Maintain REDUCE on Aditya Birla Fashion and Retail - Not out of the woods yet; recent fundraise helps - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

ABFRL's 2Q performance recovery lagged that of peers (ex-department chains) as both anchors - Madura and Pantaloons - limped their way back to recovery. Margin delivery improved and was better than expected (0.2% vs HSIE: -14%) but still in the red (pre-IND-AS116) as management continued its tight leash on costs. Net debt/equity has remained elevated since Mar-20 as the retailer had to soothe vendor nerves (reduction in payables). We have built in the recent Rs. 15bn fundraise from Flipkart + Rights issue proceeds in our forecasts and maintain our REDUCE recommendation with a DCF-based target price of Rs. 140/sh, implying 12x Sept-22 EV/EBITDA (Post IND-AS).

2QFY21 highlights: Revenue declined 56% YoY to Rs. 10.19bn (standalone). In Lifestyle brands, while the recovery in retail/other channels was encouraging at 58%+/87%+, it wasn't good enough to make up for the loss in wholesale revenue (which remains in stress). Overall, Lifestyle brands declined 58% to Rs. 5.3bn (HSIE: 5.2bn). Pantaloons was a bigger disappointment in 2Q - as it declined ~60% to Rs. 3.69bn (HSIE: 4.57bn). Other business surprised positively by growing 30% YoY with improving profitability. Overall, GM declined 284bp YoY to 47.4% (HSIE: 45%), while EBITDAM at -0.2% was commendable as the company continued to keep a tight leash on rental bills and employee/other expenses. Management hopes to hit 70-80% revenue recovery in 3Q and close to full recovery by 4Q. Net losses more than halved QoQ to Rs. 1.8bn in 2Q.

Outlook: While ABFRL continues to recover from the pandemic progressively, relative performance has been weak in 1H. The recent fundraise (Rights issue and Flipkart investment) certainly helps ABFRL's excessive leverage concerns (3.2x currently). However, we need more on the structural WC efficiency front to become more constructive on the stock. Maintain REDUCE with a DCF-based target price of Rs. 140/sh, implying 12x Sept-22 EV/EBITDA.

Shares of Aditya Birla Fashion and Retail Ltd was last trading in BSE at Rs.158.3 as compared to the previous close of Rs. 155.4. The total number of shares traded during the day was 45396 in over 1507 trades.

The stock hit an intraday high of Rs. 159.25 and intraday low of 154. The net turnover during the day was Rs. 7136105.

Source : Equity Bulls

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