Aditya Birla Fashion and Retail rating – Buy: Margin performance came as a surprise

Current valuations factor in recovery trends, and a re-rating from here will be driven by performance.

ABFRL reported an in-line recovery with a beat on margins. Highlights: (i) Recovery: The standout was the retail channel for Lifestyle brands (125% of pre-Covid), whereas Pantaloons still remains gradual due to mall exposure (73% recovery). (ii) Store addition: Upped the store target for Pantaloons; now looking at 100+ stores from FY23 (FY22: 60). (iii) Debt dipped in Q2FY22 and further in Nov-21, but is expected to increase given aggressive capex plans.

Factoring in the beat and higher store addition, we are raising FY22/23E Ebitda by 12%/6% with a revised TP of Rs 337 (21x FY23e EV/Ebitda). Retain ‘Buy’. Current valuations factor in recovery trends, and a re-rating from here will be driven by performance.

Madura tops recovery
ABFRL (standalone) reported a 96% y-o-y surge in revenues to Rs 20 bn. Overall recovery touched 86% of Q2FY20. Segment-wise, Madura was up 103% y-o-y with recovery at 98% (of Q2FY20) and Pantaloons was up 80% y-o-y with recovery at 73% (of Q2FY20). Key highlight was the retail channel recovery in Lifestyle brands at 125%. Pantaloons recovery was lower at 73% due to its high share of mall-based stores.

The business during the festive period has seen full recovery. Innerwear saw another quarter of strong performance, up 41% y-o-y and 46% higher than pre-Covid level. Despite the changed channel mix, gross margins sustained at pre-Covid levels of 53% driven by a higher retail channel mix, lower discount and dormancy charges.

Debt levels to sustain
ABFRL has increased its store addition target for Pantaloons from the run-rate of 60 (for FY22) to 100+ stores per annum going forward. Debt has reduced from Rs 12 bn in Q1FY22 to Rs 8.7 bn at the end of Q2FY22. While debt in November was down further to Rs 4.5 bn, given aggressive growth plans, debt is likely to increase by the end of the year. In ethnic wear, ABFRL launched its women’s ethnic brand Marigold Lane in a shop-in-shop (SIS) format at Pantaloons. Its ethnic brand for men will be launched during the upcoming wedding season.

Outlook: Recovery factored in
Factoring in the beat and higher store additions, we are raising FY22/23e Ebitda by 12%/6% with a revised TP of Rs 337 (Rs 260 earlier), valuing the company at 21x EV/Ebitda as we roll forward to FY23E. Maintain ‘BUY/SO’. Current valuations factor in the recovery trends, and a re-rating from here would be driven by performance.