IGI Logo

Eyeing growth across all avenues

We pored over ABFRL’s FY22 annual report to capture key details of its performance. Below are the key takeaways:

Gradual recovery from the impact of COVID-related restrictions

FY22 saw a partial recovery in the business, with the management focusing on Retail expansion, along with Balance Sheet discipline, a key focal point, given the challenges faced in FY20. Hit by the second COVID wave, consolidated revenue recovered, yet remained 7% below pre-COVID levels (FY20). EBITDA margin remained stable at 13.5% on strong cost control. On a pre-Ind AS 116, EBITDA margin was 2.2% v/s 5.1% in FY20. Revenue from the Lifestyle segment remained resilient, reaching pre-COVID levels (ASP/volumes at 5%/-7%). Revenue from Pantaloons stood 25% below pre-COVID levels (ASP/volume at +9/-32%) as its large format stores and its higher presence in malls was severely affected by the COVID-19 pandemic. EBITDA contribution from Ethnic Wear and Other segments grew to 4% from -5%, led by a recovery in Fast Fashion, Innerwear, and its recent Ethnic Wear foray.

Improved Balance Sheet, but capital allocation unclear

After a large scale fund raise of INR22.5b and a series of acquisitions in Ethnic Wear in FY21, ABFRL invested in smaller acquisitions (Reebok India and House of Masaba) in FY22. A further release in working capital (in continuation to FY21) and resumption of business ensured a healthy Balance Sheet and maintaining of net debt (excluding lease liability) at FY21 levels at a mere INR5b, much below its peak of INR24b in FY20. RoCE (pre-Ind AS 116 excluding goodwill) remained lower at 5.3% as against a healthy 30.5% in FY20. ABFRL announced a large fund raise (INR22b) from GIC (diluting 7.5%), with an eye on the D2C space. Though this can significantly strengthen its Balance Sheet, there is limited clarity on its deployment, especially with a strong OCF/FCF of INR9.5b/INR6.3b, after adjusting for a healthy growth capex of INR3.2b. This can potentially dilute its return profile and raises the risk of capital misallocation.

Straddling multiple growth categories

Contrary to general apprehensions, the Brick and Mortar space is bouncing back after the lifting of COVID-related restrictions. The management highlighted new growth prospects in the industry – Ethnic Wear, Athleisure, D2C, and opportunities in small towns, with online expected to constitute 20% of the total market by CY25. It is creating deep inroads into each of these categories, thus offering multiyear growth prospects, by leveraging: a) a host of in-house prominent brands, b) a deep Retail network, c) the inorganic route, and d) its proven execution capability, as evident from its market leading position across multiple formats. On the flip side, this creates a long tail of a fragmented portfolio mix in multiple categories, with a prolonged phase of investments and losses.

Strong growth expectations

The Lifestyle segment, through brand extensions, has delivered well, with ~50% contribution accruing from the Non-Formal Men’s Wear segment, growing outside the brand’s lineage. We expect revenue/EBITDA CAGR of 26%/31% for the Lifestyle segment over FY22-24 to INR72.9b/INR13.5b, led by a strong annual footprint addition of 270 stores and recovery in the Wholesale segment. The recovery in revenue/sq. ft. after the new Retail identity in Pantaloons will be key to an overall improvement in revenue and EBITDA, it being an around 32% contributor. We expect a recovery and aggressive footprint addition to drive revenue/EBITDA CAGR of 33%/39% over FY22-24. The Ethnic Wear segment witnessed strong revenue growth, besides turning EBITDA positive in FY22. We expect a consolidated revenue/ EBITDA CAGR of 31%/46% over FY22-24 to INR140.3b/INR23.5b, with an EBITDA margin of 16.7% (7.6% on a pre-Ind AS 116 basis).

Valuation and view

ABFRL’s strong execution capability is reflected in its ability to scale up a series of strong brands over the last 10 years with healthy growth. The recent fund raise from GIC, followed by improved profitability in the Others segment under Lifestyle and Ethnic Wear, can be viewed as key positives. However, utilization of proceeds from GIC, expansion in the D2C segment, and a tepid response to the new Pantaloons format should remain key monitorables. We value ABFRL on a SoTP basis to arrive at our TP of INR380, assigning an EV/EBITDA ratio of 20x to the Lifestyle brands, given the strong recovery and improved profitability; 17x to Pantaloons; and an EV/sales ratio of 1x to Other businesses on a FY24E basis. On a pre-Ind AS 116 EBITDA of INR10.6b for FY24E, this works out to be EV/EBITDA of ~34x. An improved Balance Sheet, healthy cash flows, and a strong overall performance remain key tailwinds for the stock to perform going forward. We maintain our Buy rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer