Analyst corner: Maintain ‘add’ on Future Lifestyle Fashions, target price at Rs 425

Future Lifestyle Fashion’s (FLFL) Q2FY19 Ebitda (adjusted for start-up expenses of Rs 15mn in Lee Cooper Footwear) increased 18% y-o-y to Rs 1.23bn led by strong growth in high-margin power brands and better operating leverage.

Revenues grew 20% y-o-y to Rs 13.4bn (I-Sec: Rs 13.8bn) led by 29% y-o-y 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 Rs 0.4bn coupled with 2% equity dilution (Rs 1.7bn invested by L Catterton Asia) during H1FY19 as the company incurred capex of Rs 2.4bn and invested Rs 0.5bn in an online venture, Koovs.

FLFL plans to invest a further Rs 0.9bn in Koovs and expects to incur capex of Rs 4bn-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 Rs 425/share (earlier: Rs 470/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’.

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 y-o-y to 31% to overall revenues in Q2FY19 (35% in H1FY19).

Overall, volumes grew 19% y-o-y in Q2FY19. John Miller and Bare, and Scullers and aLL. Lee Cooper’s growth was at 17% y-o-y. Power brands retail revenues grew 39% y-o-y in Q2FY19. Third-party brand revenues grew at a lower 11% y-o-y. Lee Cooper footwear commercial operations have started with placement of 625 LFR doors planned by Dec’18 and placement across >1,500 MBOs.

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.