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Investments in new businesses bloating debt…

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 3442 brand stores along with 406 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)

Q4FY23 Results: ABFRL reported a moderation in revenue growth with disappointing margin delivery on account of higher investment in marketing and brand building to scale up new businesses that negatively impacted the profitability.

• Revenue grew 26% YoY (I-direct estimate: 25%) aided by a favourable base and foray into newer segments to | 2879.7 crore

• Gross margins remained flattish YoY at 55.7%. However, owing to negative operating leverage, initial operating losses in TMRW and new ethnic businesses, EBITDA margins contacted significantly by 960 bps YoY slipping to single digit of 6.7% (I-direct estimate: 9.0%) (I-direct estimate: 14.1%, Q3FY22: 19.1%)

• Net losses bloated materially to | 194 crore in Q4FY23 (I-direct estimate: -| 116 core) vs. net profit of | 31.9 crore

What should investors do? ABFRL’s focus on enhancing presence across categories and filling white spaces in its portfolio has led the company to invest in new business (Innerwear, Tasva & D2C brands) that have a low profitability profile in its initial growth period. Further, ABFRL is investing in marketing to establish the brands in the new businesses, which is impacting its EBITDA margin profile. Lower than expected sales growth has led to inventory build-up and bloating of net debt to ~| 1400 crore in FY23 (FY22: | 504 crore), which is expected to increase further due to recently announced acquisition of TCNS Clothing (not factored in our estimates as we await more information on the same). We believe the recent capital allocation decisions on new businesses acquired/to be acquired will pressurise profitability in the near to medium term. Hence, we downgrade the stock from BUY to HOLD.

Target Price and Valuation: We value ABFRL at | 215 i.e. 1.5x FY24E EV/sales.

Key triggers for future price performance:

• Improvement in the profitability metrics of new business acquired would be the key monitorable

• Pursuit of aggressive revenue growth has led to bloating of debt. Going ahead, focus should be on reduction in debt on a sustainable basis and strengthening of b/s

Alternate Stock Idea: Apart from ABFRL, in our retail coverage we also like Trent.

• We have BUY rating with target price of | 1730

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