(Kotak) Aditya Birla Fashion and Retail, August 23, 2018

Company Report Aditya Birla Fashion and Retail (ABFRL) BUY
Others
August 23, 2018
INITIATING COVERAGE
Sector view:
Strutting the fashion street. We initiate coverage on Aditya Birla Fashion and Retail Price (`): 190
(ABFRL) with a BUY rating and a target price of `220 based on June 2020E EV/EBITDA
of 20X for Madura and EV/EBITDA of 17X for Pantaloons. Madura is a steady growth Target price (`): 220
and strong FCF generating business, while Pantaloons turnaround can provide a BSE-30: 38,286
strong margin kicker. We forecast healthy revenue/PBT CAGR of 16/124% over
FY2018-21 driving a reduction in leverage and improvement in return ratios.
Strong brands, multiple channels of retail and pan-India presence; initiate with BUY
ABFRL is India’s leading apparel company comprising Madura (lifestyle brands) and Pantaloons
(affordable fashion retailer). Madura owns some of the largest menswear brands in India such
as Peter England and Louis Philippe. Its strong brand pull, capital-efficient franchise model of
growth and strong cash-flow generation are key positives. We believe Pantaloons business is
on the cusp of a turnaround, with margins of the business improving to an all-time high of
9.6% in 1QFY19. SSSG revival, cost-cutting measures and stabilization of operations of
recently opened stores are set to drive an improvement in profitability.
Multiple macro and competitive risks now behind
ABFRL’s profitability was impacted by multiple macro events over FY2016-18 such as
demonetization and GST implementation, which impacted consumer spends and Madura’s
sales through distributors. Further, heavy discounting by e-commerce impacted SSSG
performance over FY2015-17. We believe macro risks have waned, and while competitive
intensity is high, ABFRL’s growth trajectory is set to improve as (1) Madura’s new casual and
event wear-focused range finds fresh demand and drives EBO expansion and (2) Pantaloons’
improved product assortment and steady expansion drive higher revenue growth.
Multiple factors to drive healthy revenue/PBT CAGR of 16/124% over FY2018-21
We forecast healthy revenue, EBITDA and PBT CAGR of 16%, 30% and 124%, respectively
over FY2018-21 driven by steady SSSG performance of Madura and Pantaloons, improved
margin profile of Pantaloons and lower losses in other businesses (innerwear, fast fashion).
We expect Madura to remain a healthy FCF-generating company, with increased profitability
in other businesses driving a steady reduction in D/E to 0.9X in FY2020 from 1.6X in FY2018.
Key risks—decline in discretionary spending and heightened competitive intensity
An economic downturn, or other factors, which may lead to reduced consumer spending, are
key risks for ABFRL. Increase in competitive intensity from other channels such as e-commerce, Garima Mishra
unavailability of requisite real estate for expansion and/or sharp increase in rentals, longer- garima.mishra@kotak.com
Mumbai: +91-22-4336-0862
than-expected turnaround of new businesses are other risks.
Company data and valuation summary
Company data Stock data High Low Price performance 1M 3M 12M

Rating: BUY 52-week range (Rs) 209 132 Absolute (%) 40.8 35.4 11.9
Rel to BSE-30 (%) 34.2 22.5 (8.7)
Current Price (Rs) Priced at close of: August 21, 2018
190 Capitalization Forecast/Valuation 2018 2019E 2020E
Market cap (Rs bn) 146.9 EPS (Rs) 1.5 2.3 3.7 Kotak Institutional Equities
Net debt/cash (Rs bn) 17.9 P/E (X) 125 83 52 Research
Free float (%) 24.0 RoAE (%) 11 15 20
Shares outstanding (mn) 773 EV/EBITDA (X) 35 24 19 Important disclosures appear
at the back
Source: Company data, Bloomberg, BSE, Kotak Institutional Equities estimates
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Others Aditya Birla Fashion and Retail
TABLE OF CONTENTS
Financial snapshot ..................................................................................................3
Valuation: BUY, with a target price of `220 ...........................................................4
ABFRL: Strong brands and improving reach in a steady growth industry .................9
ABFRL: Strong presence in a fast growing but competitive industry ......................15
ABFRL: Decline in discretionary spending and higher competition are key risks .....24
ABFRL: Strong 16% revenue CAGR and 124% PBT CAGR over FY2018-21 .........26
Schemes of demerger and corporate structure .....................................................37
The prices in this report are based on the market close of August 21, 2018.
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Aditya Birla Fashion and Retail Others
FINANCIAL SNAPSHOT
Exhibit 1: ABFRL, consolidated estimates and valuation summary, March fiscal year-ends, 2016-21E
EBITDA
Net revenues EBITDA Net income EPS margin P/E EV/EBITDA RoCE RoE
(Rs mn) (Rs mn) (Rs mn) (Rs) (%) (X) (X) (%) (%)
2016 60,346 3,784 (1,098) (1.4) 6.3 (134) 43
2017 66,330 4,375 535 0.7 6.6 274 38 8 6
2018 71,814 4,683 1,178 1.5 6.5 125 35 9 11
2019E 83,508 6,753 1,774 2.3 8.1 83 24 10 15
2020E 97,052 8,526 2,822 3.7 8.8 52 19 13 20
2021E 111,538 10,261 4,331 5.6 9.2 34 15 16 24
Source: Company, Kotak Institutional Equities estimates
xx
Exhibit 2: Consolidated income statement, balance sheet and cash flow, March fiscal year-ends, 2013-21E (Rs mn)
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Profit model
Revenue from operations 12,851 16,612 18,507 60,346 66,330 71,814 83,508 97,052 111,538
Gross profit 5,108 7,090 8,502 32,822 35,942 37,820 43,784 50,784 58,303
EBITDA 661 334 727 3,784 4,375 4,683 6,753 8,526 10,261
Depreciation and amortisation expense (544) (1,090) (1,835) (3,381) (2,425) (2,805) (3,107) (3,699) (3,811)
EBIT 117 (756) (1,108) 403 1,950 1,878 3,646 4,827 6,450
Other income 632 51 28 264 382 328 233 255 267
Finance costs (1,438) (1,173) (1,202) (1,765) (1,797) (1,716) (1,619) (1,487) (1,200)
Profit before tax (689) (1,877) (2,281) (1,098) 535 490 2,260 3,595 5,517
Taxation — — — — — 688 (486) (773) (1,186)
Profit after tax (689) (1,877) (2,281) (1,098) 535 1,178 1,774 2,822 4,331
Diluted EPS (Rs/share) (9.9) (20.2) (24.6) (1.4) 0.7 1.5 2.3 3.7 5.6
Weighted average number of shares - diluted (mn) 70 93 93 773 773 773 773 773 773
Balance sheet
Shareholders' funds 7,695 5,795 3,456 9,055 9,582 10,931 12,694 15,515 19,846
Total debt 17,307 10,821 13,106 14,764 20,317 18,615 18,115 15,615 11,615
Long-term liabilities 388 485 607 4,325 1,111 872 872 872 872
Total shareholders' funds + liabilities 25,390 17,100 17,169 28,144 31,010 30,418 31,680 32,002 32,333
Net fixed assets 16,508 16,580 15,831 23,486 25,121 26,282 26,172 25,912 25,896
Investments 8,000 60 — 344 242 42 42 42 42
Net current assets excluding cash 4 (418) 449 3,324 4,008 1,381 2,552 2,959 3,393
Total assets 25,390 17,100 17,169 28,144 31,010 30,418 31,680 32,002 32,333
Key ratios (%)
Revenue growth 29 11 226 10 8 16 16 15
EBITDA growth (50) 118 421 16 7 44 26 20
EPS growth 173 22 (52) (149) 120 51 59 53
Gross margin 40 43 46 54 54 53 52 52 52
EBITDA margin 5 2 4 6 7 7 8 9 9
Tax rate — — — — — (141) 22 22 22
Debt/equity (X) 2 2 4 2 2 2 1 1 1
RoE (18) (28) (49) (18) 6 11 15 20 24
RoCE 6 (3) (6) 3 8 9 10 13 16
Cash flow 5 2 4 6 7 7 8 9 9
Operating profit before working capital changes 543 294 737 3,850 4,644 5,699 6,500 8,008 9,342
Change in working capital/ other adjustments (516) 408 (1,096) (741) (461) 2,627 (1,171) (406) (435)
Capital expenditure (8,234) 6,813 (1,087) (1,859) (4,403) (3,767) (2,998) (3,439) (3,795)
Free cash flow (8,207) 7,515 (1,447) 1,250 (221) 4,559 2,331 4,163 5,113
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

VALUATION: BUY, WITH A TARGET PRICE OF `220

We initiate coverage on Aditya Birla Fashion and Retail (ABFRL) with a BUY rating and a target price of `220
based on 20X June 2020E EV/EBITDA ascribed to Madura and 17X June 2020E EV/EBITDA ascribed to
Pantaloons. Our target multiple for Madura is in line with the peer average, amply supported by Madura’s
strong brand proposition, superior geographic reach and stable cash generation. Pantaloons business is on
the cusp of a turnaround and can drive solid profitability over the medium term.
Initiate coverage with BUY and target price of `220

We initiate coverage on Aditya Birla Fashion and Retail (ABFRL) with a BUY rating and a
target price of `220 based on 20X June 2020E EV/EBITDA multiple for Madura and 17X
June 2020E EV/EBITDA multiple for Pantaloons.
ABFRL comprises two businesses: lifestyle brands segment comprising Madura’s menswear
brands, luxury brands and fast fashion retail (Forever 21 and People), and Pantaloons which
is a large format value fashion retailer.
At 20X, our target multiple for Madura is broadly in line with peer average. Madura has a
strong brand proposition, extensive reach and healthy return ratios. Pantaloons deserves a
lower multiple than Madura as its model has taken some time to stabilize, and profitability,
while improving, is still below its peak potential.
The peers mentioned below are all in the branded apparel business, though their business
models are different: Page is the market leader in the branded innerwear space, Trent is a
large format store retailing only private labels, Arvind has other businesses besides branded
fashion, Future Lifestyle owns Central and Brand factory formats as well as brands, Shoppers
Stop is a department store with largely third-party brands, and Vmart is a retailer of
unbranded apparel.
Exhibit 3: Indian branded fashion retailers are trading at an average EV/EBITDA of 21X March 2020
Valuation comparables of Indian retailers, March fiscal year-ends
Market-cap EV/EBITDA EV/Sales P/E ROE (%) 2018-20 CAGR (%)
Company (US$ mn) 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 Revenue EBITDA PAT
Page 5,451 46 54 44 10 12 10 110 84 68 46 46 45 21 26 27
Trent 1,770 57 44 36 5 5 4 142 71 49 6 10 14 23 31 71
Arvind 1,507 14 12 10 1 1 1 34 25 18 9 11 13 14 22 37
Future Lifestyle 1,177 18 14 12 2 2 1 65 50 37 10 9 11 21 18 32
Shoppers Stop 701 22 18 14 1 1 1 20 49 36 44 10 13 10 25 (25)
Vmart 785 25 32 26 3 4 3 71 58 46 26 23 24 22 25 24
Kewal Kiran 264 17 15 13 4 na na 25 23 21 19 19 19 8 13 10
Average 28 26 21 3 4 3 61 51 39 19 17 19 16 23 19
Source: Company, Bloomberg

ABFRL has a fast expanding portfolio of brands and retail formats

ABFRL’s business is a mix of branded wear multi-format retail, as well as large format retail.
Exhibit 4: ABFRL operates various branded apparel and retail formats
Aditya Birla
Fashion & Retail
Madura Pantaloons
Large format retailer of

own and third-party
Other businesses
Lifestyle brands Fast Fashion brands
(innerwear, luxury brands)
Van Heusen branded

Menswear brands: Allen
Forever 21 innerwear
Solly, Louis Philippe, Peter
People Luxury brands: Hackett,
England, Van Heusen
Simon Carter etc.
Source: Company, Kotak Institutional Equities
Its Madura business is the largest contributor to revenues and EBITDA, followed by
Pantaloons. ABFRL has seeded certain new businesses such as Forever 21, People and
innerwear retail, which are currently in the investment phase.

Exhibit 5: SSSG revival of Madura and margin increase in Pantaloons to drive profitability
Details of key assumptions, March fiscal year-ends
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Lifestyle brands
Revenues (Rs mn) 36,330 36,170 37,170 40,866 45,322 50,168
Yoy growth (%) (0) 3 10 11 11
EBITDA (Rs mn) 3,133 3,946 3,977 4,795 5,331 5,891
EBITDA margin (%) 9 11 11 12 12 12
SSSG (%) 0 (6) 9 10 8 8
Period-ending store count (#) 1,877 1,761 1,813 1,963 2,113 2,238
Period-ending store area (sq. ft) 2.6 2.6 2.6 2.8 3.0 3.2
Pantaloon
Revenues (Rs mn) 12,851 16,610 18,510 21,570 25,520 28,620 35,103 41,669 48,777
Yoy growth (%) 29 11 17 18 12 23 19 17
EBITDA (Rs mn) 661 334 727 1,030 1,260 1,730 2,847 3,687 4,472
EBITDA margin (%) 5 2 4 5 5 6 8 9 9
SSSG (%) — (2) 6 6 3 (3) 5 7 7
Period-ending store count (#) 95 107 134 163 209 275 330 385 440
Period-ending store area (sq. ft) 1.7 2.0 2.3 2.9 3.2 3.8 4.5 5.2 5.9
Other businesses
Revenues (Rs mn) — — — 2,450 4,640 6,020 7,538 10,061 12,592
Yoy growth (%) 89 30 25 33 25
EBITDA (Rs mn) (380) (831) (1,024) (889) (492) (103)
EBITDA margin (%) (15) (18) (17) (12) (5) (1)
Total
Revenues (Rs mn) 12,851 16,610 18,510 60,350 66,330 71,810 83,508 97,052 111,538
Yoy growth (%) 29 11 226 10 8 16 16 15
EBITDA (Rs mn) 661 334 727 3,784 4,375 4,683 6,753 8,526 10,261
EBITDA margin (%) 5 2 4 6 7 7 8 9 9
We forecast ABFRL to post revenue, EBITDA and net profit CAGR of 16%, 30% and 54%
over FY2018-21E. Like its peers, it is a key beneficiary of an increasing demand for branded
apparel and higher discretionary consumption spends. Its widespread reach and ownership
of multiple brands make it a key player in the branded apparel space.
Our investment thesis for ABFRL is based on the following:
Lifestyle brands. This business contributed ~52% of ABFRL’s revenues in FY2018. We

believe Madura, after registering a slowdown in revenues as well as store expansion over
FY2015-18, is set to see a revival in revenues over the next few years. This is on account of:
(1) improvement in product assortment to cater to greater demand for casualwear (Allen
Solly and Peter England have considerably improved this offering) and event wear (Van
Heusen and Louis Philippe), (2) greater store additions (we model 150 new EBOs to be set
up over FY2019 and FY2020 each compared to 78 EBOs set up over FY2015-18), and (3)
improved online presence with a substantial increase in revenues from this channel to 10%
in 1QFY19 from a minuscule proportion a year earlier.
Pantaloons. Pantaloons has been a drag on ABFRL’s profitability since its acquisition in
FY2013. However, the company’s recent measures to boost profitability are bearing fruit.
These include: (1) alignment of Pantaloon’s product pricing with value fashion peers in order
to cater to a wider consumer set, (2) expansion in Tier-III/IV cities where competition is
limited, (3) increased reliance on private labels with quick churn out of trendy apparel, and
(4) increased focus on cost controls, with measures such as rent and store area
rationalization, fixed cost controls, etc. Further, the company is looking to increase
advertising in both offline and online modes, as well as looking to create a dedicated online
portal for Pantaloons, as part of its omni-channel strategy, which we believe will enable a
wider reach. The impact of these measures is visible on the steadily improving margin profile
of Pantaloons over the past 3-4 quarters.

Other businesses. These comprise innerwear, fast fashion (Forever 21, People) and luxury
brands businesses. Among these, we believe the innerwear business has legs to grow, given
cross-sell opportunities in existing Van Heusen stores as well as Pantaloons stores. While this
category is competitive, ABFRL is investing in its distribution reach and product quality to
drive revenues. Fast fashion faces extreme competition from other retailers like Zara, H&M,
and hence we believe this format may take some more time to break even, and curtailment
of investments is a positive. Luxury brands is currently a small business and we believe future
expansion of the same will be measured.
We also note a change in management in the company—Ashish Dixit’s elevation to the role
of MD, as well as new business heads for both Madura and Pantaloons. We believe this has
brought about fresh strategies of reviving the omni-channel proposition as well as widening
the product portfolio for both Madura and Pantaloons.
Overall, we like ABFRL’s brands business for its steady growth potential, improving online
presence as well as strong cash generation. Pantaloons turnaround can drive a rapid
improvement in profitability as well as reduced leverage over time. Other businesses provide
an optionality, which we don’t factor in our valuations at the moment.
SoTP-based valuation of `220

As highlighted earlier, we ascribe a target multiple of 20X EV/EBITDA to Madura’s brands
business and 17X EV/EBITDA to Pantaloons. Given smaller scale but decent opportunity size
of other businesses, we ascribe a 1.0X EV/sales multiple to these businesses. This leads us to
our target price of `220 for ABFRL.
Exhibit 6: SoTP based target price of Rs220

SoTP calculation of ABFRL, March fiscal year-ends
2020 2021
Lifestyle brands
EBITDA (Rs mn) 5,331 5,891
EV/EBITDA (X) 20 20
EV (Rs mn) 106,621 117,829
Pantaloons
EBITDA (Rs mn) 3,687 4,472
EV/EBITDA (X) 17 17
EV (Rs mn) 62,675 76,021
Other businesses
Revenues (Rs mn) 7,538 10,061
EV/revenues (X) 1.0 1.0
EV of other businesses 7,538 10,061
Total EV 176,834 203,910
Net debt (Rs mn) 14,510 10,597
June 2020 equity value (Rs mn) 170,071
Target price (Rs/sh) 220
Source: Kotak Institutional Equities estimates
We back-up our multiple based target price calculation with a DCF-based TP calculation, and
arrive at a fair value of `215, similar to our multiples-based TP of `220. Our DCF assumes (1)
revenue CAGR of 13% over FY2019-25 moderating to CAGR of 8% over FY2025-35, (2)
improvement in EBIT margin from 4.4% in FY2019 to 9.4% by FY2030, (3) WACC of 10.8%
and (4) terminal growth of 5%.

Exhibit 7: DCF-based methodology yields a fair value of Rs215
2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2035E
Net Sales 71,814 83,508 97,052 111,538 127,021 143,944 161,353 178,464 197,391 217,929 240,169 264,078 289,047 408,237
Yoy growth (%) 8 16 16 15 14 13 12 11 11 10 10 10 9 5
EBIT 1,878 3,646 4,827 6,450 7,931 9,754 11,570 13,608 15,742 18,143 20,835 23,833 27,098 42,559
EBIT margin (%) 2.6 4.4 5.0 5.8 6.2 6.8 7.2 7.6 8.0 8.3 8.7 9.0 9.4 10.4
EBIT*(1-tax rate) 4,516 2,862 3,789 4,225 5,195 6,389 7,578 8,913 10,311 11,883 13,647 15,611 17,749 27,876
Depreciation/Amortisation 2,805 3,107 3,699 3,811 4,224 4,598 5,382 5,815 6,424 6,800 7,132 7,404 7,950 8,483
(Inc.)/Dec. in working capital 2,627 (1,171) (406) (435) (465) (508) (522) (513) (573) (622) (673) (724) (756) (639)
Capital expenditure (3,967) (2,998) (3,439) (3,795) (4,365) (4,830) (4,970) (5,296) (5,773) (6,367) (7,006) (7,651) (8,115) (7,391)
Free cash flows 5,982 1,800 3,643 3,806 4,589 5,649 7,468 8,919 10,389 11,695 13,100 14,641 16,828 28,329
Years discounted — 1 2 3 4 5 6 7 8 9 10 11 16
Discount factor — 1 1 1 1 1 1 0 0 0 0 0 0
Discounted cash flow — 3,372 3,179 3,458 3,841 4,581 4,937 5,189 5,270 5,326 5,371 5,570 5,606
Risk free rate (%) 6.5

Risk premium (%) 6.0
Beta (X) 1.0 WACC (%)
Cost of equity (%) 12.5 215 9.8 10.3 10.8 11.3 11.8
WACC (%) 10.8 4.0 214 204 195 187 181
Terminal growth rate (%) 5.0 Terminal 4.5 227 215 204 195 188
Sum of free cash flow (Rs mn) 78,897 growth 5.0 242 227 215 205 196
Terminal value (Rs mn) 100,911 rate (%) 5.5 261 243 228 216 205
Enterprise value (Rs mn) 179,808 6.0 285 262 244 229 216
Investments (Rs mn) 0
Net debt (Rs mn) 13,532
Equity value (Rs mn) 166,277
No. of shares (mn) 773
Equity value per share (Rs) 215

ABFRL: STRONG BRANDS AND IMPROVING REACH IN A STEADY GROWTH INDUSTRY

Apparel and accessories contribute a sizeable ~8% to India’s overall retail consumption. Current low per
capita consumption of fashion, improving availability of new categories and brands as well as rising consumer
aspiration should aid above-industry growth rates for organized brands and retailers. Within this, ABFRL
should benefit from its increasing footprint, particularly in Tier II/III/IV cities, omni-channel strategy as well as
strong brand presence.
Apparel and accessories: rising penetration of organized retail

Among various retail categories, the proportion of organized retail is one of the highest in
fashion and lifestyle, given the wide network of stores built by retailers across the country.
Going forward, the share of organized retail within apparel is expected to increase further as
existing players launch new stores and increase their penetration in smaller towns and cities.
Growth is also expected to be driven by the entry of new players due to opening of 100%
foreign direct investment in single brand retail and higher penetration of online retailing.
Organized apparel retailing in India is currently driven by exclusive brand outlets of leading
brands of Madura (Louis Philippe, Van Heusen, Peter England etc.), Raymond, Fabindia,
BIBA, AND, Zara and large format lifestyle stores such as Shoppers Stop, Lifestyle and
Pantaloons.
Exhibit 8: Apparel and accessories has the highest penetration of organized retail after consumer
electronics
Penetration of organized retail in various products category (%)
2007 2017 2021

Apparel and accessories 14.0 24.0 36.0
Consumer electronics 3.0 27.0 12.6
Food and grocery 1.0 3.0 5.7
Footwear 10.0 27.0 34.0
Home and living 6.0 11.0 12.6
Jewelry and watches 6.0 28.0 34.8
Others 14.0 13.0 14.6
Pharmacy and wellness 21.0 11.0 30.0
Source: Report on ‘Women’s Ethnic Wear Market in India’ by Technopak, Kotak Institutional Equities
Exhibit 9: Apparel and accessories was the second largest retail category in 2017
Category-wise size of total retail and organized retail, March fiscal year-end, 2017
Proportion of Size of Penetration of

Retail size total retail organized retail organized retail
(US$ bn) (%) (US$ bn) (%) Key organized retailers
Food and grocery 474 67 16 3 Big Bazaar, Dmart, Reliance Fresh, More
Raymond, Vmadura brands, Shoppers' Stop,
Apparel and accessories 56 8 14 24
Lifestyle, Fab India, Biba
Jewelry and watches 55 8 15 28 Tanishq, Malabar, Kalyan
Consumer electronics 42 6 11 27 Samsung, Vijay Sales, Croma, Reliance Digital
Home and living 31 4 3 11 Home Centre, Home Stop
Includes books and stationery, toys, eyewear,
Others 23 3 3 13
sports goods, alcoholic beverages and tobacco
Pharmacy and wellness 21 3 2 11 Apollo, MedPlus
Foot apparel 8 1 2 27 Bata India, Metro, Adidas, Clarks
Total 710 100 67 9
Source: Report on ‘Women’s Ethnic Wear Market in India’ by Technopak, Kotak Institutional Equities estimates

Greater discretionary spends to drive branded apparel growth

The overall apparel market size was pegged at US$50.9 bn in FY2017, and is expected to
grow at a CAGR of 9% to reach a size of US$65.8 bn by FY2020. Growth of organized
apparel retail is set to be faster and this channel is set to account for a sizeable 33% of the
overall apparel retail market by FY2020. Greater purchasing power in turn driving growth in
primary discretionary spend, better access and availability of products, higher brand
consciousness, increasing urbanization and increasing digitization are key drivers for strong
growth of branded and organized retail.
Exhibit 10: Proportion of branded and organized apparel retail to increase over time
Size of branded and organized apparel retail, March fiscal year-ends (US$ bn)
2012 2017 2020

Apparel 31.8 50.9 65.8
Branded apparel 7.9 18.8 31.6
Proportion of branded in overall apparel retail (%) 25 37 48
Organized apparel 6.4 12.2 21.7
Proportion of organized in overall apparel retail (%) 20 24 33
Notes:
(a) Branded apparel signifies registered trademarks that are sold through both organized retail and trade
channels.
(b) Organized retail signifies formal retail channels of Exclusive Brand Outlets (EBOs), LFS, e-commerce, etc.
Apparel retailed through these organized retail point of sales is necessarily branded.
Source: Report on ‘Women’s Ethnic Wear Market in India’ by Technopak, Kotak Institutional Equities
ABFRL’s geographic reach to benefit from rising discretionary spends beyond

metros
Urbanization and increase in overall consumption is set to drive up the contribution from
non-metro cities. As seen below, contribution from Tier I, II, III and IV cities is set to increase
from 37% of overall household consumption expenditure in 2016 to 47% of expenditure in
2025.
Exhibit 11: Share of non-metro cities in overall consumption on the rise

Geographic distribution of total household consumption expenditure, December calendar year-ends
Share of household consumption expenditure Population

(%) (mn)
2016 2025
Metropolitan 12 12 > 4 mn
Tier I 10 13 1-4 mn
Tier II 4 5 0.5-1.0 mn
Tier III 10 12 0.01-0.50 mn
Tier IV 13 17 10,000-100,000
Rural 51 42 <10,000
Source: BCG analysis, Kotak Institutional Equities
Higher consumption in these cities augurs well for ABFRL, which has a wider presence than
competitors and intends to expand to newer cities. Its largest flagship brand Peter England is
present in 750+ cities, compared to 450+ cities for Raymond.
Omni-channel the right strategy for apparel retailers

ABFRL’s omni-channel strategy of reaching a larger number of customers is a sensible one.
We believe brand-building requires establishing the relevant reach as well as customer
connect which a pure online brand will find difficult to do. While heavy promotional and
marketing spends may help, for longer term growth of the brand, we believe an offline
presence at marquee locations is important.

A case in point is China – which has a substantially larger apparel market size and also a
much higher penetration of e-commerce. However, we see that large Chinese brands are
still adding stores. Their commentary suggests that even though e-commerce as a
proportion of sales is increasing, they are still witnessing growth in their offline format.
Further, store additions are particularly helpful in situations of companies looking to either
revamp brands and/or plan brand extensions.
We believe apparel retailers will need to be present across both offline and online channels
of sales. With rising urban population and increasing purchasing power of non-metro cities,
we believe ABFRL can continue to grow its network of stores over the next few years.
Exhibit 12: Chinese branded apparel companies are still expanding physical stores
Revenue and store count of branded apparel Chinese companies, December calendar year-ends
Revenues No. of stores

(US$ bn) (#)
2016 2017 2016 2017 Nature of merchandise
Anta 2.54 2.62 8,860 9,467 Sportswear
Zhejiang Semir 1.59 1.77 8,252 8,423 Casual wear and children's clothing
Li Ning 1.21 1.31 6,440 6,435 Sportswear
Bosideng 0.91 1.01 2,626 2,885 Menswear and women's wear
Source: Companies, Bloomberg, Kotak Institutional Equities
How many buyers of branded wear are there?

Given the fragmented user base and unavailability of precise data, we try and estimate the
current shopping base of customers of branded clothing by triangulating data points on
loyal members of leading retailers and unique users of Myntra (online shopping platform).
We note that loyal customers contribute a sizeable 50-90% of revenues of leading retailers.
While there will be certain overlaps between loyal customers of various retailers, we also
note that: (1) usually the loyalty program is taken up by one member of the household and
not all shoppers, and (2) there will certainly be customers who are members of only one
retailer. Summing up all these customers leads us to total customer count of 47 mn. We
believe after adjusting for overlap and also the fact that there will also be customers who
shop for branded wear but are not a part of any loyalty program, we believe the total buyers
of branded apparel could be ~40-50 mn households.
Exhibit 13: ABFRL's Pantaloons and Madura brands have the largest number of loyal members
Number of members of loyalty programs of retailers as of March 31 2018
Number of members
Retailer Loyalty program (mn)
Pantaloons Loyalty program 11.8
Madura brands Loyalty program 10.2
Shoppers' Stop First Citizen 5.3
Trent Clubwest 3.5
Brand Factory Payback 2.5
Central Payback 2.2
Retailer Unique users
Myntra Unique users 11.0
Source: Companies, Industry discussions, Kotak Institutional Equities

xx
Exhibit 14: Loyal customers contribute to a large proportion of retailers' revenues

Contribution of loyal customers to revenues as of March 31 2018
Proportion of revenues
Number of members contributed by loyal customers
Retailer (mn) (%)
Pantaloons 11.8 92.0
Madura brands 10.2 50.0
Shoppers' Stop 5.3 75.0
Brand Factory 3.5 70.0
Central 2.5 60.0
Source: Companies, Kotak Institutional Equities
Rising urban population, purchasing power to drive ABFRL’s menswear business

We believe that the bulk of branded wear consumption would happen in urban areas, given
the presence of formal retail channels in these areas, as well as higher purchasing power. In
FY2017, industry estimates had pegged the total apparel market size at US$51 bn, and
men’s apparel market size at US$21 bn. Total industry and apparel market was estimated to
be 30% penetrated by organized retail in FY2017. Assuming menswear had a higher
proportion of organized/branded retail penetration due to the presence of larger brands and
more standardized offerings, we peg branded wear penetration at 30% in men’s apparel.
Assuming 50 mn urban households in FY2017 had one person buying branded apparel, our
calculation implies per person spends of US$63. We believe this spend can increase at least
in line with real GDP growth over the medium term. Coupled with a 3.5% growth in urban
households, which basically implies a similar growth in the number of buyers, we believe
men’s branded apparel industry can grow at a CAGR of 11% over FY2017-25. Our 2025
estimate of per capita spend by urban men on apparel comes to ~US$200. This is
significantly higher than the estimated per capita average Indian spend of US$66 estimated
by Technopak on apparel in FY2025 – indicating the sharp difference in consumption
patterns among various income groups.
Exhibit 15: Increase in urban population and purchasing power to drive growth in men’s apparel market
Estimation of men’s apparel market size, March fiscal year-ends
2017-25 CAGR
2017 2020 2025 (%)
Number of households (mn)
Rural 179 184 194 1.0
Urban 102 114 135 3.6
Total 281 298 329 2.0
Estimation of size of men's apparel market
Size of apparel market (US$ bn) 51 66 99 8.7
Share of menswear (%) 42 39 38
Size of men's apparel market (US$ bn) 21 26 38 7.3
Proportion branded (%) 26 30 34 3.4
Size of branded men's apparel market (US$ bn) 6 8 13 11.0
Number of urban households buying branded clothing (mn) 50 56 66 3.6
Assumed number of men buying branded wear per household (#) 1 1 1
Implied spend per person (US$) 111 138 193 7.2
Source: NSSO - 66th round, Census 2010, Kotak Institutional Equities estimates
xx

Exhibit 16: Higher proportion of affluent households can significantly drive apparel consumption
Contribution of
Share of household consumption expenditure Annual gross household income

(%) (US$ 000)
2016 2025
Elite 12 20 >30.8
Affluent 15 20 15.4-30.8
Aspirers 24 25 7.7-15.4
Next billion 38 30 2.3-7.7
Strugglers 11 6 <2.3
Source: BCG analysis, Kotak Institutional Equities
Competitive intensity high, though the worst is over

ABFRL’s business faces competition from both online and offline retailers. We believe the
peak of competition from online channels is over – while this channel is here to stay, the
heavy cash burn and indiscriminate customer discounts offered by multiple e-tailers seems to
be on the decline. Further, we believe the period of irrational pricing is behind and ABFRL is
using this channel effectively (10% of its Madura business revenues were accounted for by
e-commerce, compared to minuscule revenues a year ago).
We acknowledge that over FY2015-17, e-commerce did negatively impact ABFRL’s business,
resulting in weak SSSGs of Pantaloons and Madura and also leading to eventual store
rationalization.
E-tailers have forced offline retailers to increase discounting, go for better targeting of
customers and stock fresher, trendier merchandise.
Lengthening of discount season. We note that over the past 3-4 years, the traditional
discount period of one month each in January and July has gradually extended to 1.5
months each over January-February and July-August. This has possibly resulted in a higher
proportion of merchandise being sold on discount. Our discussions with retailers suggest
that unless there is a definite thought process among market participants to go back to the
two-month-a-year discount season, the prolonged season is here to stay and will be used to
draw footfalls. However, we note that during the middle and end of the discount season,
retailers are stocking up on a higher proportion of fresh merchandise to improve overall
price realization.
Targeted deals to customers. Owing to a significantly larger data-set on consumers

available to online retailers, they can better target customers with discounts, limited period
offers and new product launches. This has necessitated the collection of similar data-points
by traditional retailers also, who have always had loyalty cards in the past, but are now
seeking to target customers the same way their online peers are. Several retailers are now
collecting more data from customers in store, and providing freebies, discounts on
subsequent shopping to such customers.
Quicker change in trends. E-tailers have managed to bring together a plethora of brands
and also launched private labels across popular categories. In order to encourage customers
to buy more, they are changing their product offering quicker, aligning with seasons,
festivals and other events. This, we believe, is leading offline retailers to also shorten
production cycles to better adjust to quicker trend changes.
We believe competition from e-commerce has led ABFRL to devise its own strategies such as
commencement of Mission Happiness program which enables customers to provide detailed
feedback, pivot from a two-season model to a four-season model to take on fast fashion
retailers and diversification into different customer segments to cater to a larger consumer
base.

Foreign fast fashion retailers also pose a challenge to extant brand retailers
Foreign retailers such as Zara and H&M have scaled up operations rapidly in India. Zara
India’s revenues have grown at a CAGR of 21% over FY2016-18 to `12.2 bn. H&M posted
revenue of `8.8 bn in 2017 (year-ended November 2017), a growth of 94% yoy aided by
near doubling of store count from 15 to 27. These retailers sell only own branded products,
and we reckon they have taken away share from Indian retailers, although there are
indications that these companies are slowing down expansion. Competitive intensity will,
however, remain high for both the brands as well as Pantaloons.
That said, overall apparel consumption increase is driving an increase in investments by

brands and retailers. Several retailers including Max, Pantaloons and Reliance Trends are
investing in increasing their store presence beyond Tier-I cities. We note that multi-brand
large format stores are seeing competition from single brand retailers such as Westside, Zara
and H&M.
Exhibit 17: Affordable fashion retailers have the most aggressive expansion plans
Store count and expansion plans of key large format retailers, March fiscal year-ends
2016 2017 2018 Future plans

Affordable fashion
Reliance Trends 279 349 419 Target of 70-80 new stores annually
Pantaloons 163 209 275 Target of 50-60 new stores annually
Max Fashion 200 Target of 50 new stores annually per media reports
Mid-segment fashion
Westside 93 107 125 Target of 25 new stores annually
Shoppers' Stop 77 80 83 Measured expansion
Lifestyle 49 58 68 Measured expansion: ~10 new stores annually
Central 31 35 39 Steady expansion
Premium fashion
Zara 18 20 20 Steady expansion and focus on online
H&M 17 29 Steady expansion and focus on online
Total 710 875 1,258
Source: Media reports, Companies, Kotak Institutional Equities
We believe ABFRL’s positioning of Pantaloons in the affordable fashion segment, with an

emphasis on own brands, which are gaining in popularity is a differentiator. Further, barring
Reliance Trends there aren’t too many competitors in the space, which leaves a vast
addressable consumer population yet to be covered, in our view.
The brands business will remain relatively insulated from the likes of Zara and H&M largely
due to the much larger reach – H&M and Zara, at 20-30 stores each currently, are already
expanding in a more measured way, than they have done in the past.

ABFRL: STRONG PRESENCE IN A FAST GROWING BUT COMPETITIVE INDUSTRY

ABFRL’s well-known national brands, pan-India presence across multiple channels and focus on design and
quality leads us to believe that the lifestyle brands business can grow at a steady pace over the next few years.
Further, fast-paced increase in Pantaloons’ store count, coupled with investments in new categories such as
fast fashion and innerwear will provide much needed diversification to ABFRL’s product mix and enable it to
target a much wider customer base.
Assortment of brands catering to a wide pyramid of consumers

ABFRL is steadily evolving – from primarily a menswear fashion retailer, to a complete
fashion destination for men, women, youth and children. Besides the lifestyle brands
business of Madura, ABFRL includes Pantaloons (affordable fashion for the family), People
(affordable fashion for the youth), Forever 21 (trendy fashion for young women) and
branded innerwear.
Madura and Pantaloons together cover a wide range of customer segments. Madura caters
to menswear across categories – luxury to mass, as well as womenswear – premium and
sub-premium. Subsequent investments in Pantaloons and Forever 21 have led to an
increased focus on womenswear, which we believe is a faster growing category.
Exhibit 18: ABFRL’s lifestyle brands cater to a fairly broad spectrum of customers
Brand-wise positioning and target customer category
Positioning Brand Category
Luxury The Collective Retailer of multiple luxury brands catering to men and women
Luxury Ted Baker Luxury menswear, womenswear and accessories
Super premium Hackett London British brand specializing in formal menswear
Super premium Simon Carter Sophisticated clothing for formal and casual occasions for men
Premium Louis Philippe Spophisticated and contemporary formal and semi-formal wear for men
Premium Van Heusen Workwear, fashion formals, party wear, casual wear for men
Premium Allen Solly Smart casual wear for men and women
Sub-premium Peter England Multi-brand format housing all of Madura's menswear brands
Premium Planet Pashion Multi-brand retailer of lifestyle brands for men
Fast Fashion Forever 21 Fast Fashion with an American sensibility for young women
Fast Fashion People Casual clothing + accessories for the youth
Madura: market-leader in menswear, pan-India presence and established brands

ABFRL’s brands and retail stores have a pan-India presence. Brands are present in 350+ cities
(Peter England is present in 750+ cities), while Pantaloons is present in ~100 cities. ABFRL’s
coverage is more extensive than that of peers, and provides it with valuable insights with
respect to opening of stores of other brands within its portfolio.

Exhibit 19: ABFRL’s brands and stores have a pan-India presence

Details of ABFRL’s brands and geographic spread
Number of stores Number of cities

Lifestyle brands
Allen Solly 226 350+
Louis Philippe 277 400+
Peter England 669 750+
Planet Fashion 309 150+
Van Heusen 278 400+
Fast fashion
Forever 21 16 9
People 91 50+
Value fashion segment
Pantaloons 209 97
Notes:
(a) Number of cities includes the count of large format stores selling the brand also.
Asset light expansion in store count back in focus

Madura tempered its pace of store expansion in FY2016-18 as: (1) heavy discounting by e-
commerce companies led to higher online and lower offline customer spends, and (2)
demonetization in FY2017 led to weak spends and closure of under-performing stores.
However, with consumer spends reviving post demonetization and GST implementation, we
believe Madura’s both retail and wholesale channels are coming back to normalcy. In line
with this, we believe Madura is set to add ~120-150 stores annually over the next few years
across its menswear brands. We note that only 25-30 of these new stores will be company
operated, the remainder will be franchisee operated.
Exhibit 20: Lifestyle brands’ store additions set to pick-up

Lifestyle brands store count and net additions, March fiscal year-ends
2,500 EBOs (#) (LHS) New store additions (#) (RHS) 300
250
2,000 200
150
1,500
100
50
1,000
-
500 (50)
(100)
- (150)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Revival of retail SSSG and improvement in distributor channel to boost revenues

Madura’s overall revenue growth has been boosted by steady SSSG performance of the retail
channel over FY2012-14, and stronger growth of the distributor and large format store
channel over FY2015-16. However, FY2017-18 was impacted on account of lower customer
spends on account of demonetization and lower purchases by the distributor channel post GST.
We believe both these channels should normalize now, resulting in 10% revenue CAGR over
FY2019-21, compared to 1% revenue CAGR over FY2015-18.
Exhibit 21: SSSG improvement to driven an improved revenue growth trajectory
SSSG (%) Yoy growth (%)

30
27.9
25
24.0
20
15 15.8
12.1
10 10.0 9.2
7.1
5 5.9
3.7
0.8 0.4
0 (0.0)
(2.2)
(5)
(5.7)
(10)
2012 2013 2014 2015 2016 2017 2018
Owned brands enabling control on design and distribution

ABFRL is the owner of a majority of its lifestyle brands, enabling control on design and
distribution. In FY2017, ABFRL shifted from a two-season cycle to a four-season cycle (spring,
summer, festive and winter) thereby enabling it to offer fresher merchandise and keep in
sync with the latest trends.
Barring a couple of luxury brands (Hackett, Simon Carter), ABFRL owns most other brands,
with the design process carried out in house. Further, communication from store managers
to area managers, and further to designers ensures that designers are always aware of
market trends and customer preferences.
Asset light growth model enabling tight control on working capital

Profitable store-level economics with healthy RoCE. Our analysis of lifestyle brands
store-level economics indicates that typical store-level margins for own stores can trend at
~20%. We believe margins and RoCE can be different for different stores – a function of
varying revenues and rentals (other store level expenses such as employee cost and utilities
will not be very different).
Typically, a store is 1,000-1,500 sq. ft in size, and requires ~`2,500 sq. ft in capex on fixtures
etc. Thus, such a store does not require very high investment – `4 mn for capex and `2 mn
on inventory (~3 months of revenues). We believe stores can break-even within two years
and deliver healthy RoCE of 20-25%.

Exhibit 22: Pro forma store economics of a typical Madura store
Store level profitability

Retail revenues in FY2018 (Rs mn) 15,770
Average monthly revenue (Rs mn) 0.7
Gross margins (%) 60.0
Gross profit (Rs mn) 0.4
Rent (Rs mn) 0.1
Rent as a proportion of revenue (%) 13.0
Employee cost per month (Rs mn) 0.1
No. of employees (#) 7.0
Average cost per employee (Rs/month) 20,000
Employee cost as a proportion of revenue (%) 19.0
Other expenses per month (Rs mn) 0.1
Other expense as a proportion of revenue (%) 6.8
EBITDA per month (Rs mn) 0.2
EBITDA margin (%) 21.2
Annual EBITDA (Rs mn) 1.9
Depreciation (Rs mn) 0.6
Depreciation as proportion of gross block (%) 15.0
EBIT (Rs mn) 1.3
Store level capex and returns
Store capex (Rs/sq. ft) 2,500
Store size (sq. ft) 1,500
Store capex (Rs mn) 3.8
Inventory (Rs mn) 1.8
Total capital employed (Rs mn) 5.6
Store RoCE (%) 23.4
Multiple channels of sale enabling wide distribution

ABFRL’s Madura business has, over time, increased reliance on third-party distributor
channels. As seen below, between 2010 and 2018, the company expanded its reliance on
the trade and large format store (LFS) channel, while contribution from other channels
comprising exports and manufacturing for other brands has reduced over time. We believe
this enabled the company to grow in a capital efficient way, while at the same time
increasing its reach and distribution.
Exhibit 23: Different channels of sales of ABFRL’s brands
Channel Capex Revenue recognition Inventory

Retail
-Own Own At price of item sold to customer Own books
-Franchisee Third-party At price of item sold to franchisee Third-party's books
Large format store Third-party At price of item sold to LFS Own books
Wholesale/MBO Third-party At price of item sold to wholeseller Third-party's books
xx

Exhibit 24: Trade + LFS contributed to 34% of revenues in 2010 Exhibit 25: Trade + LFS contribution increased to 42% in 2018
Channel-wise revenues of Madura, March fiscal year-ends, 2010 (%) Channel-wise revenues of Madura, March fiscal year-ends, 2018 (%)
Others, 17
Others, 26
Retail, 40 Retail, 41
Trade +
Trade + LFS, 42
LFS, 34
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Pantaloons: on the cusp of a turnaround

We believe ABFRL’s Pantaloons business, acquired in FY2013 from Future Group, is on the
cusp of a turnaround. Pantaloons is one of the fastest expanding apparel retailers in India
with a target of adding ~65 stores annually over the next few years. Further, we believe its
SSSG can revive as price alignment with peers is now complete. Improved SSSG and
sustained store expansion can drive quicker revenue growth going forward and should also
support margin expansion.
Aggressive store expansion to boost revenue growth

Pantaloons has quickened the pace of store additions in the past three years, and is looking
to add 60-70 stores to its network annually over the next few years. Despite having started
operations in 1997 (under Future Group, its erstwhile owner), 112 of Pantaloons’ current
275 stores were added over FY2016-18, implying these stores are still to contribute
meaningfully to the company’s revenues and margins.
Exhibit 26: Most of Pantaloons’ stores have been opened recently

Store count of Pantaloons, March fiscal year-ends (#)
500 Stores (#, LHS) Store addition (#, RHS) 70
450
60
400
350 50
300
40
250
30
200
150 20
100
10
50
0 0
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Affordable fashion retailers in India are expanding faster than mid-segment and premium
retailers. Among these, Pantaloons is one of the fastest expanding chains, targeting an
addition of 60-70 new stores annually, trailing only Reliance Trends which is targeting
adding 70-80 new stores. Besides Trent, most other mid-segment and premium fashion
retailers seem to be targeting a more measured expansion.
Exhibit 27: Pantaloons is one of the largest apparel retail chains in India
Store count and expansion plans of key large format retailers, March fiscal year-ends (#)
2016 2017 2018 Future plans

Affordable fashion
Reliance Trends 279 349 419 Target of 70-80 new stores annually
Pantaloons 163 209 275 Target of 50-60 new stores annually
Max Fashion 200 Target of 50 new stores annually per media reports
Mid-segment fashion
Westside 93 107 125 Target of 25 new stores annually
Shoppers' Stop 77 80 83 Measured expansion
Lifestyle 49 58 68 Measured expansion: ~10 new stores annually
Central 31 35 39 Steady expansion
Premium fashion
Zara 18 20 20 Steady expansion and focus on online
H&M 17 29 Steady expansion and focus on online
Total 710 875 1,258
Source: Companies, Kotak Institutional Equities
New stores and completion of price alignment to drive SSSG

We note that despite sizeable expansion, Pantaloons’ revenue growth trajectory trended
down in FY2018. We believe this was on account of price cuts taken by the company in
order to align its prices with other affordable fashion players – thereby moving from the
positioning of a mid-segment retailer to that of an affordable fashion retailer. We believe
Pantaloons’ SSSG can revive going forward as: (1) impact of GST and price-cuts taken in
FY2018 normalize, and (2) revenue from new stores ramps up. Pantaloons calculates its SSG
based on two years – implying a store needs to be operational for at least 24 months before
it gets counted in the SSSG calculation. Hence, stores opened in FY2017 and FY2018 (112
of 280 stores) are still not a part of SSSG calculation, and we believe their inclusion will
enable ABFRL to boost improved SSSG figures going forward.
Exhibit 28: Price cuts in FY2018 now behind; can revive revenue growth and SSSG
Pantaloons’ revenue growth and SSSG trend, March fiscal year-ends
35 Revenue growth (%) SSSG (%)
30 29
25 23
18 19
20 17 17
15 11 12
10 7.0 7.0
5.5 5.9 5.0
3.3
5
(1.6)
- (2.6)
(5)
2014 2015 2016 2017 2018 2019E 2020E 2021E

Exhibit 29: Pantaloons’ price points are now comparable to other retailers in the affordable segment
Retailer-wise comparison of price points of different apparel
Pantaloon Max Fashion Reliance Trends Shoppers' Stop

Women's wear
Regular trousers 999-1,299 699-1,199 899-1,299 799-2,299
Dresses 999-1,499 599-1,199 999-1,499 799-2,999
Kurtas 799-2,799 599-1,899 699-1,199 799-2,599
Tops 499-1,749 349-999 499-1,299 599-2,299
Men's wear
T-shirts 499-999 399-1,299 599-1,299 399-1,499
Shirts 999-1,499 499-1,499 599-1,299 899-1,699
Jeans 1,499-2,299 799-1,399 999-1,499 2,199-2,799
Notes:
(a) Based on price comparison done online and offline in June 2018 for merchandise offered on full price.
Source: Kotak Institutional Equities
Steadily rising proportion of private label is an additional margin lever

The proportion of private label in Pantaloons’ revenue mix has increased substantially from
50% in FY2013 to 62% in FY2018. We believe this is on account of a deliberate strategy to
increase proportion of private label in the sales mix, given higher margins on such apparel.
We expect Pantaloons to continue increasing this mix steadily and earn better gross margins.
Exhibit 30: Private label contribution to sales is on the rise

Proportion of private label in overall revenues for Pantaloons, March fiscal year-ends (%)
65 Proportion of private label (%)
61 62
60
55
55
52
50
50
48
45
40
2013 2014 2015 2016 2017 2018
Pantaloons has a mix of own and exclusive brands and popular third-party brands. As seen
below, its brands have a good mix of men’s fashion, women’s fashion and kidswear.

Exhibit 31: Portfolio of exclusive and third-party brands catering to a diversified customer base
Details of Pantaloons’ exclusive and third-party brands
Exclusive brands
Akkriti Women's ethnic and casual wear
Ajile Casual clothing for men and women
Altomoda Affordable casual clothing for men and women
Annabelle Women's western wear
Bare Denim and leisure wear
Byford Men's casual wear
Candie's New York Women's western wear and accessories
Chalk Kidswear
Chirpie Pie Kidswear and kids' accessories
Honey Women's western wear
Izabel London Women's western wear
Poppers Kidswear
Rangmanch Women's ethnic wear
Richard Parker SF Smart casual wear for men
Trishaa Women's ethnic wear
Urban Eagle Mens' and women' casual wear
Madura's brands
Allen Solly Menswear and womenswear
Allen Solly Junior Kidswear
Louis Philippe Menswear
Peter England Menswear
Van Heusen Menswear and womenswear
Third-party brands
109 F Women's western wear
AND Women's western wear
Aurelia Women's ethnic wear
Barbie Kidswear
BIBA Women's ethnic wear
Celio Mens' casual wear
Chemistry Women's western wear
Gini & Jony Kidswear
Global Desi Women's ethnic wear
Jealous 21 Women's western wear
John Miller Mens' formal and casual wear
Kraus Women's western wear
Lee Cooper Mens' and womens' casual and denim wear
Levis Mens' and womens' casual and denim wear
Spykar Mens' casual and denim wear
W Women's ethnic wear
Strategy of diversifying into new categories bearing fruit

Over the past 4-5 years, Madura has successfully diversified into womenswear (offered by
Van Heusen and Pantaloons) and kidswear (Pantaloons). Further, nearly all its brands have
clothing lines catering to casual and event wear needs. For instance, Van Heusen, Peter
England and Louis Philippe are seeing an increasing demand for festive occasion suits and
shirts. Allen Solly, which has anyway been positioned as a casual wear brand is creating
trendier apparel which could be worn all five days of the work week at a semi-formal
workplace.

Diversifying into new categories of innerwear and fast fashion

Over the past 2-3 years, ABFRL has diversified into new categories and formats. We highlight
some of these below.
People: affordable fashion retailer for the youth

People is a fast-fashion brand for young men and women retailing casual wear. Located in
malls and high streets and with an average store size of 5,000-6,000 sq. ft, we expect ABFRL
to add ~10 stores in this format each year. This business is growing at healthy double-digit
SSSG, and we believe this can sustain going forward.
Forever 21: fast fashion or young women

ABFRL acquired the exclusive offline and online rights to brand ‘Forever 21’ in FY2017 and is
now the exclusive franchisee for this brand in India. ABFRL operates 20 stores in India
retailing primarily womens’ clothing, artificial jewelry, accessories and related merchandise.
These stores are typically located in upscale malls. We believe this business competes directly
with other fast fashion retailers such as Zara and H&M, and in that sense is hyper-
competitive. ABFRL has taken several steps to improve profitability of this format: (1)
reduced store size from 12,000 sq. ft+ to 8,000-9,000 sq. ft, (2) shifted from fixed rental
model to revenue share model, and (3) optimized inventory to improve inventory turns.
ABFRL is aiming to bring down its losses to nil by FY2019, though we believe it might take
longer for it to break-even.
We believe expansion of this format would be gradual (6-8 stores a year), and would be
contingent on current stores breaking even.
Exhibit 32: Fast fashion business in scale-up mode

Details of fast fashion business, March fiscal year-ends
2017 2018
Forever 21
No. of stores (#) 16 20
No. of cities present in (#) 9 14
People
No. of stores (#) 91 90
No. of cities present in (#) 50+ 50+
Fast fashion (Forever 21 + People)
Revenues (Rs mn) 3,450 3,970
EBITDA (Rs mn) (490) (540)
Innerwear: gradually building distribution strength

ABFRL commenced the innerwear business in FY2017, and has since expanded to 6,700
outlets across 75 cities. The company is aspiring to significantly increase its distribution
strength. The innerwear is branded as Van Heusen innerwear, with the idea of this brand
available at all Van Heusen stores, large format stores and smaller retail stores. Innerwear
business posted revenues of `941 mn in FY2018, and we believe this business can scale at
50-60% yoy revenue growth over the next 3-4 years. While the business may still post
EBITDA losses due to investments in product and channel (loss of `340 mn in FY2018), we
believe this business provides reasonable growth potential and medium term margin
potential.

ABFRL: DECLINE IN DISCRETIONARY SPENDING AND HIGHER COMPETITION ARE KEY RISKS
We highlight the following risk factors for ABFRL: (1) sudden price increases by cloth vendors and garmenters,
(2) increase in mall/shop rentals thereby leading to higher costs, (3) increased competition and inability to
respond to changing customer preferences, (4) inefficient inventory management and changes in terms from
suppliers, and (5) inability to attract and retain manpower at commercially attractive terms.
Economic disruptions leading to reduced discretionary spends by consumers

Economic disruptions which adversely impact discretionary spending by consumers can have
a negative impact on revenues of ABFRL. We note that the company has already faced two
macroeconomic events in the recent past: (1) demonetization in November 2016 which
impacted cash availability and discretionary spends, and (2) GST implementation, which
resulted in higher blended taxation on apparel leading to lower net realizations. Any such
event or economic downturn can lead to lower demand for ABFRL’s merchandise and hence
lead to lower revenues.
Increased competitive intensity and price-cuts

Both Pantaloons and Madura operate in a highly competitive space. Entry of large sized
brands and/or retailers, both domestic and foreign, can be a threat to business. These
brands and retailers could price their products cheaper, thus gaining market-share or driving
others to follow suit. Foreign single brand retailers (such as Zara and H&M) enjoy strong
brand pull and can generate strong loyalty among their customer base. We believe ABFRL is
trying to allay some of these risks by acquiring rights to some of these brands such as
Forever 21 and People.
Pricing led disruption from e-tailers

E-tailers, particularly those which are PE/VC funded and give out discounts to consumers can
negatively impact industry pricing and thus profitability of other retailers. This played out
over FY2015-18 when Madura’s revenue growth and store addition trajectory faltered on
account of higher discounts by e-commerce companies, which resulted in a market share
shift towards e-tailers. We believe the peak of discounting is over, as possibly demonstrated
in a decline in losses posted by Myntra to `6.3 bn in FY2017 from `8.2 bn in FY2016.
Further, Madura’s investments in its e-commerce business – brand websites, mission
happiness and availability on all e-commerce platforms – is enabling it to re-connect with
customers who have begun to prefer shopping online.
Higher lease rentals which could increase cost of doing business

Expansion of stores, particularly in new geographies will require availability of suitable real
estate for lease by ABFRL. This is a larger risk for Pantaloons which has a large store format
and is typically present within malls. Escalation in rentals of existing locations and higher
rentals of new locations can lead to adverse store economics.
Inability to adjust merchandise to evolving customer preferences

Madura’s brands as well as Pantaloons operate in a segment which is strongly dependent on
their ability to not only adapt to latest trends and fashion, but also drive new trends. Further,
given consumers’ rising exposure to social media and global trends, inability to churn
out/stock fashionable collections may lead to lower revenues as well as loss of market-share.
Change in terms of suppliers leading to higher cost of goods

ABFRL is dependent on third-party manufacturers for its brands business as well as private
labels of Pantaloons. If ABFRL is unable to continue to procure supplies at competitive prices,
its business will be adversely affected. Further, if any of its suppliers fail to deliver products in
a timely manner, it may impact ABFRL’s store inventory levels, which in turn may result in
product stock outs, thereby adversely affecting customer shopping experience and store
profitability.

Inability to attract and/or retain manpower

The retail business is manpower intensive and ABFRL will need to recruit and retain skilled
staff to grow further. As ABFRL expands to new geographies, it will need experienced
manpower that has knowledge of the local market and the retail industry to operate its
stores. Typically, the retail industry suffers from high attrition rates especially at the store
level. In the light of this, inability to retain manpower, particularly in sales and customer
service roles can be key risks.
Change in GST rates on branded apparel

Compared to an earlier sales tax + VAT rate of 6-7% on branded apparel, GST of 5% is
applicable on apparel priced below `1,000 and 12% on apparel priced above `1,000. On a
blended basis this resulted in a higher tax outgo for branded companies such as ABFRL
resulting in lower net realizations. Any adverse changes in tax rates on branded apparel in
the future could negatively impact ABFRL’s revenues.

ABFRL: STRONG 16% REVENUE CAGR AND 124% PBT CAGR OVER FY2018-21
We model revenue CAGR of 16% over FY2018-21 driven by steady addition to store count as well as improved
SSSG, particularly in Pantaloons. We expect ABFRL to post strong 124% PBT CAGR over FY2018-21 driven by
healthy revenue growth, steady margin improvement as well as interest cost reduction. We expect higher
profitability to drive an improvement in return ratios, though high goodwill on balance sheet will continue
to weigh on these ratios.
Expected increase in SSSG and consistent store addition to drive 16% revenue
CAGR over FY2018-21
We forecast ABFRL’s revenues to increase at a CAGR of 16% over FY2018-21. We expect
revenues of branded apparel segment (comprising lifestyle brands, fast fashion, People and
innerwear business) to grow at a CAGR of 13%, and the Pantaloons business to grow at a
CAGR of 19%.
Pantaloons: revival in SSSG and improved margins to drive a turnaround
Price alignment complete, new stores should drive up SSSG

Pantaloons has added stores at a fast clip over FY2016-18, though these are still to
contribute to SSSG improvement. Pantaloons has reported relatively lackluster SSSG over
FY2017 and FY2018 as: (1) demonetization impacted FY2017 revenues; particularly those of
new stores which thereby took longer to form a loyal customer base, and (2) post GST-
implementation, the company undertook a price correction as it re-aligned its positioning
from a mid-level fashion retailer to an affordable fashion retailer.
We further note the company reports SSSG on a two year basis – a store is included in SSSG
calculation only if it has been in operation for at least 24 months. This is different from most
other apparel retailers which include stores operating for 12 months or more in their SSSG
calculation. We believe Pantaloons’ SSSG can revive as: (1) the proportion of new stores in
the overall mix increases and they get included in the SSSG calculation, and (2) the impact of
GST and price reduction normalizes.
We note that Pantaloons has aligned the prices of its private label offering to other retailers
such as Max Fashion and Reliance Trends – we thus do not expect any further major price
cuts to be undertaken. Steady SSSG of 5-7% coupled with strong store addition are the key
drivers of our assumption of 19% revenue growth drivers of Pantaloons over FY2018-21.
Exhibit 33: Revenue ramp-up from new stores to rev up revenue growth trajectory
SSSG and revenue growth profile of Pantaloons, March fiscal year-ends
35 Revenue growth (%) SSSG (%)
30 29
25 23
18 19
20 17 17
15 11 12
10 7.0 7.0
5.5 5.9 5.0
3.3
5
(1.6)
- (2.6)
(5)
2014 2015 2016 2017 2018 2019E 2020E 2021E
xx

Exhibit 34: Aggressive pace of store expansion to continue

Store addition profile of Pantaloons, March fiscal year-ends
500 Stores (#, LHS) Store addition (#, RHS) 70
450
60
400
350 50
300
40
250
30
200
150 20
100
10
50
0 0
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E
xx
Exhibit 35: Pantaloons: proportion of new stores is increasing

Age-profile of Pantaloons' stores, March fiscal year-ends
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Stores (#, LHS) 95 107 134 163 209 275 330 385 440
Store addition (#, RHS) 5 12 27 29 46 66 55 55 55
Number of 5 year old stores 119 180 223 251 277
Proportion of 5 year old stores in total stores (%) 57 65 68 65 63
SSSG improvement and higher focus on private label to drive margin expansion
Pantaloons’ margin profile has been on an upward trajectory FY2014 onwards, as the
company focused on revamping and resizing older stores, and also increased the focus on
private label.
Private label. We note that gross margins on private labels can be 15-20 percentage points
higher than those on third-party brands, and hence a steady increase in the proportion of its
private label will drive margin improvement. We expect contribution of private label to
revenues to increase from 61% in FY2018 to 63% by FY2021, thus supporting gross
margins.
Rental expense. ABFRL’s P&L includes the impact of rent equalization over the lease period,
and we believe increase in rent expense recorded in the P&L over the next few years will
consequently be lower. Further, ABFRL has aggressively renegotiated rental expense for
Pantaloons stores. We note that for the consolidated company (Pantaloons + Madura +
other formats), rental expense as a percentage of revenues has declined from a high of 16.4%
in FY2017 to 14.5% in FY2018, and we expect it decline further to 13.3% by FY2021E.
Stable price points. A comparison of Pantaloons’ price points with other retailers across
different apparel categories indicates its prices are now aligned with those offered by other
retailers in the affordable category (such as Max Fashion and Reliance Trends), and are lower
than the relatively more premium retailers (such as Shoppers’ Stop). We believe Pantaloons’
price rationalization cycle is now over.

Exhibit 36: Steady improvement in Pantaloons’ EBITDA margin

EBITDA margin profile of Pantaloons, March fiscal year-ends
10 EBITDA margin (%)

9.2
8.8
9 8.1
8
7
6.0
6
5.1 4.8 4.9
5
3.9
4
3
2.0
2
0
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E
Lifestyle brands business: store additions and steady SSSG to drive revenue
growth
We expect lifestyle brands business revenues to grow at a CAGR of 10.5% over FY2018-21,
aided by 7-8% SSSG and the remainder from contribution of new stores.
Madura’s store count has remained flat over FY2016-17, though it started increasing
FY2018 onwards. With the market stabilizing post demonetization and GST and competition
from e-commerce stabilizing, we believe Madura will once again resume store addition. We
model 125-150 new stores (own+franchisee) to be added each year over FY2019-21.
While weakness in the distributor channel due to demonetization and GST impacted the
company in FY2017 and FY2018, we believe this channel is now recovering and should
enable brands business growth to revive.
Investments in other businesses may impact profitability of Madura segment

ABFRL has invested in new businesses such as Forever 21, People and innerwear business.
While People is a relatively older business, Forever 21 and innerwear businesses were
incubated/acquired in FY2017, and are currently loss making. We believe these businesses
may take 1-2 years to turn profitable, and till then, may impact profitability and return ratios
of the Madura segment.

Exhibit 37: Lifestyle brands' SSSG in a revival mode

SSSG and revenue profile of lifestyle brands, March fiscal year-ends (%)
SSSG (%) Yoy growth (%)

30
27.9
25
24.0
20
15 15.8
12.1
10 10.0 9.2
7.1
5 5.9
3.7 0.8 0.4
0 (0.0)
(2.2)
(5)
(5.7)
(10)
2012 2013 2014 2015 2016 2017 2018
xx
Exhibit 38: After tapering over FY2016-17, lifestyle brand's store additions are set to pick-up
Lifestyle brands store count and net additions, March fiscal year-ends
2,500 EBOs (#) (LHS) New store additions (#) (RHS) 300
250
2,000 200
150
1,500
100
50
1,000
-
500 (50)
(100)
- (150)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E
Robust revenue growth, margin expansion and lower interest expense to drive
strong 124% PBT CAGR over FY2018-21
We project ABFRL to report robust revenue growth of 16% over FY2018-21. Higher margins
in the Pantaloons segment should aid 30% EBITDA CAGR over FY2018-21. PBT CAGR of
124% over FY2018-21 is higher, given high leverage (March 2018 net debt: equity of 1.6X).
PAT CAGR is lower as ABFRL will pay tax at the rate of MAT FY2019 onwards, while it had a
deferred tax write-back in FY2018.

Exhibit 39: We expect 16% revenue CAGR over FY2018-21E Exhibit 40: We expect 30% EBITDA CAGR over FY2018-21E
Revenue profile, March fiscal year-ends EBITDA profile, March fiscal year-ends
(Rs bn) Revenue (Rs bn) (LHS) (%) (Rs bn) EBITDA, LHS (Rs bn)
(%)
120 Yoy growth (%) (RHS) 18 12 Yoy growth, RHS (%) 50
16
100 10
14 40
80 12 8
30
10
60 6
8
20
40 6 4
4 10
20 2
2
- - 0 0
2016 2017 2018 2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates
Exhibit 41: We expect 124% PBT CAGR over FY2018-21E Exhibit 42: We expect 54% PAT CAGR over FY2018-21E
PBT profile, March fiscal year-ends PAT profile, March fiscal year-ends
(Rs bn) PBT, LHS (Rs bn) (%) PAT, LHS (Rs bn)
(Rs bn) (%)
6 Yoy growth, RHS (%) 400
5.0 Yoy growth, RHS (%) 140
5 350
4.0 120
300
4
250 3.0 100
3 200
2.0 80
2 150
100 1.0 60
1
50
0 - 40
2016 2017 2018 2019E 2020E 2021E 0 2016 2017 2018 2019E 2020E 2021E
(1) (1.0) 20
(50)
(2) (100) (2.0) -
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates
ABFRL – focusing on capital efficiencies

ABFRL reports segment information for Pantaloons and Madura separately. However,
Madura now includes all new businesses – Forever 21, People, luxury brands and innerwear.
These new businesses are loss making, and have been incubated/acquired over FY2017-18.
We note that the loss making new businesses account for the RoCE decline of the Madura
segment over FY2016-18; excluding these, RoCE for the core Madura brands would have
still improved. We believe this has been an inherent strength of the Madura business – the
business has grown revenues at a CAGR of 12% over FY2011-18, although capital
employed has remained in the `5-6 bn range (excluding investments in new businesses).
Pantaloons business has clearly swung from a large EBIT loss in FY2016 to positive EBIT in
FY2018, and for reasons highlighted above, we believe this momentum will continue. This
will be a key driver for the overall improvement in return ratios of ABFRL.

Exhibit 43: Madura continues to be a strong RoCE business

Segmental profile, March fiscal year-ends
2016 2017 2018

EBIT (Rs mn)
Pantaloons (1,562) (171) 75
Madura Fashion & Lifestyle 2,231 2,506 2,170
Total 669 2,335 2,245
Capital employed (Rs mn)
Pantaloons 16,963 16,731 15,858
Adjustment and elimination (397) 150 881
Total 27,865 30,651 31,188
Segment RoCE (%)
Pantaloons (9) (1) 0
Madura Fashion & Lifestyle 20 18 15
Total 2 8 7
Goodwill (Rs mn)
Pantaloons 11,676 11,676 11,676
Total 17,952 18,596 18,596
Adjusted capital employed (Rs mn)
Pantaloons 5,288 5,056 4,182
Adjustment and elimination (397) 150 881
Total 9,913 12,055 12,592
Adjusted segment RoCE (%)
Pantaloons (30) (3) 2
Madura Fashion & Lifestyle 44 37 29
Total 7 19 18
Exhibit 44: Improvement in profitability will lead to decline in debt levels

Debt profile of ABFRL, March fiscal year-ends
(Rs mn) Net debt (Rs mn) (LHS) D/E (X) (RHS) (X)
25,000 2.5
20,000 2.0
15,000 1.5
10,000 1.0
5,000 0.5
- -
2016 2017 2018 2019E 2020E 2021E

Exhibit 45: Improving operating performance to drive up return ratios

Return ratios of ABFRL, March fiscal year-ends
(Rs mn) RoAE (%) RoACE (%)

30
25
20
15
10
5
0
(5)
(10)
(15)
(20)
2016 2017 2018 2019E 2020E 2021E
Superior working capital management to drive strong cash generation

We believe the lifestyle brands business is a strong cash generating business. Based on
historical data disclosed by the company on capital employed by Madura, we believe
Madura’s RoCEs have steadily expanded from 11% in FY2011 to 29% (adjusted) in FY2018.
This significant expansion in return ratios has been made possible by: (1) growth in the
dealer/distributor channel which generally involves direct sales and nil/limited sale or return
provision, thus requiring minimal capital requirement from ABFRL, and (2) proportionally
higher number of new stores being opened via the franchisee route, which requires limited
investments from Madura.
Exhibit 46: Expect net working capital cycle to remain steady at ~21 days of sales
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Current assets
Inventory 3,249 3,584 4,273 14,105 14,313 16,912 18,989 22,069 25,363
Inventory days - (1) 92 79 84 85 79 86 83 83 83
Trade receivables 10 170 71 3,124 4,539 5,518 6,417 7,458 8,571
Receivable days - (2) 0 4 1 19 25 28 28 28 28
Loans and advances + other current assets 178 261 361 3,775 4,506 5,872 6,820 7,918 9,093
Loans and advances + other current assets days - (3) 5 6 7 23 25 30 30 30 30
Current liabilities
Trade payables 3,163 3,756 3,114 14,298 15,511 20,093 21,735 25,260 29,030
Payable days - (4) 90 83 61 86 85 102 95 95 95
Other current liabilities 242 580 985 2,027 2,146 4,907 5,706 6,632 7,622
Days of other current liabilities - (5) 7 13 19 12 12 25 25 25 25
Net working capital 32 (321) 606 4,679 5,701 3,301 4,785 5,553 6,375
Net working capital days - (1) + (2) + (3) - (4) - (5) 1 (7) 12 28 31 17 21 21 21
We believe that unlike other branded apparel businesses, Madura has lower working capital
requirements due to higher reliance on franchisees and sales to direct distributors. Further,
Pantaloons is able to manage its working capital efficiently as: (1) all third-party merchandise
for sale at its store is sold on a consignment basis, and hence the inventory is on the books
of the brand, and (2) ~61% of sales are of private label, where the company can control
inventory better.
FY2018 net working capital requirements reduced significantly as the company managed to
improve its payment cycle towards its vendors.

Capex: franchisee route will limit Madura capex

We model `3.3-3.8 bn of capex over FY2019-20. Of this Madura, accounts for `1.5-1.6 bn
of capex, and the rest will be incurred towards setting up new Pantaloons stores and
beefing up IT infrastructure.
Madura. We forecast Madura to set up 150 new stores in FY2019 and FY2020, of which
we expect only 30 stores to be operated by ABFRL. Capex per store ranges from `3-3.5 mn,
implying new store capex of `100 mn. Maintenance capex is a larger chunk given the large
existing network of stores, and will lead to an additional capex of `76 mn in FY2019.
Including other businesses (fast fashion, innerwear business), centralized IT and other items,
total capex for Madura would be around `1.5 bn.
Pantaloons. We forecast Pantaloons to set up 65 new stores over FY2019 and FY2020 each.
Of these, nearly 20 stores would be set up by franchisees, and the remainder would be set
up by ABFRL. Capex on these stores, coupled with maintenance capex on old stores and IT
infrastructure leads to a capex forecast of `1.7 bn in FY2019 and `2.1 bn in FY2020.
Exhibit 47: SSSG revival of Madura and margin increase in Pantaloons to drive profitability
Details of key assumptions, March fiscal year-ends
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Lifestyle brands
Revenues (Rs mn) 36,330 36,170 37,170 40,866 45,322 50,168
Yoy growth (%) (0) 3 10 11 11
EBITDA (Rs mn) 3,133 3,946 3,977 4,795 5,331 5,891
EBITDA margin (%) 9 11 11 12 12 12
SSSG (%) 0 (6) 9 10 8 8
Period-ending store count (#) 1,877 1,761 1,813 1,963 2,113 2,238
Period-ending store area (sq. ft) 2.6 2.6 2.6 2.8 3.0 3.2
Pantaloon
Revenues (Rs mn) 12,851 16,610 18,510 21,570 25,520 28,620 35,103 41,669 48,777
Yoy growth (%) 29 11 17 18 12 23 19 17
EBITDA (Rs mn) 661 334 727 1,030 1,260 1,730 2,847 3,687 4,472
EBITDA margin (%) 5 2 4 5 5 6 8 9 9
SSSG (%) — (2) 6 6 3 (3) 5 7 7
Period-ending store count (#) 95 107 134 163 209 275 330 385 440
Period-ending store area (sq. ft) 1.7 2.0 2.3 2.9 3.2 3.8 4.5 5.2 5.9
Other businesses
Revenues (Rs mn) — — — 2,450 4,640 6,020 7,538 10,061 12,592
Yoy growth (%) 89 30 25 33 25
EBITDA (Rs mn) (380) (831) (1,024) (889) (492) (103)
EBITDA margin (%) (15) (18) (17) (12) (5) (1)
Total
Revenues (Rs mn) 12,851 16,610 18,510 60,350 66,330 71,810 83,508 97,052 111,538
Yoy growth (%) 29 11 226 10 8 16 16 15
EBITDA (Rs mn) 661 334 727 3,784 4,375 4,683 6,753 8,526 10,261
EBITDA margin (%) 5 2 4 6 7 7 8 9 9
xx

Exhibit 48: Consolidated income statement of ABFRL, March fiscal year-ends, 2013-21E (Rs mn)
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Income statement
Net revenues 12,851 16,612 18,507 60,346 66,330 71,814 83,508 97,052 111,538
COGS — — (2) (6,399) (6,370) (6,735) (6,841) (7,046) (7,257)
Purchase of stock-in-trade (7,510) (9,898) (10,648) (23,522) (23,992) (29,720) (32,883) (39,222) (45,977)
Changes in inventory of stock in trade (233) 375 644 2,396 (26) 2,461 — — —
Employee expenses (912) (1,497) (1,837) (6,205) (7,058) (7,723) (9,077) (10,544) (12,082)
Rental expenses (1,632) (2,503) (2,825) (9,032) (10,871) (10,429) (11,512) (13,027) (14,792)
Advertising expense (1,475) (2,099) (2,382) (9,847) (10,771) (11,994) (13,255) (15,294) (17,462)
Administration and other expenses (428) (657) (730) (3,954) (2,867) (2,992) (3,186) (3,393) (3,707)
EBITDA 661 334 727 3,784 4,375 4,683 6,753 8,526 10,261
Depreciation (544) (1,090) (1,835) (3,381) (2,425) (2,805) (3,107) (3,699) (3,811)
EBIT 117 (756) (1,108) 403 1,950 1,878 3,646 4,827 6,450
Other income 632 51 28 264 382 328 233 255 267
Financial charges (1,438) (1,173) (1,202) (1,765) (1,797) (1,716) (1,619) (1,487) (1,200)
Pre-tax profit (689) (1,877) (2,281) (1,098) 535 490 2,260 3,595 5,517
Taxation — — — — — 688 (486) (773) (1,186)
Net profit (689) (1,877) (2,281) (1,098) 535 1,178 1,774 2,822 4,331
Key ratios (%)
Tax rate — — — — — (140.5) 21.5 21.5 21.5
COGS 60.3 57.3 54.1 45.6 45.8 47.3 47.6 47.7 47.7
Employee expenses 7.1 9.0 9.9 10.3 10.6 10.8 10.9 10.9 10.8
Rental expenses 12.7 15.1 15.3 15.0 16.4 14.5 13.8 13.4 13.3
Advertising expense 3.3 4.0 3.9 6.6 4.3 4.2 3.8 3.5 3.3
Administration and other expenses 11.5 12.6 12.9 16.3 16.2 16.7 15.9 15.8 15.7
EBITDA margin 5.1 2.0 3.9 6.3 6.6 6.5 8.1 8.8 9.2
Year-end number of shares (mn) 70 93 93 773 773 773 773 773 773
Weighted average number of shares (mn) 70 93 93 773 773 773 773 773 773
EPS (Rs) (9.9) (20.2) (24.6) (1.4) 0.7 1.5 2.3 3.7 5.6
EPS - fully diluted (Rs) (9.9) (20.2) (24.6) (1.4) 0.7 1.5 2.3 3.7 5.6
xx

Exhibit 49: Consolidated balance sheet of ABFRL, March fiscal year-ends, 2013-21E (Rs mn)
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Balance sheet
Equity share capital 10 933 933 7,688 7,705 7,717 7,705 7,705 7,705
Share capital suspense account 8,463 — — 38 27 — — — —
Reserves & surplus (778) 4,862 2,523 1,329 1,849 3,214 4,988 7,810 12,141
Shareholders' funds 7,695 5,795 3,456 9,055 9,582 10,931 12,694 15,515 19,846
Long-term debt 4,849 10,150 9,375 6,772 12,710 12,910 12,410 9,910 5,910
Short-term debt 12,458 671 3,731 7,993 7,607 5,705 5,705 5,705 5,705
Other long-term liabilities 388 485 607 4,325 1,111 872 872 872 872
Total source of funds 25,390 17,100 17,169 28,144 31,010 30,418 31,680 32,002 32,333
Gross block 7,062 7,865 8,838 6,485 7,916 11,724 14,722 18,160 21,955
Accumulated depreciation 2,366 3,433 5,089 1,648 2,454 5,259 8,367 12,066 15,877
Net block 4,696 4,432 3,749 4,837 5,462 6,465 6,355 6,095 6,078
CWIP 136 179 38 254 250 459 459 459 459
Intangible assets — 69 — 443 812 763 763 763 763
Goodwill 11,677 11,900 12,045 17,952 18,596 18,596 18,596 18,596 18,596
Net fixed assets 16,508 16,580 15,831 23,486 25,121 26,282 26,172 25,912 25,896
Investments 8,000 60 — 344 242 42 42 42 42
Other long-term assets 626 770 816 798 1,194 1,109 1,109 1,109 1,109
Cash balances 253 108 72 192 445 728 929 1,105 1,017
Current assets 3,437 4,015 4,705 21,004 23,357 28,302 32,226 37,446 43,028
Inventories 3,249 3,584 4,273 14,105 14,313 16,912 18,989 22,069 25,363
Sundry debtors 10 170 71 3,124 4,539 5,518 6,417 7,458 8,571
Other current assets 60 94 97 3,730 4,468 5,825 6,773 7,872 9,046
Loans and advances 119 167 264 44 38 47 47 47 47
Current liabilities and provisions 3,433 4,432 4,256 17,680 19,349 26,921 29,674 34,487 39,635
Current liabilities 3,405 4,335 4,099 16,325 17,656 25,001 27,441 31,892 36,652
Provisions 28 97 156 1,355 1,693 1,920 2,233 2,595 2,982
Net current assets excluding cash 4 (418) 449 3,324 4,008 1,381 2,552 2,959 3,393
Deferred tax assets — — — — — 876 876 876 876
Total application of funds 25,390 17,100 17,169 28,144 31,010 30,418 31,680 32,002 32,333
Key ratios
Debt/equity (X) 2.2 1.8 3.8 1.6 2.1 1.6 1.4 0.9 0.5
RoE (%) (18) (28) (49) (18) 6 11 15 20 24
RoCE (%) 6 (3) (6) 3 8 9 10 13 16
xx

Exhibit 50: Consolidated cash flow statement of ABFRL, March fiscal year-ends, 2013-21E (Rs mn)
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Cash flow statement
Operating
Net profit before tax and extraordinary items (689) (1,877) (2,281) (1,098) 535 490 2,260 3,595 5,517
Add: depreciation/amortisation/non-cash prov 544 1,090 1,835 3,381 2,425 2,805 3,107 3,699 3,811
Add: financial charges 1,438 1,173 1,202 1,765 1,797 1,716 1,619 1,487 1,200
Add: other adjustments (662) (62) (3) (179) (83) — — — —
Tax paid (89) (29) (15) (19) (30) 688 (486) (773) (1,186)
Operating profit before working capital changes 543 294 737 3,850 4,644 5,699 6,500 8,008 9,342
Change in working capital/ other adjustments (516) 408 (1,096) (741) (461) 2,627 (1,171) (406) (435)
Cash flow from operations 27 701 (360) 3,109 4,183 8,326 5,329 7,601 8,907
Investing
Capital expenditure (300) (1,175) (1,163) (2,076) (4,568) (3,967) (2,998) (3,439) (3,795)
Investments (7,934) 7,988 76 217 165 200 — — —
Cash (used)/ realised in investing activities (8,234) 6,813 (1,087) (1,859) (4,403) (3,767) (2,998) (3,439) (3,795)
Free cash flow (273) (473) (1,523) 1,033 (385) 4,360 2,331 4,163 5,113
Financing
Issue of share capital 8,000 — — (16) 11 129 (12) — —
Borrowings 1,670 (6,802) 2,602 508 1,948 (1,703) (500) (2,500) (4,000)
Dividend paid (1) — — — — — — — —
Interest charges (1,242) (857) (1,191) (1,821) (1,485) (1,716) (1,619) (1,487) (1,200)
Others — — — — — (111) — — —
Cash (used)/realised in financing activities 8,427 (7,659) 1,411 (1,330) 474 (3,400) (2,131) (3,987) (5,200)
Deferred revenue expenditure — — — — — (876) — — —
Extraordinary receipts/ (payments) 32 — — — — — — — —
Cash at beginning of year 252 (144) (36) (80) 253 283 201 176 (88)
Cash generated/ utilised 252 (144) (36) (80) 253 283 201 176 (88)

SCHEMES OF DEMERGER AND CORPORATE STRUCTURE

Management profile
ABFRL’s top management has seen significant changes over the past one year.
Ashish Dikshit is the MD of ABFRL, and was appointed to this position in January 2018 post
the exit of the then MD Pranab Barua. Prior to this role, Ashish headed the Madura Fashion
& Lifestyle division, where he has worked for more than 18 years.
Vishak Kumar is the CEO of Madura Fashion & Lifestyle. He has been with the Aditya Birla
Group for more than 23 years, and has also worked as the CEO of Aditya Birla Retail.
Sangeeta Pendurkar is the CEO of the Pantaloons business. She joined ABFRL in January
2018 and was formerly MD at Kellogg India. She has worked at several consumer facing
businesses such as food, FMCG and consumer banking. Shital Mehta had earlier headed the
Pantaloons business and resigned in January 2018.
Organization structure
ABFRL operates its business as two different segments: (1) Madura business which comprises
lifestyle brands, fast fashion (Forever 21 and People) and other businesses (innerwear), and
(2) Pantaloons. Barring corporate functions, there is little overlap between these two
businesses. Pantaloons retails Madura’s brands also on an arm’s length basis.
Shareholding pattern
Aditya Birla group has a 59.2% stake in the company – 11.3% held by Grasim Industries
and the remainder 47.9% held by promoters and promoter held entities.
Exhibit 51: Promoter group companies have a 59% stake in ABFRL

Shareholding pattern of ABFRL as of March 31 2018 (%)
Grasim Industries,
Others, 14.1 11.3
Insurance cos, 4.7
FIIs, 10.5
Mutual funds, 11.3 Birla Group, 47.9
Source: BSE, Kotak Institutional Equities

Corporate structure and history

Aditya Birla Fashion and Retail Limited is a part of Aditya Birla Group, a conglomerate with
interests in cement, aluminium, telecom and financial services businesses.
The Madura business was acquired in 1999 and currently comprises the lifestyle brands, fast
fashion and innerwear business. Before the restructuring in 2015, Madura was a part of
ABNL (Aditya Birla Nuvo).
ABNL had acquired Pantaloons from Future Group in FY2013, which was listed as a separate
entity.
In 2015, Aditya Birla Group carried out a restructuring to bring fashion and retail businesses
together in one listed entity (now ABFRL). Under this restructuring, Madura Fashion and
Madura Lifestyle were demerged from ABNL and merged into Pantaloons Fashion and Retail
(PFRL), a then subsidiary of ABNL. This resulted in a sharp increase in paid-up capital of PFRL
from `933 mn to `7.7 bn. Subsequently, ABNL shareholders were awarded shares in the
combined entity, which was renamed as Aditya Birla Fashion and Retail. Aditya Birla group,
directly and via Grasim Industries currently has a 59% shareholding in the company.

"I, Garima Mishra, hereby certify that all of the views expressed in this report accurately
reflect my personal views about the subject company or companies and its or their securities.
I also certify that no part of my compensation was, is or will be, directly or indirectly, related
to the specific recommendations or views expressed in this report."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.
60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.
40% * The above categories are defined as follows: Buy = We

31.3% expect this stock to deliver more than 15% returns over the
next 12 months; Add = We expect this stock to deliver 5-15%
30% 25.4% returns over the next 12 months; Reduce = We expect this stock
21.4% 21.9% to deliver -5-+5% returns over the next 12 months; Sell = We
20% expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with
10%
5.0% 4.5% applicable regulations. As of 30/06/2018 Kotak Institutional
2.0% 0.5% Equities Investment Research had investment ratings on 201
0% equity securities.
BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of June 30, 2018
Aditya Birla Fashion & Retail (ABFRL IN)

Kotak Institutional Equities rating and stock price target history
300 40,000
38,000
250
36,000
200 34,000
32,000
150
30,000
100 28,000
26,000
50
24,000
- 22,000
Stock
Apr-16
Aug-16
Aug-18
Aug-15
Apr-17
Aug-17
Apr-18
Oct-15
Feb-16
Oct-16
Feb-17
Oct-17
Feb-18
Jun-16
Price
Jun-17
Jun-18
Dec-15
Dec-16
Dec-17
Index
Price
Source: Kotak Institutional Equities Research for ratings and price targets, Bloomberg for daily closing prices.
BSE-30 Index (RHS) Covered by Garima Mishra

Price target Not covered by current analyst
The price targets shown should be considered in the context of all prior published Kotak Institutional Equities research, which may or may
not have included price targets, as well as developments relating to the company, its industry and financial markets
Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: Garima Mishra
Company name Ticker
Aditya Birla Fashion & Retail ABFRL IN
Avenue Supermarts DMART IN
Info Edge INFOE IN
InterGlobe Aviation INDIGO IN
Just Dial JUST IN
SIS SECIS IN
TeamLease Services TEAM IN
Source: Kotak Institutional Equities research

Disclosures
Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or
Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company
and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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Company Report Aditya Birla Fashion and Retail (ABFRL) BUY

Multiple macro and competitive risks now behind

Multiple factors to drive healthy revenue/PBT CAGR of 16/124% over FY2018-21

Key risks—decline in discretionary spending and heightened competitive intensity

Company data and valuation summary

Company data Stock data High Low Price performance 1M 3M 12M

Financial snapshot ..................................................................................................3

Valuation: BUY, with a target price of `220 ...........................................................4

ABFRL: Strong presence in a fast growing but competitive industry ......................15

Schemes of demerger and corporate structure .....................................................37

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Company, Kotak Institutional Equities estimates

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

VALUATION: BUY, WITH A TARGET PRICE OF `220

Initiate coverage with BUY and target price of `220

Source: Company, Bloomberg

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ABFRL has a fast expanding portfolio of brands and retail formats

Exhibit 4: ABFRL operates various branded apparel and retail formats

Large format retailer of

Van Heusen branded

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Kotak Institutional Equities estimates

Our investment thesis for ABFRL is based on the following:

Lifestyle brands. This business contributed ~52% of ABFRL’s revenues in FY2018. We

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

SoTP-based valuation of `220

Exhibit 6: SoTP based target price of Rs220

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

Exhibit 7: DCF-based methodology yields a fair value of Rs215

Risk free rate (%) 6.5

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

ABFRL: STRONG BRANDS AND IMPROVING REACH IN A STEADY GROWTH INDUSTRY

Apparel and accessories: rising penetration of organized retail

2007 2017 2021

Proportion of Size of Penetration of

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

Greater discretionary spends to drive branded apparel growth

2012 2017 2020

ABFRL’s geographic reach to benefit from rising discretionary spends beyond

Exhibit 11: Share of non-metro cities in overall consumption on the rise

Share of household consumption expenditure Population

Source: BCG analysis, Kotak Institutional Equities

Omni-channel the right strategy for apparel retailers

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Revenues No. of stores

Source: Companies, Bloomberg, Kotak Institutional Equities

How many buyers of branded wear are there?

Source: Companies, Industry discussions, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

Exhibit 14: Loyal customers contribute to a large proportion of retailers' revenues

Source: Companies, Kotak Institutional Equities

Rising urban population, purchasing power to drive ABFRL’s menswear business

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Share of household consumption expenditure Annual gross household income

Source: BCG analysis, Kotak Institutional Equities

Competitive intensity high, though the worst is over