Initiating Coverage Report On Future Lifestyle Fashion

INITIATING COVERAGE

FUTURE LIFESTYLE FASHIONS

Two to tango
India Equity Research| Retail

Future Lifestyle Fashions (FLF) is an integrated play on brands (30 owned, EDELWEISS 4D RATINGS
licensed and investee) and retail presence (>5.4mn sq ft). This integrated Absolute Rating BUY
model had ensured strong SSSG (16.4% in FY17) and outperformance. We Rating Relative to Sector Outperform
expect ~12% SSSG to sustain over the next 2 years driven by: 1) scale up Risk Rating Relative to Sector Low
of retail channels across segments – Central in premium and Brand Sector Relative to Market Underweight
Factory in value; 2) right mix of brands – owned (~38.3% of revenues) and
third‐party; 3) Power brands, which would fuel growth; and 4) better
inventory management. Ergo, we expect sales and EBITDA CAGR of 20.3% MARKET DATA (R: NA, B: FLFL IN)
CMP : INR 310
and 24.2%, respectively, over FY17‐19E with RoE imroving to 11.0% in
Target Price : INR 416
FY19E from 2.8%. We initiate coverage with a 'BUY' and TP of INR416.
52‐week range (INR) : 380 / 108

Share in issue (mn) : 190.0
Eclectic brands treading high growth path M cap (INR bn/USD mn) : 59 / 910
FLF’s strong brands straddle across different price points, segments and distribution Avg. Daily Vol.BSE/NSE(‘000) : 266.5
channels. Own brands not only fetch higher margins (~500‐700bps), but also ensure
that inventory is well managed. The 6 power brands are now at the forefront, each SHARE HOLDING PATTERN (%)
with turnover of >INR1bn at MRP (Lee Cooper at >INR6.5bn) and revenue CAGR of 8.1% Current Q3FY17 Q2FY17
over FY14‐17E (CAGR of 11.9%, excluding one‐time supply chain impact). Promoters * 60.5 60.5 60.5
MF's, FI's & BK’s 13.6 13.7 13.6

Enviable retail presence FII's 6.5 6.1 6.0
While Central is a large format departmental store, Brand Factory is helping counter e‐ Others 19.4 19.7 19.9

* Promoters pledged shares : 18.6
commerce threat. Central and Brand Factory have clocked strong SSSG in FY16/17–
(% of share in issue)
10%/18% and 8%/17%, respectively which is expected to sustain, aided by – store
premiumisation, better layout, increased advertisement and branding, as well as PRICE PERFORMANCE (%)
professionalisation. Strong retail channels also helps FLF in positioning its own brands
EW Retail
– proportion of which is set to increase from 38.3% in FY17 to 39.2% in FY19E. Stock Nifty
Index

1 month (10.1) (0.4) (0.3)
Outlook and Valuations: On growth trajectory; initiate with ‘BUY’ 3 months 9.9 4.1 4.0
We believe double digit SSSG in Central and Brand Factory over FY17‐19E, margin 12 months 154.1 14.8 23.7
improvement (60bps over FY17‐19) and improving inventory days (from 203 days to

175 days over FY17‐19) augur well for FLF. Key risks being discretionary slowdown and

some inter group company transactions. We assign target multiple of 15x FY19E

EV/EBITDA and arrive at TP of INR416. Initiate coverage with ‘BUY/SO’.
Financials (INR mn) Abneesh Roy
+91 22 6620 3141
Year to March FY16 FY17 FY18E FY19E abneesh.roy@edelweissfin.com
Revenues (INR mn) 33,002 38,771 45,783 56,086
Click on image to view video
Rev. growth (%) 5.3 17.5 18.1 22.5
EBITDA (INR mn) 3,252 3,580 4,396 5,526 Tanmay Sharma, CFA
Adjusted Profit (INR mn) 188 460 1,243 2,062 +91 22 4040 7586
tanmay.sharma@edelweissfin.com
No. of Shares outstanding (mn) 190 190 190 190
Adjusted Diluted EPS (INR) 1.0 2.4 6.5 10.8 Alok Shah
EPS growth (%) 267.8 144.3 170.5 65.8 +91 22 6620 3040
alok.shah@edelweissfin.com
Diluted P/E (x) 312.9 128.1 47.3 28.5
EV/EBITDA (x) 21.5 18.3 14.7 11.4
July 07, 2017
ROAE (%) 1.2 2.8 7.3 11.0
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Retail

Executive Summary

Future Lifestyle Fashions (FLF) provides investors with the opportunity to play
the diversified combination of retail channel (Central, Brand Factory and
EBOs) and branded portfolio (30 brands across segments – apparels and
accessories). In 2013, FLF was carved out from Future Consumer Limited,
which housed fashion brands and from Future Retail, which housed the retail
arm, lending more focus to fashion business. FLF is now an integrated player
with focus on both brands as well as retail channel. This integrated model
helps in creating a diversified portfolio and also acts as a hedge against the
risks of slowdown in any one of the models. The company is geared to
improve its same store sales growth (SSSG), register gradual margin
expansion and spruce up its balance sheet and return ratios led by better
store and inventory layout, enhance focus on own and licensed brands via its
power brands strategy and improve working capital cycle coupled with
lowering debt.

Strong SSSG momentum to sustain
FLF’s SSSG (for both Central and Brand Factory) has been consistently improving starting
Q3FY16 – average SSSG at 15% and has been recording double‐digit SSSG since past 4
consecutive quarters. This growth was supported by better store layout and inventory
placement (the company has changed the look and feel of its stores), use of data analytics in
terms of focusing on faster‐moving brands, right mix of third party and faster growth of own
and licensed brands. Brand Factory helps in liquidation of slow‐moving inventory and hence
ensures that fashion present at the Central stores is fresh. Growth was also bolstered by the
clean up done by management in terms of design, relocation, changing the look and feel, etc
– 2 Central stores were also converted into Brand Factory outlets. To keep pace with the
evolving fashion, FLF has also opened its first international design studio, “Future Style Lab”
in London. Going forward, we expect FLF to add 5 Central and 8 Brand Factory outlets each
in FY18 and FY19. For Central and Brand Factory we have assumed SSSG of 12%/10% and
15%/12% for FY18E and FY19E, respectively.

Margin expansion aided by right brands mix
A key margin lever will be bolstering proportion of power brands within the kitty apart from
the operating leverage due to strong growth rates. FLF has a strong portfolio of 18 own and
licensed brands, out of which it has identified 6 power brands – categorised on the basis of
size and high growth segments – which will attract more focus. Gross margins in own and
licensed brands can be as high as ~500‐700bps versus third party brands (currently own
and licensed contribute 38.3% to FLF’s revenues). Having said this, third party brands are
important for growth since it is due to strong brand recall that customers walk into one of
the Central or Brand Factory outlets. Thus, while proportion of own and licensed portfolio
will increase, FLF will still continue to have a right mix of third party brands too. We expect
proportion of own and licensed brands to increase from 38.3% in FY17 to 39.2% in FY19E
(within this, share of power brands will increase from 63.6% in FY17 to 64.2% in FY19E).
This will aid EBITDA margin expansion by ~60bps over FY17‐19E.

2 Edelweiss Securities Limited
Future Lifestyle Fashions

Balance sheet improvement
Focus has significantly increased on improving overall return ratios. Improvement in return
ratios has been led by improvement in inventory days ‐ declined from 221 days in FY16 to
203 in FY17 and set to further improve to 175 days by FY19E, led by shorter season cycles,
faster liquidation of slow‐moving inventory and better fashion brands. With improvement in
working capital and lower debt (debt reduced from INR11.4bn in FY16 to INR6.8bnin FY17)
led by partial stake sale in investee brands and Lee Cooper, we expect RoCE to improve
from 6.9% in FY17 to 14.8% in FY19 and RoE to improve from 2.8% in FY17 to 11% in FY19.

We initiate coverage on FLF with a ‘BUY/Sector Outperformer’, recommendation/rating,
and target price of INR416, based on 15x FY19E EV/EBITDA. We have assigned 25%
discount to ABFRL’s valuation multiple as FLF’s scale and reach is lower than ABFRL’s.
However, FLF’s SSSG and margins have been outperforming peers and hence have been
valued at a premium to other listed comparable retailers.

Key risks
The overall growth and margins can get impacted by the slowdown in the overall macro‐
economic environment, increased competition from the other physical and online players
and increase in the raw material prices and rental costs. Apart from this, we here highlight
that there are some related party transactions done at an arm’s length which relates to
purchase of inventory for sale in FLF’s distribution channel, deposit for the use of property
etc and these transactions are in the normal course of the business.

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Investment Rationale

Integration rewards galore
FLF, a prudent mix of fashion and retail under one roof, derives multifold benefits from
this integrated model. Importantly, integration has proved to be a natural hedge
against the risks of slowdown in any one model – registered strong performance in
past 4 quarters bucking the sluggish trend in industry. The format has also allowed
better focus on same sales stores growth (SSSG), amidst a tough business
environment.

In 2013, the Future Group restructured its fashion business from its 2 listed entities,
viz.,Future Consumer (housed the brands business which including Lee Cooper, John Miller,
aLL, BARE and Indigo Nation, among others), and Future Retail (the group’s retail arm
comprising Central and Brand Factory) into Future Lifestyle Fashions (FLF).

Fig. 1: FLF – Restructuring lend better focus to FLF
FCL
Future Retail
erstwhile FVIL
Fashion
Food Entertainment (Brands) Lifestyle Fashion Hyper Market
(Central & Brand factory)
FUTURE LIFESTYLE FASHIONS

Source: Company

Benefits of this integration are manifold, viz., 1) the fashion brands and retail format are
now housed under one entity, FLF; 2) focus is now trained on fashion and lifestyle, which
has resulted in emerging synergies; 3) SSSG is better managed; and 4) the integrated model
of brands and retail channels has proved to be a natural hedge against the risks of
slowdown in any one of the models.


Table 1: Comparison of FLF’s metrics via‐a‐vis peers
Shoppers Stop (std) Trent (Westside) VMART ABFRL FLF
FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17
Key metrics
Retailer with Retailer with Retailer with Integrated player housing
Integrated player with
private label private label private label Madura, Pantaloons and
Business model private label contributing
contributing ~16‐ contributing contributing Forever21. Pantaloons
~40% of sales
20% of sales ~90% of sales ~25% of sales has ~65% private lavel
Madura:0; Madura:‐5; Central: 10; Central: 18;
Same store sales growth (%) 8.5 3.0 7.9 9.0 (1.1) 13.0 Pantaloons: Pantaloons: Brand Brand
5.9 2 Factory: 8 Factory:17
Sales per square feet (INR) 8,974 9,260 NA NA 9,072 9,588 11,018 10,649 9,429 10,257
Store count (Nos.) 77 80 93 NA 123 141 2,188 2,261 369 372
Financial Metrics (%)
Gross margin 35.8 36.0 51.9 52.4 29.4 29.8 54.5 54.4 38.0 36.9
Employee cost 6.8 6.8 8.8 9.6 7.7 7.8 9.8 10.7 5.7 5.3
Rental cost 8.4 8.4 7.5 13.1 4.9 4.8 10.7 16.5 11.3 10.7
Other exps 14.5 14.5 29.4 22.7 9.1 9.0 27.5 20.7 11.2 11.7
EBITDA margin 6.0 6.3 6.2 7.1 7.7 8.2 6.5 6.6 9.9 9.2
Revenue growth 10.7 10.6 10.5 15.8 12.4 23.8 NM 9.0 5.3 17.5
EBITDA growth 15.0 15.0 70.4 31.1 (2.3) 32.9 NM 10.1 (1.5) 10.1
Return ratios (%)
RoCE (pre‐tax) 5.6 3.5 7.7 7.4 17.9 22.6 3.2 8.0 6.0 6.9
RoE (7.4) (13.0) 4.2 3.9 12.1 15.8 (16.2) 5.4 1.2 2.8
Source: Company, Edelweiss research
Notes: (i) detailed numbers are not available for Trent & ABFRL, hence rental amount for FY17
may not be comparable; (ii) for Trent, FY17 is as per IND AS, but FY16 numbers have not been
adjusted and will be done once the annual report is out; and (iii) sales per sq ft for FLF has been
adjusted to exclude mall area of Central used for food court, multiplex, gaming zone, etc.

Being an integrated format, FLF has a unique business model.

 Mix of brands and retail – a better model
The integrated model – a combo of brands and retail channel – cushions company’s
growth considering that it is not solely dependent on either the brand or retail channels
for overall growth. Both the brands and retail channels help in creating a diversified
portfolio while simultaneously acting as a hedge against the risks of slowdown in any
one of the models. By being only a retail channel, the company would have to depend
on growth of other brands in its channel and hence largely become a quasi‐real estate
provider. Likewise, by just holding the brands, the company would be dependent on
other retail channels to showcase the brands and would entail payment of ~ 35‐40% as
channel margins to the large format retailers.

FLF is now well entrenched to capitalise on India’s burgeoning fashion segment and
register higher growth, riding the good mix of brands (30 brands) and retail channel
outlets. While the company’s own brands contribute 38.3% to revenues (which is
margin accretive too), ~70% of branded sales are undertaken through its retail
platform.

Retail

Fig.2 : Diversified model ‐ Brands and Retail under one entity
Brands Retail channel
Diversified portfolio of both retail channel and brands
Own brands get access to retail channel ‐ going to a large retail channel independently can lead to 35‐40% channel
margins
Better control on inventory and higher margins with own brands
Ability to push own brands better


 Rational expansion of retail channels
FLF, through its retail channels – Central, Brand Factory and other EBOs (Planet Sports,
aLL, etc) – has a strong network of 372 stores, covering >5.4mn sq ft extending to ~90
cities, and making it one of the largest networks in India. A diversified and integrated
model (an array of brands available through its retail chain) supports FLF’s store
expansion programme ‐ it can play with its brand portfolio depending on the type of
brand and the areas where stores need to be opened.

Table 2: Extensive store network
Stores Area (mn sqft)
Central 35 3.5
Brand Factory 53 1.5
EBO and others 284 0.4
Total 372 5.4

Table 3: Historical store addition
Nos FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Central stores 9 12 18 22 22 25 29 31 35
Brand Factory stores 8 13 14 19 27 38 39 42 53


Chart 1: Store network of FLF is one of the largest in India
7.5
6.0
4.5
(mn sq ft)
3.0
1.5
0.0
ABFRL FLF Shoppers Stop Arvind brands V Mart
Store network area


 Sharp focus on bolstering SSSG
This integrated model also helps in better managing SSSG since FLF has better control
over both its owned and licensed brands and retail outlets, unlike a pure retail chain
where brand positioning is largely dependent on the discretion of the retailers. Around
70% of FLF’s branded sales are undertaken through its own retail outlets.

Chart 2: FLF’s SSSG strong, despite tough business environment
25.0
20.0
15.0
(%)
10.0
5.0
0.0
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
FLF


With an integrated entity in place (dedicated focus on brands via in‐house retail channels),
FLF is now well placed to take further measures to ramp up SSSG. The company is focused
on the primary catalysts that will ensure strong SSSG including: 1) getting the right display;
2) monitoring the inventory supply chain; and 3) special attention given to store format,
design and layout.

Retail

 Sprucing up operations
FLF is now a more focused player with an eye on improving its bottom line and RoCE.
The company is also involved in professionalizing its management team – dedicated
CEO’s have been appointed for each of the verticals with performance being reviewed
by Mr. Biyani himself on a monthly basis.

Table 4: Dedicated vertical chiefs and professionals head various divisions
Designition Name Description
Head ‐ Central Vishnu Prasad 30 years of sales and retail experience ‐ joined Future group in 2001 to set
up Big Bazaar
Head ‐ Brands Rachna Agarwal 22 years of experience in brand management, information system
management & supply chain management
Head ‐ Lee Cooper and aLL Hetal Kotak 17 years of experience across branded apparel and retail

Head ‐ Brand Factory Suresh Sadhwani 20 years of retail experience ‐ Heading Brand Factory since 2014
Head ‐ Cover Story Manjula Tiwari 22 years experience in the fashion & lifestyle industry ‐ launched high
street brands like Esprit, Benetton
Chief Financial Officer Kaleeswaran 15 years in the Food & Fashion industry ‐ worked with Mondelez, Aditya
Arunachalam Birla Nuvo and TVS Motors in earlier role
HR Venkatesh Raja 23 years of varied experience in organizations like Sterling Holidays,
Reliance Petroleum, Reliance Infocom, MTS Group
Company Secretary Sanjay Mutha 16 years in the Secretarial and Legal functions


Central – Premium high‐street mini mall fast gaining currency
Central has managed to sustain strong SSSG (12% average over FY15‐17), as most of its
stores are predominantly located on high streets (~70‐80%) and offers a mall like feel
to consumers. The store offers premium experience to consumers who have been
continuously up‐trading the brands. The third‐party brands are fast occupying space at
Central’s shelves in turn allowing it to offer premium experience to customers. Central
is registering strong SSSG and improving throughput per outlet. Rationalisation of
average store size and prudent store expansion are some other factors lending
impetus to the Central stores.

A. Distinguished attributes…
 Large size stores generally located on high streets
Central is FLF’s departmental store that seeks to position as the neighbourhood
mall for customers. With a high‐street large format store, average size ranging
from 0.1‐0.15mn sq ft (Shopper’s Stop store size ranges from 35,000‐40,000 sq ft),
Central offers a complete shopping experience to consumers.


Fig. 3: Expanding reach with impressive brands bouquet


 Mall‐like experience
Central has managed to sustain strong SSSG (average SSSG of 12% over last 3 years) as
most of the stores are predominantly located on high streets (~70‐80% of stores). This
large departmental store is also being positioned as a mini mall ‐ has a mini cafeteria
(coffee shops/food court), PVR in some stores – and seeks to give customer a complete
experience by replicating, to some extent, the visit to a regular mall. Central stores are
present at standalone locations which not only allows fashion shopping but it also
offers an opportunity to shop from >1,000 best brands across categories including
electronic goods and accessories, apparels, cosmetics, fragrances, eyewear, watches,
accessories, sportswear, toys, mobiles, electronics and home products. Apart from
these some stores have complete range of music, books, fine dining restaurants,
discotheques, multiplex as well as special sections for travel, finance, investment, etc.

 Premiumising brands
The company is further uptrading the brands– launched Central High Definition (HD). At
Central HD, offerings are premiumised, ambience is upgraded thereby enhancing the
freshness quotient. In fact, FLF has launched its first next generation Central HD store at
Aerocity, New Delhi. This store offers world‐class designs with over 500 brands
displayed in HD exhibiting the latest fashion trends. At these HD stores, the company
uses smart and technology‐led interfaces for display and provides differentiated
customer services initiatives, such as, free home delivery, in‐store wi‐fi networks,
personal shoppers, infant care rooms, easy billing, etc. As of FY17 end, FLF had 2 HD
stores, one in Delhi and another one in Bangalore. Post which the company have added
2 more HD stores.
Retail

Fig. 4: Central HD offers premium experience to consumers


 Emerging preferred destination for branded players
EBOs have always been a key distribution channel for apparel players. Apart from being
a distribution channel, EBOs also help in better branding of products. However, the
advent of malls, MBOs and e‐commerce has seen more and more consumers preferring
to patronise a MBO as against an EBO, primarily due to the number of options available
in the former. Increasingly, MBOs appear to be more attractive than EBOs – a case
being Madura closed ~136 EBOs in H1FY17. MBOs are also focusing on increasing the
proportion of their own private label brands to drive profitability, which leaves lesser
space for third party brands. Consequently, Central has emerged as a preferred
destination for third party brands since: (i) it operates on a large size model which has
enough scope for brand additions; and (ii) FLF showcases each brand under one roof
with a wall‐to‐wall presentation which helps the brands gain better presentation and
visibility, almost similar to EBOs.

Recently, Central launched a TV commercial to increase brand awareness, which was
aired on 33 channels. The company has launched a co‐branded credit card with SBI ‐
Central SBI SELECT and SELECT+ cards where the cardholders can earn 20 reward points
for every INR100 spent at Central stores.

 Other offerings
To offer a complete mall‐like experience, Central also houses some frill outlets, such as
Café Coffee Day (CCD), amongst others. Central earns rental income from CCD, which is
treated as other operating income. This source of income is typically sticky in nature
and also helps in increasing footfalls. In FY16 and FY17, other operating income
accounted for ~2 – 2.25% of overall revenues. Going forward, we conservatively
estimate other operating income to be ~1.75 – 1.9% of total income.

B. … ramped up growth amidst adverse environment
Central, as a format, has been outpacing industry growth and has been gaining market
share in last few quarters. Despite a tough macroeconomic environment and
heightened competition particularly from online players, Central has managed to
record strong SSSG, which is commendable. The above attributes helped Central
register strong SSSG and improve throughput per outlet (INR5,986 in FY15 to
INR6,735 in FY17). Central has been rationalising average store size while selectively
expanding its store network.

Chart 3: On strong turf with rising market share…
28.0
21.0
14.0
(%)
7.0
0.0
(7.0)
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Shoppers Stop Central

Chart 4:…aided by steady double‐digit SSSG in past 4 quarters
25.0
20.0
15.0
(%)
10.0
5.0
0.0
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17

Retail

Chart 5: Improvement in throughput/store
7,000
6,700
6,400
(INR)
6,100
5,800
5,500
FY15 FY16 FY17
Revenue per sq ft

Chart 6: Rationalisation of store size too aids in improving productivity
150,000
130,000
110,000
(sq ft)
90,000
70,000
50,000
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Average size per sq ft

Chart 7: Reasonable store additions (10 stores added in past 4 years)
40.0 4.0
32.0 3.2
24.0 2.4
(mn.sq.ft)
(Nos)
16.0 1.6
8.0 0.8
0.0 0.0
Stores Size (mn sq ft)

Brand Factory – Unique monopolistic business model
Brand Factory is a niche business platform ‐ acts as a liquidation channel for FLF and
other brands. Brand Factory offers 20‐70% discount on >200 brands for men, women
and kids across 365 days a year. The format caters to value‐seeking aspirational
customers, specifically the lower and middle segments (Central caters to the premium
segment). FLF is also running TV advertisement to build the brand and creating

 Ensures better inventory management
Brand Factory is a liquidation platform for old and stagnant inventory not only for FLF
but also for other brands such as Arvind, ABFRL, etc. Consequently, stock in the retail
channels ‐ Central, EBOs, etc ‐ remain fresh in turn ensuring better footfalls. Being a
liquidation channel, Brand Factory offers customers an entire range of brands at a
discount/reduced prices. It offers 20‐70% discount across products and has 60% of
business coming from national brands.

 Physical answer to online players with no offline competition
In a way, a physical player, Brand Factory, offers competition to the online players
considering that it sells similar off‐season merchandise at discounted prices (similar to
online players that offer discounts through the year). Brand Factory sells the brands at a
discount 365 days a year, thus ensuring footfalls and not losing them to online players.
Also, it does not face competition since within offline players, Brand Factory is the only
liquidation channel in industry. Recently, to celebrate its 10th year anniversary, Brand
Factory offered flat 50% discount on all products (through June 7‐11) across its outlets.

Fig. 5: Brand Factory synonymous to best prices


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Fig. 6: Advertisement in print media depicting 10 years celebration


 Propels FLF’s revenues, transcending business cycles
Brand Factory seeks to cater to consumers who aspire to own brands, but at a value.
Shopping at Brand Factory gives consumers an opportunity to upgrade to higher brands
at a reasonable cost. Similarly, during tough times, Brand Factory ensures better growth
from consumers who are down‐trading. Thus, irrespective of the business cycle, FLF’s
revenue growth is maintained. Lately, FLF has focused on revamping Brand Factory –
has changed the look and feel of the stores, altered the store layout, etc., and has also
been advertising the products, especially via print media. This has resulted in Brand
Factory’s SSSG improving in past 4 quarters along with higher throughput per outlet
(increased from INR5,105 per sq ft to INR7,299 per sq ft).


Chart 8: Four quarters of double‐digit SSSG
25.0
20.0
15.0
(%)
10.0
5.0
0.0
Q1FY17 Q2FY17 Q3FY17 Q4FY17
SSSG

Chart 9: Better focus, store revamp led to increased throughput/outlet
7,500
6,500
5,500
(INR)
4,500
3,500
2,500
FY15 FY16 FY17
Revenue per sq ft


 Doubles up as a distribution platform
Brand Factory also acts as a distribution platform for FLF. In the areas where a Central
store cannot be set up due to constraints of space, customer profile, etc., FLF starts a
Brand Factory outlet. Average size of a Brand Factory outlet is ~30,000 sq ft, which is
about one‐third that of Central. Hence, it is easier to acquire space to open Brand
Factory stores. Going forward, FLF is looking to add more Brand Factory stores than
Central outlets (expects to add 8 Brand Factory stores as compared to 5 Central
outlets).

Retail

Chart 10: Pace of BF store additions increased in FY17
60.0 2.0
48.0 1.6
36.0 1.2
(mn sq ft)
(Nos)
24.0 0.8
12.0 0.4
0.0 0.0
Stores (Nos) Size (mn sq ft)

Strong brands synonymous with higher growth, margin expansion
FLF is one of the few companies in India which has strong brand portfolio that
straddles across price points, segments and distribution channels. Larger share of own
brands allows FLF to have better control over inventories, register higher growth (due
to brand pull) apart from being margin accretive. Going ahead, power brands will play
a key role in increasing the share of own and licensed brands in FLF’s brand portfolio.
Currently, 38.3% of sales is derived from own/licensed brands and of this Power
brands accounted for 63.6% in FY17 (up from 57% in FY15). As per management, by
FY22, Power brands are expected to contribute lion’s share (70%) in brand portfolio.
Apart from owned and licensed brands, potential of FLF’s investments in investee
brands is humongous – till date, it has exited only 2 investments (BIBA & AND) and
raked in staggering 6x and 24x returns over 5‐6 years, respectively. While ascribing
target price, we have not factored in any valuation upside from these investee brands.
This may pose upside risk to our valuation.

 Renowned brands in kitty
FLF has an eclectic array of 30 brands (own, licensed and investee) straddled across
price points, segments (men’s wear, casual wear, women’s wear, ethnic wear, sports
and leisure wear, footwear, etc) and are sold across channels (MBOs, EBOs and FLF’s
own retail channels). Currently, FLF has 18 own and licensed brands (8 own and 10
licensed). FLF is one of the few companies in India which has such renowned brands
(other players being ABFRL and Arvind). Hence, it is not just a retail outlet providing real
estate space to third party brands, but also a player with a strong brand repertoire.
Having such large share of own/licensed/investee brands facilitates better control of
inventory, which leads to higher growth due to brand pull apart from being margin
accretive.


Table 5: Strong brand portfolio straddled across price points, segments and channels
% contribution Owned Brands Licensed Brands Investee Brands
Men's wear 26 Indigo Nation Lombard Giovani
Urbana John Miller Turtle
Daniel Hechter
Women's wear 10 Mohr Cover Story
Jealous 21 Mineral
Desi belle
Unisex 53 Scullers Lee Cooper
aLL UMM
Bare
Rig
Sports/ Leisure wear 6 Urban Yoga Umbro Spunk
Champion
Converse
Footwear/ Accessories etc 5 Ceriz Tresmode
Mother Earth
Clarks
Famozi
Holii
Peperone

 Six power brands at forefront of growth, profitability…
Fine‐tuning its brands strategy, FLF has identified 6 Power brands (a strategy followed
by FMCG players, who train sharp focus on key brands) which it believes has the
potential to become big and bolster revenue and profitability. The 6 power brands are
Lee Cooper, John Miller, Scullers, Jealous 21, Indigo Nation and aLL. The company has
not only appointed a dedicated team to track these brands, but also proposes to
allocate more resources and capital to drive growth in these brands.

Fig. 7: Six power brands in focus
POWER BRANDS


Retail

Table 6: Snapshot of key brands (including the 6 power brands)
Distribution Revenues
Brand Category Target Customer Competitors channel Avg Price points (INR) (INRmn)
Lee Cooper Denim and casual Young men and Levi’s, Pepe Jeans, Central, Brand Lee Cooper originals‐ 3,200
wear women Wrangler, Lee, Factory, EBO's, INR1,500;
Killer MBO's and E‐com Lee Cooper ‐ INR2,500
platforms
John Miller Formal men's wear Mid level executives Peter England, Central, Brand 1,200 1,200
Excalibur Factory, EBO's,
MBO's and E‐com
platforms
Scullers Casual and Men, women and kids Parx, Color Plus Central, Brand 1,700 1,100
sportwear Factory, EBO's,
MBO's and E‐com
platforms
aLL Plus‐sized clothing Overweight crowd Plus size of other Central, EBO's, 1,200 1,200
brands Own website
Indigo Nation Formal and casual Urban Indian male Wrangler, Parx Central, Brand 1,500 1,100
men's wear Factory, EBO's,
MBO's and E‐com
platforms
BARE Denim and casual All demographies Lee, Pepe Jeans, Central, Brand 1,000 1,100
wear Colour Plus, Indian Factory, EBO's,
Terrain, Allen Solly MBO's and E‐com
platforms
Jealous 21 Denim and casual Women Forever New, Levi’s, Central, Brand 1,500 900
wear Pepe Jeans Factory, EBO's,
MBO's and E‐com
platforms

 …FY17 an aberration for 3 power brands, reverting to historical growth trajectory
The 6 power brands registered revenue CAGR of 8.1% during FY14‐17 (versus 12.6%
during FY14‐16). Optically, revenue CAGR of 8.1% is not encouraging, but one needs
to know the factors responsible for same. The drag in growth rates was primarily due
to the dip in growth rates for Jealous 21, John Miller and aLL in FY17. In H1FY17, FLF
saw supply chain disruption, undertook changes in job workers and faced warehousing
issues in these 3 power brands. The 6 months of disruption was followed by
demonetisation, which saw the 3 power brands bearing the brunt of the event. As a
result, FY17 revenue of these 3 power brands took a knock. The teething supply chain
issues are now a thing of the past and the 3 power brands have reverted to historical
growth rates, which are expected to sustain as well.


Table 7: Key brands: Growth trajectory (FY14‐17)
Brands Ownership CAGR (%)
Lee Cooper Licensed brands 14.1
John Miller Licensed brands (3.2)
Scullers Owned brands 6.4 Dip in FY17 revenue of Jealous 21,
Indigo Nation Owned brands 9.9 John Miller and aLL impacted overall
Jealous 21 Owned brands (16.3) revenue CAGR of Power brands
aLL Owned brands 21.9
Bare Licensed brands 13.1

The Power brands have already crossed the INR1bn mark, in terms of MRP sales to
customers, and brands such as Lee Cooper are already in the INR6.5bn brand category. For
any brand, initially it is very tough to cross the INR1bn mark, but when the same is achieved
crossing the INR5bn mark becomes relatively easier as the brand becomes well known and
distribution expansion becomes easier. Gross margin also improves as the brand becomes
big. Bigger brands help in better negotiation with the suppliers, in turn improving margins.

Chart 11: FLF’s key brands, MRP sales‐wise (all above INR1bn)
7,500
6,000
(INRmn)
4,500
3,000
1,500
0
Lee John Indigo Scullers Bare aLL Jealous 21
Cooper Miller Nation
FY17


 Power brands to propel share of own/licensed brands
Going ahead, power brands will play a key role in increasing the share of own and
licensed brands in FLF’s overall branded portfolio. Currently, 38.3% of overall sales
come from own/brands and of these power brands accounted for ~64% in FY17. With
sharper focus, Power brands are expected to clock higher growth rates owing to their
better brand value and size. As such, the share of own and licensed brands will increase
and within that the share of Power brands will further rise. We expect share of own and
licensed brands to increase from 38.3% in FY17 to 39.2% in FY19 and within this the
share of Power brands to increase from 63.6% in FY17 to 64.2% in FY19. FLF expects
power brands to contribute ~70% by FY22.

Retail

Chart 12: Share of Power brands in brand portfolio to further increase
Bare
10%
Jealous 21
Other 7%
brands Lee Cooper
36% 37%
Scullers
11%
Power
brands Indigo
64% Nation
12%
aLL John Miller
12% 11%

Share of own/licensed brands is expected to further increase following faster growth in
Power brands versus third‐party brands. This will be led by higher focus by FLF to drive
growth in these brands not only in terms of allocating more resources and capital, but
also by having better placement in its own retail outlets of Central and BF.

Chart 13: Share of third‐party brands on decline, albeit marginally (as per company)
FY14 Owned FY17 Owned

brands brands
13% 11%
Licensed Licensed
brands brands
23% Third party 27%
Third party brands
brands (net off
(net off consig.
consig. fees)
fees) 62%
64%


 Investee brands – A strong bouquet
Apart from possessing a strong portfolio of own and licensed brands, FLF has also
invested in a portfolio of other brands (known as investee brands) which are helmed by
talented designers/entrepreneurs at an early stage – the company starts with a small
investment and picks up stake in brands that have huge value unlocking potential as
they grow big. This is over and above the gains from stake sale, which can be used for
deleveraging. This also helps FLF in learning and gaining access to new categories, such
as, fast fashion, accessories, handbags, footwear, etc.


Table 8: Investee brands and FLF’s stake in them
Investee brand FLF's stake (%) Segment
Giovani 96.0 Premium brand for men
Cover Story 90.0 Fast Fashion for women
Mother Earth 72.2 Home décor, apparel, linen etc
Spunk 60.0 Leisure wear
Mineral 56.5 Women's wear
Clarks 50.0 Footwear brand for men and women
Holii 50.0 Leather bags
Tresmode 33.3 Shoes
Famozi 30.0 Shoes
Desi Belle 27.5 Women's wear
Turtle 26.0 Men's wear
Peperone 12.0 Handbags

Humungous value unlocking potential in investee brands
Recently, FLF transferred its investment in the investee companies to its wholly‐owned
subsidiary, FLF Lifestyle Brands. Post this consolidation of holdings in investee brands, FLF
sold 51% stake in FLF Lifestyle Brands for ~INR4.5bn and made a gain of INR380mn. Post this
transaction, FLF now holds 49% stake in FLF Lifestyle Brands. On a weighted average basis,
the company has ~30% stake in these investee brands. At a turnover of ~INR6bn as at FY17,
the deal was concluded at strong EV/sales of ~4.9x on trailing FY17 basis.

The potential of FLF’s investments in investee brands is humongous – of FLF’s investments in
investee brands, it has till date exited from only 2 investments (BIBA & AND)and raked in
staggering 6x and 24x returns over 5‐6 years, respectively. This reflects the underlying
potential of unlocking from which FLF is poised to benefit. In our valuation, we have not
ascribed any upside from FLF’s holding in FLF’s lifestyle brands, thereby posing an upside
risk to our valuation.

FLF shall pare debt utilising the stake sale proceeds in turn cushioning its leverage.

Table 9: Stakes divested in BIBA and AND
BIBA AND
Entry year 2007 2008
Exit Year 2013 2013
Stake acquired and exited 25.8 22.9
Acquisition price (INR mn) 420.0 60
Exit price (INR mn) 2,350.0 1450
Stake sale valuation 15x FY14 EBITDA 15x FY14 EBITDA
Return on investment 6x 24x

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Potent levers to catapult return ratios
In FY17, FLF clocked RoCE of 6.9% and we expect the same to improve to 14.8% in FY19. The
company’s return ratios are set to improve led by better SSSG, margin improvement driven
by mix, and deleveraging exercise. As discussed, overall growth will be driven by strong SSSG
in retail business, aided by increased focus on the faster‐growing Power brands and other
steps taken to improve overall SSSG (discussed in respective sections). We expect overall
SSSG of Central and Brand Factory to remain in the range of 10‐12% and 12‐15% over FY18
and FY19, respectively.

Chart 14: SSSG of Central and Brand Factory to remain strong
25.0
21.0
17.0
(%)
13.0
9.0
5.0
FY16 FY17 FY18E FY19E
Central Brand Factory


Another important lever for return ratio improvement is growth of own and licensed brands.
Power brands, which are expected to grow at CAGR of 22.4% over FY17‐19, will drive
growth of own brands whose proportion is expected to improve from 38.3% in FY17 to
39.2% in FY19 (FLF’s own brands’ share has increased from 34% in FY13). Such growth of
Power brands seems possible as management is incrementally focusing on power brands,
allocating more capital to these business, has appointed specific CEOs for those brands.
Importantly, own and licensed brands fetch much better margins versus third party brands –
differential in margins between third party and own brands is ~500‐700bps.

FLF is also taking steps to improve overall margin profile in its own retail channel –
upgrading Central via Central HD, focusing on driving higher‐margin own brands within
own channels and focusing on GMROF (Gross Margin Return On Footage) where it focuses
on gross margins earned by each brand on the basis of sq ft allocated to a particular brand.
FLF tracks brand performance for a season and if it is not performing well on GMROF
parameters, it could pull out the brand from the space and replace it with a better
throughput and margin brand.


Table 10: Segment‐wise margins
Gross margins profile (%)
Central 36‐38
Brand Factory 28‐29
Own Brands 46‐48
Third party brands 38‐39

We expect FLF’s gross margins to improve from 36.9% in FY17 to 37.3% in FY19, benefiting
from these initiatives.

Chart 15: Margins set to improve
40.0 12.0
39.0 11.0
38.0 10.0
(%)
(%)
37.0 9.0
36.0 8.0
35.0 7.0
Gross margins EBITDA margins


On debt front, stakes in the brand will come handy. Already, FLF has realised INR7bn by: (i)
selling stake in investee brands – formed a separate company which contains all the stake in
the investee brands and sold 51% stake in that company for INR4.5bn; and (ii) the company
also diluted its stake in Lee Cooper – diluted 26% stake for INR2.5bn in the brand by
transferring the business to a separate subsidiary, Future Specialty Retail Limited, and issued
convertible preference shares for the same. Apart from this, inventory days are also poised
to reduce from 221 days in FY16 ‐ it stood lower at 203 days in FY17 which is set to further
decline to 175 days in FY19E.

Retail

Chart 16: Return ratios improving and to sustain
17.5
14.0
10.5
(%)
7.0
3.5
0.0
RoCE (pre tax) RoE



Financial Outlook

We estimate FLF to clock revenue CAGR of ~20.3% over FY17‐19, riding strong growth
in own and licensed brands well supported by the >20% revenue growth in Power
brands. Robust revenue growth in Power brands will help FLF clock double‐digit SSSG
for Central (12%/10%) and Brand Factory (15%/12%) over FY18 and FY19 respectively.
From a margins perspective, FLF will see expansion not only backed by gross margin
expansion (increasing proportion of owned / licensed margins) but also by benefitting
from operative leverage and building efficiencies. All the above will feed into
improving return rations for FLF – RoEs set to reach 11% by FY19E from 2.8% in FY17.

Robust revenue trajectory
We forecast FLF to post revenue CAGR of 20.3% over FY17‐19E. The major growth triggers
include: 1) double‐digit SSSG in Central and Brand Factory – 12% and 10% for Central and
15% and 12% for Brand Factory over FY18 and FY19 respectively; 2)increasing traction in
Power Brands (poised to clock >20% revenue growth in FY18 and FY19 3) increasing
proportion of owned and licensed brands within FLF’s retail sales; and 4) deeper penetration
into unchartered geographies through calibarated addition of Central (5 stores p.a.) and
Brand Factory (8 outlets p.a.).

Chart 17: Revenue trajectory
60,000
54,000
48,000
(INRmn)
42,000
36,000
30,000
Revenues


Another important point is the mix of owned / licensed and third party brands. We agree
that while owned brands are important, a right mix of own, licensed and third party brands
becomes an attractive shopping proposition from a customer perspective – this fact is
concurred by FLF. Accordingly, we do not anticipate the proportion of own and licensed
brands to increase drastically. Over next 2 years, we conservatively expect the proportion
of own and licensend to increase to 39.2% by FY19 from 38.3% in FY17. This would be
largely aided by increasing proportion of Power brands to 64.2% by FY19 from 63.6% in
FY17.

Retail

In FY17, revenue share from Power prands had declined largely due to supply chain related
issue as highlighted earlier. With this anamoly now set to change, we expect the proportion
of own and licensed brands to improve gradually.

Chart 18: Share of owned and licensed brand to gradually rise on increasing of Power brands
70.5 100.0
69.0 80.0
59.7 61.7 60.9 60.8
67.5 60.0
(%)
(%)
66.0 40.0
64.5 20.0 40.3 38.3 39.1 39.2
63.0 0.0
FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E
Share of power brands in own brands Share of 3rd party brands Share of owned & licensed brands


EBITDA and EBTIDA margins on gradual uptrend
We estimate strong EBITDA CAGR of ~24.2% over FY17‐19, driven by margin expansion
fuelled by increasing proportion of own and licensed brands across FLF’s retail outlets. The
company’s own brands fetch ~500 – 700bps higher gross margins versus third party brands.
This, coupled with garnerng operating leverage benefits, we conservatively estimate
EBITDA margin to increase from 9.2% to 9.9% over FY17‐19E.

Chart 19: Robust EBITDA growth and improving EBITDA margins
6,000 10.5
5,400 10.1
4,800 9.7
(INR mn)
(%)
4,200 9.3
3,600 8.9
3,000 8.5
EBITDA EBITDA margins


Improving free cash flows and leverage ratios
FLF, being an integrated play on brands and retail segment, is bound to have inventory days
of >200 days. However, with increasing number of seasons, focus on power brands,

widening distribution coverage and latest designing trends, we envisage inventory days to
reduce from 203 in FY17 to 175 in FY19. This reduction will entail release of working capital,
improve free cash flow and strengthen balance sheet by lowering debt levels.

Steps to prune debt are already underway – stake sale in investee brands and Lee Cooper
has bolstered FLF’s cash reserves which was used to reduce debt.

Chart 20: Reduction in inventory days to pull down overall cash conversion cycle…
225 221
203
185
185 175
145
(in days)
105 93
70
65 50
38
25
Inventory days Cash conversion cycle

Chart 21: … resulting in better free cash flows
3,250
2,650
2,050
(INRmn)
1,450
850
250
Free Cash Flows


Minimal requirement of incremental capital; return ratios to improve
FLF has high operating leverage. Steps to improve margins, throughput per outlet and
augmentation of franchise stores, among others, will lend impetus to return ratios and
improve cash flows. Focus on increasing inventory turns by improving the value proposition
and higher number of fashion seasons will help improve the working capital cycle. With
minimal incremental capital employed, the above levers will propel the return ratios ‐ RoCE
is set to improve to 14.8% in FY19E from 6.9% in FY17 and RoE will spurt to 11.0% in FY19E
from 2.8% in FY17.
Retail

Chart 22: RoCE and RoE to improve by 850bps and 790bps, respectively (FY16‐19E)
17.5
14.0
10.5
(%)
7.0
3.5
0.0
RoCE (pre tax) RoE



Valuations

FLF has outperformed the peers (such as Shopper Stop, ABFRL etc) in terms of SSSG
and is also witnessing improvement in the working capital days led by inventory days
reduction (18 days improvement in FY17). We expect the strong momentum in SSSG to
sustain which will also flow in towards improvement in return ratios. We initiate our
coverage on FLF with ‘BUY/ Sector outperformer’, rating/ recommendation with a
target price of INR416 assigning a 15x EV/EBITDA multiple (25% discount to ABFRL).

FLF is one of the largest branded apparel and physical retailers in India with total retail
space of 5.4mn sq ft spread across 90 cities (ABFRL is spread across ~6mn sq ft) and a
diversified portfolio of 30 brands straddling across different segments (men’s, women’s and
kids wear) and price points. The company has been logging strong SSSG (double‐digit in past
4 quarters) and outperforming industry growth, led by better inventory management, focus
on premiumisation, better store layout, inventory liquidation and strong brands. From its
strong portfolio of own, licensed and investee brands, the company has identified 6 Power
brands to drive growth (Lee Cooper being the largest one), which are currently contributing
~64% of FLF’s total brands (the share is expected to further increase due to higher focus and
better brands). Power brands are margin accretive – as these brands gain scale, operating
leverage sets in leading to better margins. Investee brands, on the other hand, provide an
opportunity for stake sale as the brands grows. On strong performance (robust SSSG),
expected margin improvement (led by higher contribution by own brands and within that
Power brands) and strengthening balance sheet, we estimate RoCE to jump from 6.9% in
FY17 and 14.8 in FY19, further aided by better inventory turns and margin improvement.

We assign target EV/EBITDA multiple of 15x EBITDA to arrive at a target price of INR416.
FLF, being an integrated model, is a much better bet than other retailers as well as ABFRL
which has size as well as stronger brands and retail space. Our target multiple of 15x EBITDA
is at 25% discount to ABFRL’s multiple (Page Industries is trading at 29x FY19E EV/EBITDA) as
the latter has much larger scale, distribution strength as well as return ratios compared to
FLF. However, FLF’s valuations are at a premium to other listed entities (Shopper’s Stop,
Kewal Kiran and Indian Terrain) due to its strong growth performance and diversified brands
portfolio.

Table 11: FLF’s valuation metrics compared with peers
EV/ EBITDA (x) P/E (x) ROE (%)
FY18E FY19E FY18E FY19E FY16 FY17
Future Lifestyle Fashions 14.7 11.4 47.3 28.5 1.2 2.8
Shoppers Stop 13.9 9.3 82.0 26.9 (7.4) (13.0)
ABFRL 26.1 18.4 78.7 37.6 (16.2) 5.4
Titan 30.9 24.2 46.6 36.8 20.5 21.5
Arvind 11.6 9.4 23.8 16.4 12.9 9.7
Indian Terrain 12.7 10.7 22.2 18.5 22.9 23.0
Page Industries 35.5 28.7 55.1 44.3 52.1 45.5
V‐ Mart 20.5 16.6 41.9 32.4 12.7 15.7
Kewal Kiran 16.2 13.6 24.7 20.2 21.9 25.9
Source: Company, Bloomberg, Edelweiss research

Retail

Key Risks

Slower GDP revival leading to lower traction in discretionary spending
Currently, FLF’s target customers are in tier I & II geographies. Clothing and footwear
spending is discretionary and correlated with increase in consumer confidence index, GDP
revival, etc. Any delay in revival of GDP and slowdown in these geographies can impact the
company’s growth. FLF proposes to incrementally mark its presence in tier III & IV
geographies too. Sales in these geographies are linked to pick up in rural growth, which is
again positively impacted during periods of GDP revival, better monsoon, etc. Lack of
support from any of the mentioned factors may hamper FLF’s revenue growth.

Heightened competition
Many foreign brands are enhancing presence in India to cash in on the humongous growth
opportunity. While foreign brands such as Zara, Tommy Hilfiger, etc., have already
established themselves, other brands such as H&M and GAP, among others, are venturing
into India’s fast fashion market. Entry of these foreign brands, more sale period and offers
will keep the competitive intensity high.

Quick change in fashion
While FLF will ensure that it stays ahead of the curve in terms of changing fashion moods
and trends, in the eventuality of the company not being able to keep abreast of latest trends
may lead to reduced sales and lower inventory turnover which can impact profitability.

Improving turnover ratios
FLF has chalked out a plan to improve its inventory turnover ratios. Failure to improve
turnover ratios will lead to higher leverage and may deteriorate balance sheet and hence
earnings.

Threat from e‐commerce
FY15 and FY16 were marked by aggressive discounts and sale seasons by e‐commerce
companies,leading to shift in customers’ loyalty. FLF has BF to counter the threat from e‐
commerce. However, any other unexpected action taken by e‐commerce companies may
may hamper FLF’s SSG and hence its growth.

Related party transactions
FLF deals with some of the other entities of the Future Group such as Future Retail (some of
FLF’s brands are sold in fbb) which raises concerns of inter‐company movement of funds.
However, the company’s overall transaction value with Future Retail is small and also the
transaction happens at an arm length transaction.

Increase in lease rentals
While FLF boasts of having one of the largest store presence, this does result in huge lease
rentals. Any spike in rental costs may dampen margins.


Industry Outlook

Organised players well poised to capitalise on favourable macros

India’s apparel and organised retail industry, being at a relatively nascent stage with
per capita consumption and penetration at extremely low levels, portends humungous
growth opportunities.

Favourable domestic levers are present by way of: (i) rising disposable incomes with
per capita poised to cross USD2,000; (ii) attractive demographics – median age of 27
with ~50% of population in the working age bracket and per capita consumption 1/5th
China’s; (iii) urbanisation – urban population increased to 31.2%, as per 2011 census,
from 28.5% in 2001; and (iv) lower penetration of organised retail — 8% against 85% in
the US.

Our deep dive analysis estimates India’s organised apparel market to catapult to
INR2.3tn by FY25 from INR672bn in FY14, growing at >11% CAGR.

India’s apparel and organised retail industry is at a nascent stage with per capita
consumption and penetration at extremely low levels, entailing humungous
opportunitiesfor growth. The country’s demographics—world’s youngest nation with ~50%
population below 25 years—is an added advantage for the organised retail and apparel
sector. Other growth drivers include rising urbanisation and an expanding overall job market.
a. Rising disposable income levels: Discretionary spending has high correlation with
disposable incomes. Pertinently, disposable income is a function of economic growth, a
lynchpin for new jobs creation. Recovery in discretionary spending will help revive
growth of India’s organised retail market.
The country’s per capita income plays a vital role here. Historically, it has been seen that in
both developed as well as emerging nations the fashion market witnesses disproportionate
growth once country’s per capita crosses the USD2,000 mark.

Fig. 8: Fashion market trends across comparable countries
China Russia Brazil South Korea Singapore
Reached GDP
per capita of 2006 2001 1986 1984 1982
$2000 in (Year)
Trajectory of Revenues Revenues Revenues Revenues Revenues

Retail sales after grew 3x doubled doubled grew 4x in grew 3x in
it reached $2000 from 2002‐12, over the over the the next the next
per capital GDP with higher next next decade decade
growth kicking decade decade
in once per
capital GDP
crossed
$2000 in 2006

Retail

India’s current per capita stands at ~USD1,700. Thus, we believe that India’s fashion market
is at an inflection point and is poised to witness rapid growth in coming years.

Attractive demographics: With a median age of 27, India’s demographics are currently one
of the most enviable in the world. Further, 50% of the population is in the working age
bracket (20‐60 years) and discretionary consumption is poised to grow rapidly.

Chart 23: Favourable demographics; per capita consumption still 1/5thof China’s
50 750
44
600
38
(Years)
450
(USD)
32
300
26
150
20
Italy
UAE
UK
South Africa
France
China
Brazil
India
USA
0
FY05 FY10 FY15
Median age US EU China India

Source: Industry, Edelweiss research

Chart 24: Proportion of population by different age groups
65 years and
above
6%
45‐64 years
15%
0‐24 years
50%
25‐44 years
29%


Urbanisation: Consistent urbanisation, as a trend, has been picking up in India. Urbanisation
happens not only in the need of jobs, but also to improve the standard of living. As per the
2011 census, share of urban population to total residents stood higher at 31.2% (from 28.5%
in 2001). According to a UN report on world population, 40.8% of India's population is
expected to reside in urban areas by 2030.


Chart 25: Proportion of urban income to increase as urbanisation rises
100.0
80.0
60.0
(%)
40.0
20.0
0.0
1990 2001 2008 2030E
Urbal Income Rural Income


Chart 26: Rate of urbanisation set to increase…
45.0
40.0
35.0
(%)
30.0
25.0
20.0
1990 1991 2001 2005 2008 2011 2025E 2030E
Urbanisation Rate


Retail

Chart 27: ... in turn bolstering growth of branded apparels
1,750
1,400
1,050
(mn)
700
350
0
1990 1991 2001 2005 2008 2011 2025E 2030E
Total Population(MN) Urban Population


Lower penetration, per capita consumption indicate strong opportunity: Penetration of
organised retail in India stands at a low 8% versus other developed markets where it is as
high as 85% (US), indicating high growth potential.

Chart 28: Penetration of organised retail at ~8%, one of the lowest globally
100.0
80.0
60.0
(%)
40.0
20.0
0.0
US Taiwan Malaysia Thailand Indonesia China India



Chart 29: Apparels —Largest contributor to organised retail market
Home products
Consumer 3%
Apparel
durables, IT
28%
16%
Pharmacy
2%
Footwear
Jewellery, 5%
watches, etc Others
27%
Foods and 1%
grocery
18%


Apparel market on high growth trajectory
a. Market size huge and attractive: India’s apparel market is fragmented and unorganised
with very few branded players having national or even significant presence. As per
industry estimates, total size of organised apparel market in FY14 stood at INR672bn
(just ~15% of private final consumption expenditure towards clothing and footwear).
We have done a deep dive analysis of projected organised Indian apparel market size
by FY25. Our proprietary analysis indicates that India’s organised apparel market is
poised to grow from INR672bn in FY14 to INR2.5tn by FY25, ~12‐13% CAGR over FY14‐
25.

Table 12: Organised apparel market to clock ~12‐13% CAGR over FY14‐25E
(INRmn) 2014 2015 2016 2017 2018 2019
Indian GDP by Expenditure 112,335,220 124,451,280 136,820,350 151,837,090 167,742,809 185,314,735
Expenditure towards Clothing & Footwear 4,607,500 5,044,590 5,506,480 6,156,396 6,851,633 7,624,971
Household consumption as a % of GDP 4.1 4.05 4.02 4.05 4.08 4.11
% growth 30.2 9.5 9.2 11.8 11.3 11.3
Population of India (In mn) 1,298 1,311 1,327 1,340 1,354 1,367

Per capita spend on clothing (INR) 3,550 3,848 4,150 4,593 5,062 5,577
Size of organised apparel market (INR mn) 672,000 750,883 836,154 953,313 1,081,524 1,226,470

Per capita spend on organised apparel (INR) 518 573 630 711 799 897
Spending on organised apparel as % of total 14.6 14.9 15.2 15.5 15.8 16.1
spending on clothes

Retail

Table 12: Organised apparel market to clock ~12‐13% CAGR over FY14‐25E 9 (Contd.)
(INRmn) 2020 2021 2022 2023 2024 2025
Indian GDP by Expenditure 204,727,410 225,150,027 247,609,905 272,310,272 298,113,076 326,360,830
Expenditure towards Clothing & Footwear 8,485,145 9,399,127 10,411,021 11,531,267 12,713,348 14,015,912
Household consumption as a % of GDP 4.14 4.17 4.20 4.23 4.26 4.29
% growth 11.3 10.8 10.8 10.8 10.3 10.2
Population of India (In mn) 1,381 1,395 1,409 1,423 1,437 1,451

Per capita spend on clothing (INR) 6,145 6,739 7,391 8,105 8,847 9,657
Size of organised apparel market (INR mn) 1,390,284 1,568,236 1,768,303 1,993,170 2,235,632 2,506,734

Per capita spend on organised apparel (INR) 1,007 1,124 1,255 1,401 1,556 1,727
Spending on organised apparel as % of total 16.4 16.7 17.0 17.3 17.6 17.9
spending on clothes
Source: CMIE, Industry, Edelweiss research

Assumptions and methodology used to determineIndia’s organised apparel market:
 We expect India’s GDP by expenditure (herein referred to as India’s GDP) to grow
at ~10% over FY17‐25E.
 Whileexpenditure towards clothing &footwear, as a % of GDP, as at FY16 was 4%,
with increasing per capita consumption.As evinced in other developed and
emerging nations, we expect expenditure towards clothing and footwear to
increase by tad 3bps p.a. to 4.29% by FY25E.
 In the past 4‐5 years, India’s population has been rising at a steady 1% p.a. Going
forward too, we assume1% population growth p.a. till FY25.
 Based on our assumption of India’s GDP growth, proportion of expenditure
towards clothing and population is set to increase, and we expect overall per
capita spend on clothing to increase from INR4,150 in FY16 to INR9,657 – a
conservative increase by 9.8% CAGR over FY16‐25E.
 India’sorganised apparel market, as per various industry sources, was estimated
at INR672bn as at FY14 (source: ABFRL’s corporate presentation). This industry size
indicates that the proportion of organised apparel spending, as a percentage of
overall clothing spending, is a mere ~14.6%. Considering India’s population at 1.3tn
as at FY14, the per capita spend on organised apparel comes to INR518 per head.
Following rising aspirations, overall economic growth, increasing urbanisation, etc.,
we expect per capita spending towards organised retail to increase by 30bps p.a.
over FY15‐25. Considering these growth rates, we estimate per capita spending in
organised apparel market to rise at a modest 11.6% CAGR over FY15‐25.
 Based on these calculations, weestimate the organised apparel market to touch

INR2.5tn by FY25, growing at 12‐13% CAGR over FY15‐25.

b. Growth drivers of domestic apparel market
India’s apparel industry is gaining palpable momentum fuelled by improving
economic conditions, rising disposable incomesand increasing awareness
&availability of brands. Rising penetration of branded offerings in the Indian
market is further aided by entry of international players and expansion by existing
players. Proliferation of online retailing has also deepened penetration of branded
apparels in tier I and II cities. This apart, impulse shopping has been another major
growth driver, luring customers through offers and promotions both offline and
online.

Fig. 9: India’s branded apparel industry – Key drivers
Favourable
demographics
Foray of
Increasing
foreign
penetration
brands
Pick up of Traction in e‐
Value fashion commerce
format space

Source: Edelweiss research

Above analysis clearly highlights that with pick up in discretionary spending, well
established companies should clock ~2x growth compared to GDP. We believe players with
strong parentage, established brands, and best‐in‐class retail distribution network, among
others, will be the first ones to benefit from the above growth drivers. This in turn portends
bright prospects for FLF in ensuing years.

Retail

Company Description

FLF was formed from the de‐merged branded fashion business of Future Consumer
(erstwhile Future Ventures India) and the Lifestyle Fashion business of Future Retail. FLF
commenced operations in May 2013. Starting from a small portfolio, it now boasts of 30
brands spread over retail footprint of 5.4mn sq ft .

Fig. 10: How the fashion giant got created?


Post demerger, FLF has continued to build and strengthen its portfolio as a lifestyle fashion
arm of Future group. The company has evolved as an integrated fashion entity with
presence across key segments within the fashion industry i.e. design to distribution. In its
fourth successful year of operations, FLF has reinforced its position as a leading fashion
retailer with a strong fashion portfolio in India.

Fig. 11: FLF’s milestones


The company derives its strengths in 3 integrated areas – fashion brands, fashion
distribution and investments in fast growing fashion companies.

FLF Retail
 Central: Central is India's first seamless store and the biggest lifestyle retail from Future
Group. It offers discerning shoppers options of choosing from over 1,000 best brands
across categories including apparels, cosmetics, fragrances, eyewear, watches,
accessories, sportswear, toys, mobiles, electronics, home and much more for the entire
family. Central stores are large‐format stores measuring anywhere between 60,000 sq ft
to 230,000 sq ft and offering over 500 domestic & international brands across several
categories. These stores, often located in standalone locations also have food‐courts,
restaurants, supermarkets and electronics superstores built within. The retail format
operates around 2.4 mn sq ft of retail space under this brand. Central stores are located
in large cities like Mumbai, Bengaluru, Hyderabad, Pune, Ahmedabad and Gurgaon, as
well as smaller cities like Baroda, Indore, Vizag and Surat.
 Brand Factory: Brand Factory is India’s largest chain of fashion discount stores that
promises consumers a revolutionary discount shopping experience. It offers more than
200 Indian and International brands at 20‐70% discount, all 365 days a year. Brand
Factory offers customers a wide range of brands and categories at absolutely great
prices in an ambience that is refreshingly enjoyable. Merchandise available at Brand
Factory stores include men’s formals, casuals, youth wear, women’s western wear,
women’s ethnic, sportswear, infant wear, accessories, footwear, luggage and much
more. Brand Factory now stand at 41 stores across 20 cities.
 Planet Sports: Planet Sports is India's largest multi‐brand sports and lifestyle speciality
retail chain that offers the largest collection of International sports and lifestyle brands.
It offers an extensive range of sportswear and equipment across all categories including
running, tennis, training, golf, fitness, basketball, motor sports as well as other lifestyle
products. Other lifestyle products across categories like footwear, apparel, accessories
and sports equipments are also available at the stores. The retail format prides itself for
the sports expertise it has built over time and also for having introduced renowned
brands across sports categories like swimming, tennis, squash, badminton, soccer, golf
and basketball. Planet Sports strives to provide integrated, reliable and cost efficient
sports offerings to Indian consumers and augment India’s sports culture. FLF has now
rationalised its store expansion for Planet Sports.
 I Am in:“I Am In” caters to an enthusiastic Gen Next crowd who are aware of the latest
fashion trends. A brand new concept by Future Lifestyle Fashion, ‘I Am In’ appeals to
consumers who are fashionable, stylish, social media savvy and selfie‐lovers. With a hot
pop of fuschia & tangy orange in one corner of the store to classy basics of black & white
in the other, the collection of ‘I Am In’ will rekindle the spunky and colorful side of
customers. As the world of conversations has moved towards #Hashtags, the ‘I Am In’
stores across key metros feature funky one liners that will make customer feel more
connected to the store. The vibrancy in ‘I Am In’ designs will be the new epitome of
novelty in the fashion space.
FLF Brands
FLF has 30 domestic and foreign brands present across the country. These brands are
available in every segment within the fashion space including, menswear, womenswear, kids
wear, footwear and accessories across various price points. While many of the brands have
been developed by the Future group over a decade, the company also has exclusive
licensees and joint ventures with global brands. While all these brands are sold through the
Future group’s retail chains, they are also distributed through independent distribution
channels, exclusive brand outlets and other modern retail chains.
Retail

Fig. 12: Brief FLF Brands’ repertoire


FLF brands – Key features
1. Cover Story: Cover Story is a fast fashion brand with global design sensibilities led by
Future Style Lab. Objective of the brand is to bring fresh fashion straight from the
Future Style Lab based out of Victoria, London. Essence of Cover Story is resolutely
feminine, classy and experimental. The brand addresses sartorial needs of the
contemporary woman who is a citizen of the world.
2. aLL: It is an apparel brand launched in 2005 exclusively for plus size people. aLL's range
includes formal, ethnic, party and casual wear for both, men and women. Currently,the
brand is available at exclusive brand outlets (EBOs) and also operates through store‐in‐
stores (SIS) formats within Central and Brand Factory.
3. UMM: It is an Italian brand born out of a music label ‐ Underground Music Movement ‐
that has over the years evolved into a fashion brand. FLF owns exclusive rights to
distribute the brand in India.
4. Lee Cooper: This is a global denim brand dedicated to style since 1908. Future Group
owns exclusive license to manufacture and market the brand in categories like denims,
trousers, jackets and shirts.
5. BARE: It is FLF’s largest clothing brand with presence in casual wear, denim‐wear and
kids‐wear. Within Bare, there is something all from kids to adult men and women.
6. Scullers: Scullers is positioned as a brand that offers stylish sporty casual wear. The
brand is popular for its chinos. Scullers is distributed through EBOs as well as MBOs.
7. RIG: This brand offers utility clothing and has products for men, women and kids. RIG's
clothing is unique in style and projects a different attitude from denims to formalwear.
8. Indigo Nation: It offers a range of fashionable office‐wear, club‐wear and weekend‐
wear.The brand has consistently pushed the boundaries of stylish dressing and the
baseline 'young like that' simply reinforces it.
9. Converse: Established in 1908, the Converse brand has earned reputation as being
‘America’s Original Sports Company’. The brand has been associated with a rich
heritage of legendary shoes, such as, the Chuck Taylor All Star shoe, the Jack Purcell
shoe and the One Star shoe. Currently, Converse offers a diverse portfolio including
premium lifestyle men's and women's footwear and apparel.

10. Spalding: Spalding is an American sporting goods brand founded by Albert Spalding in
Chicago, Illinois, in 1876. It caters to the sports goods category and also offers a wide
range of footwear options designed specifically for sportsmen.
11. Daniel Hechter: Daniel Hechter is a high‐end French brand and is offered through an
exclusive license in India. The brand offers formal, semi‐formal and casual wear for
men. Launched in India in 2009, Daniel Hechter is available through EBOs and other
departmental stores.
12. Urban Yoga: Urban Yoga offers yoga apparel and accessories that compliments active
lifestyle co‐created with yoga practitioners.
13. Lombard: A men's formal wear brand, Lombard offers suits, shirts, trousers and
accessories like cufflinks, wallets and belts. Lombard is also being distributed through
the general trade and MBOs.
14. John Miller: FLF’s flagship brand, John Miller is in men's clothing. John Miller is
available through EBOs and MBOs. It offers a range of everyday corporate wear and
accessories for young male executives.
15. Mohr: Mohr is a premium womenswear brand comprising Indo‐Western clothing. The
brand offers more than 200 styles available in select Central stores. The collection
include dresses, tops, T‐shirts, tunics and trousers.
16. Jealous 21: Jealous 21 is one of India's leading exclusive women's wear brand offering
an elaborate range of hip‐fit jeans, tops and tee shirts.
17. Famozi: Famozi redefines designing footwear to suit the fashion interests of the global
style conscious consumer. The footwear collection is largely targeted at the fashion
conscious men, across various age groups. The styling for shoes is partially done in Italy,
indigenised for the Indian market, the target audience.
18. Urbana: Urbana is a premium formalwear brand offering a range of finishes like
wrinkle‐free cotton and linens, anti‐spill shirts, odor‐resistant shirts, sweat‐free
trousers. The brand offers a complete ensemble of suits, shirts, trousers and
accessories.
19. Desi belle: The brand seamlessly combines cuts, color, embellishments and
contemporary sensibilities. Classic bandhani, ikat, aztec and polka‐dotted prints are
brought to life with bright colours, while the monochromatic aesthetic is played up with
quirky illustrations.
20. Clarks: Launched in 2011, Clarks was part of a `joint venture between Future Group and
C.& J.Clark International. The brand offers a range of branded boots, sandals and shoes
for men and women. The brand already has EBOs across the country
21. Mother Earth: The brand focuses on design led fashion and home products including
furnishings, linens, furniture gifts and decor. Mother Earth sources traditionally hand‐
crafted products from artisans from all over India and provides them a market for their
livelihood and crafting skills.
22. Tresmode: Trèsmode was launched in the Indian market in 2007 with the first flagship
store in Mumbai. Within 8 years, Trèsmode has not only created a presence across the
country, but also internationally. With young, cool and fashion forward designs, the
brand is known for keeping up with the latest trends as seen on the ramps in London,
New York, Paris and Milan.
23. Giovani: A quintessential suits and jackets brand, Giovani is for the man who dons
many roles and celebrates each of them with ease. Giovani also offers a niche and
unique collection for the more discerning woman with an elegant sense of style.
Retail

24. Morpankh: Morpankh re‐views, re‐configures, re‐freshes and re‐creates what is
'traditional'. The brand propagates the concept of a capsule wardrobe and consists of a
wide range of ready to wear 'individual' & 'interchangeable' Indian ethnic pieces.
25. Peperone: Peperone came to fruition in 2010. The collection of these classy handbags
unveiled its first collection at the India International Leather Fair 2010 in Chennai. Since
then, the brand has attracted a loyal following.
26. Mineral: Mineral is post‐modern women’s clothing. It’s a smart design recombination
of Indian fabrics within a Western construct which is what sets it apart from the rest.
Mineral's clothing is not defined by time of the day or occasion, rather it is meant for all
seasons.
27. Celio: A French brand,Giovaniis operated on joint venture basis. The brand offers a
wide selection of casual wear and denim‐wear with a chain of 30 EBOs.
28. Ceriz:Ceriz echoes women’s signature style – eternally new, eternally fresh, and
effortlessly glamorous. The Ceriz woman is Indian and global, stylish and sensible, high
fashion and street.
29. Hey!: This brand is all about ‘her’. Chic is the philosophy that builds the inspiration for
Hey!. Hey! is a casual wear brand for the young fashionista who doesn't take casual
wear so casually.

Future Group
FLF is a part of >INR320bn Future Group, focussing not only on fashion but also on Food and
Home. Apart from FLF, other entities within Future Group are Future Retail, Future
Consumer, Future Enterprises and Future Supply Chains.

 Future Retail:Future Retail is the flagship company of Future Group. Through multiple
retail formats, such as, Big Bazaar, Easyday, fbb, Foodhall, HomeTown and ezone,
Future Retail is the big daddy of India’s modern trade story.

 Future Consumer: The entity is India’s first sourcing‐to‐supermarket food company.
Under Future Consumer’s spectrum, the company sources best quality commodities
from the world over, comprising extensive portfolio of established brands in food and
HPC space, builds urban convenience stores for key metros and cash‐n‐carry rural
distribution models for other cities across India.

 Future Enterprises: While Future Retail caters to the front end with its multiple retail
formats, Future Enterprises (FEL) forms the backbone and links the retail arm with its
infrastructure.FEL develops, owns and leases the retail infrastructure for the Group. FEL
also holds the Group’s investments in subsidiaries and joint ventures including
insurance, textile manufacturing, supply chain and logistics.

 Future Supply Chains:This company manages the logistics‐from warehousing, storage
to distribution of raw materials and products. Future Supply Chains (FSC) is India's first
fully integrated and IT enabled end‐to‐end supply chain and logistics company in India
with capabilities in handling modern warehousing, express logistics, cold chain and e‐
commerce logistics.FSC caters to corporates in food & beverages, lifestyle, consumer
electronics & high tech, automotive &engineering, home & furniture, healthcare,
general merchandise and e‐commerce. Each category has a distinct supply chain with
its own distinct requirements that needs customised solutions.FSC has been a pioneer
and leader in modernising logistics and supply chain in India having implemented

cutting‐edge and contemporary supply chain management practises in India through
implementation of global best practises, indigenised and best adapted for Indian
conditions.

Related party transactions
As against what is perceived, related party transaction (refer list in Appendix II) of FLF within
Future Group companies and within Key Managerial Personnel is quite limited and is at an
arm’s length. The below table presents a snapshot of key related party transactions
undertaken by FLF in past 3 years along with broad transaction rationale/details.

Table 13: FLF’s related party transactions
INR mn FY15 FY16 FY17
Revenue from operations
Subsidiaries 88.5 54.9 35.2
Associates / JVs 32.3 8.4 4.1
KMP with significant influence 1,707.8 956.0 1,653.0
Purchase of Goods and services
Associates / JVs 562.9 483.8 514.9
KMP with significant influence 994.6 545.3 1,424.7
Investments made
Associates / JVs 100.0 81.7 135.0
Outstanding receivable as at March
Associates / JVs ‐ ‐ 305.0
KMP with significant influence 2,032.3 1,063.6 1,075.1
Payable
Subsidiaries 46.8 145.8 ‐
Associates / JVs 379.9 342.6 ‐
KMP with significant influence ‐ 2.5 144.5

Retail

Management Overview

Board of Directors

Mr. Kishore Biyani, Group CEO: Mr. Biyani is the founder and Group CEO of Future Group.
He is widely credited as the pioneer of modern retail industry in India. Over the past two
decades he has created and lead some of India's most popular retail chains like Big Bazaar,
Central, Brand Factory, Foodhall, fbb, Home Town , eZone, among others. Over time, various
retail chains like Nilgiris, Aadhaar, Easy Day, fabfurnish.com, and others have also become
part of Future Group. These retail chains are present in around 240 cities across India and
attract over 370mn customers footfalls annually. Simultaneously, he has also led the
creation of a wide portfolio of consumer goods brands in fashion, food and electronics space,
that are distributed through the group's retail chains and various other modern retail
networks in the country. The group also made substantial investments in technology,
analytics, food processing, logistics and warehouse networks, provides mentorship and
investments to many Indian entrepreneurs and brands and operates joint ventures with
dunnhumby, Clarks, Generali Group, Hidesign, among others.

Mr. Rakesh Biyani, Non Executive Director: Mr. Rakesh Biyani has been associated with
Future Group for over 20 years and is actively involved in the growth of various business
formats of the Group. He has led the management and expansion of the Group’s flagship
formats like ‘Pantaloons’, ‘Central’ ‘Big Bazaar’ and ‘Food Bazaar’. Mr. Rakesh Biyani is
actively involved in Category Management, Supply Chain & Logistics Management, Retail
Stores Operations and Information Technology. He is a commerce graduate from HR College
of Commerce & Economics, Mumbai and has done an Advanced Management Program from
Harvard Business School.

Ms. Avni Biyani, Non Executive Director: Ms. Avni Biyani is the Concept Head of Foodhall,
the specialty food superstore from Future Group. She formally joined Future Group in 2011
as part of its food business and over the years has established Foodhall as India’s premium
lifestyle food destination.She is also a part of Future Group’s Integrated Food Strategy
Council and is responsible for ramping up the group's foray into the premium food segment.
She takeskeen interest in the fashion & lifestyle businesses of the group and is closely
involved with the launch of India’s first fast fashion brand – Cover Story.

Mr. C. P. Toshniwal, Non Executive Director: Mr. Toshniwal started his journey with Future
Group in May 1997 and has over 25 years of rich managerial experience. He has strong
domain knowledge of the Indian Retail Industry with good understanding of Information
Technology Systems with proven ability in setting up systems and procedures for Robust
Management Accounting. He has rich experience in the Corporate and Strategic Planning,
Financial Planning & Restructuring, Risk Management System and Process Implementation,
Mergers, Amalgamations, Takeover of Business Enterprises, Raising Capital through
innovative financial products. He is a very good leader with strong relationships with
stakeholders and employees. He was awarded the Best CFO Award‐2011 in the Service
Sector Category by The Institute of Chartered Accountants of India (ICAI). He has also been
awarded “CFO100 Roll of Honour” by CFO India for his extraordinary performance as senior
finance leader in retail Industry. Mr. Toshniwal also holds the position of Chairman of
Finance Committee of Retailer Association of India. He is a qualified CAand CS.


Management Team

Mr. Vishnu Prasad, Head – Central: Mr Prasad has over 30 years of sales and retail
experience. He joined the Future Group in 2001 and set up the Big Bazaar stores in the
South before moving to head the Central business.

Ms. Rachna Agarwal, Head – Brands: Ms. Agarwal has over 22 years of experience in brand
management, information system management & supply chain management. She has been
serving as Head of FLF Brands since 2008.

Mr. Hetal Kotak, Head – Lee Cooper & aLL: Mr Kotak has over 17 years of experience across
branded apparels and retail. In the past, he was Brand Director and Chief Operating Officer,
Color Plus and Park Avenue at Raymond.

Mr. Suresh Sadhwani, Head – Brand Factory: Mr Sadhwani has over 20 years of rich retail
experience. He has been heading Brand Factory since 2014. Since then the format has
doubled its turnover and added more than 20 new stores across India.

Ms. Manjula Tiwari, Head – Cover Story: Ms. Tiwari has over 22 years of experience in the
fashion& lifestyle industry. She has launched and developed a range of high street brands
like Esprit and Benetton bringing significant knowledge of Indian customers. At FLF, she
heads Future Style Lab and oversees Cover Story.

Mr. Kaleeswaran Arunachalam, Chief Financial Officer: Mr Arunachalam has over 15years
of experience in the Food & Fashion industry. Previously, he worked with Mondelez
International, Aditya Birla Nuvo and TVS Motor. Mr. Arunachalam is a qualified Chartered
Accountant from ICAI and holds the Master of Business Administration (Finance) from
Singapore.

Retail

Annexure I

SWOT Analysis
Strengths
 FLFis well‐positioned in the Indian apparel market with a portfolio of established brands
along with wide retail presence. The company caters to consumers across segments,
from luxury to value, straddling men, women and kids in the formal and casual space.
 It is on track to gain traction through rapid ramp up in the e‐commerce platform.
 FLF has developed a strong product portfolio which boasts of high quality, constant
innovation, has a strong internal design setup, extensive distribution network and an
agile & robust supply chain.
 FLF has a strong control and hiring system that nurtures talent ably supported by robust
people development processes, mentoring and employee engagement programmes.

Weaknesses
 Lower inventory turnover primarily owing to the nature of business; however this is set
to correct.
 Elongated cash conversion cycle owing to nature of business; however, FLF is on track
to reduce its leverage.

Opportunities
 Rising incomes, favourable demographics, increasing disposition towards fashion,

greater access and awareness about brands will enable a shift towards branded fashion
across the country.
 Immense growth opportunties in tier 2/3 cities, which remain under‐penetrated with
respect to brands and organised retailers. Gauging such humungous opportunities, FLF
is strategically focusing on expanding in these geographies.
 The emerging e‐commerce channel also opens up opportunities for the branded
apparel business to reach out to a larger base of consumers.
 Burgeoning opportunities in the super‐premium segment as more and more affluent
consumers are seeking international brands and global experiences.
 Post implementation of GST, there will be a likely shift from unorganised to organised
segments.

Threats
 Retail space in India is limited to key markets and few successful malls.
 Share of online business is growing rapidly and traditional channels of distribution are
reeling under pressure.
 There is a threat to its talent pool from competition and increasingly from new
international players and e‐commerce companies in industry.


Annexure II

List of related parties

Subsidiaries
 Elisir Lifestyle
 Future Style Lab
 Indus‐League Clothing
 Indus Tree Crafts
 Indus Tree Producer Transform (100% subsidiary of Indus Tree Crafts)
 Rachika Trading

Associate Companies
 Eclat Life Style
 KFC Shoemaker
 Mineral Fashions
 Resource World Exim
 Turtle

Joint Ventures
 Celio Future Fashion
 Clarks Future Footwear
 Holii Accessories

KMP with significant influence
 Future Corporate Resources
 Future Enterprises
 Future Ideas Company

Retail

Financial Statements

Key assumptions Income statement (INR mn)
Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E
GDP(Y‐o‐Y %) 7.2 6.5 7.1 7.7 Net revenues 33,002

38,771
45,783
56,086
Inflation (Avg) 4.9 4.8 5.0 5.2 Cost of materials 20,455

24,452
28,783
35,148
Repo rate (exit rate) 6.8 6.3 6.3 6.3 Gross profit 12,547

14,319
17,000
20,938
USD/INR (Avg) 65.0 67.5 67.0 67.0 Employee expenses 1,886 2,049 2,381 2,916
Company assumptions Rent expense 3,727 4,157 4,900 5,975
Revenue assumption Advertisement & sales costs 705 900 1,065 1,361
Central ‐ SSS growth (%) 10.3 18.1 12.0 10.0 Electricity expenses 923 951 1,145 1,402
Brand factory ‐ SSS growth (%) 8.4 16.6 15.0 12.0 S G &A expenses 2,055 2,682 3,113 3,758
Central ‐ Total stores 31 35 40 45 Total operating expenses 9,295
10,739
12,604
15,412
Brand factory ‐ Total stores 42 53 61 69 EBITDA 3,252 3,580 4,396 5,526
Share of own and licensed brands 40.3 38.3 39.1 39.2 Depreciation & amortization 1,614 1,869 1,848 1,932
Cost assumptions EBIT 1,638 1,710 2,548 3,594
COGS as % of sales 62.0 63.1 62.9 62.7 Less: Interest Expense 1,352 1,172 877 786
Overall Staff costs as % of sales 5.7 5.3 5.2 5.2 Add: Other income 58 66 70 73
Overall A&P as % of sales 2.1 2.3 2.3 2.4 Add: Exceptional items ‐ (3) ‐ ‐
Overall Electricity exp. as % of sales 2.8 2.5 2.5 2.5 Profit before tax 450 602 1,740 2,881
Overall Rent exp. as % of sales 11.0 11.3 10.7 10.7 Less: Provision for Tax 155 145 487 807
Financial assumptions Less: Minority Interest ‐ ‐ 10 12
Standalone Tax rate (%) 34.5 24.0 28.0 28.0 Reported Profit 295 457 1,243 2,062
Overall Dep. as % of gross block 6.5 7.9 8.8 8.2 Less: Prior Period (Net of Tax) 107 ‐ ‐ ‐
Overall Debtor days 28 20 18 16 Less: Exceptional Items (Net of Tax)
‐ (3) ‐ ‐
Overall Inventory days 221 203 185 175 Adjusted Profit 188 460 1,243 2,062
Overall Payable days 156 153 153 153 No. of Shares outstanding (mn) 190 190 190 190
Overall Capex (INR mn) 686 1,655 2,475 2,510 Adjusted Basic EPS 1.0 2.4 6.5 10.8
No. of Dil. shares outstanding (mn) 190 190 190 190
Adjusted Diluted EPS 1.0 2.4 6.5 10.8
Adjusted Cash EPS 9.5 12.3 16.3 21.0
Dividend per share (DPS) 0.4 0.8 0.7 0.7
Dividend Payout Ratio (%) 25.7 33.2 10.0 6.0
‐ ‐ ‐ ‐
Common size metrics‐ as % of revenues
Year to March FY16 FY17 FY18E FY19E
Cost of materials 62.0 63.1 62.9 62.7
Employee expenses 5.7 5.3 5.2 5.2
Rent and lease 11.3 10.7 10.7 10.7
S G &A expenses 6.2 6.9 6.8 6.7
Total operating expenses 28.2 27.7 27.5 27.5
Depreciation and Amortization 4.9 4.8 4.0 3.4
Interest expenditure 4.1 3.0 1.9 1.4
EBITDA margin 9.9 9.2 9.6 9.9
EBIT margin 5.0 4.4 5.6 6.4
Net profit margins 0.6 1.2 2.7 3.7
Growth metrics
Year to March FY16 FY17 FY18E FY19E
Revenues 5.3 17.5 18.1 22.5
EBITDA (1.5) 10.1 22.8 25.7
PBT 91.7 33.7 189.2 65.5
Adjusted Profit 274.5 144.8 170.5 65.8
EPS 267.8 144.3 170.5 65.8

Balance sheet (INR mn) Cash flow metrices
As on 31st March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E
Share capital 379 380 380 380 Operating cash flow 3,583 5,117 4,390 5,070
Reserves & surplus 15,853

16,350
17,444
19,358 Financing cash flow (2,481) (5,841) (1,177) (2,185)
Shareholders funds 16,232

16,730
17,824
19,738 Investing cash flow (1,553) 876 (2,405) (2,437)
Minority Interests ‐ ‐ 10 22 Net cash flow (451) 152 808 448
Long term borrowings 8,990 4,701 4,701 3,951 Capex (1,384) (2,481) (2,475) (2,510)
Short term borrowings 2,416 2,123 1,973 1,473 Dividends paid (91) (91) (149) (148)
Total Borrowings 11,405
6,824 6,674 5,424
Long Term Liabilities & Provisions 702 833 875 918 Profitability & liquidity ratios
Deferred Tax Liability (net) 709 649 649 649 Year to March FY16 FY17 FY18E FY19E
Sources of funds 29,048
25,036
26,032
26,751 Return on Avg. Equity (ROAE) (%) 1.2 2.8 7.3 11.0
Gross Block 16,145

18,242
20,667
23,128 Return on Cap. Emp. (pre‐tax) (%) 6.0 6.9 10.9 14.8
Net Block 11,995

12,644
13,251
13,814 Inventory days 221 203 185 175
Capital work in progress 1,862 1,898 1,898 1,898 Debtors days 28 20 18 16
Intangible assets 433 99 120 134 Payable days 156 153 153 153
Total Fixed Assets 14,290
14,642
15,269
15,847 Cash Conversion Cycle 93 70 50 38
Non current investments ‐ 70 70 70 Current Ratio 2.0 1.8 1.7 1.6
Current investments 3,754 363 363 363 Gross Debt/EBITDA 4 2 2 1
Cash and cash equivalents 146 298 1,105 1,553 Gross Debt/Equity 0.7 0.4 0.4 0.3
Inventories 13,050
14,180
14,997
18,707 Adjusted Debt/Equity 0.7 0.4 0.4 0.3
Sundry debtors 2,418 1,889 2,627 2,290 Interest Coverage Ratio 1.2 1.5 2.9 4.6
Loans & advances 5,586 5,954 5,624 5,942
Other Current Assets 571 144 151 158 Operating ratios
Total current assets (ex cash) 21,625
22,166
23,399
27,098 Year to March FY16 FY17 FY18E FY19E
Trade payable 9,216
11,331
12,800
16,667 Total asset turnover 1.1 1.4 1.8 2.1
Other Current Liabilities & ST Prov. 1,552 1,172 1,375 1,513 Fixed asset turnover 2.6 3.1 3.5 4.1
Total current liabilities & prov. 10,767

12,503
14,175
18,181 Equity turnover 2.0 2.4 2.6 3.0
Net current assets (ex cash) 10,858
9,663 9,224 8,917
Uses of funds 29,048
25,036
26,032
26,751 Valuation parameters
Book value per share 86 88 94 104 Year to March FY16 FY17 FY18E FY19E
Adjusted Diluted EPS (INR) 1.0 2.4 6.5 10.8
Free cash flow Y‐o‐Y growth (%) 267.8 144.3 170.5 65.8
Year to March FY16 FY17 FY18E FY19E Adjusted Cash EPS (INR) 9.5 12.3 16.3 21.0
Reported Profit 295 457 1,243 2,062 Dil. Price to Earnings Ratio (P/E) (x) 312.9 128.1 47.3 28.5
Add: Depreciation 1,614 1,869 1,848 1,932 Price to Book Ratio (P/B) (x) 3.6 3.5 3.3 3.0
Add: Interest Expense (net of tax) 886 890 632 566 Enterprise Value / Sales (x) 2.1 1.7 1.4 1.1
Others 636 587 186 160 Enterprise Value / EBITDA (x) 21.5 18.3 14.7 11.4
Less: Changes in WC (152) (1,315) (481) (351) Dividend Yield (%) 0.1 0.3 0.2 0.2
Operating cash flow 3,583 5,117 4,390 5,070
Less: Capex 1,384 2,481 2,475 2,510
Free cash flow 2,199 2,635 1,915 2,560

Peer comparison valuation
Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E
Future Lifestyle Fashions 926 47.3 28.5 14.7 11.4 7.3 11.0
Titan Company 7,346 47.5 37.5 31.5 24.6 23.5 25.3
Aditya Birla Fashion and Retail 2,054 78.7 37.6 24.9 17.5 14.6 24.8
Shoppers Stop 449 85.8 28.2 14.3 9.6 (2.6) 13.3
Wonderla Holidays 315 35.8 24.5 18.0 12.4 12.6 16.5
Source: Edelweiss research

Retail

Additional data
Directors data
Mr. Kishore Biyani Group CEO, Future Group Dr. Darlie Koshy Non‐Executive Independent Director
Mr. Rakesh Biyani Non Executive Director Mr. Bijou Kurien Non‐Executive Independent Director
Ms. Avni Biyani Non Executive Director Ms. Sharda Agarwal Non‐Executive Independent Director
Mr. C.P. Toshniwal Non Executive Director Ms. Sukanya Kripalu Non Executive ‐ Independent Director
Mr. Shailesh Haribhakti Non‐Executive Independent Director
Auditor ‐ M/s NGS & Co., LLP
* as per last annual report

Top 10 holdings
Perc. Holding Perc. Holding
Pionner Investment Fund 8.17 Bennett Coleman & Co 4.27
TIMF Holdings 2.68 L&T Investment Management 2.33
India Opportunities Growth Fund 2.33 Bhanshali Lata 1.84
Reliance Capital Trustee Co 1.69 HSBC Holdings Plc 0.71
L&T Mutual Fund 0.50 IDFC Mutual Fund 0.32
*as per last available data

Bulk Deals
Date Acquired / Seller B/S Qty Trades Price
26‐Dec‐16 Future Lifestyl Future Corporate Resources Ltd Buy 30570108 123
26‐Dec‐16 Future Lifestyl Future Enterprises Ltd Sell 30570108 123
31‐Mar‐17 Future Lifestyl Pioneer Investment Fund Buy 15527950 254.9
31‐Mar‐17 Future Lifestyl Pi Opportunities Fund 1 Lt Sell 11627950 254.9
31‐Mar‐17 Future Lifestyl Pi Opportunities Fund I Sell 3900000 254.9
*in last one year
Insider Trades
Reporting Date Acquirer / Seller B/S Qty Traded
28‐Dec‐16 FUTURE CORPORATE RESOURCES LIMITED Buy 30570108
28‐Dec‐16 Future Enterprises Limited Sell 30570108
20‐Mar‐17 Shailesh Haribhakti Buy 300000
5‐Apr‐17 Future Corporate Resources Limited Sell 60438173
5‐Apr‐17 PIL Industries Limited Sell 8858262
5‐Apr‐17 Future Capital Investment Pvt. Ltd. Sell 2820000
5‐Apr‐17 Weavette Business Ventures Limited Sell 1808708
6‐Apr‐17 PIL Industries Limited Sell 8858262
6‐Apr‐17 Future Capital Investment Pvt. Ltd. Sell 2820000
6‐Apr‐17 Weavette Business Ventures Limited Sell 1808708
10‐Apr‐17 Ryka Commercial Ventures Pvt. Ltd. Buy 10190748
10‐Apr‐17 Central Departmental Stores Pvt. Ltd Sell 2966570
10‐Apr‐17 Gargi Business Ventures Pvt. Ltd. Sell 4724178
*in last one year


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES
LIMITED, ou=HEAD RESEARCH, cn=ADITYA
Aditya Narain
NARAIN,
serialNumber=e0576796072ad1a3266c279
90f20bf0213f69235fc3f1bcd0fa1c30092792
Head of Research
NARAIN
c20, postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8
aditya.narain@edelweissfin.com e0c89e548e5001b4f8141cf423fd58c07b02,
st=Maharashtra
Date: 2017.07.07 14:04:47 +05'30'

Coverage group(s) of stocks by primary analyst(s): Retail

Aditya Birla Fashion and Retail Ltd, Future Lifestyle Fashions, Jubilant Foodworks, Shoppers Stop, Titan Company, Wonderla Holidays

Recent Research
Date Company Title Price (INR) Recos

06‐Jul‐17 Retail Strong recovery in SSG;
ResultPreview

05‐Jul‐17 Titan Novel nudge, thriving share to 536 Buy
Company prop up growth;
Visit Note

29‐May‐17 Jubilant Tough quarter; surgery 940 Hold
Foodworks underway with new CEO in
place; Result Update

Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation

Rating Expected to
Buy Hold Reduce Total

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12‐month period
* 1stocks under review
Hold appreciate up to 15% over a 12‐month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12‐month period
Market Cap (INR) 156 62 11
One year price chart
430
360
290
(INR)
220
150
80
Apr 17
Sep 16
Feb 17
Mar 17
Dec 16
Jun 17
Jul 16
Jul 17
Aug 16
Oct 16
Nov 16
May 17
Jan 17
Retail
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INITIATING COVERAGE

While Central is a large format departmental store, Brand Factory is helping counter e‐ Others 19.4 19.7 19.9

FUTURE LIFESTYLE FASHIONS

Head ‐ Lee Cooper and aLL Hetal Kotak 17 years of experience across branded apparel and retail

FY14 Owned FY17 Owned

64.5 20.0 40.3 38.3 39.1 39.2

China Russia Brazil South Korea Singapore

Trajectory of Revenues Revenues Revenues Revenues Revenues

Population of India (In mn) 1,298 1,311 1,327 1,340 1,354 1,367

Size of organised apparel market (INR mn) 672,000 750,883 836,154 953,313 1,081,524 1,226,470

Population of India (In mn) 1,381 1,395 1,409 1,423 1,437 1,451

Size of organised apparel market (INR mn) 1,390,284 1,568,236 1,768,303 1,993,170 2,235,632 2,506,734

 Based on these calculations, weestimate the organised apparel market to touch

 Rising incomes, favourable demographics, increasing disposition towards fashion,

ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to

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