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Improved operating performance

* ABFRL’s consolidated EBITDA grew 27% YoY (19% beat) to INR5.5b in 3QFY24, led by healthy revenue growth of 16% (aided by TCNS revenues). EBITDA margin expanded 120bp which was driven by gross margin (GM) expansion of 190bp YoY. Net loss, however, widened to INR1.1b (vs. estimated loss of INR514m), dragged down by higher depreciation and finance costs as a result of strong store expansion.

* A gradual revival in Pantaloons and the discontinuation of unprofitable channels in Madura turned out to be positive. However, continued investments in new businesses (Tasva and TMRW) and the streamlining of inventory in TCNS could put pressure on earnings for the next 4-6 quarters. We build in a CAGR of 13%/9% in revenue/EBITDA over FY23-25E. Retain Neutral rating

Net loss continues; GM expansion supported EBITDA

* ABFRL’s consol. revenue grew 16% YoY (7% beat) to INR41.7b in 3QFY24, led by all segments (except Lifestyle). Our estimates were understated as we did not include TCNS financials, which led to a beat in revenue and possibly EBITDA in 3QFY24. Excluding TCNS, revenue grew 8% YoY to INR38.9b (in line).

* Gross profit grew 20% YoY to INR23.5b (12% beat) and margins expanded 190bp YoY to 56.5%.

* EBITDA increased by 27% YoY (19% beat) to INR5.5b, with margin of 13.3% (+110bp YoY). The margin expansion was supported by GM expansion but offset by higher SG&A (+24% YoY) and employee expenses (+15% YoY). All segments reported positive EBITDA, except TMRW.

* ABFRL continued to report a net loss at INR1.1b in 3QFY24 (est. loss of INR514m), due to a higher cost of retailing, higher interest costs, and continued investments in TMRW.

Highlights from the management commentary

* Improvement in GM and lower mark down during the quarter led to EBITDA margin expansion.

* For Pantaloons, the presence of distribution network channels in smaller towns could remain a challenge for growth given the weaker demand within the region. ?

ABFRL plans to increase its store count to 200 for Tasva in 2-3 years by adding 30-40 stores annually.

* The company targets revenue growth of 10%-12% in the medium term for the existing businesses.

Valuation and view

* Continued 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 in this portfolio may further accentuate near-term profitability risks.

* We raise our FY24/FY25 EBITDA estimates by 17.6%/7.4% considering improved profitability. PAT may continue to see the impact related to store expansions. We factor in a CAGR of 13%/9% in revenue/EBITDA over FY23-25E.

* We value ABFRL on the SOTP basis, assigning EV/EBITDA of 20x to Lifestyle Brands, 10x to Pantaloons, and EV/sales of 1x to other businesses on FY26E. Subsequently, we retain our Neutral rating with a TP of INR260.

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