Mandhana Retail Ventures Limited is an Indian company which is in the business of marketing and selling branded apparel. Mandhana retail is a public company listed on the Bombay Stock Exchange (BSE) and National Stock Exchange of India Limited (NSE).
Setting the Table:
Before we begin our analysis/valuation of the share target price for Mandhana Retail Ventures Ltd; it is important to observe the facts, economy, industry outlook, financials, past performance and competitive advantages. After analysis, each section will form assumptions leading to our valuation.
- Mandhana Retail Ventures sells 100% of its products (clothing) under the brand name “Being Human”.
- The “Being Human” brand is owned by Salman Khan foundation and Mandhana retail has the license to use it till 2020. The company plans to renew it for a 9 year period post-2020, however, this is a risk.
- As of March 2017, the company had net sales of 216 crores with a net profit of 20.02 crores.
- Mandhana Retail Ventures sells branded apparells from EBO (Exclusive brand outlets), SIS (store in stores), Franchise outlets, distributors (traditional) and online channels.
- Rakesh Jhunjhunwala owns 12.74% stake in the company and with a board seat.
Mandhana Retail ventures Ltd operates in the branded apparel market in India. The branded apparel market is part of the Indian textile industry. The Indian textile industry is slated to grow at 9% till 2020 and 7% for the period from 2020 to 2025.
The Indian branded apparel market is slated to grow at 14% CAGR till 2025. Further to this, a key important point to note is that currently organized retail is only about 6-8% of total retail as opposed to nearly 80% in developed western countries.
Industry Experts estimate that branded apparel retail will grow at 1.5X GDP in next ten years.
Another important point to keep in mind is that the growth of branded apparel depends on the per capita income and disposal income in India. As the Indian economy grows the rising per capita income should help the industry growth rate. However it is important to understand that merely rising per capita income will not benefit the sector, the ideal scenario would be growth with low levels of inflation as this gives rise to disposable income.
The competitive intensity is high with many players and low entry barriers in the Industry, the only differentiating factor is the strength of the brand.
Assumption 1: The Branded apparel market in India will grow in the range between 9-14% CAGR till 2027.
Performance of Mandhana Retail ventures
Let us now analyze the performance of Mandhana Retail ventures and the “Being Human” brand.
Analysis of Existing Business
The company mainly operates in Indian market and exports to middle east markets.
The distribution network of the company comprises of EBO (Exclusive brand outlets), SIS (store in stores), Franchise outlets, distributors (traditional) and online channels.
The EBOs and Franchise outlets have grown from 5 in 2013 to 53 in 2017.
The SIS and other distribution networks have grown from 33 in 2013 to 404 in 2017.
It had total 457 selling points across in India in 2017, this translates into sales of close to 40 lakhs per outlet per annum in 2017.
The company has partnered with Myntra and other online portals to sell clothing under “Being human” brand online, this account for close to 6% of company sales in 2017.
Analysis of Future Growth prospects
The future growth for Mandhana Retail can come from 2 things namely
- Higher sales in existing outlets: In my view, Mandhana Retail will be able to grow by investing in more money into building the “Being Human” brand and by introducing new brands to increase revenues. The current investment into the “Being Human” brand is 5% of sales (royalties paid to Salman Khan foundation). Further to this, the company spends close to 3% of sales on advertising. The company also plans to enter into the women’s wear segment, however, it will need to increase spends on advertising and branding to appeal to women. Mandhana retail in its investor presentation for of Q1 FY18 has mentioned that it will introduce a new brand by FY19.
- Increase in the number of outlets: The distribution network of the company can grow on two fronts namely, India and outside of India. The company plans to increase the POS (point of sale outlets) to 1600 by 2020 from 600 existing POS. Further to this, the company plans to increase EBO (Exclusive business outlets) from 53 in 2017 to 200 by 2020. The company has tied up with myntra.com and is exploring other tie-ups in the online space.
Assumption 2: Mandhana Retail will be able to scale up its distribution network to 1600 POS and introduce new brands in coming years.
Risks and Critical factors
The biggest risk is the termination of the brand license agreement with the Being Human foundation. However, the company has assured time and again that they don’t see any problem renewing the agreement in the near future. Another risk is the attachment of the brand to Salman Khan as a personality and its dependency on his actions and reputation.
The company may not be able to scale up and maintain margins in tie 2 and tier 3 cities. The average spends per customer is between 1500-2000 for the Being Human merchandise, as the company expands into tier 2 and tier 3 cities it may not be able to maintain the price points.
The key competitive strength of a brand is either a higher market share or higher profit margins. In my research of the “Being Human” brand I could not find evidence of either, however, this may be due to the fact that it is fairly new brand and in the growth stage, but nevertheless, this limits the growth prospects and chances of a high valuation in my view.
Assumption 3: Mandhana retail will be able to mitigate and manage the above risks.
Financial Statement Analysis
There is a lack of information when it comes to the track record as the company was spun off from Mandhana Industries in 2016. This limits our analysis to a great extent.
The company does not pay out any dividends and is still in the growth phase.
Mandhana retail has experienced a decent growth rate of 18.5% CAGR in revenues over the past 3 years (2014-2017).The revenues in 2017 were impacted by one-off events spin-off (lack of focus from management, please note this is the reason given by management) of the company, GST implementation, and demonization.
Assumption 4: The revenue of the company will grow in the range of 9-14% CAGR for next 10 years.
As of 2017, the PBIT (profit before interest and tax) margins for Mandhana retail were close to 16%. Due to lack of financial history, we can only go by the forward-looking statements of the management which expects it to remain at 16% for the foreseeable future. However as is always the case we should be conservative in our approach when it comes to valuation and the profit margins will depend upon the brand strength of the “Being Human” brand.
Assumption 5: The PBIT (Profit before interest and tax) margins will be in the range of 10-16%.
In order to maintain and grow its revenue in the future. Mandhana will need to reinvest its earnings in three things: distribution network, new designs, and development of existing and new brands.As of 2017, Mandhana has a return on equity (PBIT/Shareholder Equity) of 43% which is very high and signifies that its strength lies in intangible assets like the brand. We estimate that Mandhana Retail will spend close to 2% of its net revenue on expansion each year. This 2% is over and above investments in the form of the royalty of 5% in Being Human and 3% of sales spent on advertising.
Almost always as is the case with predicting future earnings, there are many possible outcomes. Therefore a scenario analysis is important. After considering all factors our valuation reflects Average Per Share value of 212 Rs per share with a company valuation of 468.2 Crores INR. A range of 145 to 422 Rs per share value was discovered as a result of conducting scenario analysis on our assumptions.
The current market price of 145 Rs (November 2017) as against the valuation of 212 per share.Therefore we feel that Mandhana Retail is –undervalued valued by close to 32.6%; which is a decent margin of safety as a value investor in a mature company. In conclusion – A long-term investor can start buying at current levels of 145 Rs and keep adding if the share price goes down in the short run. The time horizon will be 2 years. Please remember to keep an eye on news updates on the company with an eye on the assumptions mentioned in this report.
Please note that the valuation will be updated each quarter. As also will any news impacting any of the assumptions or factors in Mandhana Retail’s target price; and valuation; so STAY TUNED.