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Aditya Birla Fashion & Retail: Strong growth prospects to sustain positive stock price momentum

ICICIdirect Research 14 Sep 2022 DISCLAIMER

What’s Buzzing

The share price of ABFRL recently witnessed a healthy appreciation of nearly 35% in the last three months (at an all-time high). However, before the recent rally, the stock was underperforming the broader indices with mere CAGR of 4% over the last three years. Robust performance in Q1FY23 (overall revenue recovery rate reaching 139% of pre-Covid levels) and managements reiteration of guidance of Rs 21000 crore revenue by FY26 has fuelled the current rally.

Context

ABFRL has been on a profitable growth path with multiple levers firing currently. Healthy operational performance in Q1FY23 was the testimony of the same. On the segmental front, lifestyle brands (53% of sales) were the key growth driver registering 15% revenue CAGR over the last three years in Q1FY23 (151% of pre-Covid levels). The segment, which houses major brands such as Louis Phillippe, Allen Solly, Peter England and Van Hussein has been on a healthy growth trajectory as the company had undertaken several initiatives. It has curated the product portfolio from being dominant formalwear brands to casualwear (currently contributes more than 50% of revenues). Also, store addition trajectory has been robust as the company added 540+ stores during the last three years (2500+stores spread across 3.2 mn sq ft). Another key parameter was revenue/sq ft (annualised) increasing to Rs 9700/sq ft vs. Rs 6900 during pre-Covid levels. For Pantaloons (36% of sales), the segment displayed a strong performance in Q1FY23 with revenue recovery rate reaching 115% of pre-Covid levels. In the last couple of years, ABFRL has mainly focused on improving profitability metrics for the Pantaloons segment through re-engineering fixed cost expenses, lowering discounting days and higher focus on freshness of merchandise. This has resulted in significant upgradation in margin profile from 18.5% in pre-Covid levels to 20%+ in Q1FY23 (post Ind-AS 116 EBITDA margins).

Our Perspective

ABFRL has strengthened its balance sheet through recent equity infusion with net debt declining sharply from Rs 2500 crore (in FY20) to ~Rs 649 crore. Furthermore, the management announced a fund raise to the tune of Rs 2195 crore by way of preferential issue of equity and warrants to an affiliate of GIC. We believe the fund raise will meet its long term capital needs, strengthen its balance sheet and improve its competitive positioning, which would require higher spending across its product portfolio. We believe ABFRL with a lighter balance sheet (cash surplus) and strong bouquet of brands is well placed to accelerate the pace of store addition and revenue growth. It has aggressive store addition plans in FY23E with 75+ Pantaloons store and 400+ lifestyle brand stores. Enhanced focus on ethnic wear through recent acquisitions (current annual rate of Rs 400 crore), rapid progression in innerwear and athleisure category (presence now scaled up to ~30000 touchpoints) and new strategic initiatives like acquiring Reebok's India operations are expected to add value over the medium to long term. ABFRL aims to become a Rs 21000 crore entity by FY26, translating to 15% CAGR in FY20-26E. Despite the recent run up in the stock price, it continues to trade at reasonable valuations of 2.3x FY24 EV/sales. We continue to maintain our positive stance on the company.

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