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Strengthened balance sheet to aid growth initiatives

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 largest value fashion retailer. The company has a robust distribution network having, 2874 brand stores along with 342 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)

Q3FY22 Results: Reported better than estimated results due to improved consumer sentiment, which led to a sharp demand recovery that was further amplified by a good wedding season.

On a favourable base, revenue grew 44x YoY to | 2987 crore. Overall revenue recovery surpassed pre-Covid levels and reached 116% in Q3FY22

Tighter markdown management and better product offerings resulted in gross margins improving ~230 bps YoY to 54.7%

Strong revenue growth and higher gross margins enabled the company to report an EBITDA (post Ind-AS 116) of | 582 crore vs. EBITDA of | 365 crore in Q3FY21 with EBITDA margin improving 190 bps YoY to 19.5%

What should investors do? Stock price of ABFRL has appreciated at a CAGR of ~15% over the last five years

ABFRL has strengthened its b/s through recent equity infusion and strong cashflows, which led to the company being net cash surplus (vs. net debt of | 2500 crore). We remain structurally positive and maintain BUY rating on the stock

Target Price and Valuation: We value ABFRL at | 360 i.e. 2.5x FY24E EV/sales

Key triggers for future price performance:

ABFRL has aggressive store addition plans for FY23E with 80+ 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, Star, Zara) and proven business model position Trent as a preferred pick

BUY with target price of ₹1300

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