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Analyst Corner: Cost rationalisation leads to EBITDA growth for FLFL

Revenue contribution of Central/Brand Factory/other brands stood at 49%/42%/9% for 3QFY20.

Revenue contribution of Central/Brand Factory/other brands stood at 49%/42%/9% for 3QFY20.

FLFL’s revenue growth remained muted due to the weak macroeconomic environment, but its gross/EBITDA margin expanded on the back of cost containment measures.   We marginally tweak our revenue/EBITDA estimate for FY20, but cut revenue/EBITDA estimates by ~10% for FY21, considering weak SSSG and slower pace of store addition.

Consol. revenue increased 3.2% YoY to `17.5b (8% miss). Gross margin improved 110bp YoY (150bp beat) led by lower RM cost.  Pre-Ind-AS 116 EBITDA was up 10.4% YoY at `1.8b (5% beat) due to a better gross margin and lower SG&A expense (-10.4% YoY), partially offset by higher rental cost (+23% YoY).

EBITDA margin thus expanded 70bp YoY to 10.5% (130bp beat). PBT declined 11% Y-o-Y to `891 m (5% beat) on account of higher depreciation (+45% Y-o-Y) and finance expense (+9% Y-o-Y).  PAT was down 13% Y-o-Y to `594m (in-line).
FLFL’s SSSG came in at 2% in 9MFY20 v/s 8.8% in the year-ago period. In 3QFY20, Central reported mid-single-digit SSSG (our estimate: 5%), while its revenue was up 8.7% Y-o-Y at `8.6b.  Brand Factory’s revenue was flat Y-o-Y at `7.3b, and thus we estimate its SSSG to have declined. Revenue from own brands and EBOs too declined 4.6% Y-o-Y to `646m.  FLFL added 0.18m sq ft in 3QFY20 to take the total to 7.5m sq ft.

Revenue contribution of Central/Brand Factory/other brands stood at 49%/42%/9% for 3QFY20. The increased share of Central helped improve profitability. Revenue growth has been muted, primarily due to weakness at Brand Factory. While the macroeconomic environment remains weak, the impact is far more pronounced compared to Trent, ABFRL and even Shoppers Stop.

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