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Strong recovery and faster expansion improve growth outlook

* Q2 operating performance was ahead of our/Street estimates. Despite weak wholesale channel, the Lifestyle segment recovered 92%, as Retail/Online channels surpassed preCovid levels. Pantaloons recovery was slower at 73% due to higher mall presence.

* As per management, all business segments gained momentum and surpassed pre-Covid sales during the festive season amid better-than-expected demand and healthy secondary sales. New store additions expected to pick up in H2 amid higher consumer confidence.

* EBITDA margins at ~16% surpassed pre-Covid levels of ~15%, led by better fresh/privatelabel mix, stringent cost controls and some benefits of rent concessions. Basis this, ABFRL expects a higher margin profile upon normalcy.

* We raise FY23-24 earnings estimates by 9-11% on a faster recovery and ethnic-wear consolidation. Considering a stronger recovery and higher growth visibility, we retain Buy with a revised TP of Rs340, based on 30x Dec’23E EBITDA (vs. 25x Sep’23E earlier).

Strong recovery in Retail/Online channels:

ABFRL reported an 87% recovery in Q2, aided by a healthy ~92% recovery in the Lifestyle segment and a slower 73% recovery in Pantaloons due to higher mall presence. Within Lifestyle, Retail/Online channels saw industry-leading performance with 12%/24% CAGRs on a 2-Yr basis, whereas the wholesale channel saw a negative 34% CAGR. Importantly, Pantaloons and the Wholesale channel returned to preCovid levels during the festive period in Q3, led by strong demand and healthy secondary sales. Innerwear is expected to maintain its strong growth trajectory (40%+ growth in Q2), led by market share gains, outlet expansion and online traction. For the Ethnic category, ABFRL remained upbeat about growth prospects with the launch of women-wear brand ‘Marigold Lane’ and the expected launch of a men’s ethnic brand in Q3. ABFRL expects to add ~100 stores for the ethnic-wear category in the next 12 months. Barring Pantaloons, store additions picked up pace, with ~160 stores added across business segments in Q2. Store addition for pantaloons is also expected to pick up with 60 new stores due to open in FY22. Net Debt stood at Rs8.7bn at Q2-end and capex is likely to be in the range of Rs4bn.

Cost savings to aid structural margin improvement:

EBITDA margins at 15.8% were better than pre-Covid levels of ~15%, despite only 87% revenue recovery. Margin recovery has been led by ~300bps improvement in Pantaloons, helped by better fresh/private-label mix and stringent cost controls. ABFRL expects a higher margin profile upon return of normalcy.

Stronger franchise; maintain Buy:

Faster recovery trends, aggressive outlook and improved margin profile should drive healthy revenue/EBITDA CAGRs of 11%/25% over FY20-24E. Retain Buy with a revised TP of Rs340 on 30x Dec’23E pre-IndAS116 EBITDA (vs. 25x Sep’23E earlier). The multiple revision was due to improved growth confidence and margin gains across segments driving better ROCE.

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