Buy Go Fashion Ltd for the Target Rs. 1,127 by Motilal Oswal Financial Services Ltd
Get set, GO in style!
* Go Fashion (GOCOLORS), operating under the brand 'Go Colors', is a pioneer and category leader in the women’s bottom wear market, holding an 8% share of the organized market. Leveraging its first-mover advantage, GOCOLORS has successfully established a direct-to-consumer (D2C) brand, offering a wide range of products through 776 exclusive brand outlets (EBOs) across 180 cities.
* Positioned as a core wardrobe essential, bottom wear addresses functional, repeat-use needs and is less susceptible to fashion cycles compared to top wear. Its year-round relevance supports steady demand and operational stability, enabling companies to exercise strong pricing discipline. Valued at INR135b in 2020, this segment is the fastest-growing sub-category (~12% CAGR) within the apparel market. It remains highly fragmented and unorganized, with organized retail penetration likely to be only ~38% in 2025.
* GOCOLORS’s success stems from: 1) its exclusive focus on women’s bottomwear, a structurally underserved category, which enabled the company to build deep domain expertise, high product variety, and strong brand recall, and 2) its early transition to the EBO model, which provided complete control over pricing, merchandising, and consumer experience. This distinctive approach enabled GOCOLORS to establish a scalable, brand-led retail presence across metros and Tier 2/3 cities, reinforcing its leadership in a high-repeat, functional apparel category.
* During FY19-25, GOCOLORS delivered a healthy revenue/Pre-IND-EBITDA/ PAT CAGR of 20%/19%/20%, underpinned by its EBO-led expansion strategy. EBOs, contributing ~73% of revenue, posted a 22% CAGR, which was supported by a 15% CAGR in store additions. While improved channel mix and benign input costs drove ~350 bps expansion in gross margins (to 63.3%), negative operating leverage in FY25 offset margin gains, keeping EBITDA margins flat at ~17%. Despite this, the company generated INR3.3b in CFO and INR1.6b in FCFF, sustaining a healthy RoCE of 18%.
* Valuation & View: GOCOLORS is well-positioned to leverage its leadership in the women’s bottom-wear segment and D2C model, with significant expansion potential beyond its current presence in ~180 cities. We model a 16% revenue CAGR over FY25–28E, led by an 18% growth in EBO/online channels. While its gross margin may contract ~130bp due to RM benefit pass-through, its operating leverage is likely to drive ~135bp EBITDA margin expansion to 18.2%. EBITDA and PAT are projected to clock 19%/20% CAGR, over FY25-28E. Strong operational cash flows are expected to result in cumulative OCF/ FCFF of INR3.7b/INR2.5b.
* Following the recent correction, the stock currently trades at 34x FY27E EPS. We value the stock at 45x FY27E EPS to arrive at our TP of INR 1,127. We initiate coverage on the stock with a BUY rating.
* Key Risks: (i) Higher concentration on Reliance Retail (19% sales in FY24), subdued retail environment, (iii) Increasing competitive intensity, (iv) Promoter Pledge (11.3% of Equity).
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