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Growth prospects and balance sheet strong but capital allocation and margin concerns remain 

* View – We would rate this as a mixed performance with the positives being growth in innerwear, recovery in Madura retail sales, better margins in Pantaloons, strong cash generation and the negatives being weak recovery in Pantaloons, margin decline in Madura and aggressive investments in ethnic wear. While valuations do have a room for re‐rating, it would be contingent upon sustenance of balance sheet health which has improved post the equity infusions and strong cost controls which have driven margin improvement. At this stage, we would give higher weightage to strong growth prospects for the company and therefore be in the bullish camp.

* Quarter highlights ‐ Revenue up 100% qoq and recovered to 80% yoy; EBITDA flattish despite lower sales given better discount management and cost savings, total savings of 157crs on rent, employee, other costs in 3Q, product innovation and digitization efforts continue, opened 230 plus stores as footprint addition accelerated, strong CFO of 588crs (led by 325cr inventory reduction) helped paring debt, will reduce net debt by 90% to 250cr from FY20 levels.

* Lifestyle business – 92% recovery in retail channel sales and overall 80% recovery with wholesales down 63% and, margin expansion of 140bps, LFL decline of 17%, secondary sales in wholesale channel also recovered to 70‐80% as primary sales were controlled to manage inventory, e‐com sales rose sharply, opened 230 stores YTD, post success of Peter England Red (300 stores), now piloted Allen Solly Prime (6 stores).

* Pantaloons – 75% recovery in sales and highest ever EBITDA margins with 300bps expansion led by improved mix, lower discounting, cost controls; took longer to recover as stores recovered later than smaller stores, online sales up 2.3x, launched multiple new categories, opened 7 new stores in 3Q and 15 YTD.

* Innerwear/other business – Overall only 7% sales decline in other businesses with 11% margin vs losses yoy; Innerwear has now reached 20,000 outlets, saw 24% revenue growth, e‐Commerce channel up 2.7x led by seasonal thermal wear and athleisure; fast recovery given wide MBO‐led distribution and essential nature of category.

* Global brands – Forever 21% saw 80% revenue recovery and became profitable, 20% growth in other premium brands.

* Ethnicwear – Overall 15% decline in sales with marginal losses; Jeypore grew 15% led by online sales and opened 1st store, Shantanu & Nikhil opened 3 new stores, Sabyasachi also a big opportunity.   

* Margin outlook ‐ Industry using this opportunity to bring down inventory, improve freshness and commanding better gross margins which should sustain; EBITDA margin sustenance would need full sales recovery.

* Geographic dynamics – Smaller cities would have recovered to 85% plus levels vs slower growth in metros and larger cities, small store formats growing much faster than large format stores.

* COVID learnings for company which should sustain – 1) Change in merchandising process with better agility, 2) faster digital acceleration, 3) more frequency/lesser time to go to market, 4) variablization of fixed costs.

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