Buy This Small-Cap Apparels Stock For Target Price Of Rs 1,450, Brokerage Expects Gains Up To 34%

ICICI Securities, in its recently published report on Go Fashion (India) Limited, published on August 11, has suggested buying the stock of the company for a target price of Rs 1,450 apiece. Considering the brokerage's estimated target price, if the stocks of the company are bought at the current market price, it could witness potential gains of 34% in 12 months or 1 year.

1QFY23 revenue print of Rs1.65bn (up 42% QoQ and 16% above 3QFY22) was great. Higher growth in LFS (GM dilutive; salience of 23.1% vs 17.6% QoQ) and sharp increase in other opex (mainly ad-spends) led to (reported) EBITDA margin print of 32.1% (3QFY22: 36.7%).

Stock Outlook & Returns

The current market price of the stock is Rs 1084.45 apiece was opened at Rs 1090.40 apiece. The stock is currently trading Rs 237.15 above the 52 week low of Rs 847.30 apiece, and Rs 255.45 below the 52 week high of Rs 1339.90 apiece, respectively.

Over the past week, the shares of the company gained 3%. Stock in the past 1 month gained around 8.39%. In the past 3 months, the stock gained 16.97%. In the past 6 months, the stock gained 9.58%. It was listed on exchange last year in November. Since its listing, the stocks have fallen 13.56%.

Good quarter on an overall basis

On a reported basis, Go Fashion reported revenue print of Rs1.65bn, up 42% QoQ. We note that sales were up 16% vs 3QFY22 (good quarter for most retail cos).

Key highlights

(1) LFS sales grew much ahead of EBO (contribution increased to 23.1% from 17.6% QoQ). We note that from 3Q levels, LFS has grown 21% vs EBO growth 15%.

(2) ASP has increased 9% vs FY22 levels to Rs718 (includes both price and mix benefit),

(3) SSSG vs pre-Covid (1QFY20) was 30%.

Higher spends and channel (mix) weigh on margins

On QoQ basis, gross margins contracted 120bps to 60.6%. We believe this is largely due to increased LFS salience (as highlighted above). We note that the price hike benefit (which was taken in Dec-21) is likely to have come in this quarter. We await any incremental update on RM inflation but last quarter the management said that current price hikes are sufficient to cover for the (RM) inflationary pressure.

EBITDA margins (on reported basis) were down 28bps QoQ to 32.1%. Staff costs and other expenses increased by 17% and 68% QoQ, respectively. Ad-spends were up 4x vs FY20 levels (as % of sales up to 4.5% vs 1.8-1.9% in FY19-20; there was some indication of the intent to increase spends for the year (up to 3%).

The company launched several brand awareness initiatives with a six-week campaign ending July-22. We like this considering most brands are underinvested (on ad-spends) for the last year given the environment was not conducive. Furthermore, there are some investments in improving supply-chain (commissioned new warehouse facility in Bhiwandi) and tech capabilities. The working capital structure at the end of 1Q (in terms of number of days) is largely in-line with our expectation (full-year).

Expansion plans on track

It added 30 new EBOs in the quarter (533 stores) and entered one new city (total 135). We note that store expansion had picked up in the previous quarter - it added 27 stores in 4QFY22 itself (54 EBO stores in FY22). It is confident on adding 120-130 stores each year going forward. There was a marked increase of 8% QoQ in number of LFS outlets to 1,597.

Valuation and risk

"We like the increased ad-spends in the quarter (4.9% of sales vs typical 2%) - these are good spends and we expect (good) brands to increase it in the near-term given most have under-invested for last two years; that said, only limited ones have the required headroom given the inflationary pressure," the brokerage said.

The brokerage added, "We believe the brand has been able to create a replicable template of diverse product portfolio along with a highly efficient operating model of EBOs. Going forward, there is (1) comfort on (product-level) margins and (2) continued thrust on EBO store addition. Further, there seems to continued success in new products outside of core products. Maintain BUY with a DCF-based revised target price of Rs1,450 (from Rs1,300). "

"We increase our earnings estimates for FY23-24E by 16- 14%; modelling revenue / EBITDA / PAT CAGR of 45% / 113% / 94% respectively over FY22-FY24E," The brokerage added.

According to the the brokerage, the key risks for the buy call are: (1) risk of high share from Reliance Retail and (2) likely increased competition from new players entering the category.

About - Go Fashion (India) Limited

Go Fashion (India) Limited was incorporated in 2010. The company is mainly engaged in the business of manufacturing and sale of apparel for women and kids. Go Fashion is a well-established women's bottom wear brand in India with multi-channel distribution and a market share of 8 per cent in the branded women's bottom wear market as of FY20. Go Fashion sells its products through an extensive network of 459 exclusive brand outlets(EBOs) that are spread across 23 states and union territories in India. Its distribution channels also have large format stores (LFS) including Reliance Retail Central Unlimited Globus Stores and Spencer's Retail among others. The company also sells products through its website and online marketplaces and multi-brand outlets (MBOs).

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.