Hold Aditya Birla Fashion & Retail Ltd for Target Rs.40 by Axis Direct
Growth Slowdown, Margins Impact Persists; Maintain HOLD
Est. Vs. Actual for Q2FY27: Revenue – MISS; EBITDA – MISS
Changes in Estimates post Q2FY27
FY27E/FY28E: Revenue: -3%/-4%; EBITDA: -25%/-30%
Recommendation Rationale
* Muted Revenue Growth: ABFRL reported 2.4% YoY revenue growth in Q2FY27, impacted by the shift in the festive calendar, with Durga Puja, pre-Diwali purchases and associated ecommerce sale events moving to Q3, alongside a subdued wedding season. Performance remained muted across key segments, with Pantaloons reporting flat revenue and the Ethnic business growing just 2%; together, these segments contribute approximately 80% of revenue.
* Margin Pressure: EBITDA declined 80.7% YoY, with EBITDA margin contracting 282bps to 0.7%, primarily due to lower treasury income, gross margin pressure and investments in scaling newer businesses, including OWND and Galeries Lafayette. Profitability was further impacted by lower operating leverage due to the shift in festive demand to Q3. Additionally, 4–5% cost inflation, which Pantaloons has been unable to fully pass on through price hikes, is expected to result in an estimated 100bps gross margin impact as the inflationary impact fully sets in.
* Management Outlook: Consumer demand remained steady, with better traction in lower-tier and rural markets despite festive shifts hurting Q2. Early H2 trends are strong, with Onam and Durga Puja posting double-digit LTL growth and Diwali trending at mid-to-high single digits. In the near term, solid same-store sales should offset cost pressures, with margins expected to expand next year as cost inflation eases. Cash flow is projected to recover in H2 from seasonal working capital release and festive volumes, aided by an upcoming $100 Mn–$150 Mn external fundraise for TMRW.
Sector Outlook: Cautious
Company Outlook & Guidance: We reiterate our HOLD rating and cut our FY27/FY28 estimates considering the inflationary cost pressure.
Current Valuation: 11xSep’28 EV/EBITDA (Earlier Valuation: 12xJun’28 EV/EBITDA)
Current TP: Rs 40/share (Earlier TP: Rs 65/share)
Recommendation: With a 0% upside from the CMP, we maintain our HOLD rating.
Financial Performance
The company’s consolidated revenue stood at Rs 2,030 Cr, up ~2.4% YoY, as growth was affected by a shift in the festival season from Q2 to Q3. EBITDA came in at Rs 13 Cr, plunging 80.7% YoY, while margins stood at 0.7%, contracting by 282 bps YoY. The company reported a net loss of Rs 376 Cr.
Outlook
Management’s renewed focus on profitability marks a positive shift. Its strategy of expanding the product lineup through new launches and acquisitions, strengthening brand positioning, and driving digital transformation to increase online sales, including next-generation, digital-first brands under the technology-driven ‘House of D2C Brands’ venture, TMRW, should support longterm growth. However, these initiatives will take time to yield full results. Meanwhile, the near-term textile cost inflation and discretionary demand volatility remain key monitorables, and hence, we adopt a “Wait and Watch” approach and maintain our HOLD rating on the stock with a revised TP of Rs 40/share, implying a 0% upside from the CMP.
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