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Just got nimbler

Recovery was all-round at 80% (HSIE: 73%) as all verticals beat expectations. Madura/Pantaloons recovered 81/75% resp. (HSIE: 72/71%). Gross margin recoup (52.3%) was sharper than expected, led by 1. Lower inventory provisioning and discounting levels and 2. Higher retail sales in Lifestyle brands. EBITDAM expanded 193bp YoY to 17.9%. A nimble ABFRL was a welcome change (debt was down from Rs. 33.4bn in Jun-20 to Rs. 5.8bn in Feb21). We upgrade ABFRL to a Buy recommendation with a DCF-based TP of Rs. 200/sh, implying 14x FY23 EV/EBITDA, given 1. a stronger balance sheet (FY21 net debt/equity estimated at 0.2x), 2. stronger top-line/margin recovery and 3. ebbing working capital stress. (FY22/23 EBITDA estimate changes 8/2% resp)

* 3QFY21 highlights: Revenue declined 19.6% YoY to Rs. 20.6bn (standalone). Lifestyle brands recovered 79% (HSIE: 71%) underpinned by strong recovery in retail channel (92%). Wholesale channel remains in stress (declined 63.5%). Primary sales are expected to bounce back in 4Q. Secondary sales recovery stood at 70-80%. Pantaloons declined 25% (HSIE: - 30%). Other business grew 49% growth in 3Q. Gross margin recoup was sharper than expected led by 1. Lower Inventory provisioning, 2. Lower discounting levels and 3. Lifestyle brand’s higher retail skew in 3Q. GM/EBITDAM expanded 30/193bp YoY to 52.3/17.9%. Cash release in 3Q stood at Rs. 5.88bn (Rs. 3.25bn came from inventory reduction). Total cost savings for 9MFY21 stood at Rs. 10.3bn. Company added 88/2 stores (net) in Lifestyle brands/Pantaloons resp (9MFY21) and intends to aggressively start store additions by FY22. The much-awaited deleveraging exercise in now near completion (courtesy Flipkart money + Rights issue). Net debt is likely to reduce to Rs. 2.5bn (ex-Sabyasaachi acquisition) by FY21.

* Outlook: We are encouraged with ABFRL’s top-line/margin recovery and more so by its receding leverage concerns. With its newfound nimbleness, we expect ABFRL to now focus on disciplined growth. Hence, we upgrade ABFRL to a BUY recommendation with a DCF-based TP of Rs. 200/sh (earlier Rs. 180/sh), implying 14x FY23 EV/EBITDA.

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