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Lifestyle and Pantaloons drive profitability

* ABFRL’s consolidated EBITDA grew 47% YoY (27% beat), led by the Lifestyle/ Pantaloons segments, which saw 480bp/270bp improvements in EBITDAM. Revenue growth was led by new businesses. Net loss, however, widened to INR2.7b YoY (est. loss INR2.4b), due to higher depreciation and finance costs.

* The rationalization of loss-making stores and the discontinuation of unprofitable channels in Madura turned out to be positive. However, continued investments in new businesses (Tasva and TMRW), along with the streamlining of inventory in TCNS, could put pressure on earnings for the next 4-6 quarters. We estimate a CAGR of 15%/16% in revenue/EBITDA over FY24- 26E. Retain Neutral rating.

EBITDA up 47% YoY (27% beat)

* ABFRL’s consol. revenue grew 18% YoY (in line) to INR34b in 4QFY24, led by growth across all segments.

* Gross profit grew 18% YoY to INR19b (in line) and margins were flat YoY at 55.8%.

* EBITDA jumped 47% YoY (27% beat) to INR2.8b and margin expanded to 8.3% (+160bp YoY). The increase in margins was led by Lifestyle/Pantaloons segments, which reported 480bp/270bp improvement in EBITDAM.

* ABFRL continued to report a net loss. 4Q net loss stood at INR2.7b (est. loss of INR2.4b), due to higher interest costs and continued investments in TMRW business.

*  Full-year revenue grew by 13% YoY, while EBITDA declined 3% YoY. Losses increased in FY24.

* OCF improved in FY24 to INR 2.5b (vs cash outflow of INR3b in FY23), led by the working capital release. Capex Stood at INR7.4b (vs INR6.7b in FY23), resulting in cash outflow post interest of INR13.1b (vs. cash outflow of INR15.1b in FY23).

* ABFRL received GIC equity of INR14.3b and paid INR16.1b for the acquisitions. As a result, net debt increased by INR14.4b to INR28.6b.

Highlights from the management commentary

* Distribution optimization: The company is rationalizing stores to improve its operating performance. It has shut underperforming stores across brands and doubled down on profitable channels and partnerships.

* Pantaloons: The store closure is a one-time action. Going forward, the company plans to open 25-30 stores in FY25. In FY24, it opened 29 stores and closed 43 stores.

* Tasva and Style up: Style-up expansion would be slower in FY25 and will gradually pick up. The company is looking to double the revenue going forward, with 60 odd stores in the pipeline.

* Capex: ABFRL expects a capex outlay of INR6-6.5b in FY25.

Valuation and view

* Persistent softness in discretionary demand could remain an overhang. Further, the value segment is expected to remain under pressure, which may impact earnings.

* In the last few years, ABFRL has invested in multiple new businesses, with a long tail of businesses that are presently loss-making or yet to stabilize. Scaling up the ethnic wear and Reebok and turning around the newly set up D2C segment could be a bumpy ride. The inclusion of TCNS to this portfolio may further accentuate near-term profitability risks.

* We broadly maintained our revenue/EBITDA estimates for FY25/FY26, factoring in a CAGR of 15%/21% in revenue/EBITDA over FY24-26E.

* We value ABFRL on the SOTP basis, assigning EV/EBITDA of 20x to ABLFL, 10x EV/EBITDA to Pantaloons and EV/sales of 0.5x to other businesses of ABFRL (demerged) on FY26E. Subsequently, we retain our Neutral rating with a TP of INR335.

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