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MOSL: ADITYA BIRLA FASHION AND RETAIL (Buy)-Performance subdued, undertaking course correction

Aditya Birla Fashion and Retail: Performance subdued, undertaking course correction

(ABFRL IN, Mkt Cap USD2.1b, CMP INR192, TP INR240, 25% Upside, Buy)

 

• A dismal quarter: The fourth-quarter performance was impacted by the muted show in the Pantaloons business and the steep increase in marketing spends across segments. Revenue grew by a modest 9% YoY to INR19.2b (5% miss), mainly on the back of 12%/65% growth in Lifestyle/Other businesses. EBITDA declined steeply by 24% YoY to INR1.2b owing to (a) the rise in marketing spends, particularly in Lifestyle, (b) high employee cost attributed to the commencement of a new facility, (c) inventory write-down of INR100m in Pantaloons and (d) higher spend toward women’s innerwear launch. Adjusted for the INR1.9b DTA impact, PAT stood at INR87m (-80% YoY; our estimate: INR823m). For FY19, revenue/EBITDA/adj. PAT grew 13%/18%/158%.
• Concall highlights: (1) In Lifestyle, the company expects the 400 gross EBO adds and the renewed focus on marketing spends in FY20 to drive growth. (2) In Innerwear, the launch of the women’s category and the expansion to 20-25k outlets (from 12k now) should keep losses at FY19 level; aims for a breakeven in FY21.(3) In Pantaloons, the company targets to open 60-70 new stores.
• Focus on scale to restrict margin expansion: Strong growth potential in Innerwear, the accelerated pace of store adds under Pantaloons and the renewed investment focus to scale up the Lifestyle segment are likely to drive healthy 13% revenue CAGR over FY19-21 (our estimates are largely maintained). However, we cut our EBITDA estimate by 7-9% for FY20/21, primarily due to (a) adjustment of increasing cost in 4QFY19, (b) management’s continued high investments in Innerwear and Lifestyle and (c) slower-than-expected pace of improvement in the private label mix under Pantaloons (expect 150bp margin expansion over FY19-21 to reach 8.3%).