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See healthy expansion led growth ahead; leverage a key monitorable

* Revenue recovered to 89% of pre-COVID levels (2QFY20) at INR20.5b, with a 340bp improvement in gross margin. This translated into an EBITDA/PAT improvement to INR3.1b/INR59m.

* We factor in a revenue/EBITDA CAGR of 7%/16% over FY20-23E, and estimate Ind AS 116 EBITDA at INR7.3b in FY23E. Net debt remains a key monitorable as earnings in 2HFY22 and the final tranche of the rightsissue could offset capex and WC spends. We maintain our Buy rating.

EBITDA/PAT turn positive

* Consolidated revenue grew by 2x YoY to INR20.5b (7% beat), or 89% of preCOVID levels (2QFY20). Estimated LTL fell 11% as it saw limited store additions. TRENT clocked 25% YoY revenue growth, with a 46% addition in its area footprint.

* Gross margin improved significantly (590bp YoY) to 53.4% (~340bp above pre-COVID levels) on lower mark downs and higher share of private labels. EBITDA came in 43% higher than our estimate at INR3.1b v/s an operating loss of INR76m in 2QFY21 (and INR3.3b in 2QFY20). Net profit stood at INR59m v/s an estimated loss of INR835m.

* Net debt stood at INR8.7b v/s INR5.3b/INR12b as of FY21/1QFY22 end. The profitability and working capital unwind have reduced net debt QoQ.

* Lifestyle: Revenue grew by 2.2x YoY to INR11.5b (92% of pre-COVID levels), with EBITDA up by 3.3x YoY at INR2.1b. Pantaloons: Revenue grew 80% YoY to INR6.6b (27% below pre-COVID levels), with EBITDA at INR1.2b. Ethnic Wear: Revenue grew by ~5.8x YoY to INR0.6b, with an EBITDA of INR10m v/s an operating loss of INR70m QoQ and INR40m YoY.

Highlights from the management commentary

* Recovery: The management expects a strong and a sustained recovery on the back of tailwinds from the festive season and opening up of the economy after the lifting of COVID-related restrictions.To Read Complete Report & Disclaimer Click Here

* Capex: It expects an annual capex of ~INR4b.

* Margin improvements: ABFRL witnessed a margin improvement on an improved share of Retail and private labels, lower mark downs, and cost control measures.

* Store expansion: The management will continue with its aggressive store expansion plans across segments. Ethnic Wear and Pantaloons will see over 100 new stores annually.

Valuation and view

* We factor in a revenue/EBITDA CAGR of 7%/16% over FY20-23E, and estimate Ind AS 116 EBITDA at INR7.3b in FY23E. ABFRL has consistently improved its earnings graph, with a revenue/EBITDA CAGR of 37%/75% over FY14-19. If FY20 growth is taken into consideration, revenue/EBITDA CAGR stands at 32%/55% over FY14-20 (FY20 pre-Ind AS 116 EBITDA of INR4.5b).

* After the recent fund raise through a rights issue of INR2.5b and strategic stake sale to Flipkart, leverage has come under control. Net debt rose to INR8.7b in 2QFY22 v/s INR5.3b in FY21. It remains a key monitorable as earnings in 2HFY22 and the final tranche of the rights issue could offset capex and WC spends.

* The near term increase in losses from expansion in the Ethnic Wear vertical remains a concern, but we expect it to be largely offset by a reduction in losses from other business and growth in the Lifestyle/Pantaloons business.

* We value ABFRL on a SoTP basis, rolling forward our valuation to Sep’23E. We assign an EV/EBITDA of 16x/15x to Lifestyle/Pantaloons and 1x EV/sales to other businesses, slightly upping our multiple, given the quick recovery and improving Balance Sheet. We arrive at a TP of INR350/share (from INR280 earlier). We maintain our Buy rating.

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