26 November 2015

Pantaloons Fashion & Retail

spotlight

The Idea Junction

Aditya Birla Fashion & Retail (as Pantaloon Fashion & Retail will come to be known post the

merger with Madura Garments) is India's largest pure-play fashion lifestyle company and

consists of brands and retail businesses of Madura and Pantaloons, respectively. AB Fashion

(ABFRL) is the number one branded women's wear and men's wear player in India by

market positioning, with a retail network of 1869 stores (4.8m sq ft)-the largest in fashion

space in India. Madura has four leading brands under its fold (Louis Philippe, Van Heusen,

Allen Solly and Peter England) with a network of 1735 stores across India; Pantaloons is one

of India's largest big-box affordable fashion retailers, with presence in 49 cities and 134

stores and a strong portfolio of exclusive private brands (which form ~52% of its revenues).

Stock Info

Bloomberg

CMP (INR)

Equity Shares (m)

M.Cap. (INR m)/(USD b)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

PFRL IN

215

769.5

165.4/2.5

245/100

4/26/94

Financials & Valuation (INR b)

Y/E March 2016E 2017E 2018E

Sales

59.5

69.6

82.4

EBITDA

5.2

7.0

9.5

NP

1.4

2.6

5.0

EPS (INR)

1.9

3.4

6.5

EPS Gr. (%) -107.5

81.7

92.5

BV/Sh. (INR) 15.1

18.5

25.0

RoE (%)

18.9

20.0

29.8

RoCE (%)

13.3

14.6

21.1

P/E (x)

115.9

63.8

33.1

P/BV (x)

14.2

11.6

8.6

EV/EBITDA (x) 35.0

26.0

18.5

EV/Sales (x)

3.1

2.6

2.1

Brands play: Set to ride discretionary spend boom

Set for multi-year secular growth along with robust capital efficiency

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ABFRL's Madura sells four iconic brands (Louis Philippe, Van Heusen, Allen Solley and

Peter England) and has successfully scaled up each- Louis Philippe and Van Heusen, the

top 2 largest selling brands in India, individually clocked revenues of ~INR10b in FY15.

A unique differentiator for ABFRL is that unlike peers who have licenses for global

brands, it has the ownership / perpetual license of its brands.

The combination of Madura and Pantaloons is highly synergetic in the sense that it

merges the expertise of Madura in the menswear market with the expertise of

Pantaloons in the womenswear market; we believe combination of the two formats

gives ABFRL the bargaining power in retail space and inventory sourcing.

We believe a rise in per capita income in India over the next decade-from USD2,113 in

FY15 to USD4,194 by FY24-can lead to 10x discretionary demand, thus providing strong

growth tailwind. We expect demand for luxury and bridgeto-luxury products to witness

exponential growth over next 10 years, and market leaders like ABFRL will be the

frontrunners to benefit from this growth.

ABFRL has a capital efficient distribution model, with 70%-80% of incremental store

additions in Madura likely to come from Buy and Sell stores, COFO or FOFO stores-

where the responsibility of capex lies with the franchisee. The unique model has

resulted in strong 70% RoCE for ABFRL (ex Pantaloons).

We believe ABFRL is a pure play on India's fast-growing and high-potential brands and

retail business, and enjoys best-in-class profitability and management pedigree. The

company will be amongst the biggest beneficiaries of the J-Curve in luxury and bridge-

to-luxury spends. The stock trades at 33x FY18E EPS.

Shareholding pattern (%)

As on

Sep-15

Promoter 72.6

DII

10.3

FII

1.5

Others

15.6

Jun-15

72.6

0.7

0.2

26.5

Sep-14

68.0

0.8

0.6

30.6

Notes: FII includes depository receipts

Stock performance (1 year)

Interesting: Currently, the analyst

believes that this is an interesting

stock based on its fundamental

strength

Cautious: Currently, the analyst

does not have adequate

conviction based on fundamental

assessment of the stock

In Transition: Currently, the

analyst thinks that the stock is in

transition from "Cautious" to

"Interesting"

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emerging midcap names that are not under our coverage.

Spotlight

is our attempt to feature such stocks based

on fundamental analysis and site visits, without initiating formal coverage on them. Spotlight adopts a descriptive

rating system, which uses terms like Interesting, Cautious and In Transition (see definitions alongside). We do

not assign Buy, Sell or Neutral recommendations to the stocks under Spotlight. Investors should carefully read

Motilal Oswal Research in its entirety, and not draw inferences from the ratings alone. Ratings should not be

used or relied upon as investment advice.

Niket Shah

(Niket.Shah@MotilalOswal.com); +91 22 3982 5426

Chintan Modi

(Chintan.Modi@MotilalOswal.com); +9122 39825422/Kaustubh

Kale

(Kaustubh.Kale@MotilalOswal.co); +9122 30102498

1

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

spotlight

| Pantaloons Fashion & Retail

Unique model of brand ownership the key

While Madura has strong presence in the menswear

segment with its large bouquet of brands across the

differentiator

With the acquisition of Madura Garments (established

as Madura Coats Limited in 1988) from the erstwhile

Coats Viyella Plc—Europe’s largest clothing supplier—

in December 1999, Aditya Birla Nuvo became the owner

of three brands: Louis Philippe (LP), Allen Solly (AS)and

Peter England (PE). It also got perpetual license for Van

Heusen (VH) for India, Middle East and SAARC countries.

Unlike peers - Arvind and Page Industries, who hold

licenses for popular brands for the India region, Madura

owns all four brands with the management focused on

pursuing a similar model of brand ownership going

forward as well. We believe this model of brand

ownership lends freedom to Madura to expand the

brand the way it desires, along with flexibility in

merchandise. Additionally, brand ownership results in

savings of royalty (unlike in Arvind and Page who have

to pay the brand royalties to brand owners).

super-premium, premium and sub-premium range,

Pantaloons fills the product gap on the women’s wear

front through its large bouquet of private labels and its

niche in women’s ethnic wear market and kids market.

The combination of Madura and Pantaloons is

synergetic in the sense that its merges the expertise of

Madura in the menswear market with the expertise of

Pantaloons in the women’s wear market; we believe

combination of the two formats gives ABFRL strong

bargaining power in sourcing retail space and inventory

management.

Store expansion plans geared toward low-capex

model

In line with historic trend, Madura plans to open ~300

stores annually over FY16-FY17—of which 100 will be

under the buy and sell model and 200 under the

consignment model. Since capex is the responsibility

of franchisee under COFO/FOFO/ Buy & Sell, we expect

capex intensity to be limited going forward—

considering the fact that 80% of planned stores are

either Buy and Sell, COFO or FOFO. On Pantaloon’s front,

ABFRL plans to add ~30-35 stores annually in FY16 and

FY17, which will extend Pantaloons leadership as a

retailer.

Presence across affordability pyramid through

multi-brand strategy

Madura primarily caters to men’s formal wear and has

presence across various price points: Louis Philippe is a

premium formal brand focused on classy designs

serving middle-aged consu mers; Van Heusen is also a

premium brand and targets young consumers; Allen

Solly with its differentiated concept of Friday dressing

gives a casual feel while Peter England being a sub-

premium brand, targets the affordable segment of

consumers. We believe this multi-brand strategy and

brand pyramid adequately covers the lifecycle of an

average consumer—while a fresher corporate

employee might pick an unbranded product to start

with, he switches to Peter England and later to the more

premium brands like Louis Philippe/Van Heusen as he

moves up the ladder in his career. After a certain point

of time, the consumer sticks to premium wear; hence,

the demand is relatively price inelastic, thus rendering

loyal consumers.

With doubling of GDP per capita, discretionary

demand can grow 10x

We believe a rise in per capita income in India over the

next decade—from USD2,113 in FY15 to USD4,194 by

FY24—can lead to 10x discretionary demand, thus

providing strong growth tailwind. We believe demand

for luxury and bridge-to-luxury products will witness

exponential growth over the next 10 years, a key

beneficiary of which will be leading brand owners like

ABFRL.

Valuation and view

We believe ABFRL is a pure play on India’s fast-growing

and high-potential brands and retail business, and

enjoys best-in-class profitability and management

pedigree. ABFRL will be amongst the biggest

beneficiaries of the J-Curve in luxury and bridge-to-

luxury spends. The stock trades at 33x FY18E EPS.

2

Pantaloons completes portfolio with presence in

women’s/kid’s wear

Madura’s merger with Pantaloons adequately

completes ABFRL’s brands and retail business portfolio.

26 November 2015

Pantaloons Fashion & Retail

Company overview

Aditya Birla Fashions: A brands play

Aditya Birla Fashions (earlier a segment of Aditya Birla Nuvo) post demerger will

consist of brands and retail businesses of Madura and Pantaloons respectively. By

market positioning, AB Fashions will be the number one branded women’s wear and

men’s wear player in India with a retail network of 1869 stores (4.8m sq ft) – the

largest in fashion space in India.

Exhibit 1: Winning combination of brands and retail

Source: Company, MOSL

Exhibit 2: Revenues mix (FY15)

Exhibit 3: EBITDA mix (FY15)

Pantaloons,

13%

Pantaloons,

33%

Madura,

67%

Madura,

87%

Source: Company, MOSL

Source: Company, MOSL

Madura Fashion & Lifestyle Limited

Established in 1988 by Madura Coats Limited, Madura Garments has its origins in

the erstwhile Coats Viyella Plc—Europe’s largest clothing supplier. Aditya Birla Nuvo

acquired Madura Garments in December 1999. Madura owns /holds perpetual

license for four iconic brands (Louis Philippe, Van Heusen, Allen Solley and Peter

England) and currently it has 1759 stores across India.

26 November 2015

3

Pantaloons Fashion & Retail

Pantaloons Fashion & Retail Limited

Pantaloons Fashion & Retail Limited operates a national chain of ‘Pantaloons’ stores

of apparels and fashion accessories. Pantaloons retails over 200 brands, which

comprise a mix of exclusive brands, licensed brands, international brands and more

in apparel as well as accessories.

Exhibit 4: Journey of fashion & lifestyle business

Source: Company, MOSL

Exhibit 5: Transaction details of Madura and Pantaloons merger

Source: Company, MOSL

26 November 2015

4

Pantaloons Fashion & Retail

Strong portfolio of leading brands; at an inflection point

Unique model of brand ownership the key differentiator

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Unlike Arvind and Page Industries, who hold licenses for popular brands, ABFRL’s

Madura owns / holds perpetual license for its four iconic brands (LP, VH, AS and PE);

this ensures freedom and flexibility in expansion and merchandising, apart from

savings in substantial royalty costs.

Brands offered cater to various price points, thereby expanding customer base and

affordability across the pyramid.

ABFRL employs a strategy of product extensions, leveraging on brand equity of its

existing brands. Some of the brand extensions include LP shoes on the back of its

hugely popular mother brand Louis Philippe.

Merger of Madura and Pantaloons extends the fast fashion segment of merchandise

with Pantaloons unique model of ‘design to retail’.

Unique model of brand ownership the key differentiator

With the acquisition of Madura Fashion & Lifestyle (established as Madura Coats

Limited in 1988) from the erstwhile Coats Viyella Plc—Europe’s largest clothing

supplier—in December 1999, Aditya Birla Nuvo became the owner of four brands:

Louis Philippe (LP), Allen Solly (AS), Peter England (PE) and Van Heusen (VH). While

for LP, AS and PE, Madura has right to use the brands on a global basis, in case of

Van Heusen the rights are restricted to India, Middle East and SAARC.

Unlike peers Arvind and Page Industries, who hold licenses to popular brands for

India region, Madura owns / holds perpetual license for all four brands and the

management is focused on pursuing a similar model of brand ownership going

forward as well. We believe this model of brand ownership lends strong freedom to

ABFRL to expand the brand in the way it desires, along with flexibility in

merchandise. Brand ownership also results in savings of royalty expenses, unlike in

the case of Arvind and Page who have to pay the brand royalties to brand owners.

Exhibit 6: Key brands owned by AB Fashions

Source: Company, MOSL

Presence across the affordability pyramid through multi-brand strategy

ABFRL’s Madura primarily caters to men’s formal wear and has presence across the

affordability pyramid:

Louis Philippe,

being a premium formal brand is focused on

classy designs serving middle-aged consumers;

Van Heusen,

also a premium brand,

targets young consumers;

Allen Solly

with its differentiated concept of Friday

dressing gives a more semi-formal feel while

Peter England

being a mass-premium

brand, targets the affordable segment of consumers. ABFRL’s brand pyramid

adequately covers the lifecycle of an average consumer—while a fresher corporate

employee might pick an unbranded product to start with, he switches to

Peter

England

and later to the more premium brands like

Louis Philippe/Van Heusen

as

he moves up the ladder in his career. After a certain point of time, the consumer

sticks to premium wear; hence, the demand is relatively price inelastic.

26 November 2015

5

Pantaloons Fashion & Retail

Exhibit 7: Presence across the affordability pyramid through multi-brand strategy

Source: Company, MOSL

Product extensions driving higher growth for power brands

With a view to leverage existing brands, ABFRL’s Madura has significantly oriented

its attention on product extensions over the last couple of years; for e.g. Madura

launched ‘LP Young’, a colorful, classy version of Louis Philippe to cater to the youth.

To expand presence in newer product categories, a new brand ‘LP Shoes’ was also

launched—it is now ~INR0.7b brand, with three Exclusive Brand Outlets (EBO) for LP

Shoes operational in Bangalore. We believe the strategy of entering newer

categories on the back of strength of existing brands provides a strong lever for

growth, especially considering the brand equity and acceptability of existing brands.

Exhibit 8: AB Fashions’s Madura has rapidly grown its power brands through product extensions

Source: Company, MOSL

26 November 2015

6

Pantaloons Fashion & Retail

Successfully scaled individual brands

ABFRL has successfully scaled up its four large brands, with Louis Philippe and Van

Heusen, the top 2 largest selling brands in India, clocking revenues of ~INR10b in

FY15. We believe with the right focus on store expansion as well as brand

extensions, ABFRL is on track for continued growth for its four iconic brands.

Exhibit 9: Revenue profile of key brands of Madura

Brand

Louis Philippe

Van Heusen

Peter England

Allen Solly

Value (INR m)

10,000

9,600

8,500

5,600

Source: Company, MOSL

Exhibit 10: Shirts contribute 43% of Madura’s sales

Others, 17%

Jeans / T-shirts,

12%

Suits, 9%

Trousers, 19%

Shirts, 43%

Exhibit 11: Madura brands primarily cater to men’ wear category

Women's / Kids,

5%

Men's wear, 95%

26 November 2015

7

Pantaloons Fashion & Retail

Exhibit 12: Madura brands distributed through a mix of retail and wholesale channels

Depletion/Exports

/Ecom, 16%

Retail, 44%

Wholesale, 40%

Pantaloons completes portfolio with presence in women’s/kid’s wear

Madura’s merger with Pantaloons adequately completes ABFRL brands portfolio.

While Madura has strong presence in the menswear segment with its large bouquet

of brands across the affordability pyramid, Pantaloons fills the product gaps on the

womenswear front through its large bouquet of private labels and its niche in

women’s ethnic wear market and kids market. The combination of Madura and

Pantaloons is highly synergetic in the sense that its merges the expertise of Madura

in the menswear market with the expertise of Pantaloons in the womens wear

market; we believe combination of the two formats gives AB Fashions bargaining

power in sourcing retail space and inventory management.

Exhibit 13: Pantaloons completes portfolio with presence in womenswear and kidswear

Source: Company, MOSL

Exhibit 14: More than 50% of Pantaloons revenues come from women’s / kids wear

Non apps, 14%

Kid's wear, 9%

Women's wear,

42%

Men's wear, 35%

26 November 2015

8

Pantaloons Fashion & Retail

Pantaloons extends range in fast fashion and mass segment

With Pantaloons, which is India’s largest big-box affordable fashion retailer, we

believe ABFRL has expanded its footprints in the fast fashion segment. Pantaloons

has a rich portfolio, which spans across genders and consumer segments.

Pantaloons’ unique business model of ‘design to retail’, with private labels

contributing ~52% of its revenues, augurs well from a gross margin perspective.

Reduced share from non-core brands/non-apps to drive margin expansion

The management highlights that steps have been taken to reduce the share of non-

core brands and loss-making segments like non-apparels in Pantaloons. The

contribution of non-apparels like perfumes and watches towards revenue mix has

reduced to ~14% vs ~17% earlier. Going forward, the target mix for these products is

expected to be ~10% and the focus remains on faster-moving branded womenswear

segments. We believe the discontinuance of non-core brands and lower share of

non-apparels would lead to margin expansion over FY15-18 in Pantaloons’ business.

Operational efficiencies, synergies to drive margin expansion

Pantaloons and Madura together have the largest fashion space in India—a strong

retail network across of 1,869 EBOs with an area of 4.8m sqft. The merger will pave

way for operational synergies through common purchases and bargaining power on

retail space. We believe the merger of Pantaloons and Madura will drive margin

improvement and efficiencies in working capital and, consequently, improve RoCEs.

Madura being a strong brands business commands higher margins and better terms

of trade with franchisees, led by its strong brand pull; we believe this will rub off on

Pantaloons. Given that ABFRL might look at franchising Pantaloons stores going

forward, Madura’s brands can act as a catalyst to secure favorable terms for

Pantaloons with increased operational efficiencies.

Exhibit 15: Retail space for Madura

Carpet Area (Mn Sqft)

3.0

1.9

1,272

2.2

1,541

1.6

FY14

FY15

FY16E

FY17E

FY18E

2.5

1,735

1,985

2,235

2,485

90

95

1.7

107

2

EBOs / Stores

3.4

3.7

Exhibit 16: Retail space for Pantaloons

No of stores incl factory outlets

Carpet Area (Mn Sqft)

224

194

164

3.8

3.3

2.8

134

2.3

1.6

1,129

FY12

FY13

Jun-12 Mar-13 Mar-14 Mar-15

FY16E

FY17E

FY18E

Source: Company, MOSL

Source: Company, MOSL

26 November 2015

9

Pantaloons Fashion & Retail

Exhibit 17: Combined retail network of 1,869 stores—the largest fashion space in India

Carpet Area (Mn Sqft)

1,869

EBOs / Stores

2,149

2,429

2,709

895

1.3

FY11

1,129

1,367

1,648

3.6

1.6

FY12

FY13

4.2

4.8

5.8

6.7

7.5

FY14

FY15

FY16E

FY17E

FY18E

Tax advantages from Pantaloon to result in lower effective tax rate

Being a profitable entity, Madura was subject to taxes under the normal provisions

of income taxes (~33% tax rate). The brought forward losses of Pantaloons will

result in lower tax rate for the merged entity ABFRL. As per our estimates, the

brought forward losses will be set off by FY18, and expect FY19 to be a normally

taxed year.

26 November 2015

10

Pantaloons Fashion & Retail

Strong play on J-curve in discretionary demand

When per capita GDP doubles, discretionary spend grows 10x

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Expansion in per capita income may lead to a 10x increase in discretionary demand,

thereby providing a platform for exponential growth over the next decade.

The organized retail market is expected to post 18% CAGR over the next five years,

reaching USD93b in size.

ABFRL’s brands have strong appeal, acceptability and aspirational demand. Market is a

function of supply of brands, with enough demand for absorption of products.

Doubling of per capita GDP may drive 10x growth in discretionary demand

We believe a rise in per capita income in India over the next decade—from

USD2,113 in FY15 to USD4,194 by FY24—can lead to 10x discretionary demand, thus

providing strong growth tailwind. We believe demand for luxury and bridge-to-

luxury products will witness exponential growth over the next 10 years, a key

beneficiary of which will be leading brand owners like ABFRL.

Exhibit 18: Linear growth, exponential opportunity

Source: Company, MOSL

Exhibit 19: When per capita GDP doubles, discretionary spend becomes 10x

Source: Company, MOSL

26 November 2015

11

Pantaloons Fashion & Retail

Supply-led market: Increasing affordability levels to drive strong growth in

the bridge-to-luxury segment

The Indian organized retail market currently stands at USD40b, of which apparel

segment accounts for the highest portion (28%). The organized retail market is

expected to post strong 18% CAGR over next 5 years, reaching USD93b in size. We

expect exponential growth in the luxury and bridge-to-luxury market in the long-

term, given the underpenetrated nature of the market, rising per capita income and

highly discretionary nature of the market.

We believe, growth in the market is more of a function of supply of brands, with

enough demand for absorption of products; given that only a handful of large

brands currently cater to the luxury and bridge-to-luxury segment, we believe ABFRL

is poised for a strong growth in the segment owing to strong appeal, acceptability

and aspirational demand of its brands.

Exhibit 20: Apparel accounts for the largest share (28%) of the USD40b organized retail market in India

Source: Company, MOSL

26 November 2015

12

Pantaloons Fashion & Retail

Robust and capital efficient distribution model

80% of incremental distribution Madura additions will not require capex

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Madura’s distribution model comprises COCO, COFO or FOFO stores, depending on the

place of function. Its flexible model helps in tapping regional markets efficiently.

Out of the 300 store openings planned over next three years, 100 would be through

B&S model; out of the balance 200, ~30% each will be through COFO and COCO, and

~40% through FOFO. Capex intensity is seen to be lower, considering that ~80% of

stores will be Buy and Sell, COFO or FOFO.

ABFRL sells directly to third party e-commerce channels and has agreements in place

with its traditional channel ensuring discipline in sales through the ecommerce model.

The company also operates independently through its website TRENDIN.com. The

rapid growth of ecommerce provides sufficient scope to ramp up in this channel.

Distribution expansion through franchising—enhances capital efficiency

Madura’s distribution strategy has evolved over the last decade. During the initial

years (2000-2006), Madura largely concentrated on a wholesale model— where it

sold through multi-brand outlets (MBOs) like Shoppers Stop and Westside.

However, realizing that the wholesale-based strategy will not be conducive for long-

term growth/ visibility of its brands and to de-risk its overdependence on a single

channel, Madura changed its strategy post 2006 and started opening exclusive

stores for its brands.

Accordingly, beginning 2006, Madura started expanding its exclusive brand outlets

(EBOs). Madura opened EBOs through three formats: 1) Company Owned Company

Operated (COCO) 2) Company Owned Franchisee Operated (COFO), 3) Franchisee

Owned Franchisee Operated (FOFO). All these three stores formats are consignment

stores and hence inventory is in books of the company. Besides, Madura also sells its

brands through Buy and Sell (B&S) stores, which are EBOs, however, inventory is in

books of store owner. Out of the 1735 stores of Madura as on Mar’15, ~640 are

B&S, ~360 COCO, ~500 COFO and ~240 FOFO.

Exhibit 21: Store mix

FOFO, 240

B&S, 640

COFO, 500

COCO, 360

Source: Company, MOSL

26 November 2015

13

Pantaloons Fashion & Retail

Exhibit 22: 44% of Madura’s sales come through its retail channels

Depletion/Exports

/Ecom, 16%

Retail, 44%

Wholesale, 40%

Source: Company, MOSL

Differentiated store formats provides the right flexibility

The company opens COCO stores in high-potential metros; it relies on COFO format

in Tier 1 cities, where it sees large spending potential and where the market is

largely untapped. However, since the company does not have expertise in smaller

cities and is unaware of local micro market conditions, it relies on local

entrepreneurs through COFO and FOFO formats. The key difference between COFO

and FOFO formats is that lease is under the name of the company in COFO and

under the name of the franchisee in FOFO; the capex and store operations are the

responsibility of the franchisee under both the formats, thus Madura has no

investment requirements. Over the last four years, Madura has opened on an

average 250-300 new stores annually including B&S, of which consignment stores

were ~150-200 stores per annum.

Exhibit 23: Largest retail network in the fashion space

Source: Company, MOSL

26 November 2015

14

Pantaloons Fashion & Retail

Store expansion plans geared toward low-capex model

Following the historic trend, the management plans to open 250-300 new stores

over FY16-FY17—out of these, about 100 under buy and sell model, 200 under the

consignment model. The average store size is ~1,000 sq ft for a buy and sell store,

~2000 sq ft for a COCO store, ~1500 sq ft each for COFO and FOFO stores. On an

average, Madura stores require a capex of INR2700/ sq ft depending on the brand

mix and format; capex per sq ft differs based on the brand. Since capex is the

responsibility of franchisee under COFO/FOFO, we expect capex intensity to be

limited going forward— considering 80% of the planned stores are either Buy and

Sell, COFO or FOFO. On Pantaloons front, ABFRL plans to add ~30-35 stores each in

FY16 and FY17 which will extend Pantaloons leadership as a retailer.

Exhibit 24: Madura store count has expanded by 150-200 stores (net) annually

Carpet Area (Mn Sqft)

1,735

EBOs / Stores

1,985

2,235

2,485

1,129

1.6

FY12

1,272

1.9

1,541

2.2

2.5

3.0

3.4

3.7

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, MOSL

Exhibit 25: Pantaloon’s has 134 outlets as at FY15 and plans to add 30-35 stores annually

No of stores incl factory outlets

Carpet Area (Mn Sqft)

2.8

3.3

3.8

1.6

90

Jun-12

1.7

95

Mar-13

2

107

2.3

134

164

194

224

Mar-14

Mar-15

FY16E

FY17E

FY18E

Source: Company, MOSL

Scaling up e-commerce presence through TRENDIN, third-party platforms

ABFRL launched online sales portal TRENDIN.com to showcase its entire range of

brands and products and capitalize on the growing importance of online as a sales

channel. The management also plans to empower its current offline presence with

an OMNI channel network, wherein consumers can pick a particular design/product

even if it is not available in the store and ABFRL can deliver the product to the

consumer’s address either from a nearby store of the nearby warehouse. Currently,

online channel contributes less than 2% to the total revenues. ABFRL has direct

supply agreements in place with e-commerce players to limit discounts, thereby

retaining the brand value and avoiding cannibalizing of brick and mortar sales.

26 November 2015

15

Pantaloons Fashion & Retail

Earnings seen at INR5b in FY18

Earnings seen at INR5b, capital efficiency to remain robust

We expect PAT at INR5b, with RoCE and RoE at 21% and 30%.

Exhibit 26: Revenues to post 15% CAGR over FY15-18E

Revenues (INRm)

25.2%

16.9%

9.2%

4,010

FY14

5,320

FY15

5,206

FY16E

6,961

FY17E

9,518

FY18E

18.5%

8.4%

Growth (%)

Exhibit 27: EBITDA to post 18% CAGR over FY15-18E

EBITDA (INR m)

Margins (%)

10.0%

11.5%

14.5%

9.8%

8.7%

47,590

FY14

54,500

FY15

59,523

FY16E

69,576

FY17E

82,442

FY18E

Source: Company, MOSL

Source: Company, MOSL

Note –

Numbers listed above for FY14/FY15 for revenue and EBITDA are proforma

numbers and include Madura’s financials. Madura will be merged effective FY16 and

hence we have built in the consolidation of Madura effective FY16 in our forward

numbers. We have not adjusted FY14/FY15 numbers for Madura for below charts.

Exhibit 28: PAT seen at INR5b

PAT (INR m)

4,995

2,595

1,428

2,375

Exhibit 29: Free cash generation on cards

Free cash flow (INR m)

5,768

3,368

FY14

-1,877

FY15

-2,281

FY16E*

FY17E*

FY18E*

-473

FY14

-1,523

FY15

FY16E*

FY17E*

FY18E*

Source: Company, MOSL

Source: Company, MOSL

Exhibit 30: RoCE to improve to 21% by FY18

RoCE (%)

13

15

21

Exhibit 31: RoE to improve to 30% by FY18

RoE (%)

19

20

30

-3

FY14

-28

-6

FY15

FY16E*

FY17E*

FY18E*

FY14

-49

FY15

FY16E*

FY17E*

FY18E*

Source: Company, MOSL

Source: Company, MOSL

26 November 2015

16

Pantaloons Fashion & Retail

Valuation and view







Strong beneficiary of higher discretionary demand: As per capita incomes expand in

India from USD2,113 in FY15 to USD4,194 by FY24, discretionary demand can be 10x—

thus providing strong growth tailwind. We believe the demand for luxury and bridge-

to-luxury products will witness exponential growth over next 10 years and leaders like

ABFRL will be front-runners to capture this growth.

Pure play on branded apparel business: We believe AB Fashions is a pure play on

India’s fast-growing and high-potential brands and retail business, and enjoys best-in-

class profitability and management pedigree. AB Fashions will be amongst the biggest

beneficiaries of the J-Curve in luxury and bridge-to-luxury spends.

The stock trades at 33x FY18E EPS.

Exhibit 32: Assumption sheet

Y/E March

Income from Operations

Revenues

Madura

Pantaloons

Growth (%)

Madura

Pantaloons

EBITDA

Madura

Pantaloons

EBITDA Margin (%)

Madura

Pantaloons

3,120

2,450

670

8.2%

9.7%

5.2%

FY13

38,080

25,230

12,850

FY14

48,870

32,260

16,610

FY15

55,860

37,350

18,510

FY16E

59,523

40,734

20,353

9%

9%

10%

5,234

4,481

753

8.8%

11.0%

3.7%

FY17E

69,576

47,327

24,047

17%

16%

18%

7,122

5,679

1,443

10.2%

12.0%

6.0%

FY18E

82,442

56,215

28,296

18%

19%

18%

9,568

7,870

1,698

11.6%

14.0%

6.0%

28%

28%

29%

4,010

3,880

130

8.2%

12.0%

0.8%

14%

16%

11%

5,320

4,630

690

9.5%

12.4%

3.7%

Source: Company, MOSL

26 November 2015

17

Pantaloons Fashion & Retail

Key risks

Slowdown in discretionary demand

ABFRL is the largest fashion house in the country. Demand is highly dependent on

the macroeconomic environment in India and a slowdown can impact the

discretionary demand, which in turn will affect growth.

Sharp increase in raw material prices

Any sharp increase in cotton or other raw material prices could impact margins in

near term.

Rising e-commerce penetration

E-commerce is growing rapidly in India and is fast acquiring acceptability far and

wide. Any slowdown in capitalization of this channel may affect revenues.

26 November 2015

18

Pantaloons Fashion & Retail

Management overview

Mr. Pranab Barua, Business Director, Apparel & Retail Business

Mr. Barua is a 40+ year veteran in the consumer and retail industry. Before joining

Aditya Birla Group (ABG), he was the CEO of Trinethra Super Retail (acquired by ABG

in 2007). He has also worked in senior positions with Brooke Bond India, as Foods

Director on the Hindustan Unilever Board, as Chairman and Managing Director of

Reckitt Benckiser and as Regional Director of Reckitt Benckiser for South Asia. He

holds a graduate degree in B.A. (English Honours) from St. Stephens College, New

Delhi.

Mr. Ashish Dikshit, Business Head, Madura

Mr. Dikshit has been with the Aditya Birla Group for over 15 years and joined

Madura from Asian Paints in 1998. He has worked across several functions in the

business and has headed its supply chain, marketing and sourcing functions. He has

also worked as Principal Executive Assistant to the Chairman of ABG for more than

three years. Mr. Dikshit is an Electronics and Electrical Engineer from IIT-Madras and

holds a Postgraduate Diploma in Management from IIM-Bangalore

Mr. Shital Mehta, CEO, Pantaloons

Mr. Mehta has been with Aditya Birla Group for about 15 years. Previously, he

served as the Chief Operating Officer of the International Brands and Retail, Madura

Fashions and Lifestyle. Prior to that, he worked as a brand manager for Godrej

Foods. He is an MBA in marketing from SP Jain Institute of Management and

Research and has attended advanced management programs at Wharton Business

School.

S Visvanathan, CFO, Apparel & Retail Business

Mr. Visvanathan joined the Aditya Birla Group in 2007 and has been with the Textile

and Apparel business since then. He is also a member of the Management

Committee of the Textile and Apparel business of the Aditya Birla Group. He has 26

years of experience across industries spanning white goods, capital equipment,

electrical equipment and auto components. Mr. Visvanathan’s has earlier worked

with the Tata Group in various capacities in the Auto Components business, Voltas

and Allwyn (CFO). He is a commerce graduate from Chennai University and a

qualified Chartered Accountant and Cost Accountant.

26 November 2015

19

Pantaloons Fashion & Retail

Financials and valuations

Standalone - Income Statement

Y/E March

Total Income from Operations

Change (%)

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT

Current Tax

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY13

12,851

7,273.1

752

5.9

544

208

1,529

632

-689

0

-689

-689

-5,746.7

-5.4

FY14

16,612

29.3

455

2.7

1,090

-635

1,293

51

-1,877

0

-1,877

-1,877

172.5

-11.3

FY15

18,507

11.4

868

4.7

1,835

-966

1,343

28

-2,281

0

-2,281

-2,281

21.5

-12.3

FY16E*

59,523

221.6

5,206

8.7

2,187

3,019

1,624

33

1,428

0

1,428

1,428

-162.6

2.4

(INR Million)

FY17E*

69,576

16.9

6,961

10.0

2,639

4,323

1,768

40

2,595

0

2,595

2,595

81.7

3.7

FY18E*

82,442

18.5

9,518

11.5

3,119

6,400

1,453

48

4,995

0

4,995

4,995

92.5

6.1

Standalone - Balance Sheet

Y/E March

Equity Share Capital

Equity Application Money

Preference Capital

Total Reserves

Net Worth

Deferred Tax Liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

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

FY13

5

8,463

5

-778

7,695

0

17,307

25,002

7,132

2,435

4,697

11,676

136

8,000

4,315

3,249

10

253

804

3,821

3,241

529

51

494

0

25,002

FY14

928

0

5

4,862

5,795

1,592

10,505

17,891

8,161

3,504

4,656

11,676

249

60

4,892

3,584

170

108

1,031

5,233

4,044

1,035

154

-341

1,592

17,891

FY15

928

0

5

2,523

3,456

1,718

13,106

18,280

9,305

5,187

4,118

11,676

38

0

5,557

4,273

35

72

1,177

4,827

3,411

1,194

222

731

1,718

18,280

FY16E*

7,695

0

5

3,950

11,650

1,718

17,836

31,204

14,992

7,373

7,619

17,266

0

0

18,332

12,649

2,446

856

2,381

13,730

10,566

2,976

188

4,602

1,718

31,204

(INR Million)

FY17E*

7,695

0

5

6,545

14,245

1,718

15,836

31,799

17,992

10,012

7,980

17,266

0

0

20,720

14,581

2,859

496

2,783

15,884

12,180

3,479

225

4,836

1,718

31,799

FY18E*

7,695

0

5

11,540

19,240

1,718

11,836

32,794

20,992

13,131

7,861

17,266

0

0

24,527

16,982

3,388

859

3,298

18,578

14,185

4,122

270

5,949

1,718

32,794

* Financials till FY15 are standalone financials of Pantaloons Fashion and Retail Ltd. Financials from

FY16 assume consolidation of Madura Fashion & Lifestyle Ltd into Pantaloons Fashion and Retail Ltd.

26 November 2015

20

Pantaloons Fashion & Retail

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

Working Capital Ratios

Inventory (Days)

Debtor (Days)

Creditor (Days)

Working Cap. Turnover (Days)

Leverage Ratio (x)

Debt/Equity

FY13

-7.4

-1.6

82.9

0.0

0.0

FY14

-20.2

-8.5

62.4

0.0

0.0

-10.6

-25.3

3.4

1.8

66.7

0.0

-5.1

-27.8

-2.8

79

4

89

-10

1.8

FY15

-24.6

-4.8

37.2

0.0

0.0

-8.7

-44.6

5.8

1.8

38.0

0.0

-16.4

-49.3

-5.7

84

1

67

13

3.8

FY16E*

1.9

4.7

15.1

0.0

0.0

115.9

45.8

14.2

3.1

35.0

0.0

3.1

18.9

13.3

78

15

65

23

1.5

FY17E*

3.4

6.8

18.5

0.0

0.0

63.8

31.6

11.6

2.6

26.0

0.0

4.4

20.0

14.6

76

15

64

23

1.1

FY18E*

6.5

10.5

25.0

0.0

0.0

33.1

20.4

8.6

2.1

18.5

0.0

7.5

29.8

21.1

75

15

63

23

0.6

0.0

-2.9

-17.9

6.7

92

0

92

7

2.2

Standalone - Cash Flow Statement

(INR Million)

Y/E March

FY13

FY14

FY15 FY16E* FY17E* FY18E*

OP/(Loss) before Tax

-689

-1,877

-2,281

1,428

2,595

4,995

Depreciation

544

1,090

1,835

2,187

2,639

3,119

Interest & Finance Charges

816

1,153

1,201

1,591

1,728

1,405

Direct Taxes Paid

-89

-29

-15

0

0

0

(Inc)/Dec in WC

-516

408

-1,096

19

-593

-750

CF from Operations

67

744

-357

5,225

6,368

8,768

Others

-40

-43

-3

0

0

0

CF from Operating incl EO

27

701

-360

5,225

6,368

8,768

(Inc)/Dec in FA

-300

-1,175

-1,163

-2,850

-3,000

-3,000

Free Cash Flow

-273

-473

-1,523

2,375

3,368

5,768

(Pur)/Sale of Investments

-7,997

7,968

75

0

0

0

Others

94

20

0

33

40

48

CF from Investments

-8,202

6,813

-1,088

-2,817

-2,960

-2,952

Issue of Shares

8,000

0

0

0

0

0

Inc/(Dec) in Debt

1,670

-6,802

2,602

0

-2,000

-4,000

Interest Paid

-1,242

-857

-1,191

-1,624

-1,768

-1,453

CF from Fin. Activity

8,427

-7,659

1,411

-1,624

-3,768

-5,453

Inc/Dec of Cash

252

-144

-36

784

-360

363

Opening Balance

1

253

108

72

856

496

Closing Balance

252

108

72

856

496

859

E: MOSL Estimates

* Financials till FY15 are standalone financials of Pantaloons Fashion and Retail Ltd. Financials from

FY16 assume consolidation of Madura Fashion & Lifestyle Ltd into Pantaloons Fashion and Retail Ltd.

26 November 2015

21

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PANTALOONS FASHION & RETAIL

No

No

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