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Accelerated store addition plan in place…

About the stock: ABFRL combines Madura’s portfolio of leading power brands (Allen Solly, Van Heusen, Louis Philippe and Peter England) with Pantaloons’ forte of largest value fashion retailer. The company has a robust distribution network with 2874 brand stores along with 342 Pantaloons stores.

* ABFRL has charted out growth strategies to become a ~US$2.8 billion entity (| 21000 crore) by FY26E, translating to 15% CAGR in FY20-26E

* It has enhanced focus on ethnic wear (through its recent acquisitions).

Q1FY22 Results: Covid induced lockdowns significantly disrupted the performance for ABFRL in Q1FY22. Green-shoots are visible with ~75% recovery rate in July.

* Revenue de-grew 55% QoQ to | 812.0 crore (up 151% YoY). On the base of Q1FY20, recovery rate was at ~40% of pre-Covid levels

* Higher-than-expected employee & other expenses resulted in PBT losses coming in ahead of our estimates

* PBT losses were at | 467 crore vs. | 121 crore in Q4FY21 and | 545 crore in Q1FY21. Finance cost declined sharply by 32% owing to a substantial decline in debt levels

What should investors do?

The stock price has underperformed the broader indices over the last five years with returns of ~58%.

* ABFRL has strengthened its b/s through recent equity infusion with net debt declining sharply from | 2500 crore to | 530 crore as on FY20. We remain structurally positive and maintain our BUY rating on the stock Target Price and Valuation: We value ABFRL at | 265 i.e. 2.5x FY23E EV/Sales.

Key triggers for future price performance:

* ABFRL has aggressive store addition plans for FY22E with 60+ Pantaloons stores and 400+ (franchisee) lifestyle brand stores

* To penetrate further in small towns through Peter England Red stores and Allen Solly Prime Stores (~200 stores in FY22E)

* Strengthening omni-channel strategy with enabling 2000+ stores omni enabled from current 1300 stores. Also, launching new Pantaloons website in Q3FY22 and multi-branded app in Q4FY22

* Maintaining b/s strength coupled with aggressive expansion would be the focus of ABFRL, going forward (debt/EBITDA: 1-2x)

Alternate Stock Idea: Apart from ABFRL, in our retail coverage we also like Trent.

* Inherent strength of brands (Westside, Zudio, Star, Zara) and proven business model position Trent as a preferred pick

* BUY with a target price of | 1,060

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