Neutral Aditya Birla Fashion and Retail Ltd For Target Rs.40 by Motilal Oswal Financial Services Ltd
Washout quarter; tough decisions need to be taken
* Aditya Birla Fashion and Retail (ABFRL) delivered muted ~2% YoY revenue growth in 2Q due to the shift in festive calendar and wedding days. Growth was weak across segments: Pantaloons (flat YoY), Ethnic (+2% YoY), TMRW (+10% YoY), and Luxury (+11%).
* EBITDA declined ~81% YoY due to ~170bp YoY gross margin contraction, significant operating deleverage, and continued losses in OWND, Tasva, and Galeries Lafayette (GL), and one-off expenses in Sabyasachi.
* 1HFY27 FCF outflow stood at INR9.5b (vs. INR8.8b YoY and management’s expectation of INR5-6b FCF outflow during FY27), resulting in ~INR12b increase in net debt during 1H.
* Management expects better FCF profile in 2HFY27, given the higher skew of ABFRL’s portfolio to the wedding calendar, while TMRW is looking at a separate fund raise of ~INR10b to fund its growth/losses.
* Given the low profitability and muted growth trends in the cash cow Pantaloons business, we believe management needs to take tough calls on some of the sub-scale and loss making parts in ABFRL portfolio.
* We cut our FY27-29 EBITDA by ~6-9%, driven by weaker performance in Pantaloons and higher losses in some of the loss-making formats. We model a CAGR of ~8%/14% in revenue/reported EBITDA over FY26-29, though we do not expect ABFRL to achieve pre-IND AS EBITDA or reported PAT breakeven by FY29.
* Reiterate our Neutral rating on ABFRL with a revised TP of INR40.
Key highlights from the management commentary
* Festive demand: Pantaloons' festive LTL was in double-digit in South and East, led by footfalls, and mid-to-high single digit elsewhere, partly affected by rains. Pujo was among the format's strongest, supporting expectations of a better 3Q. Reported growth in Pantaloons, however, would be partly hit by store closures (net 12 closures in 2Q).
* RM inflation: Pantaloons is witnessing 4-5% raw material inflation. The company is not looking to completely pass on the inflationary impact to consumers and expects ~100bp gross margin contraction. Healthy LTL growth and closure of unprofitable stores should partly offset the hit on EBITDA.
* Liquidity: Management expects standalone cash at INR3-4b by end- FY27 (vs. INR5b guided earlier and INR3.8b at 1H), with 2H working capital release supporting a marginal improvement. A further ~INR5b loss funding in FY28 would require fund raise at various subsidiaries to fund their growth plans.
* Capital allocation: Focus remains on driving profitable growth through prioritization of businesses, with a visible turnaround and a cautious stance on laggards. Capex is likely to remain ~INR3b in FY27, and the portfolio strategy will be reassessed at the start of FY28. Designer-led ethnic subsidiaries largely fund growth through internal cash flows and debt.
Valuation and view
* Given the low profitability and muted growth trends in the cash cow Pantaloons business, we believe management needs to take tough calls on some of the subscale and loss-making parts in ABFRL portfolio.
* We cut our FY27-29 EBITDA by ~6-9%, driven by weaker performance in Pantaloons and higher losses in some of the loss making formats. We model a CAGR of ~8%/14% in revenue/reported EBITDA over FY26-29, though we do not expect ABFRL to achieve pre-IND AS EBITDA or reported PAT breakeven by FY29.
* We value ABFRL on an SoTP basis. We assign an EV/EBITDA multiple of 8.5x/8x to Pantaloons (inc. OWND!) and designer-led ethnic portfolio. We ascribe EV/sales multiple of 0.9x/0.9x/1.1x to ABFRL’s attributable stakes in premium ethnic/TMRW/Luxury Retail portfolio to arrive at our revised TP of INR40 (earlier INR50). Reiterate Neutral.
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