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Key thrust on enhancing share of private label brands

SSL’s Q4FY21 print was broadly in line with our estimates with revenue down 5% YoY to | 671.2 crore (non-GAAP revenue fell 10% YoY with SSSG at -10.7%). On the base of Q4FY19, recovery rate was at 85% in Q4FY21 vs. 71% in Q3FY21. Non-metro cities continued to recover at a faster pace (4% YoY growth) vs. stores in metro cities (down 18% YoY). Omni-channel strategies continue to provide the key thrust with digital sales growth of 188% YoY (6.2% of overall sales up 430 bps YoY).

On account of favourable product mix (higher share of private label brands), gross margins improved 90 bps YoY to 40.9%. On the back of significant cost rationalisation measures, PBT losses narrowed down substantially to | 37.2 crore vs. loss of | 157.5 crore in Q4FY20. The management expects the business to remain resilient amid uncertainty in the near term and see through the current health crisis. The company expects to ramp up space through addition of 20 stores (10 departmental stores) in FY22E (capex: | 100 crore for FY22E).

Healthy volume growth witnessed for private labels in Q4

In a bid to boost share, SSL has re-jigged its product portfolio of private label brands through launch of sharper price point assortments (<| 999) and enhanced product offerings such as sleepwear, loungewear and innerwear. This is the second consecutive quarter of positive volume growth for its private label brands. During Q4FY21, volumes grew 38% YoY while value growth was restricted to 11% YoY (owing to EOSS discounts and lower price point mix). Share of private label brands improved 250 bps YoY (40 bps down QoQ) to 13%. The progress on MD’s strategic growth roadmap with improvement in key parameters like SSSG and private label share would be critical factors to watch.

Re-engineered cost structure to support margins…

With revenue in FY21 being significantly impacted by the pandemic (down 49% YoY), SSL undertook several cost optimisation initiatives with monthly operating cost run-rate decline from | 109 crore in FY20 to | 72 crore in FY21 (down 33% YoY). Annual cost savings were at | 433 crore in FY21. The management expects cost savings worth | 200 crore to be sustainable in FY22E. Re-engineered cost structure would aid EBITDA margins, going forward, with lower breakeven sales for new stores.

Valuation & Outlook

For FY21, negative FCF was at ~| 320 crore. In a bid to strengthen the b/s, SSL had proposed a rights issue worth | 300 crore that was fully subscribed. The company’s liquidity position is fairly stable with cash & investments worth | 169 crore and debt worth | 150 (net surplus | 19 crore). Given near term headwinds, we revise our revenue estimates downwards by 18%, 2%, in FY22E, FY23E, respectively. We believe the new MD (former Westside CEO) would bring in his expertise in the private label brands domain and focus on enhancing the share of private labels. We expect RoCE to improve steadily to ~13% by FY23E. Enhancement of revenue share of private labels and consequent improvement in margin profile would be key triggers for a re-rating of the stock. We upgrade the stock from HOLD to BUY with a revised target price of | 275 (7.5x FY23E EV/EBITDA, earlier TP: | 228).

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