EUR 120.00 For Business Accounts Only

MOSL: ADITYA BIRLA FASHION AND RETAIL (Buy)-Stellar margin delivery-footprint widening across verticals

ADITYA BIRLA FASHION AND RETAIL: Stellar margin delivery; footprint widening across verticals

(ABFRL IN, Mkt Cap USD2.2b, CMP INR200, TP INR240, 20% Upside, Buy)

 

• PAT driven by margin improvement: ABFRL delivered a stellar 1QFY20 performance, with EBITDA increasing by 25% YoY to INR1.4b (5% beat) led by 8% YoY revenue growth. Lifestyle/Pantaloons reported healthy EBITDA growth of 22%/12% YoY, with a margin improvement of 120bp/20bp YoY (largely as the overall gross margin expanded by 220bp YoY). PAT adjusted for Ind-AS 116 stood at INR216m, implying a jump of 4x YoY, led by higher EBITDA growth and other income, despite a 51% impact from the new accounting standards.
• Concall highlights: (1) The target is to add 400+ Lifestyle stores and 60+ Pantaloons stores. (3) It expects a 100bp margin improvement annually in Pantaloons and a breakeven in Innerwear by the next fiscal. (3) Company aims to scale up the ethnic wear business meaningfully over the next 3-5 years; presently targeting 30-40 stores in newly acquired 'Jaypore' and 'Shantanu & Nikhil' ventures. (4) The plan is to launch '12 Season' in the upcoming months - ground test is done, which will facilitate efficient supply chain management.
• Strong expansion plans bolster growth prospects: Accelerated pace of store addition under Pantaloons, coupled with strong growth potential in Innerwear, and steady growth in Lifestyle, is likely to drive healthy 13% revenue CAGR over FY19-21. Further, we expect Pantaloons EBITDA margin to improve 150bp YoY, and Innerwear losses to reduce to INR300m by FY21 (FY19 at -INR850m), which will likely act as key levers of margin improvement. Subsequently, we raise our EBITDA estimate marginally by ~4% on a pre-Ind-AS 116 basis, and expect PAT CAGR of 68% over FY19-21 on a post Ind-AS 116 basis.
• Valuation view: We maintain our SOTP-based TP at INR240, assigning 12x/9x to Lifestyle/Pantaloons EBITDA and 1x to other segment sales on FY21E post Ind-AS 116 basis. Expectation of strong growth in Pantaloons/Innerwear, coupled with its healthy FCF and RoCE profile, should allow ABFRL to garner superior valuations. Maintain Buy.