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ABFRL’s Q2 EBITDA was slightly better than estimated, led by boost in Madura margin, albeit offset by muted revenue. Lifestyle/Pantaloons’ performance lagged peers’, but softness in Innerwear/Ethnic was in-line. ABFRL is confident of its leadership in Lifestyle and attributed the 12% Q2 LTL decline to shift in wedding season to Q3 and lesser participation in low-margin channels (margin: +450bps). With higher East mix+intense competition+inventory optimization, Pantaloons saw a 15% dip in LTL/600bps drop in margin. Festive commentary was muted, but ABFRL remains hopeful of pickup in the wedding period. Despite weak trends, ABFRL maintains its Pantaloons/Tasva store-count target; Innerwear expansion is curtailed, on weak Athleisure. Net Debt rose by Rs30bn in H1, owing to Rs16.5bn towards TCNS stake, Rs4bn for D2C investments, with the rest for capex/WC (festive mismatch). Pantaloons/D2C are grey areas, while Lifestyle/Reebok/Ethnic are doing well; retain HOLD with TP at Rs220.

Aditya Birla Fashion & Retail: Financial Snapshot (Consolidated)

Anticipate demand recovery with onset of festive season: Standalone revenue at Rs30bn was flat and consolidation of Ethnic/D2C helped to consolidate growth of 5% in Q2. Growth in Ethnic subsidiaries was slower at 32%, but is expected to pick up with shift of festive season to Q3. For the Standalone business, Lifestyle/Pantaloons sales declined 6%/7%, due to LTL declining 12-15%. The weak performance was on account of shift of festive/wedding season to Q3, lower participation in low-margin channels, and intense competition in the value retail space. Innerwear de-grew 10%, due to athleisure related challenges. E-com trends were weak across business segments due to shift of festive season. Standalone EBITDA margin at 12.7% was down by 230bps, hit by old inventory clearance/negative leverage in Pantaloons (down by 600bps) and Innerwear losses. Performance of Other segments was better, on the back of gross-margin-led 430bps margin gains in Lifestyle and an early breakeven expected for Reebok in FY24 with Rs4bn topline. Among subsidiaries, Ethnic loss is lower at Rs0.5bn in H1, but TMRW (D2C) loss is higher at Rs0.7bn. Net debt at Rs44bn (vs. Rs14bn at Mar-23 end) increased by Rs30bn, due to Rs16.5bn payment for TCNS stake, Rs4bn investment in D2C, with the rest likely towards capex and WC increase due to festive shift. ABFRL expects to end FY24 with Rs28bn net debt; near-term debt level will remain elevated.

Earnings call KTAs: 1) ABFRL is seeing a K-shaped recovery, with premium/luxury segments doing better; but the value segment is stressed due to increase in personal indebtedness, elevated rental/health costs, and low wage hikes. 2) ABFRL does not expect further rise in debt (from Rs28bn by FY24-end), with thoughtful capital allocation across business segments. 90% of the planned TMRW (D2C) investments are done — another Rs1.5bn will happen in H2. Innerwear is expected to see breakeven in FY25. Pantaloons will fund its own growth, but Tasva will require capital infusion in the near term. 3) ABFRL expects Reebok to turn profitable by FY24-end and aims to add 15-20 stores every quarter, and reach a 170-180 store-count by then. 4) Targets adding 40/30- 35 Ethnic/Pantaloons stores in FY24; Innerwear expansion has been curtailed. 5) Lifestyle margins expected to track 18-19% levels. 6) Plans adding 30-35 Pantaloons stores every year (earlier run-rate: 60-65 stores). 7) In TMRW, loss run-rate at Rs1.4bn is higher vs. earlier estimate of Rs0.8-1bn for FY24; losses should moderate going ahead.

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