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ABFRL bags exclusive licensing rights for Reebok India – profitable biz with limited upfront investment

Key highlights:

* Aditya Birla Fashion and Retail Ltd (ABFRL) acquired Reebok India’s current business and exclusive licensing rights for an investment of just INR750m– INR1b. Reebok India has a steady revenue/EBITDA of INR4.3b/INR721m

* In our view, this is a highly value-accretive deal – ABFRL has acquired a strong and established Indian brand, with high visibility, for a very low upfront payment.

* Sportswear is the fastest growing category in the Footwear market and has seen peers growing to 2–3x Reebok India’s size over the last few years – this underscores high growth opportunity.

* FY20 EBITDA of INR721m (for Reebok India) is just 4% of ABFRL’s estimated FY23E EBITDA. However, it could add incremental value of 8–10%, with scope in Athleisure, among others.

* We revise our TP for ABFRL to INR340 (on stronger growth and an improved balance sheet), valuing it on Sept’23E EBITDA. We further assign an EV/EBITDA of 17x to the Lifestyle Brands business and 16x to the Pantaloons segment, and EV/sales of 1x to other businesses. Maintain Buy.

Deal contours

* Long-term exclusive licensing, with low upfront investment: ABFRL announced the acquisition of long-term exclusive licensing rights for Reebok India and the ASEAN business. The expected consideration would be INR750m–INR1b towards the purchase of inventory and other current assets/liabilities, with a revenue/EBITDA scale of INR4.3b/INR721m.

* Flexibility to grow: While the royalty has not been disclosed, assuming it is in the single digits, it could stand at INR200–300m annually. ABFRL would partner with Reebok Design Group (RDG) on all product design/development and also have the flexibility to source locally, saving on custom duty.

* Change of hands globally: Owned by Adidas AG globally, in Aug’21, the Reebok brand was sold to Authentic Brands Group (ABG) for USD2.5b – ABG owns over 40 global brands, with Forever 21, Arrow, Van Heusen, Nautica, and Izod among these.

* A good deal: In our view, this is a highly value-accretive deal – ABFRL has acquired a strong and established Indian brand, with high visibility, for a very low upfront payment. Reebok has a steady, profitable business, contrary to some of the companies that ABFRL has recently entered into deals with. This is also a new untapped space for ABFRL, which is in a very high growth phase in India. Moreover, going by the company’s strategy, it aims to build India’s leading sports athletic lifestyle brand. It could endeavor to achieve this with a steady flow of >INR500m recurring cashflow from operations – this is a good opportunity for a limited upfront investment.

Business

* Highly profitable: Reebok India’s revenue at INR4.3b has remained flattish over the last 3–4 years, with a 17% EBITDA margin. Nearly 60% of the revenue is generated from Footwear, while the remaining 40% comes from Athleisure.

* Massive scope for growth: 30–40% of the business is contributed by the retail channel, with 150–180 small stores (1000–1200 sq ft), while the rest is contributed by e-commerce and multi-brand outlets (MBO). The brand has the ability to grow by 3–4x over the next few years.

Opportunity and competition

* Fastest growing segment in Footwear: In the last five years, the Sportswear category has seen strong double-digit growth and emerged as the fastest growing segment in the Footwear market – it has grown to a size of INR900– 1000b, particularly in the last couple of years since the advent of COVID. Interestingly, given the specialized and high-performance nature of the product, Sportswear is one category within the Footwear market where consumers are highly brand loyal.

* Strong brand left behind in the race: This is validated by the dominance of global sports footwear brands such as Adidas, Puma, Nike, ASICS, and Skechers (which has recently seen high growth). Despite Reebok being an old hand in the market, with strong brand recall, other competitors have reached INR8–14b, i.e., grown 2–3x Reebok’s size. This is possibly attributable to a lower focus by Adidas, which has grown 3x Reebok’s size in India.

How does it fit in the overall scheme of things?

* Small share, but big opportunity: Reebok would contribute just 4% to ABFRL’s total estimated revenue/EBITDA of INR109b/INR19b in FY23E. However, it has the ability to grow by 3–4x over the next few years; this could add incremental EBITDA of 8–10%, even after adjusting for the estimated single-digit royalty. Furthermore, ABFRL could bring better efficiencies through local sourcing.

Valuation and view

* After the recent fundraise through a rights issue and the strategic stake sale to Flipkart, ABFRL’s leverage has come under control.

* The increase in losses from its expansion in the Ethnic Wear vertical should be offset by a) a reduction in losses from other businesses as well as b) growth in the Lifestyle Brands / Pantaloons business.

* We revise our TP for ABFRL to INR340 (on stronger growth and an improved balance sheet), valuing it on Sept’23E EBITDA. We further assign an EV/EBITDA of 17x to the Lifestyle Brands business and 16x to the Pantaloons segment, and EV/sales of 1x to other businesses. Maintain Buy.

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