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Published on 8/11/2018 10:09:31 AM | Source: ICICI Securities Ltd

Update On Future Lifestyle Fashions Ltd - ICICI Sec

Increasing capex intensity to impact cashflow

Reason for report: Q2FY19 results review and earnings revision

Future Lifestyle Fashion’s (FLFL) Q2FY19 EBITDA (adjusted for start-up expenses of Rs15mn in Lee Cooper Footwear) increased 18% YoY to Rs1.23bn (I-Sec: Rs1.26bn) led by strong growth in high-margin power brands and better operating leverage. Revenues grew 20% YoY to Rs13.4bn (I-Sec: Rs13.8bn) led by 29% YoY growth in own / licensed brands and network expansion. FLFL plans to accelerate growth with aggressive network expansion and expects to add total 5-6 Central and 25-30 BF stores in FY19. Net debt increased by Rs0.4bn coupled with 2% equity dilution (Rs1.7bn invested by L Catterton Asia) during H1FY19 as the company incurred capex of Rs2.4bn and invested Rs0.5bn in an online venture, Koovs. FLFL plans to invest a further Rs0.9bn in Koovs and expects to incur capex of Rs4bn-4.5bn during FY19. We believe capex intensity is likely to remain high in the near term given expectations of acceleration in BF store additions, which may impact return ratios. Hence, we cut our target multiple by one notch to 14x EV/E (earlier 15x) and reduce our target price to Rs425/share (earlier: Rs470/share), based on 14x Jun’20E EV/E. We broadly maintain our FY19E-FY20E EBITDA and expect ~17% revenue and EBITDA CAGR each year over FY18-FY21E. Maintain ADD.

 

Revenues (including revenue from Lee Cooper) grew 20% YoY. Central and BF registered SSSG of 1% and 3.1% respectively in Q2FY19. However, adjusting for shift in festive days, SSSG in Central and BF stood at 6.7% and 12.3% respectively. Management has guided to sustain close to low double-digit SSSG in FY19. BF contribution increased by 300bps YoY to 31% to overall revenues in Q2FY19 (~35% in H1FY19). Overall, volumes grew 19% YoY in Q2FY19.

FLFL owned / licensed brands’ revenues grew 29% YoY / 11% QoQ in Q2FY19 led by strong growth registered in key brands like Indigo Nation (+2.2x YoY), Jealous 21 (+84% YoY), John Miller and Bare (+40-45% YoY each), and Scullers and aLL (+35-37% YoY). Lee Cooper’s growth was at 17% YoY. Power brands retail revenues grew 39% YoY in Q2FY19. Third-party brand revenues grew at a lower 11% YoY. Lee Cooper footwear commercial operations has started with placement of 625 LFR doors planned by Dec’18 and placement across >1,500 MBOs.

EBITDA increased 18% YoY to Rs1.23bn (I-Sec: Rs1.26bn) owing to increased contribution of own brands by 300bps led by strong YoY growth in high-margin power brands and better operating leverage. EBITDA including other income increased 19% YoY to Rs1.31bn. PAT increased 22% YoY to Rs370mn.

Company’s retail footprint increased to 6.2mn-sqft in Q2FY19 from 6.0mn-sqft in Q1FY19. In Q2FY19, the company opened two new Central stores (Trivandrum and Mysore) and closed one while it opened seven BF stores. In H1FY19, FLFL opened three Central and 13 BF stores net.

 

Maintain ADD with target price of Rs425/share

We believe capex intensity is likely to remain high in the near term given expectations of acceleration in BF store additions, which may impact return ratios. Hence, we cut our target multiple by one notch to 14x EV/E (earlier 15x) and reduce our target price to Rs425/share (earlier: Rs470/share), based on 14x Jun’20E EV/E. We broadly maintain our FY19E-FY20E EBITDA and expect ~17% revenue and EBITDA CAGR each year over FY18-FY21E. Maintain ADD.

 

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