Retail - HDFC securities - 3QFY20... · Outlook on jewellery demand Outlook on Watches and Eyewear businesses Non-jewellery business EBIT margin Pace of network expansion THANGAMAYIL

Retail

3QFY20E Results Preview

12 Jan 2020

Rutvi Chokshi [email protected] +91-22-3021-2080

Jay Gandhi [email protected] +91-22-6171-7320

2

Retail: Marred by multiple footfall dampeners 3Q was marred by multiple footfall dampeners - 1. Weak consumer

sentiments, ergo weak volume off-take, 2. Socio-political protests (CAA & NRC-led), 3. Competitive intensity continued to heighten (especially across food & grocery and apparels).

Jewellery – Volume pressure palpable: Jewellery retail continues to face volume pressures as elevated gold prices (up 25% YoY) keep fresh jewellery purchase at bay. Albeit, we reckon a reasonable wedding season (relatively inelastic demand) is expected to cap the magnitude of decline. Jewellers are expected to push volumes via aggressive exchange programs to navigate the weak demand outlook. However, this would in turn come keep margins under pressure. An exchange programme typically gets capital-heavy, if the up-selling opportunity it presents is not milked. Hence, a key monitor-able would be to assess the capital base of jewellers over the next couple of quarters. Most of the big-box jewellers have clocked 7-15% revenue growth in 3Q. (channel checks)

Food & grocery - Competitive intensity heightening: Online grocers have been stepping up the heat on pricing, while smartly improving trade margins. However, most are yet to build a strong supply chain in D-MART geographies, hence the latter’s gravy train is expected to continue in 3Q as it milks India’s urban density. Future Retail on the other hand, is expected to focus on fixing its working capital woes and closing down loss-making stores. Ergo, growth may take a back seat.

Apparel – Value/fast fashion plays to outperform brands: Expect most apparel retailers to clock weak SSSG (Ex-Trent) as 1. Aggressive online festive sales, 2. Ongoing consumer slowdown, 3. Socio-political protests keep footfall growth at bay. Channel checks

suggest Myntra’s FY19 aggression on discounting and brand tie-ups continues. Hence, pure-play 3P-selling department stores remain at risk. We build in a (8)-4% SSSG for most. (Ex-Trent). Trent is expected to clock 9% SSSG in 3Q. Economics to keep strong value fashion (V-MART) plays off-limits for e-tailers. Key brands to tread the growth-working capital equation cautiously and hence, growth may assume a back seat (Ex-Madura).

Top-picks: V-MART (BUY), Avenue Supermart (SELL).

RETAIL: 3QFY20E RESULTS PREVIEW

Retail: Expect 12% Sales and EBITDA growth

Source: Company, HDFC sec Inst Research , Note: Thangamayil, Trent and Titan haven't disclosed the adjustments for IND-AS 116. Hence are not comparable YoY.

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Sales Gr (%) EBITDA Gr (%)

3

COMPANY 3QFY20E

OUTLOOK WHAT’S LIKELY KEY MONITORABLES

TITAN AVG

We expect growth of 11% YoY (vs. 37% in 2QFY19 and 0.1% in 2QFY20) in Jewellery business as wedding season caps the volume decline in a tough cycle where elevated gold prices have kept fresh jewellery purchase at bay. Titan added 16 Tanishq stores (net) in 3Q. We expect gold grammage de-growth of -7% YoY and realization uptick of 18%.

Non-jewellery business is expected to grow by ~3.5% with Watches/Eyewear/Other business to registering 0/2/22% growth respectively.

Expect Jewellery EBIT margins to decline (90bp decline factored in) largely led by higher discounting and aggressive exchange schemes to rake in volumes.

Overall EBIT margin to come off by ~50bp YoY

Grammage growth and market share change

Outlook on jewellery demand

Outlook on Watches and Eyewear businesses

Non-jewellery business EBIT margin

Pace of network expansion

THANGAMAYIL AVG

We expect revenue to grow by 10% YoY (8.3% in 3QFY19 and 10.7% in 2QFY20). We model a de-growth of 5% in gold volumes YoY given the low base (1.5% de-growth in 3QFY19 and 19% de-growth in 2QFY20).

EBITDA margin expected to remain flat (4.7%).

Adj. PAT to grow by ~23% YoY.

Grammage growth and demand outlook

Commentary on store renovation and expansion

EBIT margin


Jewellery: 3QFY20E

4

COMPANY 3QFY20E


Avenue Supermarts

GOOD

We expect revenue growth of ~25% YoY (vs. 33% in 3QFY20 and 22% in 2QFY20) in Jewellery business. Expect Avenue to add 4 stores (net) in 3Q. Ergo, lion’s share of growth is expected to be SSSG-led. (est: 14%) Building in revenue per sq. ft of Rs. 41.5k

LTL EBITDA margins to marginally improve (8.5% vs 8.3%) as D-MART focuses on increasing store sizes for retailing more higher-margin categories

Expect APAT to grow 47% courtesy low corporate tax rates.

Sales velocity and margins.

Competitive intensity and discount levels


Future Retail AVG

FRL to rein in expansion across formats to stem the balooning working capital woes. Ergo, building in a moderate 7.6% revenue growth YoY (13% in 3QFY19 and 10% in 2QFY20).

Focus likely to be on improving profitability as loss-making stores get the axe.

Expect LTL EBITDA margin to largely remain flat at 5%

Building in 3.1% PAT margin for 3Q

Sales velocity and margins.

Competitive intensity and discount levels

Easyday profitability

Fund raising plans

Commentary on pledge reductions


Food & Grocery: 3QFY20E

5

COMPANY 3QFY20E


ABFRL AVG

We expect revenue to grow at 8.6% YoY (23% in 3QFY19 and 15% in 2QFY20).

Expect Madura to grow at 10% YoY largely underpinned by its Lifestyle brands and innerwear biz. Fast fashion segment to continue to lose relevance. Pantaloons to clock 9.5% growth YoY in 3Q

LTL EBITDA margins may contract marginally (50bp) to 7.1% due to increasing discount levels and continued marketing investments in Pantaloons

SSSG growth and market share change

Outlook on industry discount levels


Trent GOOD

We expect revenue (standalone) to grow 24.3% YoY (26% in 3QFY19 and 32.8% in 2QFY20). SSSG is expected to remain healthy at 9%

Expect PBT margins to come off by 30bp to 9.1% courtesy 1. low-margin Zudio’s increasing contribution to the mix 2. Front-loading of new store expenses, while sales velocity lags.

Format-wise SSSG and sales velocity


LTL EBIT margin


Apparels: 3QFY20E

6

COMPANY 3QFY20E


Future Lifestyle AVG

We expect growth to taper off for both Central and Brand Factory (BF) courtesy 1. High base and 2. Weak consumer sentiments. Overall revenue to grow at 8% YoY (vs. 36% in 3QFY19 and 19% in 2QFY20).

Central/BF expected to clock 6/9% revenue growth respectively. Growth will be largely SSSG-led for the former and expansion-led for the latter. Building in 4/(9)% SSSG for Central/BF.

Building in 1/4 store adds for Central/BF respectively.

LTL EBITDA margin to contract by 70bps to 8.4% during the quarter as cost inflation overshoots SSSG.

Outlook on footfalls across both formats

Discounting levels across formats

SSSG

Outlook on network expansion

V-MART GOOD

We expect revenue to grow at a robust 20.5% YoY (35.6% in 3QFY19 and 31.2% in 2QFY20). We model 3% SSSG and 17% expansion-led growth.

V-MART has added 18 stores in 3Q taking the total store count to 257

Building in a 110/170bp EBITDA margin decline YoY to factor in 1) Impact of the liquidation imperative across the value fashion tail, 2) heightening competive intensity.

Adj. PAT to grow by ~27% YoY largely led by lower tax outgo post the recent corporate tax cut.

Shifts in competitive landscape

Update on financial position of the value fashion tail


EBIT margin


Apparels: 3QFY20E

7

COMPANY 3QFY20E


Shoppers Stop GOOD

We expect growth of 1% YoY (vs. 29% in 2QFY19 and 14% in 1QFY20) largely SSSG-led (1%).

Margins are expected to take a beating as 1) cost-inflation outguns SSSG, 2. E-tailers’ aggression on pricing and brand tie-ups continue. Ergo, building in a 130bp decline in LTL EBITDA margins in 3Q to 8.4%

STOP is estimated to have added 6 stores in 3Q taking the store count to 89.

Footfall and conversions.

Discounting levels


Beauty segment performance

TCNS Clothing BAD

We expect revenue growth of 6% YoY largely led by EBOs/Online and LFS. MBO-based revenues to continue to languish as the channel continues to face liquidity issues.

We build growth of 8/7/-30/20% across EBOs/LFS/MBOs/Online channels respectively .

While we largely maintain gross margins, LTL EBITDA margin to contract by 500bp YoY as higher commissions are doled out to agents/distributors to push volumes.

Outlook on footfalls and working capital

Discounting levels


EBITDA margin


Apparels: 3QFY20E

8

COMPANY 3QFY20E


Arvind Fashions BAD

Growth and profitability pangs to continue as Arvind Fashion (AFL) 1. Weeds out the duds in its brand portfolio, 2. Reduces dependence on MBOs, 3. Forks out store closure charges. We build in 10% de-growth in revenue for AFL in 3Q.

Power brands expected to remain flat YoY in 3Q, despite Arrow de-growing. Emerging brands revenue to decline 30% YoY primarily led by exit from non-core brands.

While Specialty retail to remain flat YoY; Unlimited to continue to bleed; although losses to ebb in the format as focus shifts on profitable stores. Expansion in this format to remain calibrated. GAP/Sephora to cushion the losses from Unlimited.

We build in 6/-16/-2.5% EBITDA margins for Power brands, EM brands and Specialty Retail respectively.

Working capital position and leverage

Outlook on demand

Unlimited format’s progress


Apparels: 3QFY20E

9


Estimate changes: Jewellery

The Titan Company

Thangamayil

(Rs mn) FY20E FY21E FY22E

New Old Change (%) New Old Change (%) New Old Change (%)

Revenue 220,187 220,294 (0.0) 260,735 260,862 (0.0) 308,666 309,144 (0.2)

Gross Profit 59,212 60,039 (1.4) 70,651 70,847 (0.3) 83,963 83,821 0.2

Gross Profit Margin (%) 26.9 27.3 (36 bps) 27.1 27.2 (6 bps) 27.2 27.1 9 bps

EBITDA 24,775 26,732 (7.3) 30,941 32,216 (4.0) 38,064 38,689 (1.6)

EBITDA margin (%) 11.3 12.1 (88 bps) 11.9 12.3 (48 bps) 12.3 12.5 (18 bps)

APAT 16,059 17,848 (10.0) 20,914 22,106 (5.4) 26,472 27,268 (2.9)

EPS (Rs) 18.1 20.1 (10.0) 23.6 24.9 (5.4) 29.8 30.7 (2.9)



Revenue 16,480 16,480 - 19,011 19,011 - 21,670 21,670 -

Gross Profit 1,629 1,629 - 1,898 1,898 - 2,174 2,174 -

Gross Profit Margin (%) 10 10 - 10 10 - 10 10 -

EBITDA 806 806 - 953 953 - 1,118 1,118 -

EBITDA margin (%) 5 5 - 5 5 - 5 5 -

APAT 400 400 - 504 504 - 611 611 -

EPS (Rs) 29 29 - 37 37 - 45 45 -

Source: HDFC sec Inst Research

10


Estimate changes: Food & Grocery

Avenue Supermarts

Future Retail Ltd



Revenue 251,353 251,353 - 313,344 313,344 - 384,907 384,907 -

Gross Profit 38,239 38,239 - 47,444 47,444 - 58,261 58,261 -

Gross Profit Margin (%) 15.2 15.2 - 15.1 15 - 15.1 15 -

EBITDA 22,335 22,335 - 27,943 27,943 - 34,742 34,742 -

EBITDA margin (%) 8.9 9 - 8.9 9 - 9.0 9 -

APAT 14,590 14,590 - 18,300 18,300 - 23,098 23,098 -

EPS (Rs) 23 23 - 29 29 - 37 37 -



Revenue 222,051 222,051 - 245,767 245,767 - 269,521 269,521 -

Gross Profit 59,175 59,175 - 65,638 65,638 - 72,117 72,117 -


EBITDA 11,741 11,741 - 19,965 19,965 - 22,167 22,167 -

EBITDA margin (%) 5 5 - 8 8 - 8 8 -

APAT 7,898 7,898 - 9,461 9,461 - 10,797 10,797 -

EPS (Rs) 16 16 - 17 17 - 20 20 -


11


Estimate changes: Apparels

Trent Ltd (Standalone)

Aditya Birla Fashion & Lifestyle



Revenue 90,811 92,660 (2.0) 104,178 106,368 (2.1) 119,023 121,561 (2.1)

Gross Profit 46,813 47,766 (2.0) 53,599 54,726 (2.1) 61,117 62,421 (2.1)


EBITDA 6,745 6,733 0.2 8,263 8,249 0.2 10,276 10,262 0.1

EBITDA margin (%) 7 7 16 bps 8 8 18 bps 9 8 19 bps

APAT 2,685 2,683 0.1 3,746 3,749 (0.1) 4,130 4,140 (0.3)

EPS (Rs) 3 3 0.1 5 5 (0.1) 5 5 (0.3)



Revenue 33,382 33,382 - 42,699 42,699 - 53,249 53,249 -

Gross Profit 16,799 16,799 - 21,274 21,274 - 26,264 26,264 -


EBITDA 3,036 3,036 - 3,935 3,935 - 4,956 4,956 -

EBITDA margin (%) 9 9 - 9 9 - 9 9 -

APAT 2,223 2,223 - 2,763 2,763 - 3,334 3,334 -

EPS (Rs) 6 6 - 8 8 - 9 9 -


12


Estimate changes

Future Lifestyle & Fashions

V-MART



Revenue 68,013 68,013 - 80,903 80,903 - 95,166 95,166 -

Gross Profit 24,098 24,098 - 28,580 28,580 - 33,487 33,487 -


EBITDA 6,037 6,037 - 7,366 7,366 - 8,798 8,798 -

EBITDA margin (%) 9 9 - 9 9 - 9 9 -

APAT 1,861 1,861 - 2,429 2,429 - 3,286 3,286 -

EPS (Rs) 9 9 - 12 12 - 16 16 -



Revenue 17,217 17,217 - 20,976 20,976 - 25,834 25,834 -

Gross Profit 5,342 5,342 - 6,508 6,508 - 8,015 8,015 -


EBITDA 1,342 1,342 - 1,660 1,660 - 2,070 2,070 -

EBITDA margin (%) 8 8 - 8 8 - 8 8 -

APAT 805 805 - 938 938 - 1,132 1,132 -

EPS (Rs) 44 44 - 52 52 - 63 63 -


13


Estimate changes Shoppers Stop

TCNS Clothing



Revenue 36,749 36,749 - 39,444 39,444 - 42,377 42,377 -

Gross Profit 15,440 15,440 - 16,513 16,513 - 17,677 17,677 -


EBITDA 2,777 2,777 - 3,069 3,069 - 3,276 3,276 -

EBITDA margin (%) 8 8 - 8 8 - 8 8 -

APAT 789 789 - 923 923 - 1,020 1,020 -

EPS (Rs) 9 9 - 10 10 - 12 12 -



Revenue 12,422 12,798 (2.9) 14,173 14,938 (5.1) 15,935 17,167 (7.2)

Gross Profit 8,197 8,445 (2.9) 9,345 9,849 (5.1) 10,498 11,310 (7.2)

Gross Profit Margin (%) 66 66 - 66 66 - 66 66 (0 bps)

EBITDA 1,767 1,900 (7.0) 1,982 2,198 (9.8) 2,303 2,624 (12.3)

EBITDA margin (%) 14 15 (62 bps) 14 15 (73 bps) 14 15 (84 bps)

APAT 1,334 1,428 (6.6) 1,491 1,606 (7.1) 1,722 1,893 (9.0)

EPS (Rs) 21 22 (6.6) 23 25 (7.1) 27 30 (9.0)


14


Estimate changes Arvind Fashions



Revenue 43,654 43,654 - 48,398 48,398 - 53,700 53,700 -

Gross Profit 19,956 19,956 - 22,270 22,270 - 24,871 24,871 -


EBITDA 637 637 - 2,451 2,451 - 3,190 3,190 -

EBITDA margin (%) 1 1 - 5 5 - 6 6 -

APAT -2,041 -2,041 - -461 -461 - 57 57 -

EPS (Rs) -35 -35 - -8 -8 - 1 1 -


15

Financial Summary

Source: Company, HDFC sec Inst Research


Company NET SALES (Rs bn) LTL EBITDA (Rs bn) LTL EBITDA Margin (%) APAT (Rs bn) Adj. EPS (Rs/sh) 3Q

FY20E QoQ

(%) YoY (%)

3Q FY20E

QoQ (%)

YoY (%)

3Q FY20E

QoQ (bps)

YoY (bps)

3Q FY20E

QoQ (%)

YoY (%)

3Q FY20E

2Q FY20

3Q FY19

Food & Grocery

Avenue Supermarts

69.0 15.9 26.5 5.7 19.4 25.4 8.2 47 16 3.8 21.4 48.4 6.1 5.0 4.1

FRL 57.0 4.6 7.6 2.8 -1.6 2.5 5.0 -32 -25 1.8 8.4 -11.2 3.6 3.3 4.0

Jewellery - - - - -

Titan 65.1 39.8 11.0 6.6 26.6 0.0 10.2 -105 8 4.3 38.9 -10.0 4.9 3.5 5.4

Thangamayil 3.8 -6.5 10.1 0.2 -48.6 18.6 4.7 34 778 0.1 -38.4 27.4 5.3 8.6 4.2

Apparel - - - - -

ABFRL 24.8 7.3 8.6 1.6 3.4 -7.9 6.4 -25 -115 0.1 NM -82.7 0.2 -0.0 0.9

Trent 8.2 -0.3 24.3 1.5 14.8 110.1 18.7 246 764 0.6 45.1 37.9 1.6 1.1 1.2

Future Lifestyle 17.4 19.6 7.9 1.3 25.7 -11.5 7.5 36 -165 0.3 263.6 -49.7 1.4 0.4 2.8

STOP 10.1 20.0 1.5 0.6 32.7 -36.2 6.1 59 -361 0.3 NM -37.8 3.1 -0.6 5.0

TCNS Clothing 3.2 -0.9 5.9 0.4 -3.7 -23.9 12.1 -34 -474 0.2 36.4 -34.9 3.9 2.9 6.0

V-MART 5.6 78.6 20.5 0.8 NM 3.3 13.5 1,600 -224 0.5 NM 22.6 28.1 -5.9 23.0

Arvind Fashions 11.3 1.2 -10.0 0.9 750.2 9.9 8.0 707 146 0.1 NM 64.6 2.4 -8.0 1.4

16

Valuation Summary


Source: Company, HDFC sec Inst Research

Company Mcap

(Rs bn) CMP (Rs)

Reco. TP

(Rs)

EPS (Rs) P/E (x) EV/EBITDA (x) Core ROCE (%)

FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E

Avenue Supermarts

1,178 1,877 SELL 1,250 23.4 29.3 37.0 80.3 64.0 50.7 52.7 42.1 33.6 21.3 21.7 22.7

Titan 1,025 1,154 NEU 1,170 18.1 23.6 29.8 63.8 49.0 38.7 42.5 34.0 27.6 17.5 19.8 21.9

ABFRL 181 233 NEU 250 3.5 4.9 5.4 67.0 48.0 43.5 28.9 23.3 18.4 9.7 12.2 12.5

FRL 176 351 BUY 500 15.7 17.5 19.9 21.3 19.1 16.8 16.3 10.2 9.0 15.2 12.7 11.5

Trent 196 551 NEU 325 6.2 7.7 9.3 88.5 71.2 59.0 58.2 45.3 36.2 8.2 10.4 11.5

Future Lifestyle 82 407 BUY 550 9.3 12.1 16.3 42.9 32.9 24.3 14.1 11.6 9.5 9.4 10.2 12.0

STOP 34 384 NEU 360 9.0 10.5 11.6 42.8 36.6 33.1 11.3 9.8 8.8 10.5 12.3 14.0

TCNS Clothing 37 602 BUY 670 20.8 23.1 26.7 32.5 29.2 25.3 21.9 19.1 16.2 26.4 26.5 27.4

V-MART 30 1,663 BUY 2,150 44.5 51.8 62.5 37.4 32.1 26.6 22.0 18.1 14.5 19.8 18.6 18.4

Arvind Fashions 24 402 BUY 450 -35.2 -7.9 1.0 -11.4 -50.6 407.8 49.0 12.7 9.8 -3.8 3.9 6.4

Thangamayil 5 360 BUY 550 29.2 36.8 44.6 11.1 8.8 7.3 10.4 9.2 8.2 9.1 9.9 10.4

17


Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period

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Documents

Retail - HDFC securities - 3QFY20... · Outlook on jewellery demand Outlook on Watches and Eyewear businesses Non-jewellery business EBIT margin Pace of network expansion THANGAMAYIL