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In-line 2Q; consistent double-digit growth and margin expansion key to re-rating

* Aditya Birla Lifestyle Brands (ABLBL) reported ~11% YoY revenue growth in 2Q, supported by robust ~27% YoY growth in Emerging Brands. Lifestyle Brands’ revenue grew ~9% YoY, aided by ~5% retail LTL growth, despite the festive shift and double-digit growth in the wholesale channel.

* Gross margin remained broadly flat YoY at 57.7% (~20bp beat). Operating leverage on employee and rental costs, which grew ~8% and ~6% YoY, respectively, supported ~14% YoY EBITDA growth and ~35bp YoY margin expansion to 15.9% (~30bp beat).

* Management reiterated its target of ~11-12% revenue growth CAGR with consistent margin expansion over the medium term, driven by 7-8% LTL growth and retail network expansion. Over the medium term, management expects Reebok’s margin (adjusted for royalty) to be in line with the lifestyle brands’ margins, while it still expects Van Heusen Innerwear to achieve breakeven in one of the quarters in FY27 with further scale-up in FY28.

* We fine-tune our estimates and model a CAGR of 9%/10%/14% in revenue/ reported EBITDA/adj. PAT over FY26-29E.

* We reiterate our Neutral rating with a revised TP of INR80, premised on ~13x Dec’28E pre-Ind AS EV/EBITDA (implies ~32x Dec’28E EPS).

* Consistent double-digit revenue growth, along with improved profitability in emerging brands, remains the key catalyst for a potential re-rating

Key highlights from the management interaction

* Demand outlook: Consumption environment remained broadly stable in 2QFY27. The festive shift from Sep’25 to Oct’26 led to zero LTL growth in Sep’26. Adjusted for the same, LTL for 2Q would have been ~8%. Management indicated encouraging demand trends during the early festive period and expects stronger momentum in 2H, supported by festive demand, acceleration in store expansion, and continued traction across channels.

* Outlook: Management reiterated its target of ~11-12% revenue growth CAGR with consistent margin expansion over the medium term, driven by 7-8% LTL and retail network expansion. Over the medium term, management expects Reebok’s margin (adjusted for royalty) to be in line with the lifestyle brands’ margins, while it still expects Van Heusen Innerwear to achieve break-even in one of the quarters in FY27 with further scale-up in FY28.

* Store expansion and network optimization: ABLBL accelerated store expansion, adding over 100 gross stores in 2QFY27, its highest quarterly additions in over two years. During 1HFY27, the company added ~180 gross stores and ~90 net stores, with closures largely reflecting relocation to better locations or to larger formats in the same markets. Management expects further acceleration in store additions during 2HFY27, with relatively fewer closures

Valuation and view

* ABLBL combines scaled and profitable lifestyle brands with a portfolio of currently sub-scale but emerging brands with high growth potential, offering a balanced mix of steady cash generation and levers for growth and margin expansion.

* We expect ~9% CAGR in overall revenue over FY26-29, driven by ~150 net annual store additions, mid-single digit LTL growth, and the scale-up of emerging brands.

* We build in a CAGR of ~10%/15% in reported EBITDA/adj. PAT, aided by ~55bp blended reported EBITDA margin expansion over FY26-29. Improved profitability of emerging brands, remains the key driver for margin expansion.

* We expect ABLBL to generate cumulative OCF of ~INR16.6b and FCF of ~INR7.6b over FY26-29, which should provide headroom for increasing shareholder payouts while deleveraging the balance sheet.

* We reiterate our Neutral rating with a revised TP of INR80 (earlier INR85), based on 13x Dec’28E pre-Ind AS EV/EBITDA (implies ~32x Dec’28E EPS).

* Consistent double-digit revenue growth, along with improved profitability in emerging brands, remains the key catalyst for a potential re-rating.

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