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Margins miss; growth plans remain aggressive

* Q4 operating performance was ~20% below estimate due to lower margins, while revenue came in largely in line. Revenues recovered further and were flat in Q4 (recovery was 80% in Q3). EBITDA margins were lower vs. estimates at 14.4% on higher overhead expenses.

* Lifestyle and Pantaloons businesses (~90% of sales) recovered ~95%, while other businesses grew 36%. The recovery in Lifestyle was driven by retail/online channels. The wholesale channel struggled due to lower offtake by department stores.

* Growth plans remain aggressive with higher store roll-outs in Tier-3/4 cities, led by value formats PE Red/AS Prime/Pantaloons (gross addition of ~400/19 Lifestyle/Pantaloons in FY21). Margin miss was due to higher investment and should improve with full recovery.

* We cut FY22E EBITDA by 32% but retain FY23 estimates. Aggressive growth plans, scope for margin gains and a strong balance sheet after reduction in debt (to Rs6.5bn from Rs25bn) reinforce our positive view on ABFRL. Maintain Buy with a revised TP of Rs210.

Strong recovery in Retail/Other channels:

Q4 revenues recovered almost to the normal levels vs. Q4FY20 (down 2%), driven by ~95% recovery in Lifestyle/Pantaloons (~90% of sales) and strong 36% growth in other businesses (Innerwear/Intl. brands/Ethnic: ~10% of sales). In the Lifestyle business, recovery was driven by ~8%/30% growth in retail/online channels, while the wholesale channel struggled with ~40% decline. The wholesale channel is expected to recover with the opening up of department stores in malls. The innerwear business saw strong 56%/3% growth in Q4/FY21 on ~25% expansion in distribution reach.

The e-commerce channel grew strongly, with its share in Lifestyle/others doubling to ~15% and 2.3x growth in Pantaloons. Network expansion was healthy on a gross basis, with 383 store additions in Lifestyle (88% franchised), 19 new additions in Pantaloons and ~5,500 MBO additions in the innerwear business. ABFRL said it will focus on market share gains with aggressive expansion into Tier-3/4/5 towns, with PE Red/AS Prime formats and 60 new store additions under Pantaloons in FY22E.

Cost savings and full recovery to aid structural margin improvement:

EBITDA margins at 14.4% improved 580bps yoy but declined 350bps qoq on higher other costs (22% of sales vs. 17% in Q3). ABFRL reduced its operating costs by Rs12.2bn in FY21 (down 30% vs. ~40% revenue decline). Negotiated rental reductions were Rs4.8bn, while employee/other costs were down by Rs2.0bn/5.4bn. ABFRL expects some of the savings to be structural, leading to higher margin profile upon return to normal.

Strong balance sheet and growth plans:

Aggressive store additions, scope for margin gains and significant debt reduction in FY21 should drive healthy EBITDA/PAT CAGR. We estimate sales/EBITDA recovery at ~80% in FY22 vs. FY20, and growth thereafter (13% EBITDA CAGR in FY20-24E). Retain Buy with a revised TP of Rs210 (22x Jun’23E preIndAS116 EBITDA). Delayed recovery on extended lockdowns remains the key risk.

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