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Setting up a platform for D2C business

Aditya Birla Fashion and Retail’s (ABFRL) Q3FY22 consolidated revenues grew 44% YoY and 16% above pre-covid level, with gross and EBITDA margins expanding 260bps and 370bps, respectively, vs pre-covid levels – all ahead of our / consensus estimates. The beat was led mainly by lifestyle brands where revenues grew 55% YoY (23% more than pre-covid levels), with retail channel sales 30% ahead of precovid levels. Cashflow generation was robust at ~Rs10bn during the quarter, resulting in ABFRL becoming a net cash company. It announced plans to set up a platform for D2C business with an ambitious path of building India’s largest portfolio of digital-first fashion and lifestyle brands, which may unlock significant value in the medium term, in our view. We raise our FY23E-FY24E EBITDA by ~3% and increase our DCF-based target price to Rs350/sh (earlier: Rs336/sh). Maintain BUY. Key risks: Slower recovery in discretionary spends and lockdown restrictions

ABFRL to create a platform for D2C business with its portfolio likely to be built through both organic and inorganic expansion. Board has approved a proposal to set up a new subsidiary for building a portfolio of distinct, new-age, digital brands across categories in fashion, beauty and allied lifestyle segments. It will be initially funded through ABFRL’s internal accruals and the company will, at an appropriate time, bring in external capital to accelerate its growth journey

Continued progress on strategic portfolio expansion: ABFRL recently signed a definitive agreement to acquire Reebok’s India operations thereby foraying into sport and active wear segments. It also signed an agreement to acquire 51% stake in House of Masaba to enter into the beauty and personal care space with an aim to clock Rs5bn in top line over the next five years. It launched Tasva, a men’s occasion-wear brand in partnership with Tarun Tahiliani and expanded outlets of its premium women’s ethnic wear brand – Marigold Lane.

ABFRL turned net cash at Q3FY22-end with operating cashflow for the quarter at ~Rs10bn, primarily led by working capital release and improved Q3FY22 performance. Company launched more than 200 new stores across businesses and expanded into tier-3 cities and below through small town formats.

Consolidated revenues rose 44% YoY to Rs29.9bn (I-Sec: Rs28.8bn) on a low base. Revenues from lifestyle brands stood at Rs15.9bn, implying 23% growth over pre-covid levels. Segment EBITDA (post Ind-AS116) stood at Rs3.5bn with EBITDA margins higher by ~450bps over pre-covid levels of Q3FY20. Its retail channel revenues were up 30% over pre-covid levels with LTL growth of 34%. Wholesale channel revenues recovered to 95% of pre-covid levels, whereas the ‘others’ segment (including e-commerce) grew 47% over Q3FY20. Execution of its smalltown expansion strategy continued with PE Red’s total store count at >400 stores

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