Edel Invest Research BUY

Indian Terrain Ltd. – Q2FY17 Result Update

Mixed show CMP INR: 137 Target Price: 195

Kshitij Kaji After subdued growth of 13% in Q1FY17, Indian Terrain’s topline grew 30% (highest in the industry) as the
Research Analyst demand environment improved in Q2FY17. However margins came in slightly lower and below our
+91-22-4019 4736 estimates. Key highlights were: (i) Revenue grew at 30% to INR 124 Cr in Q2FY17 which was significantly
kshitij.kaji@edelweissfin.com higher than our estimates of a 20% growth. (ii) EBITDA at INR 15cr grew ~27% y-o-y and was slightly
below estimates of INR 15 Cr. EBITDA margins declined from 12.5% to 12.3% and below our expectations
of 14%. (iii) PBT of INR 13cr (up 10% y-o-y) was also below our estimate of INR 15cr due to lower other
income and higher finance and depreciation costs. (iv) PAT at INR 8 Cr degrew ~29% as the company
became fully taxpaying. With its asset light approach, prudent positioning in the lucrative men’s smart
casual wear and Friday Dressing office wear category, its expansion in boys wear, jeans and footwear,
Bloomberg: ITFL:IN Indian Terrain remains an attractive play. We re-iterate “BUY” with a TP of 195.

52-week range (INR): 185 / 102 Working Capital improves; Short term growth trajectory uncertain
Indian Terrain has improved its working capital cycle in this quarter as cash conversion cycle came in at 108
Share in issue (Crs): 3.7
days in Q2FY17 as against 117 days in Q2FY16 mainly due to improvement in debtor days. In 2 of the last 3
M cap (INR crs): 506 quarters, Indian Terrain has surpassed industry growth by a large margin and has done this while improving
their gross margins and keeping their EBITDA margins intact. The recent crackdown on black money has
Avg. Daily Vol. BSE/NSE :(‘000): 4
created a lot of uncertainty regarding the impact on consumer discretionary stocks. We believe that the
impact on smaller ticket items such as apparel is not going to be severe as transactions have moved online
and to LFOs (non cash transactions). However the impact will have to be monitored over time and growth
SHARE HOLDING PATTERN (%) could marginally suffer in the short term.

New product categories, store openings and strong distribution network to spur long term growth
Indian Terrain continued its store expansion plans and entry into new categories by launching their
Promoter, footwear category (largely under penetrated category). The new boyswear category has also seen good
29.7
traction and should aid growth as it is launched in more EBOs and LFOs. This will help the management
achieve higher throughput from each store which will aid in increasing the operating leverage. We believe
that the superior volume growth would be led by growth across all channels – EBOs, LFOs, MBOs and online
Public, 70.3
sales as the company sharpens its distribution footprint.

Outlook and valuations: Attractive; Re-iterate – BUY

Indian Terrain’s positioning in the lucrative men’s smart casual wear and Friday Dressing office wear
category, along with its expansion into boys wear and footwear will ensure robust future revenue growth.
Its asset light model and presence in the uncluttered non-metro cities are positives. The stock currently
trades at 16x FY17E and 13x FY18E EPS of INR 9 and INR 11, respectively. PAT growth will be subdued this
year as it moves to a full taxpaying company (33% plus tax rate vs 20% MAT rates). However one can
expect Indian Terrain to continue its current growth trajectory at the PBT level.
170

150 Financials
130
Year to March (INR Cr) Q2FY17 Q2FY16 % change Q1FY17 % change FY16 FY17E FY18E
110
Income from operations 124 96 30% 63 96% 325 390 468
90

70
Growth % 20% 20%

50 Total operating expenses 109 84 30% 57 91% 284 336 403

Nov-15

Jul-16
Jul-15

Sep-16
Sep-15
Mar-15

Mar-16
Jan-15

Jan-16
May-15

May-16

EBITDA 15 12 27% 6 140% 41 54 65

Adjusted net profit 8 12 -29% 3 150% 33 33 39
Indian Terrain Sensex
Growth % 0% 19%
Diluted P/E (x) 15.8 15.8 13.3
RoACE (%) 19.6 20.4 21.0
th EV/EBITDA (x) 11.7 8.9 7.4
Date: 16 November, 2016

1 Edel Invest Research

 Indian Terrain Ltd.

Q2FY17 Result
Highlights

(INR Cr) Q2FY17 Q2FY16 %Change Q1FY17 %Change H1FY17 H1FY16 %Change
Net Revenues 124 96 30% 63 96% 188 152 24%
Operating Expenses 109 84 30% 57 91% 166 134 24%
EBITDA 15 12 27% 6 140% 22 18 22%
Depreciation 1 0 294% 0 200% 2 1 109%
EBIT 14 12 19% 6 136% 20 17 17%
Interest expenses 2 1 97% 2 13% 4 3 64%
Other income 1 1 -4% 1 2% 3 3 -1%
PBT 13 12 9% 5 150% 18 17 7%
Provision for tax 5 0 NA 2 152% 6 0 NA
PAT Before Minority & Associate Share 8 12 -29% 3 150% 12 17 -30%
Share of Associates 0 0 NA 0 NA 0 0 NA
Reported PAT 8 12 -29% 3 150% 12 17 -30%
Equity Capital 7 7 7 7 7
No of Shares 4 4 4 4 4
EPS 2.3 3.3 0.9 3.2 4.7
EBITDA Margin 12% 13% 10% 12% 12%
PAT Margin 7% 12% 5% 6% 11%
Tax Rate 35% 0% 35% 35% 0%

2 Edel Invest Research

 Indian Terrain Ltd.

About the Company

Indian Terrain is a renowned branded apparel retailer in India. Its apparel brand in the men’s Smart Casual
category sells under the brand ‘Indian Terrain’. Indian Terrain was incorporated on 29th September, 2009 as
a subsidiary of Celebrity Fashions Ltd. In 2000, it was set up as a division of Celebrity Fashions. In September
2010, the Indian Terrain division of Celebrity Fashions was demerged into the company on a going concern
basis with effect from 1st April, 2010. Indian Terrain’s shares got listed in March 2011. Currently, the brand
offers a product range comprising shirts, trousers, knits, jackets and sweaters.

Investment Theme
Unique positioning in the Men’s Wear category
The Indian branded apparel market has evolved over the years due to the country’s favourable
demographics, high disposable income and growing brand awareness. Indian Terrain has positioned itself as
a contemporary Smart Men’s Casualwear brand. Indian Terrain’s Smart Casuals are uniquely positioned,
targetting the working class in the age group of 25-44 years, who are brand and fashion conscious. The
brand stands for ‘masculine’ sensibility, yet conforms to the popular ‘Friday Dressing’ concept. In spite of
competition from other well-known brands in this category, Indian Terrain has managed to differentiate
itself with contemporary designs and superior product quality. This reflects in its revenue growth, which has
grown at a CAGR of 24% over FY11-FY15 from INR 121 cr to INR 290 cr. Going forward, we expect revenues
to grow at 15% CAGR over FY16-18E.

Revenue growth led by strong distribution network, focused approach on branding

Indian Terrain has established a pan-India distribution network spread across 200 cities and ~1000 touch
points through varied distribution channels. Its strong distribution network comprises EBOs, MBOs as well as
LFOs. It has focused on expanding into Tier 2 and Tier 3 cities with long-term growth in mind. The company
has consciously followed the Hub & Spoke model for expansion, which enables it to enhance its penetration
in a specific region before growing further. Going ahead, the company plans to expand EBOs to 200 (110
EBOs currently), mostly through the franchisee route, which in turn will aid revenues, besides improving the
return ratios.

Asset Light Model – a key to success

Indian Terrain has an efficient procurement team in place, which follows an outsourcing model for
manufacturing its products. 25% of the company’s woven outsourcing requirement is met by Celebrity
Fashions while other suppliers make up for the rest. This outsourced model results in high RoCEs of +20%.
Indian Terrain was demerged from Celebrity Fashions in 2010. Celebrity Fashions was set up in 1988, and
has more than two decades of experience in designing and manufacturing branded apparels. Celebrity
Fashions is one of India’s leading garment exporters. It has manufacturing capabilities in both men’s wear as
well as women’s wear, with a product portfolio of shirts, trousers, shorts, jackets and dresses, among
others. Celebrity Fashions has been making apparels for large international labels like Timberland,
Northface, LL Bean, Marks & Spencers and Vans.

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 Indian Terrain Ltd.

Key Risks

Increase competition:
Many MNC apparel brands as well as several domestic apparel players have begun focusing on the Smart
Casuals segment within men’s wear. Any increase in competition from these players would pose a threat.

Outsourcing of Manufacturing:
Around 25% of woven manufacturing is from Celebrity Fashions. Such high exposure to one vendor poses a
key risk.

Semi-Urban slowdown:
As target consumers are from Tier 1, Tier 2 and Tier 3 cities, any material economic slowdown in the these
areas could result in lower discretionary spending which would impact sales growth.

Key Personnel Risk:

Indian Terrain has done well since its inception under the guidance of its current CEO, Charath Narsimhan.
Going forward, his expertise and experience will be crucial.

4 Edel Invest Research

 Indian Terrain Ltd.

Financials Financial Statements (INR Cr)

Year to March FY14 FY15 FY16 FY17E FY18E
Net revenue 232 290 325 390 468
Ma teri a l s cos ts 118 149 159 189 227
Gros s profi t 114 142 166 201 241
Other expens es 78 95 109 129 154
Empl oyee cos ts 11 13 17 18 22
EBITDA 24 34 41 54 65
Depreci a tion & Amortiza tion 2 3 2 5 5
EBIT 22 31 39 50 60
Other i ncome 0 1 5 5 4
EBIT i ncl . other i ncome 22 31 44 54 64
Interes t expens es 10 9 7 5 6
Profi t before tax 13 23 37 49 58
Provi s i on for tax 3 5 4 16 19
Adjus ted Profi t 10 18 33 33 39
Ba s i c s ha res outs tandi ng (Cr) 3 4 4 4 4
EPS (INR) 3.5 5.0 8.9 8.8 10.5
Di vi dend per s ha re (INR) 0.0 0.0 0.0 0.0 0.0
Di vi dend pa yout (%) 0% 0% 0% 0% 0%

Common size metrics ‐ as % of net revenues

Year to March FY14 FY15 FY16 FY17E FY18E
COGS 51.0% 51.2% 48.8% 48.5% 48.5%
Di s tri bution & Sel l i ng Exp 33.8% 32.7% 33.5% 33.0% 33.0%
Empl oyee Exp 4.8% 4.6% 5.1% 4.6% 4.6%
G&A Exp 0.0% 0.0% 0.0% 0.0% 0.0%
Depreci a tion 1.1% 1.0% 0.7% 1.2% 1.0%
EBITDA ma rgi ns 10.4% 11.5% 12.7% 13.9% 13.9%
EBIT ma rgi ns 9.4% 10.5% 11.9% 12.7% 12.9%
Adj profi t ma rgi ns 4.2% 6.2% 10.2% 8.5% 8.3%
Net profi t ma rgi ns 4.3% 6.2% 10.2% 8.5% 8.3%

Growth ratios (%)

Year to March FY14 FY15 FY16 FY17E FY18E
Revenues 48.1% 25.1% 11.9% 20.0% 20.0%
EBITDA 59.3% 38.3% 22.7% 31.8% 20.0%
PBT 162.0% 81.3% 62.6% 32.9% 18.6%
Adj profi t 162.5% 82.7% 83.8% -0.3% 18.6%
Net profi t 141.6% 81.1% 83.8% -0.3% 18.6%

5 Edel Invest Research

 Indian Terrain Ltd.

Balance sheet (INR Cr)

As on 31st March FY14 FY15 FY16 FY17E FY18E
Equi ty ca pi ta l 6 7 7 7 7
Res erves & s urpl us 30 119 152 185 224
Borrowi ngs 56 39 51 58 63
Other l ong-term l i a bi l i ti es 5 8 12 14 15
Sources of funds 98 174 223 265 310
Gros s Bl ock 10 9 31 31 31
Accumul a ted Depreci a ti on (2) (2) (5) (10) (14)
CWIP - - - - -
Net Fi xed As s ets 8 7 26 21 17
Net i nta ngi bl e a s s ets - - - - -
Inves tments - 59 - - -
Inventori es 43 36 45 55 64
Sundry debtors 77 96 117 118 141
Ca s h a nd equi va l ents 3 2 70 101 123
Loa ns a nd a dva nces 1 2 2 3 4
Tota l current a s s ets 124 136 235 276 331
Sundry credi tors a nd others 37 31 52 49 59
Provi s i ons 6 11 1 1 1
Tota l current l i a bi l i ti es & provi s i ons 43 42 52 50 60
Net current a s s ets 81 94 183 226 271
Deferred ta x a s s ets - - - - -
Other l ong-term a s s ets 9 14 14 18 22
Uses of funds 98 174 223 265 310
Book va l ue per s ha re (INR) 12.7 35.2 42.9 51.7 62.3

Free cash flow

Year to March FY14 FY15 FY16 FY17E FY18E
Net profi t 9.9 18.0 33.0 33.0 39.1
Add : Depreci a ti on -0.1 0.5 2.3 4.6 4.6
Others 11.4 9.1 1.8 0.4 2.1
Gros s ca s h fl ow 21.2 27.6 37.2 38.0 45.8
Cha nges i n WC -7.4 -16.9 -20.7 -12.8 -23.7
Opera ti ng ca s h fl ow 13.9 10.7 16.5 25.2 22.1
Ca pex 0.5 0.7 22.0 - -
Free ca s h fl ow 14.4 11.4 38.5 25.2 22.1

Cash flow metrics

Year to March FY14 FY15 FY16 FY17E FY18E
Ca s h fl ow from opera ti ons 13.9 10.7 16.5 25.2 22.1
Ca s h Fl ow from i nves ti ng a cti vi ti es 0.7 -58.3 -16.9 4.5 4.0
Ca s h Fl ow from fi na nci ng a cti vi ti es -14.4 47.3 5.3 2.0 -1.1
Ca pex 0.5 0.7 -22.0 - -
Di vi dends - - - - -

6 Edel Invest Research

 Indian Terrain Ltd.

Profitability & efficiency ratios

Year to March FY14 FY15 FY16 FY17E FY18E
ROAE (%) 32% 22% 23% 19% 18%
ROACE (%) 23% 23% 20% 20% 21%
ROIC (%) 21% 27% 31% 22% 25%
Inventory da y 133 88 104 106 103
Debtors da ys 121 120 132 110 110
Pa ya bl e da ys 115 76 119 95 95
Ca s h convers i on cycl e (da ys ) 123 115 126 117 116
Current ra tio 2.8 3.2 3.2 3.5 3.5
Debt/Equi ty 1.6 0.3 0.3 0.3 0.3
Core ROACE (%) 23% 30% 29% 31% 34%

Operating ratios
Year to March FY14 FY15 FY16 FY17E FY18E
Total a s s et turnover 2.4 2.1 1.6 1.6 1.6
Fi xed a s s et turnover 23.2 31.3 16.4 12.7 15.2
Equi ty turnover 7.5 3.6 2.3 2.2 2.2

Du pont analysis
Year to March FY14 FY15 FY16 FY17E FY18E
NP ma rgi n (%) 4.2% 6.2% 10.2% 8.5% 8.3%
Total a s s ets turnover 2.4 2.1 1.6 1.6 1.6
Levera ge mul tipl i er 3.1 1.7 1.4 1.4 1.4
ROAE (%) 31.8% 22.1% 23.1% 18.7% 18.4%

Valuation parameters
Year to March FY14 FY15 FY16 FY17E FY18E
Di l uted EPS (INR) 3.5 5.0 8.9 8.8 10.5
Y‐o‐Y growth (%) 158.8 44.6 77.3 -0.3 18.7
Di l uted PE (x) 40.5 28.0 15.8 15.8 13.3
Pri ce/BV (x) 11.0 4.0 3.3 2.7 2.2
EV/Sa l es (x) 2.1 1.7 1.5 1.2 1.0
EV/EBITDA (x) 19.9 14.4 11.7 8.9 7.4
Di vi dend yi el d (%) 0.0 0.0 0.0 0.0 0.0

7 Edel Invest Research

 Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200

Vinay Khattar

Head Research

vinay.khattar@edelweissfin.com

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

Indian Terrain 5 years price chart

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8 Edel Invest Research

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9 Edel Invest Research