IGI Logo

Revenue up, working capital improves. Lower margins in short term

2QFY23 revenue print of Rs1.66bn (up 48% QoQ) was good. Higher EOSS sequentially (GM dilutive) and sharp increase in other opex (mainly ad-spends) led to (reported) EBITDA margin print of 29.8%. Store expansion continues to be on track with expectation of further acceleration in the medium term. Working capital days have also improved significantly as expected.

We like the increased ad-spends (4.6% of sales in 1HFY23 vs typical 2%) – these are good spends and we expect (good) brands to increase it in the near-term given most have under-invested for last two years; that said, only limited ones have the required headroom given the inflationary pressure.

We believe the brand has been able to create a replicable template of diverse product portfolio along with a highly efficient operating model of EBOs. Going forward, there is (1) comfort on (product-level) margins and (2) continued thrust on EBO store addition. Further, there seems to be continued success in new products outside of core products. Maintain BUY with a DCF-based revised target price of Rs1,600.

* Good quarter on an overall basis: On a reported basis, Go Fashion reported revenue print of Rs1.66bn, up 48% YoY (flat QoQ). Same store sales and volume grew by 31% and 8% over Q2FY20 (pre-covid). EBO sales grew much ahead of LFS (EBO contribution improved from 74.5% vs 71.4% in 1QFY23). ASP has increased by 7% to Rs709 in 1HFY23 vs FY22. This includes both pricing and mix benefit as it continues to add new products across bottom wear category to strengthen its portfolio

* Higher spends and EOSS weigh on margins: On QoQ basis, gross margins contracted 110bps to 59.6% largely due to EOSS during the quarter (ASP for 1HFY23 declined to Rs709 vs Rs718 in Q1FY23, implying lower realisation in Q2FY23). Cotton prices have corrected significantly recently, however management expects the benefits of lower prices (assuming the prices remain stable) into gross margins after few quarters given 90% of their inventory are high priced.

EBITDA margins (on reported basis) were down 160bps YoY (-240bps QoQ) to 29.8% largely due to higher ad-spends. Ad-spends (as % of sales) were up to 4.6% in 1HFY23 vs 1.8-1.9% in FY19-20. Management expects ad-spends to be ~3-4% for FY23 (significantly lower in second half of the year).

The company launched several India brand awareness initiatives with a six-week campaign ending July-22. We like this considering most brands are underinvested (on ad-spends) for the last year given the environment was not conducive. The working capital structure at the end of 1HFY23 (in terms of number of days) is largely in-line with our expectation (full-year).

* Expansion plans on track with some actions towards accelerating store expansion in the medium term: It added 36 new EBOs in the quarter (569 stores in 133 cities). Management is confident on adding 120-130 stores each year going forward as guided earlier. Company generally evaluates 900-1,000 locations for opening 120-130 stores annually. It plans to expand its team for evaluating 1,500 locations annually which would accelerate the store expansion targets. In terms of LFS, it added 57 counters (181 counters in 1HFY23; EOP: 1,654). Company will keep expanding selectively through LFS to enter new markets.

* Valuation and risk: Our earnings estimates are largely unchanged; modelling revenue / EBITDA / PAT CAGR of 47% / 112% / 93% respectively over FY22- FY24E. We maintain our BUY rating with a DCF-based revised target price of Rs1,600 (was Rs1,450). Key risks: (1) risk of high share from Reliance Retail and (2) likely increased competition from new players entering the category.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer