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Impressive on the margin execution front

* Aditya Birla Fashion and Retail (ABFRL)’s consolidated EBITDA grew 23% YoY (12% beat), led by the Lifestyle/ABLFL others/Pantaloons segments, which saw 50bp/11pp/470bp expansion in EBITDAM. Revenue growth was fueled by new businesses. The net loss widened to INR2.1b (vs. loss of INR1.6b YoY).

* 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) could put pressure on earnings for the next few quarters. We estimate a CAGR of 13%/21% in revenue/EBITDA over FY24-26E. Reiterate Neutral.

ABLBL and Pantaloons drive profitability improvement

* ABFRL’s consol. revenue grew 7% YoY (in line) to INR34.3b, led by all segments, except Lifestyle.

* ABLBL’s revenue declined 5% YoY, while EBITDA rose 8% YoY as the nonLifestyle segment turned profitable and the company focused on profitable channels in the Lifestyle segment.

* Demerged ABFRL’s revenue/EBITDA rose 40%/65% YoY. Profitability growth was led by Pantaloons. Ethnics and TMRW continue to post higher losses.

* Gross profit grew 11% YoY to INR19.4b (in-line), and margin improved 180bp YoY to 55.8%.

* EBITDA increased 23% YoY (12% beat) to INR3.6b, with margin expanding to 10.5% (+130bp YoY) during the quarter.

* The expansion in margins was fueled by Lifestyle/Pantaloons/Reebok, which reported 50bp/470bp/11.5pp improvements in EBITDAM.

* The company continued to report a net loss. It reported INR2.1b loss (vs. loss of INR1.6b YoY) due to continued investments in Tasva/TMRW businesses.

Highlights from the management commentary

* Demand environment: The consumption environment remained weak during the quarter. This was led by a subdued wedding season and prolonged heat waves. This impacted the overall footfall. The management anticipates an improved demand environment in the upcoming wedding and festive seasons.

* Pantaloons: The management guided to open ~25 stores during the year. The majority of the stores will be backended (in 2HFY25). Pantaloons will focus on metro and Tier 1-2 cities, while Styleup will focus on other areas.

* TCNS: Management expects TCNS to turn profitable in 2HFY25. The brands have seen an increased market share in the top departmental stores and posted a retail LTL growth of 5%.

* Lifestyle: The LFL growth was in low single digit negative. This was largely led by lower wedding days. The management expects the lifestyle business to continue to grow at a double-digit rate.

Valuation and view

* Persistent softness in discretionary demand could remain an overhang. Further, the premium segment is likely to remain under pressure, which may hurt 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 broadly maintained our revenue/EBITDA estimates for FY25/FY26, factoring in a CAGR of 13%/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 1x to other businesses of ABFRL (demerged) on FY26E. Hence, we reiterate our Neutral rating with a TP of INR340.

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