Aditya Birla Fashion and Retail rating – Buy- Deal with GIC boosts long-term prospects

Aditya Birla Fashion and Retail rating – Buy: Deal with GIC boosts long-term prospects

ABFRL posted another strong quarter driven primarily by traction in Lifestyle Brands, which benefitted from a strong wedding season, wardrobe refresh and brand extensions playing out. The key highlight though is Rs 22 bn of equity investment by GIC. ABFRL plans to deploy it to accelerate investment in core business (missing since Covid) and strengthen the balance sheet. Details on allocation are awaited; Pantaloons would get the largest share and, on the back on this, is targeting FY23e capex of Rs 7 bn, its highest ever.

We are tweaking down FY23e Ebitda by 2% to factor in higher marketing spends. This along with a rollover to Sep-23e yields a revised TP of Rs 354 (21x EV/Ebitda; earlier Rs 347). Maintain ‘Buy’.

ABFRL reported a 22% y-o-y jump in revenue to Rs 21.8 bn (120% of Q4FY20). By segment, Lifestyle Brands grew 34% y-o-y while Ebitda surged 77%, on the back of revival of wholesale business and retail LTL of 13% y-o-y. Pantaloons was up 13% y-o-y, with recovery at 108% of Q4FY20. Ethnic business has touched an annual run rate of Rs 4 bn and broke even at Ebitda level. Gross margin improved ~100bp y-o-y despite RM inflation as ABFRL has taken price hikes to mitigate the impact.

Net debt stood at Rs 5 bn (Q3FY22 – negative net debt) and ABFRL saw inventory build-up for the coming season along with new business requirements. Management guided for higher sales & marketing spends in FY23, and is targeting FY23e capex of Rs 7 bn.

GIC investment of Rs 22 bn to fund long-term expansion

ABFRL approved raising of up to Rs 22 bn from GIC, Singapore’s sovereign wealth fund, after which it would own ~7.5% equity stake. Accordingly, ABFRL is looking at an accelerated investment in business, which according to the company has not happened since Covid struck, and strengthening the balance sheet. While exact details are awaited, Pantaloons would get the largest share of investment.

Outlook and valuation: Baking in higher spends; maintain ‘BUY’

We are tweaking down FY23e Ebitda by 2% to factor in higher marketing spends by the firm. This along with a rollover to Sep-23 yields a revised TP of Rs 354 (21x EV/Ebitda, Rs 347 earlier). Maintain ‘Buy’ rating.