Pantaloons and Madura Fashion: Two stitches at a time

By combining Pantaloons with Madura Fashion & Lifestyle, Kumar Mangalam Birla believes he will be able to justify a far higher valuation

After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.

Pantaloons and Madura Fashion: Two stitches at a time
Image: Vikas Khot

A day before Future Group Founder and CEO Kishore Biyani and vice chairman of Bharti Enterprises Rajan Mittal combined operations, the Aditya Birla Group, on May 3, announced a retail consolidation of its own: Pantaloons Fashion & Retail, which the Group acquired from Biyani in 2012, was merged with Madura Fashion & Lifestyle to create India’s largest apparel retailer. Once the merger is approved, it will trade as Aditya Birla Fashion & Retail Ltd.

The logic for the merger is straightforward: Madura Fashion & Lifestyle had been housed in Aditya Birla Nuvo, a Group company that functions as a vehicle for holding stakes in new businesses. After the acquisition of Pantaloons, Kumar Mangalam Birla, chairman of the Aditya Birla Group, believes the market failed to recognise the combined value of the portfolio of brands the two businesses have. These brands, sold across 1,869 stores, range from Peter England to premium labels like Allen Solly and Van Heusen.

Birla believes the Pantaloons business was undervalued at about Rs 1,000 crore. “The consolidation will unlock value for the shareholders by giving them an opportunity to participate in the fashion space directly,” he said in a press release.

SP Tulsian, a stock market analyst in Mumbai, says that, historically, family-run businesses in India have preferred to have multiple businesses under one company to diversify risk and ensure that one business can offset potential weaknesses in another. “But, as individual ventures like Aditya Birla’s retail business grow, promoters feel they need to be brought under a separate entity that has its own identity. This is also done because foreign investors are uncomfortable with complicated business structures,” says Tulsian.

The Aditya Birla Group will have its hands full integrating the two companies. While Madura has relatively healthy Ebidta (earnings before interest, taxes, depreciation and amortisation) margins of 12 percent, Pantaloons’s is just 2.3 percent.

But Birla has room to be optimistic as the merger will put both Madura and Pantaloons on a stronger footing. The numbers back his optimism: In the past 10 years, Madura Fashion & Lifestyle has had sales growth of 23 percent a year, to touch Rs 3,226 crore. With Pantaloons, combined sales amount to Rs 4,759 crore in FY2015. Ebidta for both businesses stand at Rs 500 crore.

In a call with investors, Ashish Dixit, business head, Madura Fashion & Lifestyle, said Pantaloons’s margins have increased by 60 percent in the last nine months to 4.2 percent.

The plan is to tap into back-end and sourcing synergies to further improve margins. Shareholders stand to gain as well. Pantaloons’s 9.3 crore shares will be boosted with 63 crore shares issued by Aditya Birla Nuvo in the new entity. This will ensure more liquidity.

Investors appear to approve of the deal: Since the restructuring, share performances of Aditya Birla Nuvo and Pantaloons have risen. On May 20, Pantaloons shares were trading at Rs 190.5 on the BSE, up 36 percent. In the same period, Aditya Birla Nuvo’s shares have gained 19 percent to trade at Rs 1,850.   

(With inputs from Aveek Datta)

(This story appears in the 12 June, 2015 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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