Be it Apple, Microsoft, Nestle or P&G , If we closely track the history of huge wealth
creating stocks around the globe, in majority cases we can find out one
common factor – the company owns or entitled to use one or more successful brands. Indian market is not an
exception . We have many examples like Page Industries ( Jockey), Jubilant Foodworks ( Dominos) ,Eicher Motors ( Royal Enfield) , Whirlpool ,Laopala ..etc.
The new kid on this block is Pantaloon Fashion Retails. Ltd. Let us look into
this which I consider as a true multi bagger in making for long term investors.
It came into
existence by joining the fashion arms of erstwhile Pantaloon Retail and Future
Ventures .By virtue of its name ,many investors still considering PFRL
as a company belongs to the debt ridden future group led by Kishore Biyani.But
in reality , now this company belongs to Kumar Mangalam Birla led Aditya Birla
Group . Earlier Biyani sold it to Aditya Birla group in an effort to pare the debt
of his future group.
What make this loss making company suddenly attractive is
the scheme of arrangement announced by Aditya Birla Group few days back.To consolidate all its branded apparel business into a single entity AB
Group now bringing many super brands under PFRL’s fold. It will de-merge Madura
Fashion (the branded apparel retailing division) and Madura Garments Lifestyle
(luxury branded apparel retailing division) and merge them with Pantaloons.This scheme of arrangement will bring many
undisputed brands in premium apparel segment with this company which includes -
Louis Philippe, Van Heusen, Allen Solly, People, Hackett London , The
Collective ,Peter England ..etc. I don’t think any extra explanation is needed
to describe the success of these brands in our market and hence not wasting
time for that .
When we consider any business depends on
brands , we should look into the ownership of brands too . If such a company
loose its brand in any circumstances , the entire business may collapse and
hence some understanding about this part is very important for an investor. As
you are aware Page industries is not the owner of Jockey brand but they are
using that brand name as an exclusive licensee of Jockey Brand products from
Jockey International Inc till 2030. Like this ,Jubilant Foodworks using Dominoz brands through
an exclusive franchise agreement with Dominos International which is valid till
2025. Why I bring these examples here is just to point out the fact that these
agreements are made with a time frame and it should be renewed thereafter for
another fixed period, time to time.Though chances are rare for a termination , we
can’t rule out possibility for introduction of more and more covenants by original brand owner at
the time of each renewal. Even in some rare cases, relation between both
parties may go beyond this and ends in never ending disputes.The recent
incident of the dispute between the owner of McDonald brand and one of its
Indian franchise owner Mr Vikram Bakshi is one best example for such
unfortunate incidents.In this back ground let us look into the brand ownership
scenario of some of its major brands viz- Louis Philippe, Van Heusen, Allen
Solly and Peter England . Louis Philippe is a brand currently owned by Madura
itself.Van Heusen is originally owned by Philips Van heusen company ( US ) but Madura owns the perpetual right to use
this brand .The world rights of Peter England brand acquired by Madura in 2000.
The brand ‘Allen Solly’ is originally started by a company named ‘William
Hollins & Company’ in 1744 and
Madura Garments taken over this company in 1990.In nutshell , uncertainties
surrounding the ownership and usage of PFRL’s
( on completion of scheme of arrangement) major brands are nil or less
compared with brands of many of the highly flying listed players like Page or
Jubilant.( I believe brands like Louis Philippe, Van Heusen, Allen Solly ,
Peter England..etc are equal or above
the brands of mentioned other companies in their respective category .More than
that when others own one good brand ,here in this case all these four brands are
extremely strong .Existing brands of Pantaloon ( Byford,Factor,annabelle..etc..etc)
will continue in this company itself.In addition to this branded apparel
manufacturing ,the combined entity will own a retail network of 1,869 stores
across India and a strong e-sale platform - http://www.trendin.com/ .
The First reason for investors and analysts apathy is
the current loss and debt position of PFRL.At present, PFRL’s debt is almost
Rs.1085 Cr and Debt to
EBITDA ratio is 28: 1.I am accepting the fact that any
investor taking investment decisions after analysing the equations and numbers
will avoid any company with such a Debt to EBITDA ratio . But if we closely look at the possible Debt
to EBITDA post merger of Madura units ,
it will sharply improve from 28:1 to 3.8:1. From the present huge loss, PFRL
will turn into a strong company with Rs.400 Cr( approx) pre-tax free cash flow
on merger. Company has said , on completion of
restructuring it would invest Rs 450-500
crore for the next three years, to add 250-300 Madura Garments stores
and 25-30 of Pantaloon stores.
Management already announced their decision
to change the combined entity’s name
from Pantaloon to Aditya Birla Fashion Retail ( ABFR) .This will help for an image
makeover from the chequered past of Pantaloon( due to debt related issues)
under previous management and remove the misunderstanding of Investors about the
ownership of this company. In a press statement ,Group Chairman Mr.Kumar Mangalam
Birla claimed “The new company will be the largest branded apparel player in India not only in the listed but also in
the non-listed space," .
Another confusion is about valuation of stock
post expansion of equity .As you are aware ,companies with market leadership
position with excellent brand and decent
growth will always trade at premium valuation at high P/E multiples .( I remember ,99 % analysts suggested to skip
Jubilant foodworks IPO when they offer
shares @ Rs.145 in 2010 citing higher
valuation at that price.). Considering the current financial data of listed
company ( Pantaloon) and the companies to be merged with Pantaloon , I hope the
new combined entity will report an EPS of Rs.6.50-7 on completion of merger .
Having said , this will be India’s largest branded apparel player and deserving
premium valuation. Brand recall of Its super duper brands – Louis Philippe, Van
Heusen, Allen Solly and Peter England- is NOT a tad below the single brand of
Page Industries . The most important factor is,these brands are showing very
high growth rate and Madura Lifestyle’s sales have grown at a CAGR of 27% from FY10 to
FY14. In addition to this, company already announced its plans to open 100
Madura Garments stores and 10 Pantaloon stores in every year for next three
years. Operational synergies and cost savings from merger is expected to reduce
the loss of Pantaloon division going forward and excellent cash flow of Madura
divisions will help to ease the debt pressure of combined entity . As a
combined entity ,cost saving opportunities are also possible in case of
sourcing , technology,real estate ..etc.Now let us look into the P/E multiple
of few listed companies who own market leading brands and business depends on consumer spending . See
below Table :
# P/E of PFRL calculated based on the expected EPS post scheme of arrangement
Click on the image for better view
Even if the given small companies( by
turnover ) is not strictly comparable with Aditya Birla Fashion Retail Limited
- ABFRL ( proposed name of merged entity) , considered the same for arriving a
fair comparison in case of P/E multiples. Even the turnover of Page industries
will be only a fraction of the turnover of ABFRL once the merger process
completes.
Having said, the brands owned by Page and
Jubilant ..etc not even owned by them( franchise of brands owned by foreign
companies upto a fixed time with renewal option) where there is no uncertainty
regarding the brands owned by ABFRL which is either owned brands or with
perpetual rights . Aditya Birla groups financial muscle and reputation is
another factor to keep in mind while comparing with others . Brand extension
possibilities to other fashion accessories is another possibility. Company
already selling products like Footwear, Belt,wallet..etc under its popular
brands . Creating succefull sub brands is also a possibility and they started the same with Allen Solly Junior . All together ,I believe AB group is capable enough to handle the debt
position and will find out a way to improve return ratios going forward once
the merger process is complete . There is no reason to get a below average P/E
for a company like this which own four super brands (Louis Philippe, Van
Heusen, Allen Solly and Peter England) ,along with 2000 retail outlets pan India and a robust
CAGR .Merger process is expected to complete in this financial year itself .
With excellent brands , high potential fast growing
business , financial muscle and business acumen of Aditya Birla group , I
believe , few years from now ABFRL ( now Pantaloon Fashion Retail ) will grow
as the feather in the cap of Aditya Birla Group and it is one future blue chip in making .Being a long term investor ,I am taking it as a rare opportunity to grab a high potential company in Indian fashion
space at its beginning stage and comfortable to buy even at this price .Suggesting my readers to take a call based on own conviction .Stock (PFRL) listed in both exchanges and trading around
Rs.195.
-----------------------------------------------------------------------------------
# This report prepared in anticipation of smooth completion of Scheme of Arrangement as per the terms and conditions announced by both companies.
Disc: Holding shares in PFRL
Link to the website of Madura fashion & Lifestyle HERE
Related news links below
