ADITYA BIRLA FASHION AND RETAIL, Strong growth in Madura, underwhelming in Pantaloons
Call & Research Report by ICICI Securities
Sector: Retailing
CMP Rs. 252, Target Rs. 330 (31% upside potential)
Target Period: 12 Months
We like the continued strong growth in Madura (5% SSSG) during Q3FY23 as premium brands are relatively less impacted by general slowdown in discretionary consumption (at value price). However, performance in Pantaloons has been underwhelming (-9% SSSG vs pre-covid). Emerging businesses’ revenue growth (48% YoY, ~15% of revenues) looks impressive, but unstable profitability causes concern. Positively, Reebok was successfully integrated in Q3FY23 numbers (effective 1st Oct’22). However, it needs some investments (A&P + retail expansion) in the near term (9-12 months) to drive revenue growth and achieve stability in EBITDA margin.
Profitability was impacted by accelerated marketing spend (2.3x vs last year) and losses in emerging businesses. Retail expansion is on track.
We reiterate our thesis that ABFRL is on a growth path with strategic partnership:
(1) comprising top brands in menswear, (2) creating right to win in value segment through Pantaloons, (3) investments in emerging businesses; (4) tapping high-growth opportunity in ethnic-wear, innerwear, footwear and athleisure. Volatility in the operating profit of emerging businesses remains a key concern. We expect this to stabilise in next 24-30 months. Maintain BUY.
● Madura outperforms; Pantaloons impacted by slowdown in consumption. Overall revenues grew by a healthy 17% YoY (9% 3Y CAGR) led by outperformance in Madura (19%YoY/13% 3Y CAGR) while Pantaloons grew 9% YoY (2% 3Y CAGR vs 6% 3Y CAGR in retail expansion). We believe, relative underperformance in Pantaloons (1% SSSG vs 5% SSSG in Lifestyle Brands) has been due to: (1) general slowdown in discretionary consumption at value price points (especially in tier-2&3 towns), and (2) rise in competitive intensity from peers (Reliance Trends, Westside, etc). On a like-to-like basis, SSSG for Pantaloons stands at -9% vs pre-covid levels. Emerging businesses grew 26% YoY to Rs3,630mn contributing 16% to Madura (11% total standalone revenues). Revenues from ethnic subsidiary grew 66% YoY to Rs1,890mn (5% of consolidated revenues). Company added 245 branded stores (10 in Pantaloons) in Q3FY23.
● Higher A&P spend and losses in emerging businesses impact profitability: Gross margin stayed at a healthy 53% while EBITDA margin contracted sharply by 591bps YoY to 13.4% due to: (1) higher marketing investments (2.3x vs last year; launched nationwide campaigns for Tasva and innerwear business); (2) rental savings of ~Rs 550mn in the base quarter; and (3) higher losses in emerging businesses (-6% EBITDA loss). EBITDA declined 19% YoY to Rs 4.5bn while adjusted-PAT fell 70% YoY to Rs 569mn.
● Valuations and risks: We cut our FY23E-FY24E earnings estimates by 5-6%,\ modelling revenue / EBITDA / PAT CAGRs of 12 / 19 / 16 (%) over FY19-FY24E. Maintain BUY with a revised DCF-based target price of Rs330 (earlier: Rs385). Key downside risks: increase in competitive intensity from online/offline players, and slower than expected improvement in profitability of emerging businesses.
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