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ABFRL’s board has approved the demerger of its Madura business into a new entity – ABLBL, upon the requisite regulatory approvals over the next 9-12 months. In our view, this move should unlock value through better capital allocation and improved investor interest for the two businesses individually. Post de-merger, ABFRL plans to raise Rs25bn in the remnant entity, to support growth/debt reduction, while new entity ABLBL should generate healthy cash flows. Debt allocation of Rs10bn to ABLBL (33% of overall debt) is in line with its asset mix and regulatory conditions. ABLBL has a strong track-record of delivering low-teens earnings CAGR along with a healthy return profile of 25- 30%, and the demerger has potential to drive a ~15% re-rating. But remaining businesses (Value Retail + Ethnic + D2C + Luxury) will need investments in the near term. We remain conservative and retain REDUCE on ABFRL; we will watch for margin gains in the remnant entity before turning constructive on the stock.

ABLBL: Improved capital allocation/investor interest offer re-rating potential

Madura Fashion and Lifestyle (ARR: Rs80bn), comprising lifestyle brands, casual wear brands, sportswear, and innerwear business, will be transferred to the newly de-merged entity – Aditya Birla Lifestyle Brands (ABLBL). ABLBL’s portfolio has potential to deliver mid-teens EBITDA CAGR in the medium term, with a healthy ROCE profile of 25-30%. It generates ~70% value for our overall SOTP, at 22x FY26E EBITDA. We believe this business has scope for a re-rating, with improved capital allocation and investor interest. Good growth businesses similar to ABLBL trade at ~30x EBITDA vs. 22x that we assign to ABLBL in the overall SOTP; this provides a potential re-rating of ~20% in ABLBL or ~15% in overall SOTP.

Post-demerger ABFRL: Capital infusion to fund growth; focus on consolidation

The value retail, ethnic wear portfolio and other luxury/digital brands will be retained by the existing ABFRL (ARR: Rs70bn). It is likely to raise growth capital of Rs25bn for infusing strength into the balance sheet to take care of growth prospects. Pantaloons currently contributes almost the entire value for this segment, at ~30% to the overall SOTP, as we largely value the Ethnic and D2C business at cost. After a series of acquisitions, ABFRL’s focus is on consolidation and driving more value in the existing business segments

Analyst Call KTAs:

1) Promoters remain committed to participate in the Rs25bn equity raise, and funds are likely to be used for growth/debt repayment. Preference for growthrelated allocation will be in this order: Ethnic-wear, Value Retail and, then, Luxury. 2) The TCNS merger is a pre-condition to this scheme, and Management expects the merger process to close within the next 4 months. The current demerger is expected to be completed within 9-12 months. 3) All segments are run by separate CEOs and Management is likely to analyze & announce an appropriate management structure for the two entities in the next 6-12 months. 4) ABLBL, with its better return profile, is likely to eliminate debt over the next 2/3 years. 5) The post-demerger ABFRL debt of Rs20bn includes Rs15bn of long-term debt, with the balance being short-term debt.

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