09-01-2021 10:22 AM | Source: Emkay Global Financial Services Ltd
Buy Aditya Birla Fashion And Retail Ltd : Well poised for post-pandemic opportunity - Emkay Global
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Buy Aditya Birla Fashion And Retail Ltd For Target Rs.250

Well poised for post-pandemic opportunity

* The recent 15% correction in ABFRL appears unwarranted, given its stronger recovery vs. peers and valuation discount. We believe the faster recovery trends and an aggressive expansion plan make ABFRL an attractive play on recovery in fashion. Reiterate Buy with a TP of Rs250.

* We note that ABFRL’s recovery has been faster than most apparel players. Retail/Online channels (excl. wholesale) witnessed an industry-leading recovery at ~110%/40% in Q4FY21/Q1FY22. Our channel checks suggest a stronger recovery in Aug’21 vs. Jul’21, led by higher operational network and strong demand during end-of-season sales (EOSS).

* Cost savings were low in Q1 across peers due to the uncertainty around operations. ABFRL cut overhead costs by ~35% (vs. Q4), in line with peers. We are optimistic about margins and expect structural cost savings to drive a better margin profile on full recovery.

* We expect a higher normalized sales growth of mid-teens (vs 10% in FY16-20) and EBITDA margin (pre IndAS) at 9% in FY24E (vs. ~7% pre-Covid). Stock trades at 22x/18x FY23E/24E EV/EVITDA. Turnaround in innerwear/international brands can offer upsides.

 

Strong recovery trends and aggressive initiatives to accelerate growth:

Upon unlocking, ABFRL has seen a strong recovery in both Q4FY21 and Jul-Aug’21 period. Excluding the wholesale channel (~20% of Pre-Covid sales), ABFRL saw an industry-leading recovery at 110% in Retail/Online channels (~80% of sales) in Q4FY21, indicating strong traction for its brands. After the second unlocking too, ABFRL posted a healthy 85%/70% recovery in Lifestyle/Pantaloons segments in Jul’21.

Our channel checks suggest even better trends in Aug’21. We believe that ABFRL is likely to sustain a stronger recovery vs. peers and faster growth ahead, driven by 1) strong digital presence (up 2.5x YoY in Q1FY22), 2) agility in design/casualization across brands, 3) aggressive expansion with 400/60 store additions for Lifestyle/Pantaloons in FY22, and 4) expansion into a new segment, ethnic-wear.

 

Overhead cost reduction on track; expect higher margins on full recovery:

A comparison of ABFRL’s overhead costs with those of peers indicated that Q1 cost reduction (vs Q4) was similar as most firms faced disruption during Q1, resulting in lower savings. With a faster recovery, we believe margins can potentially surprise, and with structural cost savings, we expect the margin profile to be better than the pre-Covid level. The expected turnaround in Innerwear/International brands can significantly offset the initial investments required to grow the ethnic business. We expect EBITDA margins (pre IndAS116) to expand to ~9% by FY24E from ~7%/5% in FY19/FY20.

 

Good play on recovery in fashion; Buy:

After the recent 15% correction, ABFRL trades at 22x/18x FY23E/24E EV/EBITDA (pre-IndAS), a substantial discount to peers, despite a healthy 23% EBITDA CAGR over FY20-24E. In our view, faster recovery trends and aggressive expansion plans make ABFRL an attractive play on recovery. Re-iterate Buy with a TP of Rs250, valuing it at 25x Sep’23E pre-IndAS116 EBITDA.

 

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