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Reid & Taylor is the biggest driver of sales.

Bhavana Acharya

Low valuations and a unique business model make the stock of Brandhouse Retail (BHRL) an attractive buy. BHRL functioned as the retail arm of textile player, S. Kumar’s Nationwide, and was hived off and listed as a separate entity in March this year.

At Rs 23, the stock trades at 7 times its FY-09 earnings and 6 times the estimated FY-10 earnings, which is a significant discount to its retail peers. Investors may invest in this stock with a horizon of one year, while limiting exposure due to the stock’s small-cap status.

BHRL’s primary business is to operate as a master franchisee for international brands. Here, it retails those brands that already have an established recall, ensuring a quicker pick up and sustenance of sales.

Its portfolio comprises Reid & Taylor, Dunhill, Carmichael House, Stephens Brothers and Belmonte. It retails these brands through exclusive outlets. The company is looking to expand this portfolio and will add new brands in the next few quarters.

This model places the company at an advantage; it operates on a pure buy-sell model for inventory, with production and distribution of the apparel undertaken by the producers of the brand, curbing costs for BHRL.

Additionally, advertising will be the responsibility of the brand’s producers and not BHRL, again helping on the cost front, while allowing BHRL to benefit from brand equity.

Besides being a franchisee of global brands, the company has also entered into a joint venture with mid-price Italian brand Oviesse, aimed at young adults and children.

This is a deviation from BHRL’s other brands that are concentrated on the premium end of the spectrum. BHRL will hold 62.5 per cent in the venture, and will bring in Rs 161 crore in equity over the next five years.

Oviesse stores will roll out later this year and the company aims at reaching a wider market, and move into smaller cities with this brand.

The company intends to open 190 stores in a span of five years. In addition to private brands through Oviesse, BHRL will retail those of its parent, S. Kumar’s Nationwide.

The company’s retail network spans 683 stores with plans to take this count to 900 by the end of this financial year calling for a capital investment of approximately Rs 28 crore.

BHRL expanded by about 2.5 lakh square feet in FY-09, primarily through debt. About half the company’s current store count for the past two years has been through franchisees — a move undertaken to counter the need for capital that would have been necessary had BHRL aimed at owning all stores.

The company will increase the count of its own stores in the future, given the softening rentals and signs of pick up in retail real estate, though franchisees would still be used for expansion.

With the company’s debt-equity ratio on the lower side at 0.9 times, with an interest cover of 9 times, funding problems seem unlikely. BHRL will cap debt at 2 times its equity.

Reid & Taylor is the biggest driver of growth, followed by Belmonte and Carmichael. Sales grew 76 per cent in FY-09 over FY-08, but a two-fold jump in interest and employee costs and a 78 per cent increase in costs of raw material brought down net profits, which grew by a mere 2 per cent.

Margins, consequently, have suffered, sliding from 10 per cent to 7.5 per cent at the operating level and 4 to 2 per cent at the net level.

Lower rentals and introduction of private labels may help expand margins in the coming quarters. An improvement in working capital turnover from 2.7 times in FY-08 to 3.4 times in FY-09 also bodes well.

The company is weighted on the premium apparel side, with plans to foray into the mid-price segment. It is the affordable segment that would deliver high growth. Similar to its peers, footfalls have been on the decline. Stores opened through its mid-price venture with Oviesse will take about two quarters to mature, which may tell on margins.

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