erformance of retail firms in the fourth quarter of the fiscal year 2018-19 remained a mixed bag, with all the companies covered by Motilal Oswal reporting a double-digit growth but at the cost of margins. The brokerage, however, said its recent checks indicate that the trend has reversed in the first quarter of FY 2019-20. “Across retailers, growth was largely an outcome of the step-up in pace of store adds, even as same-store sales growth (SSSG) remained modest due to impact from the advancement of end of season sale (EOSS) in 3QFY19,” said the brokerage.
Motilal Oswal said it prefers companies with the value fashion format and the food and grocery segment. Aditya Birla Fashion and Retail Ltd (ABFRL), Trent Ltd, Future Lifestyle and Fashions Ltd (FLFL) and Future Retail Ltd (FRL) are the top picks.
Aditya Birla Fashion and Retail: TP- Rs 240 per share
The stock has gained over 5 percent in 2019 and nearly 55 percent in the last one year. “We ascribe 23x FY21 EBITDA of INR6.4b for the lifestyle segment given its strong brand value. We expect Pantaloons to drive earnings growth for ABFRL and ascribe 18x FY21 EBITDA of INR3.7b for this segment. We ascribe 1x FY21 sales for the fast-fashion and other businesses. This implies ~10 percent premium to the target EV/EBITDA multiple for our apparel coverage,” it said.
Trent Ltd: TP-Rs 440
Trent shares rose over 9 percent this year and 22 percent in the last one year. “TRENT’s ROIC remains a point of worry though, but we believe that Star’s reducing losses and Zudio’s scale benefits should start improving ROICs,” the brokerage said.
“We ascribe (a) Westside and Zara 25x (~20 percent premium to the target EV/EBITDA multiple of our apparel coverage) FY21E EBITDA, and (b) THPL 1x FY21E Sales,” it added.
Future Lifestyle and Fashions: TP-Rs 585 per share
The stock rose 6 percent so far this year and 3 percent in the last 1 year. “FLF has delivered consistently healthy revenue growth coming in from Brand Factory, Central and its own brands. We expect 23 percent EBITDA CAGR and 30 percent adj. PAT CAGR over FY19-21,” said Motilal Oswal.
Future Retail: TP-Rs 550 per share
Future Retail stock price declined 8 percent this year and 17 percent in the last one year. “FRL has consistently improved its EBITDA margin growing 170bp over FY17-19; we expect it to continue with 50bp improvement over FY19-21,” said the brokerage.
“FRL trades at ~50 percent discount to DMART. With growth levers in place and return ratios set to take off, the valuation gap should reduce, in our view,” it added.