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Expects to beat FY26E target with fund raise; maintain Buy

* ABFRL has approved a Rs22bn capital raise from GIC Singapore through a mix of fresh equity (Rs3bn) and convertible warrants (Rs19bn) at Rs289/share. GIC will pay Rs7.7bn for fresh equity + a premium for warrant subscription now (~25%), followed by Rs14.3bn within the next 18 months. After the investment, ABFRL will see a 7.5% equity dilution.

* With this raise, ABFRL has strengthened its balance sheet for the medium term and expects to beat its earlier stated target of Rs210bn top-line by FY26 (~15% FY20-26E CAGR). A majority of the funds would go toward ramping up Pantaloons/Ethnic/Innerwear.

* Q4 EBITDA was 35-70% ahead of estimates, led by strong traction in Lifestyle (rev/sqft up ~15% vs. pre-covid). Pantaloons recovery was slower at 90%. It expects ~400/80/70 store additions in Lifestyle/Pantaloons/Ethnic after modest additions in FY22 due to challenges.  We largely maintain FY24 estimates. The FY26E top-line target is factored in, but we remain conservative on margins by ~150bps. Retain Buy with TP of Rs360 (Rs400 earlier) on 26x Jun’24 pre-IndAS EBITDA (28x earlier). Multiple cut is led by 50bps higher WACC.

Robust expansion plans aided by fund raise:

Top-line grew ~22%, led by 34% growth in Lifestyle and 13% growth in Pantaloons. Lifestyle growth was led by 71% growth in the wholesale channel, while physical retail/other channels delivered a healthy 25%/16% growth. In line with recent trends, Lifestyle EBOs saw strong traction with Rev/sqft ~15% higher than pre-Covid levels despite operational challenges in the first half of Q4. While store additions picked up in Pantaloons with 16 new additions, rev/sqft was still ~10% below pre-covid levels. However, ABFRL expects to get back to near pre-Covid levels in FY23. Compared to recent trends, Innerwear growth was slower at ~15% in Q4 and 33% in FY22. Ethnic business reported sales of Rs1bn (up 2.5x), with an annual run rate of Rs4bn. Going ahead, it expects store additions to pick up with ~400/80/70 additions expected in Lifestyle/Pantaloons/Ethnic segments in FY23E vs. 143/31 store additions for Lifestyle/Pantaloons in FY22. Capex is expected to be ~Rs7bn in FY23E for new store additions, back-end infra and digital capabilities. ABFRL had a net debt of Rs5bn as of FY22-end.

Lifestyle segment led margin gains:

EBITDA margins improved ~260bps to 17%, led by a 570bps gain in Lifestyle and a ~230bps decline in Pantaloons. Strong SSG reflected in strong margin gains for lifestyle, while weaker SSG led to a margin decline in Pantaloons. ABFRL expects a pick-up in discretionary expenses and strong expansion to impact margins from ~19% in H2. We remain conservative with 17-18% margin expectations over FY22-25E.

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Stronger franchise; maintain Buy:

Strong recovery trends, aggressive expansion plans and an improving margin profile should drive healthy revenue/EBITDA CAGRs of 15%/28% over FY20-25E. RoIC (ex-goodwill) is expected to improve to ~30% by FY25. Retain Buy with a revised TP of Rs360 (26x Jun’24E pre-IndAS116 EBITDA vs. 28x FY24E earlier). The reduction in multiple is due to 3M roll-over and higher WACC.

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