Moneycontrol
Sep 13, 2017 12:51 PM IST | Source: Moneycontrol.com

Indian Terrain Fashions: A weak first quarter doesn’t tarnish the long-term story

At 18.4x FY19 projected earnings, the company’s fundamentals definitely warrant attention for accumulation.

 
 
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Indian Terrain Fashions (ITF), a stock we initiated coverage on in the past, reported a healthy growth in revenue in the quarter ended June 2017 vis-à-vis the same quarter last year. However, the same didn’t reflect in the bottom–line on account of margin pressure.

Should investors worry or capitalise on the weakness?

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The growth in Q1FY18 turnover was attributed to an uptake by wholesale channels till mid-May and pre-GST sales pickup in June 2017. The menswear segment led the pack with a gain in market share, whereas the boyswear segment also managed to double its revenues.

Extension of the ‘end of season sale’ period (resulting in more discounts), increased marketing and personnel spends to enhance brand visibility, and de-stocking by traders took a toll on ITF’s EBITDA margins.

 

Does the result weakness alter the long-term story?

ITF remains on course to achieve its objective of doubling its sales from the boyswear category by FY19 through product launches in exclusive brand outlets (EBOs) and large format stores (LFS) throughout India. Furthermore, with 85 new outlets likely to be set up by the end of FY18 in tier 1/2/3 cities, the company’s retail store count will increase by 64 percent by the end of the year (from 133 outlets as on June 30, 2017).

With apparel supplies getting back to normalcy by the end of August 2017 and festive season promotional offers expected to kick off by September end (and anticipated to continue for the remainder of FY18), ITF is gearing up for a better performance in the second half of this fiscal by leveraging on the brand appeal of its menswear range.

Moreover, a GST rate of 12 percent on garments exceeding Rs 1,000 in value is largely tax-neutral, and, therefore, won’t materially affect ITF.

 

 Valuation

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Though ITF has managed to align its processes to the new tax regime, we expect the company’s Q2FY18 performance to be somewhat subdued owing to challenges on fronts such as inventory management, supply channel stabilization, and subdued consumer demand at the start of the quarter. The company’s operating margin profile may not improve substantially in the ongoing fiscal because of a relatively weak first half, in addition to higher advertising and employee costs.

At this point, we have not made any material change to our previous estimates. At 18.4x FY19 projected earnings, the company’s fundamentals definitely warrant attention for accumulation.

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