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Prioritizing profitable and organic growth to unlock value

We attended ABFRL’s Investor Day held on 3rd Apr’25. Below are the key takeaways:

* Over the last few years, ABFRL has built its portfolio around five key consumption themes – western wear, ethnic wear, masstige and value retail, luxury retail, and digital brands – through organic and inorganic routes.

* The company is gearing up for the demerger of its legacy lifestyle brands and athleisure portfolio under ABLBL, while demerged ABFRL would focus on high-growth segments with a large TAM (value and masstige, ethnic wear, luxury retail and digital-first brands).

* The two entities will be separately listed and would attract specific investors based on their differing growth paths and capital structure profiles to unlock value. The demerger is likely to be completed in the next 2-3 months.

* The biggest takeaway was the management’s focus on 1) prioritizing organic growth in existing portfolio with no further M&A, 2) leveraging strong balance sheet with no additional fund raising (except for TMRW), and 3) driving profitable growth and improving return ratios.

* For ABLBL, the management has laid out the guidance to double revenue over FY24-30 (11%+ CAGR), driven by high single digit L2L & network expansion (250+ net store additions annually). Further, management aims to achieve ~300bp margin expansion, improve pre-INDAS RoCE to ~70% by FY30, and become debt free in the next 2-3 years. ABLBL’s strong FCF generation should enable it to become a dividend-paying company.

* For the demerged ABFRL, management is aiming to triple revenue by FY30 (19%+ CAGR), driven by robust growth across consumption segments. Additionally, management expects significant (~700bp) margin expansion, driven by operating leverage at scale to enable FCF generation by FY29 and 18%+ pre-INDAS RoCE by FY30. The demerged ABFRL business will start operations with a cash balance of ~INR13b to fund growth initiatives.

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.

* While the debt concerns have been addressed with the recent fundraise, we believe that profitably scaling up the value fashion and ethnic wear and turning around the newly setup digital-first brands could be a bumpy ride.

* We build in a CAGR of 7%/16% in revenue/EBITDA over FY24-27E for ABFRL, with demerged ABFRL to record better ~11%/31% revenue/EBITDA CAGRs.

* We value ABFRL on the SOTP basis. We assign EV/EBITDA multiple of 14x to both ABLBL and Pantaloons business and EV/sales of 1x to other businesses of ABFRL (demerged) on FY27E. Our SoTP implies an enterprise value of INR203b (or ~INR166/share) for ABLBL and INR165b (or ~INR135/share) for the demerged ABFRL.

* We reiterate our Neutral rating with a TP of INR285 as we await improvement in the demand environment and a profitable scale-up of ABFRL’s loss-making businesses before we turn more constructive.

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