Neutral Aditya Birla Fashion and Retail Ltd For Target Rs.335 By Motilal Oswal Financial Services Ltd
Revenue in-line; modest EBITDA beat on improved profitability in Pantaloons
* Aditya Birla Fashion and Retail (ABFRL)’s consol. revenue grew 13% YoY, driven by TCNS consolidation and improvement in Lifestyle’s LTL growth.
* ABFRL’s EBITDA was up 12% YoY (4% beat) as improvement in Pantaloons’ profitability was offset by ~300bp YoY margin contraction in Lifestyle. ABFRL posted a net loss of INR2.1b in 2Q (INR13.6b cumulative loss since 4QFY23).
* We lower our FY25-26 revenue estimate by 3%/6% on lower store additions, while our EBITDA estimates are broadly unchanged.
* We build in a CAGR of 10%/17% in revenue/EBITDA over FY24-27E. We believe our estimates of profitability improvement in newer segments are optimistic. Delays in ramp-up in profitability could pose downside risks.
* We value ABFRL on the SOTP basis. We assign EV/EBITDA multiple of 15x to both ABLBL and Pantaloons businesses and EV/sales of 1x to other businesses of ABFRL (demerged) on Dec’26E. We reiterate our Neutral rating with a TP of INR335.
Modest EBITDA beat on improved profitability in Pantaloons
* ABFRL's consolidated revenue grew 13% YoY (in-line) to INR36.4b, driven by the TCNS acquisition and robust growth in ethnic and TMRW.
* Lifestyle revenue grew 3% YoY (vs. -7% YoY in 1Q), driven by 3.4% LTL growth in the retail channel, while Pantaloons’ revenue grew 3% YoY, led by 1.3% LTL growth.
* Gross Profit grew 19% YoY to INR20.6b (5% beat) as margins expanded 310bp YoY to 56.5%.
* EBITDA increased 12% YoY (4% beat) to INR3.6b as higher gross margin was offset by the 23%/26% YoY increase in employee costs and other expenses.
* Consolidated EBITDA margin contracted 10bp YoY to 9.9% as 560bp margin expansion in Pantaloons and lower losses in ethnic/TMRW were offset by ~300bp margin contraction in Lifestyle EBITDA margin.
* ABFRL continued to report a net loss. Reported loss was INR2.1b loss (vs. estimated loss of INR2.4b).
* Revenue/EBITDA for 1HFY25 grew 10%/17% YoY, while net loss increased to INR4.3b (from INR3.6b in 1HFY24).
* For 2HFY25, the implied ask-rate for revenue/EBITDA growth is 10%/21% YoY.
Balance sheet and cash flow analysis
* ABFRL’s consolidated net working capital days stood at 48 (vs 61/43 in 1HFY24/FY24), driven by a reduction in inventory days.
* 1HFY25 OCF (post leases) outflow was INR0.3b, though lower than the INR4.9b outflow in 1HFY24, largely on favorable WC movement. Capex stood at INR2.6b (vs. INR4b YoY). As a result, ABFRL’s 1HFY25 outflow stood at INR7.5b (vs. outflow of INR12.8b YoY).
* ABFLR’s net debt increased ~INR9b in 1HFY25 to INR37.6b.
Key highlights from the management interaction
* Demand environment: The overall demand environment remained subdued in 2Q, but with festive and occasion led sales picking up, 2H should be better.
* Capital allocation: ABFRL has expanded its portfolio significantly through acquisitions in the past few years. Management indicated that the acquisition phase is over and the focus is now on ramping up profitability.
* Pantaloons’ profitability improvement: Management highlighted that profitability improvement in Pantaloons was driven by better inventory markdown management, rationalization of unprofitable stores, and cost improvement drive across the company. Further, management does not plan to use discounting as a lever to grow and is focused on store/merchandise improvement to drive higher store productivity.
* ABLBL weaker margins: ABLBL margins were impacted by the scaling down of business in one of its top four trading partners (Centro). Further, 2QFY24 benefitted from one-off gains (on account of the reversal of the minimum wages norm in Karnataka) and the overall margins in 2QFY25 appear optically lower on a higher base. Management expects to achieve an 18% EBITDA margin in ABLBL in the longer term.
* Store additions: Management’s focus was on consolidating unprofitable stores in 1H and expects ~100 store openings in urban-centric locations in ABLBL Lifestyle brands and Reebok stores in 2H. Further, management aims to open 20-25 stores annually in Pantaloons in larger towns.
* Demerger update: It has received NOC from stock exchanges and filed an application with the NCLT. It expects the demerger to be completed by the end of FY25.
Valuation and view
* 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 business and Reebok and turning around the newly set up Digital First brands could be a bumpy ride. The inclusion of TCNS in this portfolio may further accentuate near-term profitability risks.
* We lower our FY25-26E revenue estimate by 3%/6% on lower store additions, while our EBITDA estimates are broadly unchanged. We build in a CAGR of 10%/17% in revenue/EBITDA over FY24-27E. We believe our estimates of profitability improvement in newer segments are optimistic and any delays in ramp-up in profitability could pose downside risks to our EBITDA/PAT estimates.
* We value ABFRL on the SOTP basis. We assign EV/EBITDA multiple of 15x to both ABLBL and Pantaloons businesses and EV/sales of 1x to other businesses of ABFRL (demerged) on Dec’26E. We reiterate our Neutral rating with a TP of INR335.
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