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Published on 19/11/2020 10:49:11 AM | Source: Emkay Global Financial Services Ltd

Buy Aditya Birla Fashion & Retail Ltd For Target Rs.180 - Emkay Global

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Flipkart’s investment strengthens balance sheet and growth outlook

* ABFRL raised Rs15bn through a preferential allotment to Flipkart. ABFRL will issue ~73mn equity shares at a price of Rs205 per share (~35% premium), diluting its equity by 8.5%. Flipkart will own a 7.8% stake in ABFRL (post dilution).

* Capital infusion will significantly repair ABFRL’s leveraged balance sheet. ABFRL will use the capital to scale-up its existing businesses and other high-growth categories (innerwear and athleisure). We now expect debt to decline to Rs5bn in FY23E (from Rs30bn).

* The deal also aims at strengthening ABFRL’s omni-channel capabilities and expanding its range of brands on Flipkart/Myntra. We have currently not factored in any benefits and play as we await details from management.

* Factoring in debt reduction and high capex/store expansion, we increase sales/EBITDA estimates by 6-9% and EPS by 40-70% for FY22/23. Reduced leverage concerns and strong growth plans keep us positive on ABFRL. Faster demand recovery can drive more upsides, in our view. Retain Buy with a revised TP of Rs180, valuing at 22x Dec’22E EBITDA

 

Flipkart’s investment strengthens balance sheet and growth plans:

Capital infusion of Rs15bn by Flipkart for a 7.8% stake (post dilution) at a 35% premium should significantly repair ABFRL’s leveraged balance sheet, improving its profitability and cash flows. Along with the rights issue, ABFRL has now raised Rs25bn with an equity dilution of ~20%. Post this deal, promoter holding will come down to 55.1% from 59.8%. Most of the funds are likely to be utilized for debt repayment, while some will also be used to step up ABFRL’s growth plans, which were curtailed in the wake of Covid-19. This should help ABFRL restart its retail space expansion across formats and accelerate growth.

 

Watch out for collaboration on digital/omni-channel play:

The deal aims at strengthening ABFRL’s omni-channel capabilities and expanding its range of brands on Flipkart and Myntra. We note that this is not an exclusive deal and ABFRL already has a significant presence on Flipkart/Myntra. We believe that the deal still offers ABFRL a significant scope to improve its ecommerce and omni-channel play along with Flipkart over the long term. We have currently not baked in any benefits in our estimates as we await more details from management.

 

Improved balance sheet and profitability; maintain Buy:

Factoring in debt reduction and increase in growth plans over FY22/23, our sales/EBITDA forecasts are increased by 6-9% and EPS by 40-70%. We expect ABFRL’s debt to fall from more than Rs30bn now to Rs5bn in FY23E, with the Rs25bn fund raise and liquidation of inventory. Reduced leverage concerns and stronger growth plans keep us positive on ABFRL and we believe that further normalcy across key markets and faster recovery in consumer demand can drive more upsides. Retain Buy with a revised TP of Rs180, now valuing it at 22x Dec’22 EBITDA.

 

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