Neutral Aditya Birla Fashion and Retail Ltd for the Target Rs 60 by Motilal Oswal Financial Services Ltd
Growth moderates in TMRW; profitability remains weak
* ABFRL delivered ~11% YoY revenue growth in 1QFY27, led by Luxury (+30%), TMRW (+11% YoY) and Pantaloons (+10%), while a short wedding season dragged down growth in Ethnics (+4% YoY).
* Reported EBITDA grew by a modest ~5% YoY (18% miss) as profitability remained under pressure from continued investments in OWND, TASVA, TCNS, and Galeries Lafayette (GL), even as TMRW losses narrowed YoY.
* Pantaloons revenue grew 7% YoY with 4% LTL growth, driven by improved traction in stores refurbished under the new brand identity. Management targets 20 new store additions and mid-to-high single-digit LTL growth in FY27.
* Ethnics revenue grew ~4% YoY; excluding TCNS, growth was healthy at ~14%. Tasva (+35%), Jaypore (+30%) and Sabyasachi (>INR1b quarterly revenue) remained strong, despite a shorter wedding calendar.
* TMRW revenue grew 11% YoY, with secondary sales higher at 16% YoY. Operating losses narrowed by 33% to INR420m. Management believes 1Q was an aberration and targets 20%+ YoY growth in FY27.
* Luxury revenue grew 30% YoY, led by GL and double-digit growth in The Collective. However, segmental profitability was weaker due to losses in scaling up GL and lower treasury income (on reduced gross cash).
* Management expects current gross cash of INR10b (vs. ~INR11.5b at end-FY26) to be sufficient to fund the losses over FY27-28, with portfolio likely to turn FCF positive starting FY29.
* We cut our FY27-28E EBITDA by ~4-6% considering higher losses in some of the currently loss-making formats. We model a CAGR of ~10%/20% in revenue/reported EBITDA over FY26-29E, though we do not expect ABFRL to achieve pre-IND AS EBITDA breakeven by FY29.
* Reiterate our Neutral rating on ABFRL with an unchanged TP of INR60
Revenue growth in line; profitability weaker
* Revenue grew 11% YoY to INR20.3b (in line) as robust growth in Luxury (+30% YoY), TMRW (+11% YoY), and Pantaloons (+10% YoY) was offset by weaker performance in Ethnics (+4% YoY), partly reflecting weaker wedding demand due to Adhikmaas and drag from TCNS.
* Gross profit grew ~9% YoY (in line) as gross margin contracted ~75bp YoY to 56.6% (~40bp miss).
* Employee/rental/other expenses grew ~14%/12%/7% YoY.
* Reported EBITDA grew ~5% YoY to ~INR1.17b (18% miss), as EBITDA margin contracted ~30bp YoY to 5.8% (~125bp miss) owing to the investments in the scale-up of newer businesses (OWND, TASVA, TCNS and Galeries Lafayette), despite narrowing of losses in TMRW.
* Reported losses after tax and minority came in at INR2.15b (stable YoY) as higher depreciation (+11% YoY) and finance costs (+21% YoY) were offset by higher losses attributable to minorities.
Valuation and view
* Consistent revenue growth and steady margin expansion in Pantaloons with the refreshed brand identity, along with loss reduction in TCNS and scale-up of TASVA/OWND, remain the key long-term catalysts for ABFRL.
* However, higher investments and/or slower profitability ramp-up in some of the currently loss-making businesses could remain a key drag on overall profitability and cash flows for ABFRL.
* We cut our FY27-28E EBITDA by ~4-6%, driven by higher losses in some of the currently loss-making formats. We model a CAGR of ~10%/ 20% in revenue/ reported EBITDA over FY26-29E, though we do not expect ABFRL to achieve preIND AS EBITDA breakeven by FY29.
* We value ABFRL on an SoTP basis. We assign an EV/EBITDA multiple of 9x to Pantaloons (inc. OWND!) and 11x to the designer-led ethnic portfolio. We ascribe EV/sales multiple of 1x/0.9x/1.5x to ABFRL’s attributable stakes in premium ethnic/TMRW/Luxury Retail portfolio to arrive at our unchanged TP of INR60. Reiterate Neutral.
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