Stellar cost rationalization efforts cushion EBITDA
* While revenues were down 85% YoY (9.5% beat) due to lockdown, sharp cost rationalization, with a 60% reduction in operational cost (refer to exhibit 1), cushioned EBITDA loss at INR3.5b v/s EBITDA of INR3.1b in 1QFY20.
* We cut our revenue by 13%/8% in FY21E/FY22E due to the prolonged impact of COVID-19. However, we maintain our EBITDA estimates, factoring 29% operational cost decline in FY21 (v/s 15% estimated earlier) as cost rationalization has been better than expected.
Store closures lead to sharp earnings decline
* Revenues were down 84.5% YoY to INR3.2b (10% above est.) (V-Mart / Shoppers Stop was down 83%/93% YoY) due to store shutdowns. Madura/Pantaloons’ revenue fell 80%/91% YoY to INR2.4b/INR820m.
* The gross margin shrank by a steep 13pp YoY to 41.4% (v/s est. of 52%), primarily led by fixed manufacturing overheads, but no discounting, as per management.
* Operating cost reduced by 40% (in-line), largely owing to lower rent and SG&A expense. Factoring the rent benefit accounted for in other income (as per Ind-AS 116), the opex reduction is at ~60%; other income increased to INR1.8b v/s INR175m YoY, led by INR1.6b rent waivers received during lockdown.
* EBITDA loss stood at INR3.5b v/s EBITDA of INR3.1b YoY (-INR3.7b estimate). Madura/Pantaloons’ EBITDA loss stood at INR1b/INR720m.
* PBT turned to loss of INR5.3b (v/s INR351m profit in 1QFY20). Subsequently, net loss was at INR4b on the back of DTA credit of INR1.3b.
* Lifestyle stores on an LTL basis were above 50% of pre-COVID-19 levels in Jun’20.
* By the end of 1QFY21, 256 of Pantaloons’ stores (total 342) had resumed partial operations.
Highlights from management commentary
* COVID-19 impact: Almost 90% of stores have been opened up as of Aug’20.
* Gross margin impact: GM declined due to fixed manufacturing cost impact on low production, and should revert to previous levels as business returns to normal.
* Net debt: This should reduce from the peak of INR32.5b in 1QFY21 to INR20b by end-FY21. This would be led by INR7.5b proceeds from a rights issue and INR5b from WC
Valuation and view
* ABFRL’s execution over the last few years has been outstanding as the Lifestyle segment attained scale of INR46b in FY20. Pantaloons, since its acquisition, saw EBITDA margin improvement to 8.5% in FY20 from merely 2.3% in FY14.
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