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Buy Aditya Birla Fashion Ltd For Target Rs.200

Acquires 51% stake in Sabyasachi Contours of the deal

* ABFRL acquired 51% stake in Sabyasachi Couture for INR4b. Of this, about INR1b would be through the primary route, while the rest would be via the secondary market.

* The deal values Sabyasachi at an EV of INR7.8b, with FY20 EV/Sales of 2.8x and EV/EBITDA of 15x.

* The ‘Sabyasachi’ brand is engaged in Luxury Designer Apparel and accessories. With a revenue of INR2.7b (9% CAGR over FY18-20) and 20% EBITDA margin, it constitutes a mere 3% of ABFRL’s overall revenue.

Ambitious plans for the Ethnic wear market

* The management highlighted that the Ethnic wear is the largest segment in the Apparels space and offers huge long-term growth.

* It eyes growth in the Mass market through Pantaloons and other avenues in the Men’s Ethnic wear space.

* But given the small scale of acquisitions and long gestation period for the returns to fructify, these deals may show limited returns in the interim and turn cash guzzlers.

Key highlights from ABFRL’s management concall

* Ambitions in the Ethnic wear market: The management has a huge longterm ambition to grow in the Ethnic wear market, which is the largest segment in the overall Apparels space with a market size of USD17b.

* More action may follow: It may carve out its Mass Ethnic brands from Pantaloons and explore the Mass Men’s category.

* Sabyasachi can grow at 20-25% annually through store expansion as well as new products/brand extensions, including accessories.

* Deleveraged Balance Sheet: Core net debt reduced to INR4b (excluding lease liability and Sabyasachi investment) after factoring in INR7.5b (out of the INR10b rights issue) and INR15b from stake sale to Flipkart.

Valuation and view: Strong parentage, but leverage remains a concern

* As highlighted in our earlier note, ‘ABFRL – On a Steady Ground’, despite strong parentage and execution capabilities, high debt had overshadowed the stock valuation. However, the issue now appears to be subsiding.

* ABFRL has consistently improved its earnings graph, with a revenue/EBITDA CAGR of 37%/75% over FY14-19. If dented FY20 growth is taken into consideration, revenue/EBITDA CAGR would stand at 32%/55% over FY14-20 25 (FY20 pre-Ind AS 116 EBITDA of INR4.5b).

* Pantaloons (31% EBITDA CAGR over FY16-20) and Innerwear (~INR2.7b sales within three years of launch) presents a healthy growth opportunity.

* However, investment in new ventures and acquisition has partly tapered its optimum operating performance and Balance Sheet health as investments in Ethnic wear may take 4-5 years to show a meaningful contribution.

* We value ABFRL on FY22E SoTP basis and assign an EV/EBITDA multiple of 17x/16x to Lifestyle/Pantaloons, and EV/Sales of 1x to other businesses. We arrive at TP of INR200 per share. Maintain Buy.