B/s concerns lingers in uncertain demand environment
Disruptions due to Covid-19 elevated woes in an already challenging FY20 for the company. Revenues for the quarter fell 39% YoY to | 710.5 crore. As per management estimates, the company lost sales worth | ~300 crore due to Covid-19 disruptions. Lower gross margins, negative operating leverage led it to report EBITDA loss of | 92.3 crore. Also, exceptional expense worth | 60.7 crore (pertaining to provision of margins on sales return & inventory dormancy) and higher finance cost (up 36% YoY) led the company to report net loss worth | 226.0 crore. Significantly higher losses in FY20, bloated total debt by 53% YoY to | 1210 crore (D/E: ~1.7x). To address the balance sheet concerns, the company has proposed a rights issue worth | 400 crore and sold a minority stake in Arvind Youth Brands that houses brand 'Flying Machine' for cash consideration worth | 260 crore. Quantum of reduction in overall debt is likely to be lower than the cash infused in the business as part of proceeds will be utilised towards funding operational loses and payment to suppliers. Currently, 75% of stores are operational with June sales reaching 30% of pre-Covid levels. We remain cautious on the outlook given the highly levered balance sheet and ambiguous demand environment.
FY20 performance impacted by trade channel corrections
Power brands (62% of sales) are the only brands that drive the profitability for the company. However, a correction in stock levels in trade channels (exit from long credit cycle customers) significantly impacted the performance in FY20. Power brands reported revenue de-growth of 15% YoY to | 2380 crore with EBITDA falling sharply by 73% YoY to | 93.0 crore (margin: 3.9%) in FY20. Revenue from emerging brands (12% of sales) fell 37% YoY to | 445.0 crore mainly due to exit from unprofitable brands (underlying revenue de-growth: 20% YoY). The division reported significant EBITDA losses of | 134.0 crore (including | 73.0 crore provided for one time exit losses). Revenue from Speciality Retail division de-grew 6% YoY to | 1041.0 crore with EBITDA losses widening to | 76.0 crore. Overall as on FY20, the company reported revenue de-growth of 17% YoY with net losses of | 413.0 crore. Exit from unprofitable emerging brands and trade channel corrections were completed in FY20. Inventory spiked sharply due to loss of sales in FY20 (inventory days: 123 vs. 93). It is mulling releasing cash through inventory reduction (selling in the next ensuing season & cancellation of 60% of autumn-winter orders).
Valuation & Outlook
The company has adopted multiple initiatives to sharply rationalise fixed overheads, going forward. It expects cost reduction of ~35% in FY21E, with 15% reduction to be structural in nature. Expected cash infusion (| 660 crore) may provide some cushion but higher anticipated losses will restrict debt reduction ability. Factoring in the elongated Covid-19 impact, we cut our earnings estimates sharply in FY21/22E. Given the balance sheet stress and challenging market scenario, we reiterate our REDUCE rating on the stock with a revised target price of | 150 (10.5x FY22E EV/EBITDA).
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