Aditya Birla Fashion and Retail - Focus on scaling up new businesses - ICICI Securities

ABFRL management, at its recent first-ever annual investor day update call unveiled its five years' growth strategies. Key takeaways include (a) targeting 15% revenue CAGR over FY20-26E with ~360bps margin expansion to ~11% resulting in 3.4x FY20 EBITDA and pre-tax RoCE of ~25% by FY26E; (b) FCF generation of Rs10bn after incurring capex of Rs20-25bn over FY22-26E; (c) new businesses (including innerwear and ethnic wear) are expected to grow >30% CAGR on a low base and constitute ~22% of revenue by FY26E from <10% in FY20; (d) these new businesses (incurring EBITDA loss currently) are likely to contribute >20% to the overall EBITDA by FY26E as they attain scale and benefits from operational efficiencies; and (e) online / omni-channel platform will grow the fastest and constitute 8-10% of FY26E revenue from ~3% in FY20. We maintain our FY22E-FY23E estimates, while raise our DCF-based target price to Rs232/sh (earlier: Rs197) as we factor higher medium-term growth and on half-yearly rollover. Maintain BUY. Key risks: Lower discretionary spends and increasing competition.

- Aggressive 5x growth planned in innerwear and athleisure wear to Rs15bn revenue by FY26 with ~15% EBITDA margin. ABFRL plans to more than double its MBO reach from the current 20,000 distributors and expand EBOs from 50 stores to 500 stores (mainly franchisee) with significant LFS and online presence by FY26E. The company has already invested Rs3bn over past five years and will be investing further ~Rs3bn over the next five years. It expects to breakeven in FY23E vs EBITDA loss of Rs480mn in FY20.

- Ethnic wear business targeted to scale up to Rs20bn revenue by FY26E with ~11% EBITDA margin. ABFRL, in-line with its long-term strategy, intends to build large portfolio of ethnic wear. Recent 51% stake acquisition in Sabyasachi and 33% stake in Tarun Tahiliani coupled with previous acquisitions of Jaypore and Shantanu and Nikhil, ABFRL intends to serve customers across key consumer segments, usage occasions (including relatively price inelastic but huge opportunity in wedding markets), geographies and across all price points. It expects ethnic wear business to be EBITDA +ve in FY24 and FCF +ve in FY25

- Expects Lifestyle brand's business to grow at 11% CAGR over FY20-26E led by increased penetration beyond tier-2 cities and rural markets and higher casualisation (share increased to 59% in FY20 from 34% in FY10). ABFRL had launched Peter England Red store exclusively for tier-4/5 towns and will be scaling up to 1,000 stores from the current 300 stores over the next 3 years. Similarly, ABFRL plans to open 500 Allen Solly Prime stores over the next 3 years. The management conservatively expects to sustain EBITDA margin at ~11% given short-term challenges around formalwear growth, change in mix etc, although will continue to enjoy pre-tax RoCE of >30%.

- Expects Pantaloons to grow at ~15% CAGR over FY20-26E led by increased penetration in tier-2/3/4 towns (to add another 100 towns on current base of 169 cities), new product launches including Saris, Home category with Living Scapes, strengthening menswear with the introduction of private labels in casual and athleisure wear and increase in share of online sales to 8-10% of sales from ~1% in FY20. Management expects Pantaloons' EBITDA margin to expand by 300bps to ~11% by FY26 with increase in share of private labels from 61% currently to 75% by FY26E, better operating leverage and increased cost efficiencies.

- Expects to generate FCF of Rs10bn over FY22-26E. ABFRL expects to generate OCF of Rs30-35bn (after taxes / interest costs) and incur capex of Rs20-25bn over FY22-26E. The company had net debt of Rs6bn as of Jan'21-end. Lifestyle brands generated FCF of Rs3bn p.a. which was used to fund aggressive growth plans of Pantaloons. With improving scale and profitability, Pantaloons is likely to fund its own growth and FCF of Lifestyle brands would now be utilised to fund aggressive growth plans of new businesses (including innerwear and ethnic wear). ABFRL expects to post pre-tax RoCE of 25% by FY26E with 35% RoCE in Lifestyle brand, 25% RoCE in Pantaloons and 20% RoCE in new businesses.

Shares of Aditya Birla Fashion and Retail Ltd was last trading in BSE at Rs.192.7 as compared to the previous close of Rs. 183.75. The total number of shares traded during the day was 650568 in over 6531 trades.

The stock hit an intraday high of Rs. 196.85 and intraday low of 182.6. The net turnover during the day was Rs. 124816028.

Source : Equity Bulls

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