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Some recovery and cost savings seen in 4Q

* Aditya Birla Fashion and Retail (ABFRL)’s revenue fell 2% YoY (in-line). However, healthy 200bp gross margin improvement (better than even preCOVID levels) and strong cost management (aided by rent/employee cost savings) drove a 65% YoY EBITDA jump. Nevertheless, the company posted net loss of INR1.3b (in-line) on tax and other income impact.

* Given the lockdowns amid the second COVID wave, we cut our FY22 revenue/EBITDA estimate by 29%/74%, marginally above FY21 levels. However, we expect swift recovery in FY23E, keeping the revenue/EBITDA estimate intact at 13%/16% above FY20 stable-state financials. Maintain Buy.

EBITDA posts massive beat, but net loss in-line

* ABFRL’s 4QFY21 revenue fell 2% YoY to INR17.8b (in-line), led by strong traction in e-commerce and strong sales in smaller towns and cities. (Westside / Shoppers Stop / V-Mart saw 0%/-5%/6% growth YoY).

* Gross margins increased 200bp YoY to 53.3%. Gross profits posted a 5% beat to INR9.5b (up 2% YoY).

* SG&A / employee cost fell 2%/20% YoY and rent expenses fell 18% YoY – overall expense was down a commendable 11% YoY, particularly surprising on rental cost.

* Better-than-expected revenue, strong gross margins, and rental savings led to a massive EBITDA beat of 73% to INR2.5b (up 65% YoY on a low base in 4QFY20). The big beat in EBITDA was primarily owing to lower rent.

* Finance cost declined 20% YoY to INR1.1b (18% below est). Other income stood at INR202m (-65% YoY). Subsequently, net loss stood at INR1.3b (in-line).

* For the full year FY21, revenue/EBITDA declined 41%/78%, with net loss of INR6.5b (v/s INR1.5b in FY20). ABFRL launched more than 400 new stores across businesses and formats in FY21.

* The company lowered net debt by ~74% to INR6.5b in FY21 (from INR25.1b in FY20) through fundraise and working capital efficiency.

* Lifestyle revenue/EBITDA at INR10b/INR1.8b was -6%/7% YoY, with 220bp margin improvement to 17.5%. Pantaloons’ revenue/EBITDA at INR6b/INR860m was -5%/54% YoY, with 560bp margin improvement to 14.5%.

Highlights from management commentary

* The COVID impact has been lower in smaller stores v/s large formats, high streets v/s malls, and lower tier towns v/s metros; hence, Pantaloons has seen a higher revenue impact.

* Recovery is expected to commence from 2QFY22 if the COVID situation is controlled. Moreover, the spurt in consumer demand, coupled with a better competitive position against smaller peers, should translate to a revenue scale better than pre-COVID levels.

* It should be able to retain a portion of the cost savings permanently, and the EBITDA margin should improve once revenue recovers to normalized levels.

* Balance sheet strength would be maintained, and there is strong flexibility to manage working capital. Hence, even once revenue recovers, it should be contained along with the leverage.

Valuation and view

* ABFRL has consistently improved its earnings graph, with a revenue/EBITDA CAGR of 37%/75% over FY14–19. If dented FY20 growth is taken into consideration, the revenue/EBITDA CAGR would stand at 32%/55% over FY14– 20 (FY20 pre-IND AS 116 EBITDA of INR4.5b).

* ABFRL’s high leverage and poor balance sheet strength were key concerns for investors. However, the fundraise through a rights issue of INR10b and stake sale to Flipkart, coupled with working capital management, reduced its core net debt to INR6.6b in FY21 (from INR25b in FY20) – INR5.2b was spent on acquiring two ethnic wear brands.

* The company’s lifestyle brands’ retail channel sales posted 8% YoY growth, by far the best in the industry. The company’s execution capabilities and its agility to tweak its product portfolio as per changing consumer needs have enabled this. Losses have reduced as fast fashion delivered the first quarter of profitability. Cumulative loss was INR100m (4% of EBITDA) in 4QFY21 v/s INR530m (32% of EBITDA) in 4QFY20, even after including losses in Ethnic Wear, as fast fashion turned profitable. Furthermore, Pantaloons/Innerwear presents a long runway for growth.

* We value ABFRL on an SOTP basis and assign an EV/EBITDA of 18x to the lifestyle brands and Pantaloons segment and EV/sales of 1x to other business – slightly upping our multiple given its better balance sheet position to bolster growth. Subsequently, we arrive at TP of INR240 (v/s INR220 earlier). Maintain Buy.

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