Buy Aditya Birla Fashion and Retail Ltd For target Rs. 232 - ICICI Securities
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Accelerating investments despite disruptions
Aditya Birla Fashion and Retail’s (ABFRL) Q4FY21 consolidated revenue decline of 1% YoY and (post Ind-AS 116) EBITDA growth of 51% YoY on a low base was broadly in line with consensus estimates. While only ~15% of the network stores are currently operational owing to covid resurgence and lockdowns, management expects gradual demand recovery from Q2FY22-end.
Despite current disruptions, ABFRL intends to invest aggressively in expanding its distribution network and strengthening e-commerce across businesses and ramp up the ethnic wear business to achieve scale in the medium term. Factoring-in the impact of recent lockdowns, we reduce our FY22E EBITDA though we maintain it for FY23E. Maintain BUY with unchanged DCF-based target price of Rs232/sh. Key risk: slower recovery in discretionary spends, and increasing online competition.
* Standalone revenues declined 2% YoY at Rs17.8bn. Strong recovery in Q4FY21 was halted by resurgence of covid cases from mid-Mar’21 leading to localised shutdowns. Revenues from lifestyle brands stood at Rs10bn, down 6% YoY. Retail stores delivered growth of 8% YoY (-1.7% LTL). Wholesale channel continued to be impacted due to covid with revenues down 40% YoY, whereas the ‘others’ segment (including e-commerce) grew 30% YoY. ABFRL added 383 new stores during FY21 (~88% franchisee-led) and closed 247 stores taking the total store count to 2,379 with total area of 3mnsqft. Company plans to add >400 stores in FY22.
* Revenues from Pantaloons stood at Rs5.9bn, down 5% YoY (LTL -10.6%). Revenue from smaller towns grew YoY whereas that from metro and tier-1 cities continued to lag. High street stores recovered faster than malls. E-commerce sales grew 3x YoY on low base. ABFRL opened 19 stores and closed 15 unviable stores during FY21 taking the total store count to 346 with coverage of 4.46mnsqft. Company plans to add >50 Pantaloons store n FY22.
* Net debt declined by Rs18.6bn to Rs6.5bn in FY21 led by Rs7.5bn rights issue and Rs15bn preferential issue to Flipkart. ABFRL incurred Rs1.4bn capex and Rs6bn (our estimate) operating loss including ~Rs3bn interest costs; while Rs5.2bn was utilised for acquisitions. Working capital release of Rs8.5bn in FY21 was led by Rs6bn reduction in inventories YoY, although trade payables increased by Rs6.4bn QoQ and Rs0.7bn YoY. Net debt may inch up in FY22 owing to higher working capital needs and also due to likely operating losses in H1FY22, in our view.
* Gross margin expanded 200bps YoY to 53% while post Ind-AS 116 EBITDA margin expanded 480bps YoY owing to better product mix, tighter markdown, cost controls and also aided by low base YoY. Company achieved substantial fixed-cost savings of Rs12.2bn YoY in FY21 led by savings of Rs4.7bn in rent expenses, Rs2.03bn in employee costs & Rs5.4bn in other expenses (including ad spends).
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