179: ABFRL: 1-year forward P/E band

P/E (x)

Min (x)

120

100

51.8

45.9

Avg (x)

+1SD

110.9

96.1

74.0

Max (x)

-1SD

Exhibit 180: ABFRL: 1-year forward EV/EBITDA band

EV/EBITDA (x)

Max (x)

+1SD

Avg (x)

Min (x)

-1SD

49.3

33.6

23.4

13.2

6.8

54.4

24.1

Source: Bloomberg, MOFSL

April 2019

Retail | Thematic

Financials and valuations

Standalone - Income Statement

Y/E March

Total Income from Operations

Change (%)

Raw Materials

Employees Cost

Rent

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY14

16,612

9,523

1,497

2,503

2,755

16,278

98.0

334

2.0

1,090

-756

1,173

-1,877

0.0

-1,877

-11.3

FY15

18,507

11.4

10,004

1,837

2,825

3,114

17,780

96.1

727

3.9

1,835

-1,108

1,202

-2,281

0.0

-2,281

21.5

-12.3

FY16

60,339

226.0

27,518

6,205

9,032

13,801

56,555

93.7

3,784

6.3

3,381

403

1,765

264

-1,098

0.0

-1,098

-51.9

-1.8

FY17

66,029

9.4

30,070

7,058

10,871

13,638

61,637

93.3

4,392

6.7

2,425

1,967

1,797

382

552

0.0

552

-150.3

0.8

FY18

71,721

8.6

33,901

7,723

10,429

14,985

67,038

93.5

4,683

6.5

2,805

1,878

1,716

328

490

-688

-140.5

1,178

113.4

1.6

FY19E

82,251

14.7

40,094

8,965

11,280

15,743

76,082

92.5

6,169

7.5

2,835

3,334

1,836

509

2,006

0.0

2,006

70.3

2.4

FY20E

93,359

13.5

44,756

10,083

12,712

18,209

85,759

91.9

7,600

8.1

3,319

4,281

1,711

534

3,103

0.0

3,103

54.7

3.3

FY21E

1,06,545

14.1

51,202

11,507

14,268

20,253

97,230

91.3

9,315

8.7

3,946

5,369

1,461

561

4,468

0.0

4,468

44.0

4.2

(INR m)

Standalone - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans & Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

FY14

933

4,862

5,795

10,155

15,949

19,905

3,504

16,401

179

4,892

3,584

170

108

1,031

5,583

3,756

1,673

154

-691

15,949

FY15

928

9,211

10,139

16,864

27,003

29,868

5,187

24,681

157

19,796

11,503

4,085

270

3,938

17,631

12,415

4,621

595

2,165

27,003

FY16

7,688

1,367

9,055

15,436

24,491

24,943

1,711

23,232

254

22,338

14,105

3,124

192

4,917

21,334

14,298

6,290

746

1,005

24,491

FY17

7,705

1,876

9,582

20,446

30,028

27,575

2,704

24,871

250

25,238

14,313

4,522

497

5,907

20,331

14,578

3,823

1,929

4,907

30,028

FY18

7,717

3,214

10,931

18,615

-688

28,857

30,667

4,844

25,823

459

30,326

16,912

5,518

728

7,168

27,793

20,093

5,780

1,920

2,533

28,858

FY19E

7,717

5,220

12,937

18,115

31,052

33,767

7,679

26,088

459

34,926

19,380

6,760

899

7,887

30,422

22,084

6,084

2,253

4,505

31,051

FY20E

7,717

8,324

16,040

16,115

32,155

37,067

10,998

26,069

459

38,878

21,997

7,673

767

8,441

33,251

24,043

6,650

2,558

5,627

32,155

(INR m)

FY21E

7,717

12,792

20,509

13,115

33,623

40,367

14,945

25,422

459

43,938

25,104

8,757

1,028

9,049

36,196

26,271

7,006

2,919

7,742

33,623

April 2019

Retail | Thematic

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Net Debt/Equity

FY14

-2.4

-1.0

7.5

0.0

FY15

-3.0

-0.6

13.2

0.0

FY16

-1.4

3.0

11.8

0.0

FY17

0.7

3.9

12.4

0.0

305.8

56.7

17.6

2.9

43.0

0.0

-0.3

5.9

8.6

7.4

2.4

2.2

1.2

1.1

2.1

FY18

1.5

5.2

14.2

0.0

143.3

42.4

15.4

2.6

39.9

0.0

3.5

11.5

17.8

15.9

2.3

2.5

102

1.1

1.6

FY19E

2.6

6.3

16.8

0.0

84.1

34.9

13.0

2.3

30.2

0.0

2.5

16.8

12.7

11.6

2.4

2.6

1.1

1.8

1.3

FY20E

4.0

8.3

20.8

0.0

54.4

26.3

10.5

2.0

24.3

0.0

3.9

21.4

15.2

14.1

2.5

2.9

1.2

2.5

1.0

FY21E

5.8

10.9

26.6

0.0

37.8

20.1

8.2

1.7

19.4

0.0

5.4

24.5

18.0

17.0

2.6

3.2

1.2

3.7

0.6

0.0

-5.1

-32.4

0.8

1.0

0.9

-0.6

1.7

0.0

-16.4

-28.6

-5.0

-5.3

0.6

0.7

227

245

1.1

-0.9

1.6

0.0

1.3

-11.4

2.6

1.6

2.4

2.5

1.0

0.2

1.7

Standalone - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY14

-1,877

1,090

1,173

-29

408

763

-62

701

-1,175

-473

7,968

6,813

-6,802

-857

-7,659

-144

253

108

FY15

-2,281

1,835

1,202

-15

-1,096

-357

-3

-359

-1,163

-1,522

198

-889

2,602

-1,191

1,411

162

108

271

FY16

-1,098

3,381

1,765

-19

-741

3,288

-179

3,109

-2,076

1,033

219

-1,857

-16

508

-1,821

-1,330

-78

270

192

FY17

535

2,425

1,761

-30

-573

4,118

134

4,252

-4,499

-247

-4,455

1,948

-1,450

509

306

190

496

FY18

490

2,805

1,669

-10

760

5,714

237

5,951

-3,271

2,680

-36

-3,250

-1,832

-649

-2,469

233

495

727

FY19E

2,006

2,835

1,836

-1,112

5,566

-509

5,057

-3,100

1,957

511

-2,547

-500

-1,836

-2,336

174

725

899

FY20E

3,103

3,319

1,711

-1,254

6,880

-534

6,346

-3,300

3,046

536

-2,764

-2,000

-1,711

-3,711

-130

897

767

(INR m)

FY21E

4,468

3,946

1,461

-1,854

8,022

-561

7,461

-3,300

4,161

563

-2,737

-3,000

-1,461

-4,461

263

765

1,028

April 2019

April 2019

Initiating Coverage

Retail | Thematic

| Sector: Retail

BSE SENSEX

38,862

S&P CNX

11,666

Avenue Supermarkets

CMP: INR1,446

TP: INR1,300 (-10%)

Sell

Well-oiled growth engine

But limited room for re-rating

Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)



DMART IN

624

902.5 / 13

1696 / 1127

-8/-4/-12

1195

18.8



Financials Snapshot (INR b)

Y/E MARCH

FY19E FY20E FY21E

Sales

199.5 245.4 309.8

EBITDA

16.8

21.0

27.1

9.6

12.3

16.3

EPS (INR)

15.3

19.7

26.1

EPS Gr. (%)

18.6

28.5

32.7

BV/Sh (INR)

90.1 109.8 136.0

P/E (x)

94.4

73.4

55.3

P/BV (x)

16.0

13.2

10.6

EV/EBITDA (x)

53.7

42.8

32.9

EV/Sales (x)

4.6

3.7

2.9

RoE (%)

18.6

19.7

21.3

RoCE (%)

17.7

18.8

20.5

Shareholding pattern (%)

As On

Dec-18 Sep-18 Dec-17

Promoter

81.2

82.2

DII

3.1

3.0

3.6

FII

5.9

5.5

3.6

Others

9.8

10.3

10.7

FII Includes depository receipts

Stock Performance (1-year)



DMART has consistently outperformed its peers, with strong 20% SSSG and 8.4%

EBITDA margin (FY19). Its EDLC-EDLP strategy has been the key catalyst for its

success. Better assortment, scale and vendor mix, supply chain efficiencies, and rent

savings provide a competitive edge to DMART.

We expect revenue CAGR of 25% over FY19-21, driven by 22% SSSG and healthy 26

store additions annually. As around one third of its 179 stores (FY19E) that are in

early growth phase move up in their lifecycle, productivity should inch up. This,

coupled with judicious store location (targeting under-served regions), bodes well for

SSSG.

~15% gross margin, coupled with operating leverage, should lead to modest 30bp

EBITDA margin expansion to ~9% over FY19-21. We expect 27% EBITDA CAGR and

31% PAT CAGR over FY19-21.

At CMP, the stock is expensively valued at 43x/33x FY20/21E EV/EBITDA and 73x/55x

FY20/21E P/E. At such rich valuations, we believe there is limited room for a rerating.

We, thus, maintain our Sell rating with a target price of INR1,300, ascribing 30x (~40%

discount to two-year average multiple of 45x, since IPO) EV/EBITDA to FY21E EBITDA

of INR27b.

King of value retail

DMART’s well-oiled business model with a strong focus on low procurement and

operating cost has created a deep moat around it. Its optimal product assortment,

strong supplier network and low payable days ensure low procurement cost and

enable it to squeeze cash discounts from creditors. Its store ownership model, right

store size (~30,000sf) and low supply chain cost with auto replenishments help it

maintain low operating cost to achieve the key pillar of its success – everyday low

cost (EDLC) and everyday low price (EDLP). In a predominantly food and grocery

business (52% revenue contribution) with wafer-thin margins (15% gross margin),

DMART is able to offer everyday low pricing, unlike peers that offer discounts on

select days in a week or month, creating a competitive edge.

Proven recipe for high SSSG

DMART’s high SSSG of over 20% has been a pivotal link in delivering 8.4% EBITDA

margin (FY19E), as against peers’ mid-single-digit EBITDA margins (5-7%). DMART’s

performance is aided by (a) high sales velocity, triggered by a virtuous cycle of low-

cost offerings and high inventory churn, (b) accelerated store adds, with ~30% of

the stores less than two years old and in high growth phase and (c) strategic store

locations – targets stores in virgin locations with low competition, giving it first-

mover advantage and an opportunity to create loyal customers by delivering value.

Winning against the tide

Unlike the leased store model adopted globally to achieve scale, DMART has

chosen the owned store model. Though owned stores have a longer payback

April 2019

Retail | Thematic

period of about nine years, DMART has achieved healthy scale without severe

pressure on the balance sheet. This model has enabled it to (a) keep operating cost

low, allowing high sales velocity and store productivity, (b) de-risk itself from store

churn due to lease model, allowing it to take advantage of a store’s best years of

profitability (RoCE of ~30% from the fifth year), and (c) open stores in clusters,

resulting in scale-related supply chain and marketing cost benefits, as well as higher

brand recall. Though it is difficult to gauge the indirect impact of the lease model on

DMART’s EDLC strategy, and subsequently, on inventory churn and store

productivity, simple math indicates that the lease model may impact store EBIT

margin by 170bp but improve RoCE from 19% to over 35% and improve scalability,

both in terms of investment requirement and execution capability.

The question is:

If the company continues its ownership model, what would be the

store addition potential? We believe DMART’s cash flows, along with IPO proceeds,

provide a runway to add stores (capex of ~INR400m/store) for the next two years

without any requirement from external sources. This will help garner cumulative FCF

of INR8.1b over FY19-21 and expand the profit base from new stores – enough to

trigger an engine of profit growth that should sustain healthy store addition for the

next 3-5 years. Yet, in the long term, growth through the ownership model without

meaningful reliance on external capital could be challenging.

Earnings growth to sustain over FY19-21

DMART’s spectacular average SSSG of over 20% in the last five years (except FY18)

has been a hallmark of success in an industry where peers have hardly managed to

achieve SSSG of 8-10% consistently. The recent IPO has filled its fuel tank for steady

store additions, which should help sustain growth in the conceivable future. We

expect addition of 26 stores and 22% SSSG in each of the next two years (FY20, and

FY21), driving 25% revenue CAGR over FY19-21. DMART’s stellar EBITDA margin of

8.4% in FY19E already factors in high efficiency gain. We believe management’s

focus on competitive pricing over margin improvement would offset the scale-

related opex benefits. Consequently, we expect EBITDA margin to expand by modest

30bp to ~9% (FY21). Further, IPO-driven debt repayment should also save interest

cost. We expect CAGR of 27% in EBITDA and 31% in PAT over FY19-21. DMART’s

well-oiled working capital cycle and asset turns should continue improving RoCE

from 18% in FY19E to ~21% by FY21.

Rich valuations to sustain, but little left on the table

DMART’s remarkable consistency in achieving industry leading growth, margins and

RoCE despite a relatively asset-heavy model is captured in the stock valuation. At

FY21E EV/EBITDA of ~33x and P/E of ~55x, it commands a healthy 2x premium to

FRL. Over the last two years, DMART’s 2-3x revenue growth, ~150bp higher EBITDA

margin v/s industry players due to its ownership model and better competitive

position (seen in product pricing, growth, margins, RoCE) helped it to command

better valuations. We expect the valuation premium to continue until DMART is able

to maintain its earnings growth lead. Yet, at EV/EBITDA of 33x and P/E of 55x, there

is hardly any upside potential even on FY21. Our TP stands at INR1,300 – 30x (~40%

discount to two-year average multiple of 45x, since IPO) FY21E EV/EBITDA. We

recommend

Sell.

April 2019

Retail | Thematic

King of value retail

EDLC-EDLP the mantra



Thriving on the business mantra of EDLC-EDLP, DMART has evolved as a low cost value

retailer, deriving ~52% of its revenue from food and grocery.

Optimal product assortment, scale, vendor mix and historically low creditor days have

consistently backed DMART’s low procurement cost, while its store ownership model,

cluster-based expansion and ~32ksf store size (offering wide range of SKUs) have

reduced opex, providing impetus to offer lower prices to customers (on daily basis).

This gives DMART an economic moat, helping it to garner strong SSSG and healthy

EBITDA margins relative to peers.

DMART operates a virtuous cycle of low cost procurement and operating cost, which

allows it to offer a value retail proposition to customers at significantly lower prices

than peers. This increases sales velocity and drives store productivity, enhancing

profit generation.

EDLC-EDLP strategy – a key catalyst

Despite operating predominantly in the food and grocery business (52% of revenue),

with wafer thin margins (8.4% EBITDA margin), DMART is able to provide the lowest

cost offerings to customers consistently, creating strong customer loyalty. Its value

retailing format operates on everyday low cost - everyday low price (EDLC-EDLP)

strategy. It offers low prices daily rather than as a special promotion limited to

certain products or to a particular day, week or any other specific period in the year.

It is able to do so by achieving low procurement and operations cost.

Exhibit 181: Total billings on a steep rise (m)

Total Bills Cuts (INR mn)

108.5

84.7

43.1

53.4

67.2

134.4

31.8

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Source: MOFSL, Company

Exhibit 182: Revenue mix remains skewed (FY12)…

Exhibit 183: …towards Foods category (FY18)

Foods

26.0%

Foods

Non-Foods (FMCG)

General Merchandise &

Apparel

28%

52%

20%

Non-Foods (FMCG)

53.0%

21.0%

General

Merchandise &

Apparel

Source: Company, MOFSL

April 2019

Retail | Thematic

The EDLC-EDLP strategy requires minimization of (a) cost of procurement, and (b)

cost of operations to achieve low prices on a daily basis. DMART minimizes

operating costs in several ways: (1) it owns underlying real estate or enters into

long-term lease arrangements for most of its stores to minimize rental costs, (2)

procures goods directly from vendors and manufacturers, (3) employs an efficient

logistics and distribution system, and (4) maintains strong focus on product

assortment to minimize inventory build-up, supported by efficient store operations.

The following are the key drivers of DMART’s EDLC-EDLP strategy:

Optimal product assortment and low procurement cost:

DMART’s key strategy is to

ensure strong sales velocity to create high store productivity, leading to higher store

profitability. This is achieved by (a) customizing the product assortment in each

store keeping in mind local demands, (b) locating the best product sources in

relation to both quality and price, and (c) sourcing products from regions where the

product is widely available or manufactured to minimize procurement costs.

Low creditor days:

One of the key factors driving low cost operations is DMART’s

efficient working capital cycle, with single-digit creditor days. DMART operates on

the philosophy that if creditors are paid on time, they can be squeezed to pass on

the working capital cost savings. This allows it to reduce cost of procurement.

Besides, increased churn triggered by lower pricing allows higher turnover ratio,

thus improving earnings.

Exhibit 184: Creditor days consistently low for years

Trade Payable days

Source: Company, MOFSL

No rental cost:

Unlike the conventional lease model used globally in the retail

business, DMART has adopted the capex-heavy ownership model and used it in its

favor, reducing operating cost and subsequently driving low cost business growth.

The store ownership model helps DMART to control fixed costs per store and to

execute its EDLC-EDLP strategy effectively. The rent savings outweigh the capital

servicing costs and provide a significant competitive advantage.

Cluster-based approach – reducing supply chain cost:

DMART’s expansion has

predominantly covered Maharashtra, Gujarat, Telangana and Andhra Pradesh using

a cluster-based approach. Strengthened store and distribution center presence

within a radius of a few kilometers has ensured (a) better understanding of local

needs and preferences, and tailoring offerings accordingly, (b) higher cost efficiency

due to economies of scale achieved in supply chain and inventory management, and

marketing and advertising initiatives.

April 2019

Retail | Thematic

Exhibit 185: Expanding presence through cluster approach…

(store count)

FY12

FY18

Exhibit 186: …with four key markets accounting for 86% of

total store network (FY18)

Maharashtra

Gujarat

40%

Telangana

Karnataka

Andhra Pradesh

19%

Other region

14%

Maharashtra

Gujarat

Karnataka

12%

Andhra Pradesh

& Telangana

Source: Company, MOFSL

Right store size – offering wide range of SKUs:

With an average size of ~32ksf each,

DMART stores are nearly 15% smaller than peers’ stores. Given the limited space,

DMART stores restrict inventory to only higher-selling SKUs, thus improving store

productivity. This is reflected in DMART’s productivity – at ~INR38k/sf, the

productivity of DMART stores is nearly double that of its peers.

Exhibit 187: Average store size of ~32ksf for DMART (FY19E)

Avg. store size ('000 sqft)

Exhibit 188: DMART garners ~38k revenue/sf (FY19E)

Revenue/sqft (INR'000)

35.3

Big Bazaar/FBB

Big Bazaar includes FBB

31.8

D-Mart

Source: Company, MOFSL

12.7

Big Bazaar/FBB

37.6

D-Mart

Source: Company, MOFSL

Exhibit 189: Overall productivity to grow at ~8% CAGR over FY19-21E (INR k)

37.6

40.0

44.3

13.9

18.5

21.4

23.9

28.4

31.9

33.4

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Source: MOFSL, Company

April 2019

Retail | Thematic

Proven recipe for high SSSG

Expect 22% over FY19-21



We expect DMART to add ~26 stores per year, taking total store count to ~231 by

FY21. Also, about a third of its current 179 stores (FY19E) are less than two years old.

As these stores move up in their lifecycle, productivity should rise, driving SSSG.

This coupled with (1) judicious store location – targeting under-served regions, and (2)

EDLP mantra – value offerings catering to low-to-upper-middle class should drive high

inventory churns, driving strong SSSG.

We expect DMART to continue its strong SSSG momentum, with an average 22% SSSG

over FY19-21, driven by robust store adds, judicious locations, and the EDLP mantra.

Accelerated store additions

Despite operating on ownership model, DMART’s store count has more than

doubled from 75 in FY14 to 179 in FY19E. Retail business area too grew 160% to

5.7msf, highlighting that the ownership model has had limited impact on its pace of

growth. With a large proportion of stores in early stage of growth, DMART’s average

SSSG has continued to hover at >20%, far higher than the average industry SSSG of

8-10%.

Exhibit 190: Retail business area to grow at ~14% over FY19-

Total Retail Business Area (sqft m)

Area Additions (sqft m)

0.7

0.8

0.9

3.4

4.1

4.9

5.7

6.6

7.4

110

131

155

179

205

231

Exhibit 191: Store count has more than doubled over FY14-

19E

Total Store Count

New Stores

0.2

1.6

1.8

0.4

2.2

0.5

2.7

Source: Company, MOFSL

Exhibit 192: ~1/3 of stores less than two years old (%)

27%

42%

Less than 2 years

2-5 years

More than 5 years

31%

Source: Company, MOFSL

April 2019

Retail | Thematic

Strategic locations with cluster-based approach

DMART’s selection of suitable locations for stores has been critical to its steady

growth. It aims to be an early mover in its target markets to take advantage of the

opportunities offered by these under-served regions. It takes the cluster approach,

targeting densely-populated neighborhoods and residential areas inhabited by

lower-middle, middle and aspiring upper-middle class consumers. This enables

DMART stores to achieve high footfalls and healthy revenue growth.

Exhibit 193: DMART’s geographical footprint (FY18)

Source: Company, MOFSL

EDLP strategy enabling high volume growth

DMART’s EDLP strategy allows it to grow above industry growth rate. Even its

mature stores are able to grow at 8-10%. The combination of high growth in new

stores and industry-leading growth in mature stores provides a good mix of growth

engines for elevated SSSG.

Exhibit 194: Expect strong 22% SSSG over FY19-21 (24 months, %)

32%

26%

20%

22%

21%

14%

20%

22%

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY21E

Source: Company, MOFSL

April 2019

Retail | Thematic

Winning against the tide

Store ownership model a test in the longer term



Though the store ownership model provides ~170bp higher EBIT margin than the lease

model, the latter knocks down the former in terms of RoCE. Yet, lower costs enable

the ownership model to offer low pricing in a low margin business.

We believe its cash flows along with IPO proceeds should meet its FY20-21 capex

requirements of ~INR21.1b. Yet in the long term, the current pace of growth through

ownership model will be difficult without external funding.

DMART predominantly operates on an ownership model (including long-term lease

arrangements – the land is leased for at least 30 years and the building is owned by

DMART). Despite adopting a capex-heavy approach, DMART’s balance sheet and

leverage position remain comfortable. It enjoys industry-leading RoCE of ~18%. We

try to dissect the reasons.

Payback of less than nine years

DMART’s store investment is nearly 4x (Gross Block of INR8,500/sqft) required

under the lease model. This is because it invests in land/building; in the lease model,

the investment is only in store fit-outs. However, assuming a rent of

INR68/sf/month for DMART’s owned properties (20% discount to FRL due to its sub-

premium locations), it might require about nine years to recover the investment

through rental cost savings.

Ownership model saves 170bp on EBIT

While it is difficult to gauge the indirect impact of the lease model on DMART’s EDLC

strategy (and subsequently, on inventory churn and store productivity), simple math

indicates that the lease model may impact store EBITDA margin by about 250bp due

to rental cost, but net of depreciation cost (80bp), the impact on EBIT margin would

be ~170bp. Despite its asset-heavy store ownership model, DMART garners ~20%

RoCE. Looking at a typical 10-year lifecycle for a DMART store, we find that in year-5,

the store starts generating EBITDA margin of 10% and RoCE of over 30%, and

therefore, benefits from limited risk of store churn. In the leased store model, the

risk of store churn is significant, given the periodic rental rate renegotiations.

April 2019

Retail | Thematic

Exhibit 195: DMART: Ownership v/s Lease model (FY18, INR m)

Particulars

Revenue

Revenue/store

Revenue/sqft (INR)

Rental expense

as a % of sales

Rentals/sqft (INR)

EBITDA

Margin (%)

Depreciation

as a % of rev

EBIT

Margin (%)

ROCE (%)

Payback (years)

Capex recovery via rent (years)

Own Model

1,50,332

1,051

33,407

13,528

9.0%

1,590

1.1%

11,938

7.9%

19%

2.7

Lease Model

1,50,332

1,051

33,407

3,799

9,729

6.5%

397

0.3%

9,331

6.2%

37%

1.0

9.7

Source: MOFSL, Company

Lease model RoCE superior, but competitive advantage could be

compromised

Using simple math, we find that DMART’s current RoCE of 19% could shoot up over

35% if it were following the leased store model – the steep capex requirement more

than offsets the savings in rental costs. This could also improve DMART’s scalability

proposition, both in terms of investment requirement and execution capability.

However, the high operating cost pushed up by rentals could deter the pricing edge

hurting profitability indirectly.

Growth rate to sustain for five years

If DMART continues its ownership model, what would be the store add potential?

We believe its cash flows along with IPO proceeds provide runway for stores

addition (capex of INR400m/store for the next two years without any requirement

from internal sources). This in turn will garner a cumulative FCF of INR8.1b over

FY19-21E and expand profit base from new stores enough to trigger an engine of

profit growth that may sustain healthy store addition for the next 3-5 years.

However, in the long term, we believe, the ownership model would be tested.

Exhibit 196: RoCE generation over the store lifecycle

Year of Operation

Sales Capacity (new store Trajectory)

Sales

Gross Margins %

Gross Profit

Operating Costs

Growth in Op expenses

EBITDA (excl. rent)

EBITDA margin (%)

Pre Tax Cash RoCE %

40%

388

14%

(1)

60%

582

14%

80%

776

14%

111

15%

100%

970

15%

147

24%

110%

1,067

16%

170

107

10%

30%

113%

1,096

16%

177

111

10%

31%

118%

1,144

16%

185

117

10%

33%

124%

1,203

16%

196

125

10%

35%

131%

1,271

16%

208

134

11%

37%

138%

1,338

16%

220

144

11%

40%

Source: MOFSL, Company

April 2019

Retail | Thematic

Stellar performance should continue

Expect 31% PAT CAGR over FY19-21



We expect revenue to grow at a robust 25% CAGR over FY19-21, led by 22% SSSG and 26

new store additions. Management’s focus on competitive pricing over margin

improvement would offset the scale-related opex benefits; expect EBITDA margin to

expand by modest 30bp to ~9% (FY21). EBITDA should grow at 27% CAGR over FY19-21.

Further, strong cash flows along with unutilized IPO proceed help trim gearing (and

finance cost), driving 31% PAT CAGR over FY19-21.

We expect RoCE to reach ~21% by FY21, up from 18% in FY19E.

Robust revenue growth to continue

DMART’s spectacular growth has been a hallmark of success in an industry where

peers have hardly managed to achieve SSSG of 8-10% consistently. Its recent IPO has

filled its fuel tank for steady store additions, and thus, sustained SSSG. We expect

DMART to add 26 stores per year and achieve 22% SSSG in the next two years,

driving 25% revenue CAGR over FY19-21.

Exhibit 197: Revenue to witness robust 25% CAGR over FY19-21

51%

40%

Revenue (INR b)

37%

39%

26%

YoY growth (%)

33%

23%

26%

22.1

FY12

33.4

FY13

46.9

FY14

64.4

FY15

85.8

FY16

119.0

FY17

150.3

FY18

199.5

FY19E

245.4

FY20E

309.8

FY21E

Source: MOFSL, Company

Focusing on penetrating existing clusters and farming new ones

DMART plans to further deepen its footprint in Maharashtra, Gujarat, Andhra

Pradesh, and Telangana by expanding its store network in these states. It also

intends to farm new catchment areas in Madhya Pradesh, Karnataka, Chhattisgarh,

Tamil Nadu, and in North India, where it has limited presence. With over a decade of

experience and proven success, DMART is well-positioned to make the most of the

growth opportunities in many western, southern, central and northern states.

EBITDA margin to still witness an uptick

DMART’s stellar EBITDA margin of 8.4% in FY19E already factors high efficiency gain.

Management’s focus on competitive pricing over margin improvement would offset

the scale-related opex benefits; expect EBITDA margin to expand by modest 30bp to

~9% (FY21). Further, IPO-driven debt repayment should also save interest cost. We

expect 27% EBITDA CAGR and 31% PAT CAGR over FY19-21.

April 2019

Retail | Thematic

Exhibit 198: Gross margin to remain steady over FY19-21E

Gross Profit (INR b)

Gross margin (%)

15.9%

14.7% 14.5%

3.2

4.8

15.0% 14.8% 14.9%

15.3%

14.9% 14.8% 14.8%

Exhibit 199: EBITDA margin to inch up gradually over FY19-

21E

EBITDA (INR b)

EBITDA margin (%)

9.0%

6.3% 6.4%

1.4

2.2

7.3% 7.1%

7.7% 8.2%

8.4% 8.6% 8.8%

7.0

9.5

12.8 18.2 24.0 29.6 36.3 45.8

3.4

4.6

6.6

9.8

13.5 16.8 21.0 27.1

Source: MOFSL, Company

Exhibit 200: PAT to grow at 31% CAGR over FY19-21E

PAT (INR b)

PAT margin (%)

4.1

5.2

5.0

5.3

4.8

2.7

0.6

2.8

3.4

3.3

3.7

0.9

1.6

2.1

3.2

4.9

7.9

9.6

12.3

16.3

Source: MOFSL, Company

RoCE to grow despite asset-heavy business model

DMART’s well-oiled working capital cycle and asset turns despite the asset-heavy

model highlight its efficient operations. We expect RoCE to improve from 16% in

FY18 to 21% by FY21 on the back of improving asset turns and EBITDA margins.

Further, its healthy cash flows along with IPO proceed should support capex

requirements and maintain low gearing.

Exhibit 201: Inventory days to remain steady at 30-35 days

Exhibit 202: Net WC days to remain steady near 25 days

Source: MOFSL, Company

April 2019

Retail | Thematic

Exhibit 203: Capex to remain elevated due to robust store

adds… (INR b)

9.1

6.3

4.8

1.8

2.4

2.7

6.4

9.4

10.1

11.0

Exhibit 204: … yet, healthy growth should drive FCF…

FCF (INR b)

FCF yield (%)

2.8

-1.2

-1.1

-0.7

-2.5

-2.0

-1.8

-0.3

5.4

Source: MOFSL, Company

Exhibit 205: …providing impetus to lower gearing

Gross Debt (INR b)

0.5

0.6

0.4 0.5

0.7 0.7

0.8 0.8

0.4

0.1 0.1 0.1 0.1

Gross Debt/Equity (x)

Exhibit 206: Return ratios to witness an uptick

RoE (%)

RoCE (%)

RoIC (%)

1.5 1.8 3.0 3.8 5.3 6.4 9.0 11.9 15.0 4.4 4.4 4.4 4.4

Source: MOFSL, Company

April 2019

Retail | Thematic

Valuation and view

Recommend Sell with TP of INR1,300



At CMP, stock is expensively valued at 43x/33x FY20/21E EV/EBITDA and 73x/55x

FY20/21E P/E. We believe there is limited room for rerating given the strong grasp of

D-mart, capitalizing the industry.

Maintain Sell, with a target price of INR1,300 ascribing 30x EV/EBITDA to FY21E

EBITDA of INR27b.

Strong competitive position warrants premium valuations…

DMART’s remarkable consistency in achieving industry-leading growth, margins and

RoCE despite a relatively asset-heavy model is captured in the stock valuation. . At

FY21E EV/EBITDA of 33x and P/E of 55x, it commands a healthy 2x premium to FRL.

Over the last two years, DMART’s 2-3x revenue growth, ~150bp higher EBITDA

margin v/s industry players (due to its ownership model) and better competitive

position (seen in product pricing, growth, margins, RoCE) helped it command better

valuations. We expect the valuation premium to continue until DMART is able to

maintain its earnings growth lead. Yet, at EV/EBITDA of 33x and P/E of 55x, there is

hardly any upside potential even on FY21E. Our target price is INR1,300, ascribing

30x FY21E (~40% discount to two-year average multiple of 45x, since IPO)

EV/EBITDA. We recommend

Sell.

…but premium valuations hardly leave any room for error

We believe the premium valuations leave little room for error. Any deceleration in

growth due to (a) macroeconomic factors, (b) inability to find attractively-priced real

estate for new stores, (c) delay in turnaround of stores on acquired land, and (d)

changes in consumption patterns could severely impact valuations.

Exhibit 207: Valuation based on FY21E EBITDA

EBITDA

Less Net debt

Total Value

Shares o/s (m)

CMP (INR)

Upside (%)

Methodology

FY21 EV/EBITDA

Driver (INR b)

Multiple (x)

Fair Value (INR b)

800

-11

811

624

Value/share (INR)

1,282

-18

1,300

1,446

-10

Source: MOFSL, Company

Exhibit 208: DMART: 1-year forward P/E

105

P/E (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

Exhibit 209: DMART: 1-year forward EV/EBITDA

EV/EBITDA (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

98.6

91.2

78.1

49.4

65.0

56.6

52.2

45.1

37.9

29.3

75.0

43.7

Source: Bloomberg, MOFSL

April 2019

Retail | Thematic

Financials and valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Raw Materials

Gross Margins

Margin (%)

Employees Cost

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY14

46,865

40.3

39,845

7,020

15.0

873

2,729

43,448

92.7

3,417

7.3

570

2,847

557

158

2,449

835

34.1

1,614

71.9

3.4

FY15

64,394

37.4

54,879

9,515

14.8

1,341

3,592

59,811

92.9

4,583

7.1

815

3,768

724

183

3,226

1,109

34.4

2,117

31.2

3.3

FY16

85,838

33.3

73,035

12,802

14.9

1,490

4,676

79,201

92.3

6,636

7.7

984

5,652

913

179

4,918

1,715

34.9

3,202

51.3

3.7

FY17

1,18,977

38.6

1,00,810

18,167

15.3

1,925

6,429

1,09,165

91.8

9,812

8.2

1,278

8,534

1,220

286

7,600

2,683

35.3

129

4,788

49.5

4.0

FY18

1,50,332

26.4

1,26,356

23,976

15.9

2,826

7,622

1,36,804

91.0

13,528

9.0

1,590

11,938

595

693

12,036

4,158

34.5

-185

8,063

68.4

5.4

FY19E

1,99,465

32.7

1,69,844

29,621

14.9

3,371

9,475

1,82,690

91.6

16,775

8.4

2,042

14,733

483

466

14,716

5,151

35.0

9,565

18.6

4.8

FY20E

2,45,412

23.0

2,09,091

36,321

14.8

4,025

11,289

2,24,405

91.4

21,007

8.6

2,520

18,487

439

716

18,764

6,474

34.5

12,290

28.5

5.0

(INR Million)

FY21E

3,09,769

26.2

2,63,923

45,846

14.8

4,801

13,940

2,82,664

91.3

27,105

8.8

3,030

24,074

439

1,260

24,895

8,589

34.5

16,306

32.7

5.3

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Deferred Tax Liabilities

Capital Employed

FY14

5,468

4,088

9,556

6,408

265

16,229

13,969

2,252

11,717

888

155

5,316

3,783

554

884

1,847

1,226

533

3,469

16,229

FY15

5,615

6,377

11,992

9,043

305

21,340

18,321

3,041

15,281

981

152

7,134

5,396

380

1,287

2,208

1,185

843

179

4,926

21,340

FY16

5,615

9,589

15,204

11,923

399

27,527

21,918

983

20,935

817

293

8,970

6,717

351

1,818

3,488

1,944

1,487

5,482

27,527

FY17

6,241

32,177

38,418

14,973

505

53,898

27,764

2,260

25,504

1,529

531

30,629

9,479

210

18,843

2,097

4,295

2,607

1,605

26,334

53,897

FY18

6,241

40,450

46,691

4,393

452

51,541

37,041

3,987

33,054

1,471

845

20,330

11,634

335

5,602

2,758

4,942

3,173

1,642

127

15,387

51,541

FY19E

6,241

50,015

56,256

4,393

452

61,107

46,318

6,029

40,289

1,596

845

23,510

14,890

328

5,299

2,992

5,917

3,723

1,995

199

17,593

61,107

FY20E

6,241

62,305

68,546

4,393

452

73,397

56,538

8,549

47,989

1,472

845

29,016

17,186

403

8,359

3,068

6,710

4,010

2,454

245

22,306

73,397

(INR Million)

FY21E

6,241

78,611

84,852

4,393

452

89,703

67,149

11,580

55,569

1,859

845

38,392

20,246

509

14,539

3,098

7,746

4,338

3,098

310

30,646

89,703

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans & Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Deferred Tax assets

Appl. of Funds

E: MOSL Estimates

April 2019

Retail | Thematic

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS (diluted from FY17)

Cash EPS (diluted from FY17)

BV/Share (diluted from FY17)

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Net Debt/Equity

FY14

3.0

3.9

17.5

0.0

FY15

3.8

5.2

21.4

0.0

FY16

5.7

7.5

27.1

0.0

FY17

7.7

9.7

61.6

0.0

188.5

148.8

23.5

7.6

91.6

0.0

-2.8

17.9

14.2

18.7

4.3

2.2

7.1

7.0

-0.1

FY18

12.9

15.5

74.8

0.0

111.9

93.5

19.3

6.0

66.6

0.0

-2.9

18.9

15.8

20.4

4.1

2.9

4.1

20.0

0.0

FY19E

15.3

18.6

90.1

0.0

94.4

77.8

16.0

4.5

53.7

0.0

-0.5

18.6

17.7

19.7

4.3

3.3

4.0

30.5

0.0

FY20E

19.7

23.7

109.8

0.0

73.4

60.9

13.2

3.7

42.8

0.0

4.5

19.7

18.8

20.9

4.3

3.3

4.3

42.1

-0.1

FY21E

26.1

31.0

136.0

0.0

55.3

46.7

10.6

2.9

32.9

0.0

8.6

21.3

20.5

23.3

4.6

3.5

5.0

54.8

-0.1

0.0

-1.2

18.5

13.6

14.4

3.4

2.9

5.1

0.6

0.0

-4.1

19.6

14.0

14.3

3.5

3.0

3.2

5.2

0.7

0.0

-3.2

23.6

15.8

16.0

3.9

3.1

2.6

6.2

0.7

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY14

2,449

570

557

-750

-827

1,998

-17

1,981

-2,706

-724

-2,694

1,148

-552

652

-60

614

554

FY15

3,226

815

724

-1,000

-1,520

2,245

-25

2,220

-4,770

-2,549

-4,731

326

2,634

-621

2,345

-166

546

380

FY16

4,918

984

913

-1,642

-685

4,489

-154

4,335

-6,350

-2,015

-151

181

-6,320

2,898

-934

1,964

-21

370

349

FY17

7,600

1,278

1,220

-2,586

-2,697

4,815

-237

4,578

-6,354

-1,775

-229

244

-6,339

18,406

3,050

-1,203

20,253

18,492

351

18,843

FY18

12,036

1,590

595

-4,027

-2,427

7,767

-467

7,300

-9,087

-1,787

-247

383

-8,951

-10,791

-800

-11,591

-13,241

18,843

5,601

FY19E

14,716

2,042

483

-5,151

-2,508

9,583

-466

9,116

-9,402

-285

466

-8,936

-483

-302

5,601

5,299

FY20E

18,764

2,520

439

-6,474

-1,654

13,596

-716

12,880

-10,097

2,783

716

-9,381

-439

3,060

5,299

8,359

(INR Million)

FY21E

24,895

3,030

439

-8,589

-2,160

17,616

-1,260

16,356

-10,996

5,360

1,260

-9,737

-439

6,180

8,359

14,539

April 2019