This small-cap apparel brand eyes 62% revenue growth in 3 years: Can it rerate?

Cantabil Retail India Ltd faced setbacks after 2010 but rebounded with strategic restructuring. Now debt-free, it targets ₹1,000 crore in sales by FY27, expanding its store presence, boosting margins, and leveraging e-commerce.

The recession after the 2008 global financial crisis severely impacted businesses worldwide. Companies with minimal debt managed to survive, while others either closed or struggled to stay afloat.

Cantabil Retail, a rising apparel brand, faced its own set of challenges in 2010. While its growth trajectory had been strong until that point, the economic downturn forced the company to step back and restructure its operations.

But rather than succumbing to the pressure, it used the crisis as an opportunity to rebuild. Today, the company is on a strong growth trajectory, with ambitious goals set for the future, including a revenue target of ₹1,000 crore by FY27. Cantabil is now on the path to sustained growth. Let’s take a closer look at how this small-cap apparel company turned crisis into an opportunity and what lies ahead in its journey.

Cantabil restructuring after the recession hit it hard.

In FY10, Cantabil had 411 stores and reported revenues of ₹202 crore, with an earnings before interest, taxes, depreciation, and amortization (Ebitda) of ₹31 crore and a PAT of ₹15 crore. One of the key metrics, the average revenue per store, was ₹55 lakh, and the business was growing steadily. However, the company needed funds for further expansion. Hence, it decided to raise ₹105 crores in September 2010 through an initial public offering.

The funds were earmarked for ambitious plans: setting up a new manufacturing facility in Haryana, opening 180 new stores across many cities, increasing working capital, and repaying debt. The company aimed to scale rapidly and cement its presence in India’s retail market.

However, the economic environment soon changed. A slowdown in India’s gross domestic product (GDP), driven by global recessionary trends, hit Cantabil hard. Sales began to slow, and the company’s expansion plans quickly became unsustainable.

In response, Cantabil tried to clear its inventory by offering massive discounts of up to 80%. While this move helped liquidate stock, it had a significant negative impact on profitability and operational performance. Cantabil then realized the need to restructure the business. By FY12, the company began taking tough but necessary steps.

It drastically reduced its store network from 411 in FY10 to 143 by FY14, trimming its employee base from 1,100 to 885 during the same period. This strategic move enhanced operational efficiency, cutting down inventory days from 217 in FY10 to 153 in FY14.

But it laid the foundation for brighter days ahead.

From FY10 to FY14, Cantabil faced significant challenges. Yet, as the saying goes, tough times either make or break you. In Cantabil’s case, these challenges paved the way for a more focused and efficient business model. It laid the foundation for a strong and stable comeback in the coming years.

The company adopted a more thoughtful and selective strategy for expanding its stores to keep the debt burden low. The number of stores grew steadily from 143 in FY14 to 241 by FY19, accompanied by robust financial results.

Revenue grew at a CAGR of 21%, reaching ₹289 crore in FY19, up from ₹100 in FY14. This was driven by a significant increase in revenue per store, rising from ₹75 lakh to ₹1.3 crore. Meanwhile, PAT improved to ₹12 crore from a loss of ₹9 crore. The company’s Ebitda also rose to ₹30 crore from a loss of ₹3 crore, with a margin of 10.3%.

Meanwhile, the metrics influencing stock prices—return on equity (RoE) and return on capital employed (RoCE)—improved to 10.3% and 13.5%, respectively, from negative 4.4% and 4.5%. The change in fundamentals fueled its share price at a CAGR of ~62%, rising from ₹3 to ₹56 over six years from calendar year 2014 to 2019.

What about recent performance?

However, another tornado—the pandemic—was waiting for it, again slowing down its growth strategy. Lockdowns across the country affected all parameters, severely impacting its performance in FY21. However, once the economy reopened, revenue buying helped it regain momentum.

This helped its revenue grow at a 25% CAGR from ₹252 crore to ₹616 crore in the last four years. On the other hand, profit surged 6x to ₹62 crore at a CAGR of 58%. Its Ebitda margin increased by 6% in FY24 but fell by 4% in FY24 due to a demand slowdown.

Moreover, its RoE and RoCE surged from 7.9% and 25.4% to 35.3% and 57.1% in FY23. This improvement reflected the company’s strong operational efficiency and recovery. However, despite these gains, the numbers fell slightly in FY24 due to external factors like rising input costs, among other things.

The subdued performance in FY24 affected the entire industry, primarily due to a slowdown in discretionary spending linked to weak consumer demand. Additional factors included national elections, heat waves, and decreased wedding dates. However, a reversal is anticipated starting in H2FY25, fueled by more wedding dates and recovery in the rural segment.

Cantabil entering the next phase of growth

To start with, Cantabil wants to grow its revenue to ₹1,000 crore by FY27, which is 62% higher than current levels. To achieve this goal, it has planned multiple expansion strategies that are expected to bear fruit gradually in the coming years.

Cantabil has a pan-Indian presence, with 533 stores as of FY24. However, the company plans to expand its retail presence by opening 70 to 80 new stores annually, reaching 700 stores by FY26 and 775 by FY27. Moreover, it plans to expand internationally, with the first store expected to open in Nepal.

Cantabil intends to launch these stores in underserved tier 2 and tier 3 cities with an expanding middle-class population. This strategy aims to enhance sales performance and establish the brand for the next leg of growth. Notably, 50% of its customers are repeat customers in FY24.

Furthermore, the stores are expected to be larger, enabling the company to provide a wider variety of products all in one place. Ventura Securities believes that increasing retail space will boost its sales, potentially fueled by a 15-18% rise in volume. This volume growth may also be backed by ramping up production from 6 million pieces to 9 million by FY27. Its FY24 volume growth stood at 10%.

It has a diversified product portfolio, including men’s, women’s, children’s, and accessories. It derives 83% of its revenue from men’s clothing, with the remaining portion coming from women’s and children’s wear. However, men’s wear has lower margins than women’s and children’s.

Given this, the company is expanding into the more profitable segments of women’s and children’s apparel. This aligns with its strategy to offer customers a “one-stop solution” for all family requirements.

This strategy is expected to raise the average order value from ₹1,039 in FY24, increasing total revenue. Additionally, it aims to increase its margin to 28-30% by FY27, up from the current 26.7%. This will enhance profitability, which could be further improved by reducing material costs.

Finally, Cantabil is bolstering its presence on fast-growing e-commerce platforms to enhance its online sales. This goal aligns with its strategy to expand further into tier-2 and tier-3 cities, where the demand for branded apparel is rising. Currently, e-commerce contributes 5.7% of its sales, higher than 2.6% in FY23, and it plans to increase this to 10% in the next two years.

The expansion will boost Cantabil’s revenue and profit growth in the years ahead, enhancing its cash flow. Its current cash balance stands at ₹35 crore. Since the company is already debt-free, it plans to finance all this growth through internal accruals instead of borrowing.

What about valuation?

On a price-to-equity (P/E) basis, it trades at a P/E of 37.1x, a 26.6% premium to its 10-year median multiple of 29.3x. When comparing its valuation on an EV/Ebitda basis, its current valuation of 14.5x is also a premium to the 10-year median EV multiple of 11.2x.

To evaluate Cantabil’s valuation, we used the EV/Ebitda metric and compared it with Aditya Birla Fashion and Retail (ABFRL), given their similar product offerings. Since ABFRL is currently making losses, the P/E ratio won’t apply.

Relatively, we found that Cantabil is trading at nearly a 50% discount to ABFRL’s 10-year median EV multiple of 22.3. This suggests significant room for growth as the company focuses on growing its top and bottom lines.

Systematix notes that this stock is among the cheapest retail stocks despite having best-in-class metrics. However, its relatively small size and the looming threat of established pan-Indian competitors entering tier 2 and tier 3 markets pose risks.

For more such analysis, read Profit Pulse.

Although competition is the primary concern, its strong financial discipline suggests it can succeed, especially within its target market of aspirational buyers seeking quality value-for-money apparel in these regions.

Note: Throughout this article, we have relied on data from www.screener.in and Tijorifinance. Only in cases where the data was not available have we used an alternative but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.

Disclosure: The writer does not hold the stocks discussed in this article.