Published on 13/01/2021 10:59:01 AM | Source: ICICI Direct

Buy Aditya Birla Fashion and Retail Ltd For Target Rs.210 - ICICI Direct

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Cost optimisation on track; sales normalcy by

Q4FY21 Post re-opening of standalone stores, malls, revenue recovery was visible QoQ but it continues to be below pre-Covid levels. Revenue posted degrowth of 55.7% YoY to | 1018.6 crore (I-direct estimate: | 1075 crore), with 95% of stores being operational. ABFRL continued its strategy of significantly reducing cash burns through cost rationalisation measures (| 417 crore cost savings in Q2FY21). This led to better than anticipated operational performance in Q2FY21. Reported EBITDA loss (post Ind-AS 116) was at | 1.7 crore vs. I-direct estimate of | 18.3 crore loss. Hence, PBT losses narrowed down significantly QoQ to | 242.4 crore (Q1FY21: | 533 crore). Through better inventory management (cash release worth | 259 crore) and proceeds of first tranche right issue (| 497 crore), it has paid off creditors to tune of | 550 crore and debt worth by | 90 crore to | 3159 crore (Q1FY21: | 3250 crore). With upcoming festive season, the management expects revenue recovery rate to improve to 70-80% in Q3FY21E and achieve normalcy levels by Q4FY21E.


New category of WFH/Athleisure aiding revenue revival

Revenue from Lifestyle brands de-grew 58% YoY to | 531.0 crore. Retail channel (44% of revenue) witnessed better traction with revenue recovery rate of 60% while wholesale channel (14% of revenues) was a laggard due to excess inventory in trade channels. Introduction of new category lines like work from home (WFH), athleisure assisted in revenue recovery (Lifestyle brands predominantly cater to formal wear). The business model of 12 season inventory cycle has assisted in smoothly aligning its inventory with the current demand scenario. Store openings are back on track with ~100 new additions in Q2FY21 (through franchise route). Revenue from other business (including innerwear & athleisure) de-grew 16% YoY to | 175 crore. The management indicated that innerwear & athleisure bounced back the fastest, with sales reaching its pre-Covid levels.


Higher e-com/private label share aiding

Pantaloons recovery Revenue from Pantaloons division fell 60% YoY to | 369 crore. E-com continued to grow rapidly with 3x growth YoY, with omni-channel coverage up to 50% of network. Private label brand share inched up 500 bps YoY to 67% due to strong sales in kids wear (primarily private labels). It added seven new stores in Q2 and expects to open overall 20 stores by FY21E. ABFRL has embarked on refurbishing existing stores with new retail identity.


Valuation & Outlook

ABFRL expects the Flipkart deal to be executed by Q4FY21E. Capital infusion worth | 2245 crore (initial two tranches of rights issue: | 746 crore, preferential allotment: | 1500 crore) would strengthen the b/s and result in a significant decline in debt by ~| 1760 crore to | 1012 crore (D/E: 0.4x vs. 2.1x) in FY21E. The same would lead to a substantial reduction in interest outflow, going forward. With steady FCF generation from FY22E onwards, we expect debt/EBITDA ratio to decline to 0.7x by FY23E (6.0x in FY20). We believe that with its strong brand patronage and large distribution reach it will be able to revive its revenue growth post normalisation of scenario. We reiterate our BUY rating with target price of | 210 (2.0x EV/sales FY23E).


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