IndiaNivesh report on retail sector ‘Retail, Value Fashion Retailing’

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Fashion brands must go beyond just the looks

According to IndiaNivesh analyst Mr. Rajiv Bharati

“IndiaNivesh begins retail journey by exploring smaller retailers who have displayed a little better control in the Indian retail space, which has had very few successful narratives. The shakeup in the Tier 1 market due to the aggressiveness of online retailers is still relatively lower in Tier 2, 3 and 4 markets (especially eastern Uttar Pradesh). Further, maintaining a tight leash on the monthly operating cost at Rs 120-170 per sqft, i.e.  14-20% of the revenue, is difficult to breach even for an online retailer (Amazon’s shipping + fulfillment cost is at 43% of revenue). The lucrativeness of the model has invited aggressive competition from home-grown entrepreneurs who have found external funding to open stores. We believe it’s a repeat of what we have seen earlier in Tier 1 markets, where store opening took precedence over store level profitability. We are also witnessing cracks in the challengers’ model with payable days getting abnormally elongated. Further, the sharp drop in productivity in the recent past will help the leader consolidate, as the falling profitability will keep the expansion plans of competitors under check.”

“Secondly, off-price retailing has been one of the most resilient retailing models globally where the big-box retailers have shut stores in droves. We like the space as it caters to the value seeking Indian customers with a business model that thrives on the mistakes of big brands. We are initiating coverage on three retailers, viz. V-Mart, V2 Retail and FLFL with a BUY rating.”

Company-wise investment synopsis

V-Mart Retail Ltd

We like V-Mart for its extremely tight control on cost and working capital over the years; it had not raised any capital since its IPO days and became debt-free in 2017. It has also closed very few stores in the past. We want to highlight that V-Mart is growing well below its potential, as it can achieve ~490 stores instead of the 400 it is aiming for by FY23.

 V2 Retail Ltd

We like V2 Retail, the distant cousin of V-Mart, which is currently where V-Mart was 7 years ago and is rapidly narrowing the gap (in terms of store count). V2 has still to prove its potential in becoming a self-sustainable retailer, as it has grown on external capital (equity) thus far. FY20/21 should be the year, when it becomes self-sustainable, helping it to bridge the historical discount on valuation it gets as compared to V-Mart.

 Future Lifestyle Fashions Ltd (FLFL)

We prefer companies that are relatively Amazon-proof, have a tight control on cost and have an expansion strategy that is largely funded by internal cash flow. We like FLFL for its Brand Factory business, which is slowly taking over the heavy lifting from Central, and which thrives on the mistakes made by brands. It also is in line with the trend seen globally where e-commerce is eating into the market share of stores like Bloomingdales and Macy’s, while off-price retailers like TJ-Maxx and Marshalls are thriving.