- Revenue rose 15.7% YoY, but missed Motilal Oswal’s internal target.
- EBITDA margin pressured to ~13.5‑14.5% as discounting intensifies.
- Offline sales surged 22% while e‑commerce slowed to 12‑15% growth.
- New Jaipur plant promises capacity upside, yet execution risk remains.
- DCF‑derived target INR 2,600 implies a 46× FY28 P/E – a steep multiple for a value‑seeker.
You missed the warning signs in Safari’s Q3 report, and you could be paying for it.
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Why Safari Industries’ Revenue Growth Still Beats the Retail Sector
Safari Industries (SII) posted a 15.7% top‑line increase to INR 5.1 billion in Q3 FY26, outpacing the Indian organized retail CAGR of roughly 12% over the past three years. The lift stemmed from a solid 20% YoY volume expansion, chiefly in traditional brick‑and‑mortar stores where the company recorded a 22% sales jump. This demonstrates that despite an e‑commerce slowdown, the offline channel remains a growth engine for apparel‑focused firms that have a deep distribution network.
Impact of Aggressive Discounting on EBITDA Margins
Management admitted that “heightened competition to chase volumes led to elevated discounting across both offline and online channels.” The result? EBITDA rose only 10.5% YoY, translating to an implied margin of 13.5‑14.5% for the next 24 months, well below the 16%‑18% range peers like Aditya Birla Fashion typically enjoy. Discounting erodes gross profit per unit, a metric investors track as a proxy for pricing power. When margins compress, free cash flow (FCF) generation suffers, which in turn pressures the DCF‑derived valuation.
Sector Trends: Offline Resilience vs. E‑commerce Headwinds
India’s apparel sector is at a crossroads. The overall e‑commerce share of total apparel sales is projected to rise from 12% in FY23 to 18% by FY28, but growth rates are decelerating as major platforms saturate. Offline stores, meanwhile, are benefitting from “experience‑centric” formats and tier‑II/III expansion. Safari’s 22% offline growth aligns with this macro trend, but the slower 12‑15% e‑commerce growth flags a potential ceiling if the company cannot accelerate its digital footprint.
Competitor Landscape: How Tata & Adani Are Positioning Themselves
While Safari grapples with discount pressure, Tata Fashion (Tata Tapestry) has been investing heavily in omnichannel integration, achieving a stable 15% EBITDA margin. Adani Retail, leveraging its logistics arm, is offering lower freight costs to merchants, thereby reducing the need for deep price cuts. Both peers are tightening inventory turnover, a lever Safari must adopt to protect margins.
Historical Parallel: The 2019 Discount Cycle
Back in FY20, a comparable discount war erupted among mid‑tier apparel players. Those who doubled down on aggressive price cuts saw revenue spikes but suffered a 5‑point margin dip, leading to a 30% share price correction. Companies that pivoted to “value‑added” bundles (e.g., styling services) restored margin health and outperformed the sector over the subsequent two years. This historical lesson underscores the importance of strategic pricing rather than pure volume chases.
Key Definitions for the Non‑Expert
- EBITDA: Earnings before interest, taxes, depreciation, and amortization – a proxy for operating cash flow.
- DCF: Discounted cash flow – a valuation method that projects future cash flows and discounts them back to present value.
- Implied P/E: The price‑to‑earnings multiple derived from a target price; higher values suggest growth expectations.
Investor Playbook: Bull vs. Bear Cases
Bull Case
- Capacity utilization at the new Jaipur plant ramps to >85% by FY27, driving operating leverage.
- Offline channel continues to expand into tier‑II cities, sustaining >20% growth YoY.
- Management successfully launches a proprietary e‑commerce platform, narrowing the online growth gap.
- Margin expansion to 15% by FY28, validating the 46× FY28 P/E target and delivering ~30% upside.
Bear Case
- Capacity rollout delays push full‑scale production past FY28, choking top‑line momentum.
- Regional competitors intensify discount wars, forcing EBITDA below 12%.
- Online sales continue to lag, eroding future growth potential as consumer preference shifts digital.
- DCF model overestimates cash flows, resulting in a revised target of INR 1,900 – a 30% downside.
Given the mixed signals, we reiterate a BUY rating but advise investors to monitor the Jaipur plant’s ramp‑up schedule and discount intensity metrics closely. Adjust position sizing based on which scenario appears more likely.