Brokerage firm Emkay Global Financial Services is optimistic about the future prospects of Go Fashion (India) as it has initiated coverage on the stock with a 'buy' recommendation and a target price of ₹1,220, implying a 31 percent upside.
The stock hit its 52-week high of ₹1,450 on BSE on November 1, 2022. As of March 13 closing, the stock is down 35 percent from its one-year peak.
Emkay highlighted that Go Fashion is a ‘category killer’ in women-bottom-wear (WBW) space. It has only about 9 percent share of the branded market, which in turn is only nearly 33 percent of the ₹13,500 crore category.
Emkay said its bullish investment thesis rests on three pillars:
(i) Accelerated gains for branded WBW: Emkay expects Go Fashion to garner a CAGR of 14 percent over FY25-35E against 11 percent for the overall WBW. This will be supported by new innovations, brand investments and distribution expansion.
(ii) The brokerage firm expects Go Fashion to enhance its share by about 500bps over FY25-35E.
"Our detailed analysis of TAM (total addressable market) within the top 300 cities highlights the potential of 1,600 EBOs (exclusive brand outlets) by December 2030 (versus 604 EBOs currently)," said Emkay.
"We see little competitive risk with the entry of new players, as Go Fashion’s first-mover advantage leads to superior store-level RoIC (return on invested capital) of about 35 percent versus less than 10 percent for potential entrants, thereby ensuring quicker scalability," Emkay added.
(iii) Emkay expects Go Fashion's RoIC to improve by 600bps to 26 percent, as margin gains are supported by better working-capital efficiency.
"Go Fashion’s blended capital ratios are suppressed, as it uses low-yielding LFS (large format stores) or MBO (multi-brand outlet) channels (15-20 percent RoIC) to tap a new city before ramping up with its high-yielding EBO channel (35 percent RoIC)," Emkay said.
Emkay expects Go Fashion's earnings to double by FY26E on the back of near-doubling of revenue and gradual margin gains. It expects the high double-digit revenue growth to continue for several years beyond FY26.
The brokerage firm also expects Go Fashion to be far more immune to an unfavourable macro, as distribution-led share gains are relatively easier to attain for an incumbent leader.
Investment rationale by Emkay
Attractive price points and a skewed network suggest a long growth runway: The brokerage firm highlighted that Go Fashion retails 80-85 percent of its products at below the ₹1,000 price point, with an attractive ASP (average selling price) of about ₹715.
The EBO network is also skewed, as the top eight cities, of the total 137, contribute nearly 57 percent of overall EBOs.
The brokerage firm believes Go Fashion can continue adding 125 EBOs annually over the next decade, driven by the fortification of existing cities and entry into new tier-2/3 cities.
"While we expect lower throughputs in tier-2/3 cities to impact the company-level throughputs, we see a limited hit on margins as operating costs are commensurately lower in such cities. Fortification of metros should also continue, as we expect nearly 40 store additions per annum in metros, over the next decade," said Emkay.
First-mover advantage: Emkay highlighted that while attractive store-level metrics for Go Fashion will undoubtedly attract competition, the company has several first-mover advantages, such as a strong brand, coveted locations for more than 600 EBOs, existing project/business-development teams, long-term vendor relationships and an over 10-year educated supply-chain.
"Factoring in such efficiencies grant a significantly lower payback period, of two-three years for Go Fashion versus 8-10 years for new entrants, which implies a much faster expansion for Go Fashion as against new players," said Emkay.
Go Fashion offers the best-in-class proposition: Emkay said Go Fashion scores best on all four parameters – product, pricing, promotion and placement. It offers the widest assortment, with more than 50 styles in 4-7 sizes versus 5-15 styles and a free-size offering for most other brands.
Pricing is based on a cost multiplier of 3 times to ensure a strong value-for-money offering and deeper penetration in tier 2/3 cities, Emkay highlighted.
Go Fashion’s presence across over 600 EBOs naturally promotes the brand in the most coveted retail pockets, leading to lower ad spends at 3-4 percent versus 7-8 percent for mass brands, said Emkay, adding that placement is predominantly in EBOs, which is a relatively asset-light model that ensures shorter thought-to-shelf cycles and offers stronger pricing power.
The stock deserves superlative valuations: Emkay expects Go Fashion stock to deliver 28 percent EBITDA CAGR over FY23-25E which is in line with or better than the best-performing retailers across formats.
"We value Go Fashion stock at an implied EBITDA multiple of 30 times, in step with fast-growing retailers. The stock has corrected by 35 percent from its October 2022 peak which offers an attractive entry point, in our view," said Emkay.
According to a MintGenie poll, six analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
