Go Fashion India Stock Research Report by ICICI Securities
Sector: Retailing
CMP Rs. 1123, Target Rs. 1450 (29% upside potential)
Target Period: 12 Months
Go Fashion India Stock Research Report: EBOs scaling up well. LFS faces one-off challenges
In EBO channel (~74% revenue saliency) we liked the strong value (at 38%), volume (at 25%) and SSSG (at 17%: including 6% price hike, 5% volume and 6% from NPDs) led revenue performance. 10% increase in average selling price is reflective of improvement in revenue mix (from value-added products). However, volume growth in LFS channel was significantly impacted by lower dispatches to Reliance Trends (~80-85% of LFS revenue), while Online and MBOs channels continued to track well. Success of new product launches (35% contribution in SSSG) is noteworthy. Management expects to launch ~5-6 new product every year. Full price sale at 95% of total revenue despite category extensions is impressive. Positively, it has guided for the share pledge to be closed by the end of FY24.
Post adjusting for one-time ~Rs60mn benefit (credit reversal) in gross profit and ~Rs48mn inventory write-off related to Future Lifestyle exposure, operating profit margin declines 195bps YoY. However, operating margins in FY23 have been healthy and likely to be maintained (in FY24).
We stay optimistic on Go Fashion. We believe the brand has been able to create a replicable template of diverse product portfolio along with a highly efficient operating model of EBOs. Going forward, there is (1) comfort on (product-level) margins and (2) continued thrust on EBO store addition. Further, there appears to be continued success in new products outside of core products. Maintain BUY with a DCF-based revised target price of Rs1,450.
● Healthy SSSG led by mix improvement: On a reported basis, Go Fashion reported revenue print of Rs1.6bn, up 36% YoY. Revenue from EBOs (~74% saliency) grew 38% YoY led by 17% SSSG (5% volume + 6% NPD + 6% price hike), 25% YoY volume and 25% YoY retail expansion. Same cluster sales growth (SCSG) stood at 30%YoY. Overall volume grew 1% YoY impacted by lower dispatches (-35% YoY volume) to LFS (Reliance Trends). LFS sales grew much ahead of EBO (LFS contribution improved to 21% from 18% in 4QFY23). ASP has increased by 10% to Rs727 during FY23 vs FY22 led by mix benefit. It launched 5-6 new products in FY23 and is likely to launch 5-6 more in FY24.
● Operating profit margin had benefit of one-offs: Reported gross margins expanded 200bps to 64% led by correction in raw material prices and Rs 60-70mn one-time credit-reversal from Reliance Trends. Management expects gross margin to be maintained at 60-60.5% level.
EBITDA margins (on reported basis) contracted 240bps YoY to 31.5% largely due to higher operating expense which includes one-time inventory write off of Rs47.6mn related to Future Lifestyle. Post adjusting for the one-offs, EBITDA margin declined by 195bp YoY to 32%.
Ad-spends (as % of sales) stood at 3% in FY23 vs 1.8-1.9% in FY19-20. Management expects ad-spends to be ~3-4% for FY24. It generates ~Rs33 revenue for every rupee of advertisement spent.
● Expansion plans on track: It added 26 new EBOs in the quarter (630 stores in 143 cities). Management is confident on adding 120-130 stores each year going forward as guided earlier. Company generally evaluates 900-1,000 locations for opening 120-130 stores annually.
● Valuation and risk: We cut our earnings estimates by 7-8% over FY24-25E; modelling revenue / EBITDA / PAT CAGR of 24% / 26% / 36% respectively over FY23-FY25E. We maintain our BUY rating with a DCF based revised target price of Rs1,450 (was Rs1,500). Key risks: (1) risk of high revenue share from Reliance Retail in LFS channel and (2) likely increased competition from new players entering the category.
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