Target: ₹1,463

CMP: ₹1,078.75

Go Fashions’ Q3 revenue grew about 25 per cent y-o-y to ₹180 crore, in line with our estimates. Demand eased after the festival season, but rose in December. The EBITDA margin contracted about 320 bps y-o-y to 33.5 per cent, expected as Covid-19 related cost savings have reduced. The company reported 10 per cent same-store sales growth (SSSG) y-o-y arising from 10 per cent value growth and 2 per cent SSSG volume decline. Its cluster-based store-expansion model has led to revenue cannibalisation at individual store level thus impacting SSSG and volume growth. On same-cluster sales growth, volume growth was 11 per cent y-o-y. The management aims at 4-5 per cent SSSG volume growth. The gross margin (including sub-contracting expenses) contracted about 170 bps y-o-y to 59 per cent led by marketing offers from LFS partners. 

Working-capital days narrowed y-o-y, but are yet higher than pre-Covid at 151 (vs. 178 in 9M FY22). The management intends to bring down inventory days to 90 (from 120 now) by reducing inventory at warehouses. Network expansion continued; it added 35 (net) EBOs in Q3 (101 in 9M FY23), taking the total to 604. It will continue to add 120-130 stores every year. The management guided to 60-60.5 per cent/32-33 per cent gross/EBITDA margins. The stock price has fallen 20 per cent+ in the last three months.

We believe core products, higher gross margins and return ratios are positives and make the company a good long-term investment idea. Risks: Dependence on a single brand and category, lacking barriers to enter the women’s bottom-wear market. We upgrade our rating to Buy with a target price of ₹1,463 on 23x FY25e EV/EBITDA.

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