The right fits: IIFL Capital Services

6 Apr 2023 , 11:16 AM

Indian Apparel retail sector is poised for robust growth in the medium term, driven by improvement in incomes and steady shift towards organised formats. Growth is expected to be higher for companies riding the three themes – strong brands, value fashion and women & kids’ wear. While companies such as Trent and Go Fashion are well poised to deliver higher top-line growth based on analysts of IIFL Capital Services thematic framework, current valuations leave little room for any execution errors.

A sector well-poised for growth: 

The Apparel retail sector in India has grown broadly in line with nominal GDP over the years; we expect this trend to continue in the next decade. The organised part of the sector has clocked a higher Cagr of 18% over FY15-20. The unorganised portion still constitutes 68% of the sector and as incomes rise and consumers shift steadily towards organised formats, analysts of IIFL Capital Services estimate 15% Cagr in the organised space for the next decade.

E-commerce is an opportunity: 

Share of e-commerce is amongst the highest in the Apparel sector globally, as well as in India, though it is still significantly below countries like China and USA, and is poised for high growth in the medium term. Analysts of IIFL Capital Services global case study indicates that brand cum retailers such as H&M, Inditex and Uniqlo have been able to increase their online salience. Companies with strong brands such as Page, ABFRL, Trent, among others, are better placed to use e-commerce as a lever to accelerate growth.

Relevant themes for medium term:

Analysts of IIFL Capital Services list three themes that would be relevant for the medium term: 1) Strong brands – less prone to competitive headwinds and well poised to leverage the e-commerce channel 2) Women and Kid’s wear – as share of working women, which is still low in India at ~27%, goes up 3) Value Fashion – as consumers shift towards organised formats.

Stock picks:

Analysts of IIFL Capital Services reverse DCF framework indicates that current valuations already imply a higher semi-explicit growth rate for Trent, Go Fashion and V-Mart, leaving less room for any execution slip-ups. Analysts of IIFL Capital Services find the risk-reward favourable in case of ABFRL (investing behind multiple growth drivers even as the core business continues to grow steadily; adj. Ebitda Cagr of 26% over FY23-26), SHOP (value pick with renewed focus on growth) and Vedant Fashions (large runway for growth, strong execution track record and best-in-class return profile).