The 500bps y-o-y dip in Madura’s margin to 6% in Q3FY16 came as a negative surprise, resulting in the stock correcting sharply.
The 500bps y-o-y dip in Madura’s margin to 6% in Q3FY16 came as a negative surprise, resulting in the stock correcting sharply. The dip was led by heightened A&P spending to fight e-commerce players.
In our view, this strategy makes more sense as it does not dilute the brand, as in the discounting model. Aditya Birla Fashion and Retail (ABFRL) is confident that Madura’s margin will revert to the earlier trajectory — 12.4% in FY15 — over the long term as the competitive intensity wanes.
The company’s omni-channel platform is expected to roll out across stores over the ensuing 12-15 months, which will help curb lost sales due to limited SKUs at retail stores. 100% FDI in the e-commerce sector with the rider that the marketplace platform cannot influence selling prices can potentially lower discounting, which remains a key positive for brick-and-mortar retailers.
Madura’s Q3FY16 margin was adversely impacted by increased advertising (up 58% y-o-y) and higher staff costs due to bonus provision. However, we perceive this as a temporary blip. We believe brand investments are vital to stem market share loss (especially to online retailers) in a subdued demand environment.
Revival in discretionary spending, favourable demographics, strong brand equity, distribution prowess and likely turnaround of Pantaloons augur well for ABFRL. At CMP the stock is trading at 18.1x FY17E and 13.9x FY18E EV/Ebitda consensus earnings. The stock is ‘not rated’.