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Margin surprise; ups store target

ABFRL reported an in-line recovery with a beat on margins. Highlights: i) Recovery: The standout was the retail channel for Lifestyle brands (125% of pre-covid), whereas Pantaloons still remains gradual due to mall exposure (73% recovery). ii) Store addition: Upped the store target for Pantaloons; now looking at 100+ stores from FY23 (FY22: 60). iii) Debt dipped in Q2FY22 and further in Nov-21, but is expected to increase given aggressive capex plans.

Factoring in the beat and higher store addition, we are raising FY22/23E EBITDA by 12%/6% with a revised TP of INR337 (21x FY23E EV/EBITDA). Retain ‘BUY’. Current valuations factor in recovery trends, and a re-rating hereon will be driven by performance.

Madura tops recovery; Pantaloons impacted due to mall exposure

ABFRL (standalone) reported a 96% YoY surge in revenues to INR20bn. Overall recovery touched 86% of Q2FY20. Segment-wise, Madura was up 103% YoY with recovery at 98% (of Q2FY20) and Pantaloons was up 80% YoY with recovery at 73% (of Q2FY20). Key highlight was the retail channel recovery in Lifestyle brands at 125%. Pantaloons recovery was lower at 73% due to its high share of mall-based stores. The business during the festive period has seen full recovery. Innerwear saw another quarter of strong performance, up 41% YoY and 46% higher than pre-covid level. Despite the changed channel mix, gross margins sustained at pre-covid levels of 53% driven by a higher retail channel mix, lower discount and dormancy charges.

Aggressive expansion targets; debt levels to sustain

ABFRL has increased its store addition target for Pantaloons from the run-rate of 60 (for FY22) to 100+ stores per annum going forward. Debt has reduced from INR12bn in Q1FY22 to INR8.7bn at the end of Q2FY22. While debt in November was down further to INR4.5bn, given aggressive growth plans, debt is likely to increase by the end of the year. In ethnic wear, ABFRL launched its women’s ethnic brand Marigold Lane in a shop-in-shop (SIS) format at Pantaloons. Its ethnic brand for men will be launched during the upcoming wedding season.

Outlook and valuation: Recovery factored in; maintain ‘BUY’

Factoring in the beat and higher store additions, we are raisin FY22/23E EBITDA by 12%/6% with a revised TP of INR337 (INR260 earlier), valuing the company at 21x EV/EBITDA as we roll forward to FY23E. Maintain ‘BUY/SO’. Current valuations factor in the recovery trends, and a re-rating hereon would be driven by performance.

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