- ABFRL will acquire 51 percent stake in Finesse
- High marketing investments would be necessary
- The stock can be looked at despite being expensive
Aditya Birla Fashion and Retail (ABFRL) seems to be pretty buoyant about a new category - ethnic wear. After taking over Jaypore and TG Apparel in June, ABFRL’s deal with Finesse is worth taking note of.
Considering the growth potential for ethnic wear in India, these inorganic strategies will bolster ABFRL’s revenue. However, in the near term, because of branding and expansion-related investments, profitability may be impacted.
Notwithstanding this and the stock’s elevated valuation, we are bullish on ABFRL.
Incorporated in 2007, Finesse sells bespoke ethnic wear, occasion wear, ceremonial contemporary apparel, accessories and footwear (for both men and women) under the renowned brand 'Shantanu & Nikhil'. It operates five stores.
How does ABFRL benefit?
Since Finesse's offerings pertain to men and women, inclusion of its products in ABFRL's Madura (for men) and Pantaloons (primarily for women) outlets can be done with ease through allocation of some store space. This should help achieve better visibility for ABFRL's existing brands as well (such as Van Heusen, Peter England, Allen Solly, Louis Phillipe, Pantaloons).
As on March 31, 2019, ABFRL had a diverse retail network spanning 7.5 million square feet. The company operates close to 2,714 stores (exclusive brand outlets) across 750 Indian cities and towns. The company’s products are also available in 18,000+ multi-brand outlets and 5,000+ points-of-sale in department stores. Consequently, introducing ethnic wear in such markets would be somewhat easier.
‘Shantanu & Nikhil’ happens to be one of the most sought after designer brands in India. On the back of rising disposable incomes, increased awareness about style/fashion and higher inclination to splurge on festivals/occasions/weddings, super-premium ethnic brands are gaining traction at a brisk pace. ABFRL, therefore, has a good chance to attract more footfalls at its outlets.
ABFRL’s Pantaloons brand predominantly includes women’s clothing at affordable to entry-level premium rates. The company’s brands under Madura pertain to menswear and fetch higher realisations. With ‘Shantanu & Nikhil’ in its kitty, the company would move up a level higher on the pricing ladder.
Deeper presence in ethnic wear
In June, ABFRL acquired majority stakes in Jaypore and TG Apparel. Finesse’s acquisition would help ABFRL cover couture ceremonial apparel (customised and tailored to a customer’s needs) and pret lines (ready-to-wear clothing).
How does Finesse benefit?
Though Finesse has its own set of dedicated buyers, it cannot expand its operations beyond a point due to monetary limitations. As a result, it makes more sense for it to enter into a tie-up with a large retailer like ABFRL to widen its geographic and client reach.
The teething challenges
One of the immediate priorities for ABFRL in the near future would entail adding ethnic apparel outlets across regions. This is because ceremonial/ethnic wear buyers prefer brick-and-mortar shopping as against going online.
'Shantanu and Nikhil' is not known to many, especially in the smaller tier 2/3 regions. To promote the brand more aggressively, ABFRL will have to up the ante in terms of advertisement spends.
The presence of unorganised players in the ethnic wear segment is high. This could be a big hurdle to negotiate since the pricing differential can be pretty significant and designs are replicable.
And last, demand for ethnic wear gains momentum only in the second half of a fiscal year (from October - March) owing to onset of the wedding and festive season. Sales traction on this front will always be skewed.
Keeping these pointers in mind, in our view, it could be difficult for ABFRL to achieve break-even from its ethnic wear range right away. Should it succeed in scaling up sales and normalising promotional/fixed overheads, benefits of operating leverage may start accruing to the company eventually.
There is a noticeable difference in valuation multiples between Finesse and Raymond, in spite of the fact that the latter has a much larger store, network and customer base. Ironically, ABFRL’s valuation appears to be just marginally ahead of Finesse even though it is a much bigger player in the Indian retail context.
Prima facie, it appears that ABFRL purchased Finesse’s 51 percent stake at a premium. This may have been attributable to the brand’s strength (Shantanu and Nikhil's popularity) and superior pricing power of the products.
Should you invest in ABFRL?
A combination of heavy outflows in ethnic wear at the start and weak consumption sentiment, may, in all probability, cause ABFRL’s earnings growth to decelerate a bit in FY20.
ABFRL’s stock, which is valued at 48.2 times its FY21 projected earnings, has been in a correction mode lately.
A glance at the historical price performance chart during the last 12 months reveals that the stock has not witnessed a major downfall.
From a long-term investment horizon, it is still consideration-worthy because of the following moats:-
- It has a strong brand portfolio and network augmentation is under way
- Madura generates high returns on capital and delivers positive cash flows
- Losses in fast fashion (‘Forever 21’ brand) are getting trimmed
- Pantaloons stores are improving operationally
- Debt levels are gradually reducing
- Economies of distribution would pare losses in leisurewear in due course
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