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Tougher times ahead

ABFRL’s 4QFY23 earnings picture was somewhat similar to previous quarters with continued disappointment on profitability metrics. Madura segment was overall a mixed bag - small beat in revenue driven by the newer businesses while profitability was lower than expected due to higher marketing spends behind the core brands plus continued investments in newer ventures. Pantaloons did tad better on profitability vs our very subdued expectations, but does not appear to be entirely out of the woods just yet, and recovery is likely to be more gradual given continued stress in the value-segment. Management also stated that the slowdown now appears more entrenched and widespread as against the same being more restricted to the value-segment earlier. The stock is no doubt cheap, but as highlighted earlier, ABFRL has never been at steady-state and the recently-announced acquisition of TCNS further re-affirms that fact. We expect the stock to remain under pressure for some time.

Revenue tad ahead of our forecasts but profitability continued to disappoint: ABFRL’s consolidated sales grew 26.1% to INR 28.8bn and were 2.5% better than we expected, driven primarily by a c.5% beat in Madura segment revenue. Core Lifestyle brands’ growth of 14.4% was broadly inline but the newer ventures did better than we expected. Pantaloons’ revenue grew 18.2% - an uptick vs Dec-Q but still way below desired level. Operating performance continued to remain weak overall – Madura segment’s EBITDA was 12-13% below our forecasts, with Lifestyle margin down 200-250bps vs that seen in recent few quarters and much lower vs levels seen during same period last year that had significant quantum of savings, which management had then described as ‘sustainable’ but weren’t really so. The D2C venture as well as the ‘Other Businesses’ turned in a loss of INR300mn each during the quarter – the latter was likely due to teething issues in Reebok. As highlighted in the past, scale deleverage impacts not only the reported EBITDA of ABFRL but also depreciation and interest, which are 30.6% and 59% higher yoy (a large part of the rentals are now sitting in these line-items), resulting in a net loss of INR 1.9bn for the quarter (JMFe: loss of INR1.3bn).

Scale deleverage, higher spends behind core brands and new businesses dragged margin lower: 1) The Core Madura brands business grew 14.4% yoy – broadly on expected lines. EBO channel had a healthy 16% LTL growth during the quarter. Reported EBITDA margin was, however, down 859bps yoy and 227bps qoq to 14.7%. Management cited higher marketing spends and rent-concession in base quarter to be key reasons for the weaker margin comparator. 2) Pantaloons’ revenue grew 18.2% with LTL growth of 13%. Reported EBITDA margin compressed 325bps yoy to 8.9% - tad better than our expectation of 8.2%, but much lower vs recent few quarters due to the impact of muted demand scenario (especially in smaller towns) and costs emanating from a larger network size (25 stores opened during 4Q). 3) Ethnic sales grew well (+72%) but EBITDA was 40% lower yoy due to continued investments behind Tasva – this drag is likely to stay for a while. 4) Revenues of the D2C subsidiary were c.32% higher qoq, and losses were also significantly up at INR300mn (vs INR190mn in 3Q & INR70-80mn per quarter in 1H)

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