Koutons Retail – A bet on reviving textile sector

Koutons Retail India (Koutons) is an integrated apparel manufacturing and retail company. It has a broad product portfolio, covering apparel for men, women and children, under multiple brands such as ‘Koutons’, ‘Charlie Outlaw’ and ‘Les Femme’ besides accessories, footwear under brand name ‘K2One’ and leather accessories. It has a franchisee based model which ensures lower capital while expanding the presence. Currently, the company has an aggregate of 1,374 retail stores (1.29 mn sq ft). It plans to achieve a store count of 2,000 by this fiscal.

Investment Rationale

Indian Apparel market to grow rapidly: Higher disposable incomes and rising preference for branded apparels will lead to strong growth in domestic organised retail industry. Currently Apparel holds the biggest pie of organised retail with ~38% market share.

Strong Business Model: The company’s focus on franchisee model leads to low funding requirements and allows greater flexibility in terms of location. Around 75% of ‘Koutons’ and 91% of ‘Charlie Outlaw’ stores are managed through franchisees. This exclusive model gives the company the flexibility to expand with limited upfront capital expenditure.

Innovative Family stores: Its innovative family store model concept is getting good response and helping the company to expand with minimal capex. These stores are capable of serving all consumers under the same roof. These stores offer ‘Koutons’, ‘Les Femme’ (women’s) and ‘Koutons Juniors’ (Kid’s) brands and are of a larger size (2500 – 4000 sq ft). The company plans to have 300 ‘Koutons Family’ stores by end of FY10 as compared to ~230 stores as of today.                 

Best Margins in the Industry: The company enjoys best EBITDA margins of ~19% in the organised retail industry. Its backward integration and economical sourcing from SAARC nations like Bangladesh and Sri Lanka will help in maintaining margins. Further higher contribution from ladies and kids segments is likely to help margins higher as margins in these segments are higher vis-à-vis men’s segment.

Outlook & Valuation

The company’s strong business model, aggressive expansion plans, stable margins and favourable demographics make the company one of the preferred bets in organised retail space. We believe company to register 20% CAGR over next 3 years and margins are likely to remain stable. Further the reduction in interest cost due to repayment & restructuring of debt would improve profit margins at net level.

At current market price the company’s stock is trading at 11.2x and 8.7x of its FY10 E and FY11E EPS respectively and at an enterprise value of 5.6x its FY11E EBITDA. Considering the uptick in spending, lower interest costs going forward and healthy margins, we believe the stock is available at steep discount to its peers (Pantaloon is currently trading at 25x of FY11E EPS). Hence we put ‘Buy’ recommendation with first price target of Rs 490 i.e. 12x of FY11E EPS. This represents an upside potential of ~40% from the current levels.