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ABFRL is part of a leading Indian conglomerate, The Aditya Birla Group. It is India's first billion-dollar plus pure-play fashion powerhouse with an elegant bouquet of leading fashion brands and retail formats. The Company has a network of 3041EBOs (Lifestyle- 2699 & Pantaloons- 342),25000MBOs&6514LFS across India under Lifestyle brand, its branded apparels SBU that houses market leading brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England established for over 25 years. Total retail space operational under this format stood at 3.7 mnsq ft. Pantaloons, its retail play format, is one of India's largest fashion value retail brand & has total retail space under operations of 4.4mn sq ftwith 342 stores under this format.

Very well diversified play on organised retail

ABFRL's business model in India's organised retail segment is very well diversified with presence across lifestyle brands (Louis Philippe to Peter England) as well as organised retail format(Pantaloon). 60% of FY20 revenue contribution was from lifestyle brands and Pantaloon contributed the rest. Business model is also very well balanced in terms of presence across Men (~ 65% of revenue), Women (~ 25%)& Kids category (forming the rest) of apparel industry. Similarly revenue from Formal & Casual segment is balanced with the latter contributing 59% revenue of lifestyle brands. On the price point front also, its presence is very much across price points with Peter England brand catering to the economy segment and rest of the brands (Louis Philippe, Van Heusen & Allen Solly catering to the premium segment).

Strong track record of scalability of revenue & profitability of acquired businesses

ABFRL has strong track record of scaling up profitability of Pantaloon business. In a span of 4 years, profitability of the business increased from EBITDAM of 5% (FY17) to 8%(FY20) along with robust 13% revenue CAGR. Going forward, management is guiding for 11% EBITDAM accompanied by 15%+ revenue CAGR over the next 5 years. In case of Forever 21 business also, losses have been reduced substantially over the last 4 years with the management guiding for profitability of 8% along with 21% revenue CAGR over the next 5 years.

Ideally placed for inorganic growth on the back of virtually debt free BS post fund raising thrurights issue & Flipkart picking up equity stake

During FY21, ABFRL came out with rights issue to the tune of INR 9,950mnas well as Flipkart has picked up 7.8% equity stake in the company @ INR 160/share. ABFRL's BS should turn virtually debt free once these funds are infused. Again, the management has recently guided for strong FCF generation to the tune of INR 25bn over the next 5 years from its well established businesses (Lifestyle brands & Pantaloon). Such a healthy liquidity should enable strong inorganic growth in the ethnic wear SBUs that hasenormous growth potential. ABFRL has acquired "Sabyasachi" and TarunTahiliani's luxury couture business under its ethnic wear business at CY21 beginning in addition to "Jaypore" and "S&N", engaged into ethnic wear business that it had acquired in CY19. Even in terms of organic growth, innerwear business (started in FY17) stands on a firm footing with the FCF generated from established businesses seeding this SBU's growth.

Outlook & Valuation

Robust bouquet of lifestyle brands & Pantaloon retail stores that are well established businesses has enabled the company to venture into new business areas of branded apparel segment, innerwear/athleisure and ethnic wear business, having strong growth potential through conversion from unorganised to organised and at the same time having large addressable market. ABFRL is ideally placed for inorganic growth on the back of virtually debt free BS post fund raising thru rights issue & Flipkart picking up equity stake. We estimate Revenue & EBITDA CAGR of 12% & 2% respectively during FY20-23 & initiate coverage on the company with a BUY rating and price target of 244 (18x FY23E EV/ EBITDA). We've estimated EBITDA growth to be softer relative to revenue growth as sizeable marketing spend, both above the line as well as below the line, is likely to be incurred during the immediate future to achieve targeted revenue & EBITDA margin by FY26 as guided by the management.

Key Risks:

* Bounceback of COVID-19 cases leading to lockdown once again

* Increase in intensity of competition

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