The research firm ICICI Securities believes earnings of apparel brands and retail companies under their coverage may surprise positively from Q3FY22E as the likely demand recovery may result in better than expected margin performance. Some of the costs savings achieved during pandemic may sustain and coupled with high operating leverage may lead to higher than pre-covid margins from Q3FY22E. Stocks like Trent, V-Mart and Aditya Birla Fashion and Retail are the preferred picks backed by their strong and consistent track record of execution.
Emkay Global Financial's report on Aditya Birla Fashion and Retail
ABFRL has approved a Rs22bn capital raise from GIC Singapore through a mix of fresh equity (Rs3bn) and convertible warrants (Rs19bn) at Rs289/share. GIC will pay Rs7.7bn for fresh equity + a premium for warrant subscription now (~25%), followed by Rs14.3bn within the next 18 months. After the investment, ABFRL will see a 7.5% equity dilution. With this raise, ABFRL has strengthened its balance sheet for the medium term and expects to beat its earlier stated target of Rs210bn top-line by FY26 (~15% FY20-26E CAGR). A majority of the funds would go toward ramping up Pantaloons/Ethnic/Innerwear. Q4 EBITDA was 35-70% ahead of estimates, led by strong traction in Lifestyle (rev/sqft up ~15% vs. pre-covid). Pantaloons recovery was slower at 90%. It expects ~400/80/70 store additions in Lifestyle/Pantaloons/Ethnic after modest additions in FY22 due to challenges.
Outlook
We largely maintain FY24 estimates. The FY26E top-line target is factored in, but we remain conservative on margins by ~150bps. Retain Buy with TP of Rs360 (Rs400 earlier) on 26x Jun’24 pre-IndAS EBITDA (28x earlier). Multiple cut is led by 50bps higher WACC.
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