Aditya Birla fashion and retail
Ltd: As shared many
times earlier, this one is my favourite and best pick in Indian fashion retail.
For dec-17 quarter, it has posted great results; top line at 1862 cr from a715
cr but the real factor is that it has posted net profit of 35 cr from loss of
12 cr last year Q3. The main factor behind this is the performance of Pantaloons
which has operating profits of 29 cr against loss of 6 cr last year. I am
waiting for this transformation for long and it has happened now although i
feel it has been delayed only due to demoney and GST melodrama. Its underlying
main business of men's fashion brands was always doing well...it was only the
restructuring and losses of pantaloons which were eating all the profits. But i
have seen Indian markets having problems in evaluating a company having two
separate businesses one which is legacy and doing well and the other which is
under transformation and having losses but still significant business. But i
have seen Indian market does the valuation on "net" basis...net
profits of both businesses although both should be valued separately because
loss incurring business is also having valuation, it has assets.
Pantaloons is a big business...in fact it has
net capital employed of around 1600 cr compared with 1300 cr of Madurai fashion
but still its turnover is around half of Madurai. Turnover of 2500 cr on assets
base of 1600 cr is still small...so there will be high growth in the future.
Birlas are very shrewd businessmen. I have always find Birlas and Bajajs having
much better business sense than the likes of Tatas and others even Reliance.
Tatas were caught off guard as 15 years back there was no competition to them
but now they are doing their best to erase all that lethargy so i am buying all
the legacy businesses of Tatas like Tata Chem, Tata power, Tata Global, Indian
Hotels. Tata global i am done with long time back so as Tata Chem but Tata
power has great value still.
Out of total debt of ABFRL at around 2000 cr,
some 1300-1400 cr is for Pantaloons. But Pantaloons with its value fashion and
women apparel business as Madurai is mainly a men’s branded apparel business.
Most significantly, as compared to value business of other retailers like
Arvind which are still under infancy, Pantaloons is a much matured business and
very soon will be a major profit contributor. Aditya birla is trying to
restructure its business model since acquisition and has introduced major steps
like more focus on private labels and much better inventory control. Due to
these Pantaloons is on the cusp of strong growth in future.
In earlier posts and emails, I have already explained the undervaluation of
ABFRL compared to players like Arvind despite having much superior branded
apparel business. Arvind sold 10% stake in its retail arm at 740 cr valuing the
same at 7400 cr. Its EBITDA was around 180 cr so it has been valued at 40 times
of EBITDA. ABFRL has EBITDA of its Branded fashion (Madurai Fashion) business
at around 400-450 cr (although the same has been impacted due to demoney and
GST issues). But ABFRL’s brands Van Heusen, Allen Solley, Peter England and Louis
Philippe earn revenues of 1000 cr each which were the first to achieve the same
in India; as compared to this Arvind’s brands like Arrow/US Polo has revenues
around 500 cr each. Also, the brand positioning of ABFRL’s brand is way higher
than Arvind and has much better retail footprint, margin and maturity profile. Arvind is just a beginner
so I feel ABFRL should get much higher value than Arvind…around 50-60 times
taking valuation of ABFRL at 20000-25000 cr. Pantaloons with EBITDA of 200 cr
should fetch valuation of 20 times taking its valuation at 4000 cr (but it is
minimum). So ABFRL should get the
valuation of some 30000 cr even with moderate valuation multiples; its current
market value is 12000 cr!
Moreover I still feel that ABFRL could not
perform up to its potential in last two years mainly due to online discount war
by e-tailers like Amazon and Flipkart as ABFRL chose to avoid the discounting
path in order to retain its premium standing in the market. I have seen the
likes of Raymond, Arrow etc. offering big discounts at these portals but never
the brands of ABFRL. That’s the reason I have always seen people choosing ABFRL’s
brands for special occasions like marriages, parties etc. due to premium
positioning of its brands. The quality of its products is top notch, in fact
much better than the other as far as my experience is concerned. ABFRL has introduced
innerwear products under Van Heusen brand and the same is witnessing high growth
and this will be one of the highest growth area.
Now the discounting war among the E-tailers is
getting over as it was a war meant to destroy both badly with no clear winner
in the long term as people would choose the physical stores for shopping when
there are no discounts. So I think the business it lost due to this will return
in the future and the top line and margins we are seeing today do not reflect
the real picture of their strength and standing in the market.
Retail business is very difficult in India and
there is severe competition as everybody wants to garner maximum share in this
vast high growth market. But when I hear people talking about retail, I hear
the names like Reliance, Big bazaar, D-mart. But very few know that the real
winner of Indian retail is not from these ones- it is the humble CSD of Indian
defence. In 2014-15 they were the highest net profit earners with NP at 236 cr
on revenue of 13000 cr. Last year their turnover was 17000 cr but I don’t have
the figure of NP. Although it has some advantages due to low prices and people
always talk about the misuse of these canteens. But my aim is to highlight something
very significant. CSD canteens operate on wafer thin margins of 1%-2% against
10%-20% of private sector retailers which I think even out any advantage of low
prices. But CSD canteens earn better because they save two biggest costs of
private retailers- Real estate and advertising.
Real estate and advertising-I think private
retailers like ABFRL will show much better margins once they tackle these two.
Real estate costs in retail are highest in India when retail is just in its
infancy…so I think this is big anomaly and requires urgent attention. In fact,
ABFRL has already started working in this direction and closed around 200 loss
making stores last year. Indian retail market is overcrowded which resulted in
the heating up of the rentals due to high demands but now consolidation is
under way as stores are being shut down due to lack of profits as real estate
alone accounts for some 20-30% of the costs. Moreover GST will enable these
players to get the input of GST paid on lease rentals as earlier they were not
getting any input for service tax paid on lease rentals as they were paying
sales tax (VAT) on their products so input of centre level service tax was not
allowed against state level sales tax. So this will save the cost for them. Like, in this qtr their lease rent costs have come down to 267 cr from 278 cr...i think this may have some impact of GST input. Waiting for the comments from the management. I
also expect cooling down of Indian real estate market and this will have
positive impact on the margins. Advertising cost will also come down as at
present the focus is on brand positioning and making people aware of these
brands. But over time due to consolidation and lower competition this will come
down. In fact, in 2016-17 the advertising and sales promotion costs of ABFRL
have come down to 287cr from 395 cr in 2015-16. So I’ll be tracking these two
factors as both account for major part of their costs (1100 cr lease rent in
2016-17) and can be a target area for reduction.
Re-rating candidate at 156…must buy.
(Views
are personal and should not be taken as a recommendation for buying or
selling a stock. Stock markets are inherently risky so kindly do your
Due Diligence before investing. I am not a certified Sebi Analyst and holding the stock discussed in this Post).
