Focus on cost/ debt reduction
Key takeaways from Aditya Birla Fashion and Retail (ABFRL)’s Q4FY20 results: 1) focus on cost reduction through aligning rental cost in-line with revenues, curtailing discretionary spends by 50-70% and optimise employees/other costs; 2) preserving cash through rationalising capex (by ~60-70%) and optimising working capital; 3) proposing Rs10bn rights issue to de-leverage balance sheet; 4) ABFRL’s >1,300 stores (out of 3,041 stores) have started partial operations as of now. Factoring-in higher demand impact due to Covid-19, we reduce our FY21E and FY22E EBITDA by 29% and 11% respectively, target multiple to 18x (earlier 20x) and target price to Rs130/sh (earlier Rs180/sh) based on 18x FY22E EV/E. Maintain BUY, as concerns around weak H1FY21E seems adequately priced-in.
* Revenue declined 5% YoY to Rs18.2bn, in-line with our estimates. ABFRL first time ever reported (pre Ind-AS 116) EBITDA loss of Rs289mn (adjusted for one-time cost of Rs280mn pertaining to PEOPLE transition) owing to negative operating leverage. Management estimates loss of revenue of Rs3.4bn and flow through of Rs2bn lower gross profit on EBITDA due to Covid’19 related disruptions. Given high fixed cost structure, the management is focusing on cost reduction through negotiating with landlords on aligning rental cost in-line with revenues; curtailing discretionary spends (by 50-70%), optimising employee / other overheads (like travel etc.) and tighter negotiation with material vendors. Investments in new business initiatives likely to be curtailed in FY21E.
* Lifestyle brand revenue declined 5% YoY to Rs10.7bn. The company had maintained strong growth momentum in Jan & Feb with 10% LTL and 7% total growth with women’s wear growing 23% YoY. EBITDA declined 61% YoY to Rs660mn owing to loss of sales due to COVID’19 disruptions and higher fixed cost structure. Other businesses (innerwear/international brands) revenue growth was lower at 8% YoY to Rs1.2bn with EBITDA loss increasing 33% YoY of Rs320mn.
* Pantaloons revenue declined 1% YoY to Rs6.3bn with LTL of negative 11.7%. Revenue grew strongly at 19% YoY with LTL of 9.5% in Jan & Feb’20 owing to strong EoSS, weddings and new launches. It reported EBITDA loss of Rs380mn vs EBITDA of Rs130mn in Q4FY19. >80 Pantaloons stores have opened as of now.
* Management focus is on preserving cash through cost reduction, rationalising capex (by 60-70% than usual run rate of Rs3-4bn) and optimising working capital. Net debt increased Rs2.7bn and Rs6.2bn in Q4FY20 and FY20 respectively to Rs25.1bn as at Mar’20-end owing to sharp increase in working capital requirements due to COVID’19 lockdown. The company has proposed rights issue of Rs10bn (timelines ~80-90 days) mainly to de-leverage balance sheet and bring net debt to EBITDA below 2.5x by FY22E. Even without rights issue, the management is targeting to maintain net debts at current levels of Rs25bn by end-FY21E.
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