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ABFRL’s Q3 topline tracked a muted, though in-line, trend. However, lower participation in discounting and festive shift to Q3 led to margin beat of 40- 280bps vs. estimates; this is likely to reverse in Q4, with focus on growth and subdued demand. Pantaloons (value format), Athleisure, and tier-2/3 towns are facing more challenges compared with premium formats. Expansion will be curtailed and focus will now be more on metro/tier-1 cites, as ABFRL expects rationalization of loss-making stores in tier-2/3 towns. Despite the weak trends, ABFRL remains confident about healthy liquidation of its inventory. Net debt was flat at ~Rs40bn QoQ, with FY24 expected to end at Rs28bn net-debt, aided by inflow of Rs15bn GIC investment. In spite of the significant underperformance, we retain REDUCE on ABFRL, due to lack of near-term triggers. Our revised TP stands at Rs230 (Rs220 earlier); TP revision is led by 3M rollover. Pantaloons/TCNS turnaround and D2C value-creation remain potential upsides, while prolonged weakness may possibly lead to further equity dilution.

Festive shift leads to in-line Q3 print; macro tailwinds needed for growth:

Standalone revenue at Rs35bn was up 5%, led by 2%/12% growth in Madura/Pantaloons. Consolidation of TCNS/D2C helped consol. growth of 16% in Q3. LTL remained sluggish at 3% for Pantaloons and flattish for Lifestyle. Innerwear also saw weak growth, at 5%, due to 10% growth in the EBO/e-com channels, while Athleisure remained sluggish. ABFRL attributed the muted growth to the delayed winters, fewer weddings, and lower participation in EOSS/discounting channels. Basis low footfall visibility, the focus on profitability was a tactical move, given ABFRL’s expectation of lower demand elasticity with discounting. However, medium-term focus still remains on growth vs. margins. Standalone EBITDA margin at 16.2% was 280bps higher, aided by gross-margin gains (+100bps) with lower participation in discounting. Lifestyle/ Pantaloons’s margin improved by 230/360bps, to reach 19.2%/18.1%. Reebok reported another profitable quarter, with over Rs1bn sales. Growth in Ethnic subsidiaries remained in-line, at 184%, helped by consolidation of TCNS and strong traction in Sabyasachi.

Earnings call KTAs:

1) ABFRL saw mixed trends, with Nov-23 reporting robust festive sales, while Oct/Dec-23 saw muted trends on account of the ‘inauspicious’ period, fewer weddings, and a delayed winter. Q4TD trend also remained muted. 2) TCNS consolidation came in effect from Q3. However, aligning of TCNS as per ABFRL policies will continue to hamper TCNS’s profitability for another 2-3 quarters. 3) New business lines, i.e. Ethnic, Digital and Sportswear, continued to be key growth levers with ~20% contribution to the topline. 4) Net debt stood at Rs40bn; FY24 debt guidance was maintained at Rs28bn. 5) Lifestyle brands witnessed good margin performance, with Company’s conscious strategy of cutting off less profitable channels, albeit at the cost of topline growth. 6) American Eagle/Reebok performance was encouraging and ABFRL foresees these as ‘mega’ brands complementing its existing four lifestyle brands. 7) Luxury retail format ‘The Collective’ grew 16% and remained resilient, despite market slowdown. 8) ‘Sabyasachi’ saw strong LTL performance and reached Rs1.5bn quarterly run-rate; Jewelry has grown faster vs. apparel/accessories, to contribute 25%-30% of its mix. 9) Tasva topline doubled with festive LTL of 62%, albeit on a small base. Metro/Tier-1 cities are seeing relatively better traction vs. Tier-2/3 towns. ABFRL plans to exit the year with 70 stores, and aspires reaching 200 stores by FY27/28. 10) TMRW is at an ARR of Rs6bn; however, profitability will take time (at least 3 more years). 11) ABFRL believes the major gaps in the portfolio have been filled and focus is now to harp on the existing opportunity. 12) Pantaloons, over the last 5 years, has premiumized towards a less competitive space; new format Style Up caters to the value side, with 20-25 stores and target to add another 25-30.

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