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Q2 miss due to growth investments; medium-term prospects remain healthy

ABFRL’s Q2 EBITDA was 13-15% lower than our estimates. While revenue was 1-2% ahead of estimates, the full EoSS impact for Pantaloons and higher investments in marketing/Ethnic caused the miss on EBITDA margin. Management seems more confident about beating its FY26 topline target of Rs210bn, which implies a strong 27% FY22-26E CAGR. However, ABFRL indicated a need for higher near-term investments in Ethnic (Tasva) and Innerwear, till both segments achieve critical mass. Among other segments, Lifestyle is already generating surplus FCF and Pantaloons should be able to sustain the strong growth targets on its own. We cut FY24/25E EBITDA by 5-8%, led by 110-160bps reduction in our margin estimates on higher near-term investments. However, we remain confident about ABFRL's FY25-35 growth potential and increase medium-term growth expectations by 300bps, as margin improvement will now be relatively back-ended vs. earlier expectations. We maintain BUY with a Dec-23 TP of Rs380/share, based on 30x Dec-24 EBITDA (Pre-IndAS) vs. 25x earlier.

Result Summary: ABFRL’s 3Y revenue CAGR stood at ~9%, led by CAGR of 10% in Lifestyle and of 6% in Pantaloons. Within Lifestyle, the retail/others (incl. online) channels saw higher CAGR, at 22-24%, while the wholesale channel saw slower recovery, at~80%, due to shut-down of central stores (Future group). Retail channel’s 22% CAGR was led by a ~7% CAGR in the retail area, with the balance growth led by a notable gain in rev./sqft. The strong growth was attributed to share gains and lesser impact of inflation on premium consumers. Pantaloons’ lower CAGR was owing to a higher inflation-impact on value consumers. Innerwear sales saw robust growth, of 24% on 3Y CAGR basis, led by distribution expansion and brand building. Ethnic business posted sales of Rs1.1bn, albeit EBITDA loss of Rs0.4bn. With Rs7.7bn equity raised from GIC Singapore, net debt reduced to Rs2.4bn vs. Rs6.5bn at Q1-end. Pantaloons saw an addition of 21 stores in Q2 and ABFRL maintained its FY23 target of ~70 additions for both, Pantaloons and Tasva, in FY23. EBITDA margin declined 240bps, owing to the full EoSS impact for Pantaloons and higher investments in marketing/Ethnic.

Earnings-call KTAs: i) In Q2, marketing spends were higher by ~Rs1bn vs. last year. ii) Ecom sales sustained and grew 24%. iii) Financials of Reebok will be consolidated w.e.f. Q3FY23. iv) With the recent capital raise, ABFRL plans to ramp up Innerwear/Ethnic (Tasva). v) ABFRL’s new value format ‘Style-up’ is currently in the pilot phase. Company plans to expand this format initially in large towns. vi) Current private label mix for Pantaloons is below ABFRL’s expectations. Focus is to increase the private label mix with category expansion (Home/Saree) and the launch of new brands like Marigold Lane. vii) Capex for FY23 is expected at Rs7bn, with Pantaloons absorbing the largest component. viii) D2C: ABFRL plans 8-10 investments by FY23-end, aimed at acquiring majority stake in early-stage ventures.

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