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ABFRL is our bet to play the Opening up Theme in Fashion & Retail

* Having grown it’s Revenues/EBIDTA at a CAGR of 31.6%/51.5% during FY’13-FY’20, ABFRL has emerged as India’s largest fashion powerhouse with Brands that command top of the mind recall among consumers.

* FY’21 saw the adverse impact of the Pandemic & Lockdowns which resulted in losses due to lower absorption of manufacturing costs. We believe the situation has improved since June this year with states opening up along with increased pace of vaccinations.

Asset-Light scalable Business Model with a distribution strength spanning 850 cities

* Rejuvenation of the Madura & Pantaloons brands provide headroom for rapid growth as ABFRL raises the e-commerce & private label pie to drive the Total Addressable Market (TAM)

* As India’s largest pure play fashion entity, ABFRL strategy in Value Fashion & Ethnic Wear is evident from its capital employed during the last two years.

Recent Fund Raise of ₹25 bn to help de-leverage the Balance Sheet

* Preferential Issue to Flipkart (₹15 bn for a 7.8% stake) along with a Rights Issue of ₹10 bn should help de-leverage it’s Balance Sheet this fiscal.

* Digital Transformation of its supply chain has enabled ABFRL to shift from the 4 season model to the 12 season model which in our view should optimise Inventory and improve cash flows.

* Improving ESG scorecard through increasing the share of Renewable Energy & sustainable biodegradable packing materials is highly noteworthy.

* Even though the sector was grappling with digital disruption prior to the Pandemic, covid exacerbated their ability to invest for growth. ABFRL however invested aggressively through M&A and partnerships during this period.

* Well Articulated 5-Year Road Map to take ABFRL from a ₹52 bn entity to a ₹210 bn company as the Value Migration Theme plays out.

Valuation

We Initiate a BUY recommendation on ABFRL with a one-year price objective of ₹272 based on SOTP method valuing the Lifestyle & Pantaloons business by EV/ EBIDTA assigning a multiple of 17x based on its power brands, distribution network and expansion strategies across geographies. We value its other business comprising of Global Brands, Innerwear & Ethnic Wear at 1x EV/Sales.

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