Equity Research: Cantabil Retail India Ltd

Cantabil Retail India Ltd. to improve its expansion rate along with improving EBITDA and PAT margins.

CANTABIL, incorporated in 2000, is in the business of designing, manufacturing, branding and retailing apparel under the brand name Cantabil. The CANTABIL brand offers a complete range of formal wear, party wear, casual & ultracasual clothing for men and women in the middle to high-income group. 

After the restructuring of its retail business (during FY11-14), Cantabil Retail India Ltd (CANTABIL) rose like a phoenix and emerged as a formidable player in the organized apparel retail space. A distinctly visible strategy of CANTABIL to tap under discovered markets of Tier II & III cities of India (often neglected by foreign & marquee brands) is gaining momentum. The company has a network of 414 exclusive retail outlets (as on 31st Aug 2022) covering an area of 4.6 lac sq ft in 18 states (up from 241 stores & 2.6 lac sq ft area in FY19). 

During FY15-20, the Indian retail apparel market grew at a CAGR of 10.0% and was pegged at ~US$ 66 bn in FY20, while the share of organized retail improved from 23.0% to 32.0% over the same period. As per the analysis report, this market is estimated to cross the US$100 bn mark by FY25 (CAGR of 8.7% during FY20-25) with a higher organized space share of 44.8% due to favourable changes in the demographic profile of India and rapid urbanization which is improving brand awareness in Tier II & III cities. 

Citing this opportunity very early, CANTABIL has been adding 50-60 retail stores annually. In line with this, 57, 61 and 58 stores were opened in FY19, FY20 and FY22, respectively, and 30 new stores were added in Apr-Jul 2022 (FY23). The annual expansion rate is expected to improve in the coming years, and the focus will be on Tier II & III cities, which are evolving as new demand centres. EBITDA and PAT margins are expected to improve by 90bps to 30.0% and 864bps to 15.4% due to higher per-store realization and a decline in finance costs on account of faster debt repayment.  Return ratios – RoE and RoIC – to improve by 2053bps to 36.7% and 2639bps to 68.0% respectively by FY25E.

Cantabil Growth Drivers:

• Favourable changes in the demographic profile of India and rapid urbanization, which is improving brand awareness in Tier II & III cities. 
• Aggressive store expansion with an annual run rate of 50-60 stores. The run rate is expected to be higher in the coming years due to strong demand opportunities in Tier II & III cities. 
• CANTABIL has a net debt-free balance sheet and effectively managed its capex and opex, while aggressively expanding its stores in newer geographies.

CANTABIL had 411 stores on 31st Mar 2010 and it reported revenue/ EBITDA/ PAT of INR 202 cr/ INR 31 cr/ INR 15 cr in FY10. The average revenue per store stood at INR 55 lacs, while EBITDA and PAT margins were 15.2% and 7.3% respectively. To enhance its presence in new geographies and to fund this expansion, CANTABIL came with an IPO in Sept 2010 with a fresh issue size of INR 105 cr, which was planned to be utilized in the following manner: 

• INR 32 cr for the establishment of a manufacturing facility at Bahadurgarh, Haryana
• INR 25 cr for the expansion of the retail network by 180 new stores (80 stores in FY11 and 100 stores in FY12) in Hyderabad, Bengaluru, Cochin, Nagpur, Pune, Vishakhapatnam, Patiala, Bhatinda, Chandigarh, Lucknow, Kanpur and Varanasi

CANTABIL postponed its expansion plan and started offering an exorbitant flat discount of over 80% to clear its inventory. This strategy of deep discounts proved to be wrong and it impacted the operating performance and profitability of the company. To reduce cost pressure and improve its revenue per store revenue, CANTABIL changed its approach and initiated the business restructuring in FY12 – 

• Substantially reduced its store count from 411 in FY10 to 143 in FY14
• Reduced employee count from 1,100 in FY10 to 885 n FY14
• Reduced inventory days from 217 days in FY10 to 153 days in FY14, which reduced the working capital to sales by 1168bps to 41.8%.

The challenging time transformed the company and the management became very selective in store expansion strategy, which resulted in strong financial performance. During FY14-19, CANTABIL’s revenue grew at a CAGR of 21.0% to INR 289 cr while the store count increased from 143 stores in FY14 to 241 stores in FY19. Average annual revenue per store too improved from INR 75 lacs in FY14 to INR 1.3 cr in FY19 

EBITDA and PAT reported profits of INR 30 cr and INR 13 cr against the losses of INR 3 cr and INR 9 cr, respectively. EBITDA and PAT margins improved to 10.3% and 4.3%, respectively. 

FY19 balance sheet improved significantly and was in much better shape compared to FY14. During FY14-19, CANTABIL invested INR 65 cr as capex for store expansion, however, managed to keep the debt burden low – 

• The working capital cycle declined significantly from 152 days in FY14 to 84 days in FY19 and working capital to sales declined substantially from 41.8% in FY14 to 22.9% in FY19
• The net debt to equity declined from 0.43X in FY14 to 0.34X in FY19
• RoE and RoIC improved from negative 4.4% and 4.5% to positive 10.3% and 13.5% respectively.

During FY19-22, CANTABIL’s revenue grew at a CAGR of 9.9% to INR 383 cr driven by aggressive store expansion across India from 241 stores in FY19 to 378 in FY22. However, COVID-led restrictions impacted average revenue per store, which declined to INR 1.1 cr in FY22 (CAGR decline of 6.8%) from INR 1.4 cr recorded during FY19.
Despite a delayed recovery in per-store sales performance, CANTABIL managed to improve its profitability. EBITDA and PAT grew at a CAGR of 46.8% and 16.9% to INR 94 cr and INR 20 cr, respectively. EBITDA and PAT margins improved by 1418bps to 24.4% and 88bps to 5.2% respectively. As a result, return ratios – RoE & RoIC – too improved by 154bps (to 12.5%) and 1712bps (to 30.6%), respectively. 

Revenue from operations was at INR 101 cr in Q1FY23 as against INR 29 cr in Q1FY22 (YoY increase of 250.3%) mainly on account of the addition of new stores (added 23 new stores during the quarter) and significant improvement in ticket size (Q1FY22 was hugely impacted by pandemic).
EBITDA and PAT reported profits of INR 35 cr (against the loss of INR 12 cr in Q1FY22) and 14 cr (against the loss of INR 20 cr in Q1FY22) respectively, while EBITDA and PAT margins improved to 9.9% and 4.9%, respectively, during the quarter. Compared to Q4FY22, EBITDA and PAT grew by 2.9% and 73.8% respectively. Despite, input cost inflation led by the spike in global commodity prices, CANTABIL managed to improve its operating performance due to

• Effective management of inventory,
• Comfortable working capital cycle,
• Consistent expansion in new geographies and
• Shorter store turnaround time.

CANTABIL’s strategy of operating through a mix of owned and franchise stores enables it to effectively manage capex and opex, diversify risk and expand faster. The company maintains a 70:30 mix between COCO and FOFO and we see this as a credible strategy which enables it to balance its capex and opex burden while being able to expand its store network across India at a faster pace. CANTABIL has a manufacturing plant in Bahadurgarh, Haryana (area of 1.5 lac sq ft) with an annual production capacity of 10 lac pieces of garments per annum 

• Casual trousers capacity of 3 lac pcs per annum
• Formal trousers capacity of 2 lac pcs per annum
• Suits & jackets of 2 lac pcs per annum
• Shirts capacity of 3 lac pcs per annum
• CANTABIL has two centralized warehouses in Haryana and Delhi to ensure seamless and timely logistics. The company has also acquired land in Delhi NCR to construct a new 7 story warehouse (per floor area of 20,000 sq ft) for a capex of ~INR 80 cr, which will be funded through internal accruals.
  The company’s production strategy involving a combination of in-house manufacturing and outsourcing helps in effectively managing inventory while operating on an asset-light model. CANTBIL’s current annual sales volume run-rate is 45 lac pcs, out of which only about a third is manufactured in-house, and the rest is either outsourced to dedicated fabricators or contract manufacturers.

Rapid urbanization and favourable change in demographics of India have created significant growth opportunities for consumer-facing industries and CANTABIL is expanding aggressively to capture this huge market opportunity. CANTABIL has opened a substantial number of stores each year during the last five years. The company has set a target to open 60-70 new stores per year. In line with this, 57, 61 and 58 stores were opened in FY19, FY20 and FY22 respectively and added 23 new stores in Q1FY23, which took the total store count to 401. 

Management sees huge opportunities in Tier II & III cities. CANTABIL has consciously adopted a strategy of moving into Tier II & III cities. The smaller cities and towns have a growing population of aspirational classes that wish to associate with branded products. However, most international and marquee brands usually do not consider smaller towns as a part of their primary target markets, which allows CANTABIL to expand and gain share from the unorganized market of Tier II & III cities. 

The Indian retail market was valued at US$ 796 in FY20 and it is estimated to be more than US$ 1,077 bn by FY25 (CAGR growth of 6.2%) driven by socio-demographic and economic factors such as urbanisation, income growth and rise in nuclear families. India would become one of the top five retail markets in the world by economic value.

Apparel & Accessories, Jewelry and Consumer Electronics are the three key categories which accounted for 8.3%, 7.5% and 6.4% of overall Indian retail respectively in FY20. The share of Apparel & Accessories is expected to grow to reach 9.3% in FY25, growing at a CAGR of 8.7% from FY20-25. 

The current trend in apparel retailing represents the emergence of category leaders in respective groups of Western (formal and casual), Indian, Athleisure etc. 

• Value fashion retailers such as Cantabil, fbb, Max Fashion, and Vmart are working towards bridging the price gap in the branded apparel market by offering quality products at affordable prices.
• Exclusive Brands Outlets (EBOs) have emerged as a core channel for most national apparel retailers irrespective of the category (type of apparel sold) or fashion (Indian or western) play. This phase also saw the entry of existing leading players into a value- mid segment, like Cantabil spreading its exclusive outlets, Biba launching Rangriti and TCNS launching Aurelia.
• Large format stores (LFS) have also grown their footprints with the expansion of Central, Brand Factory, Shoppers Stop, Reliance Trends, Westside, Decathlon and Pantaloons in towns beyond Metros and Tier I cities and are important growth drivers for organized apparel retailing.

 While the CAGR of the apparel market during FY20-25 is expected to be 8.9%, the EBO and MBO apparel retail are expected to grow at a CAGR of 13.8% and 16.6% respectively in the same period. The growth of both EBO and MBO apparel retail share in the apparel category is expected to outpace the overall category growth. COVID-19 gave impetus to the growth of e- commerce, which is expected to become a significant growth driver for the organized market. EBOs are evolving faster than MBOs in India. Retailing through EBOs enhances the brand equity and recall value of the brand and allows the brand owners to undertake line extensions as the shelf space of each EBO is controlled by them. 

Financials:

Conclusion:

The annual expansion rate is expected to improve in the coming years, and the focus will be on Tier II & III cities, which are evolving as new demand centres. EBITDA and PAT margins are expected to improve by 90bps to 30.0% and 864bps to 15.4% due to higher per-store realization and a decline in finance costs on account of faster debt repayment.  Return ratios – RoE and RoIC – to improve by 2053bps to 36.7% and 2639bps to 68.0% respectively by FY25E.

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