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Smart recovery across segments; Lifestyle brands continue to outperform

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 being the largest value fashion retailer. The company has a robust distribution network having, 3112 brand stores along with 375 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)

Q1FY23 Results: ABFRL reported a strong operational performance with comprehensive beat across all fronts. Overall revenue recovery rate in Q1FY23 reached 139% of pre-Covid levels (I-direct estimate: 131%). The growth was mainly led by healthy show in Lifestyle brands (~53% of revenues) and smart recovery in Pantaloons segment (36% of sales).

* On a favourable base, revenue grew 254% YoY to | 2874.8 crore (three year CAGR: 12%)

* Owing to better product mix and delay in EOSS, gross margins improved ~510 bps YoY to 55.8%. Despite fixed overheads returning to normal levels, the company reported healthy EBITDA margins of 16.3%. On a three year CAGR basis, EBITDA grew at an impressive rate of 14% to | 468.4 crore

* Tracking healthy operational performance, PAT came in at | 94.4 crore (Idirect estimate: | 61 crore) vs. net loss of | 351 crore in Q1FY23

What should investors do? Stock price of ABFRL has appreciated at a CAGR of ~12% over the last five years.

* ABFRL has strengthened its balance sheet through recent equity infusion with net debt declining sharply from | 2500 crore (in FY20) to ~| 649 crore We remain structurally positive and maintain BUY rating on the stock

Target Price and Valuation: We value ABFRL at | 350 i.e. 2.5x FY24E EV/sales

Key triggers for future price performance:

* ABFRL has aggressive store addition plans for FY23E with 75+ Pantaloons store and 400+ (franchisee) lifestyle brand stores

* Multiple strategic initiatives like entry into footwear by acquiring Reebok’s India operations, acquisition of majority stake in Masaba to foray into beauty category, launch of premium menswear ethnic brand Tasva and setting up a separate platform to build a portfolio of D2C brands to add value over the medium to long term

* 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) and proven business model position Trent as a preferred pick. BUY with target price of | 1470

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