ADITY BIRLA FASHION AND RETAIL, Profitability disappoints
Call & Research Report by HDFC Securities
Sector: Retailing
CMP Rs. 256, Target Rs. 300 (17% upside potential)
Target Period: 12 Months
ABFRL’s Q3FY23 print disappointed in profitability. Q3 revenue grew 25% YoY to INR35.88bn (3-yr CAGR: 12%; HSIE: INR 34.03bn). The revenue beat was primarily Madura-driven. Pantaloons (value fashion) fell marginally short of expectations as its consumer cohort continues to reel under inflationary pressures. EBITDAM contracted 719bps YoY to 12.1% (HSIE: 13.5%) as rental bills and A&P spends outpaced expectations. Investments in new forays i.e., D2C business, ethnic wear, Reebok, etc., are likely to keep cost structures elevated. Hence, we marginally cut FY24/25 EBITDA estimates by 3/1% respectively but upgrade our recommendation to BUY (from ADD) with an unchanged TP DCF-based TP of INR300/sh, implying 20x Dec-24 EV/EBITDA.
● Q3FY23 highlights: Revenue grew by 24.9% YoY on a low base to INR 35.88bn (3-yr CAGR: 12%; HSIE: 34.03bn). Madura/Pantaloons clocked a 3- year CAGR of 13/2% resp in Q3 to INR 22.36/11.59bn (HSIE: 21.36/11.73bn resp). Lifestyle brands/other biz outdid expectations. Overall GM expanded 88bps YoY to 54.6%; HSIE: 54.1%). However, EBITDAM contracted 719bps to 12.1% (HSIE: 13.5%) as segmental margins fell short of expectations. Madura/Pantaloons/other business margins clocked 16.9/14.5/-6.3% EBITDAM (vs HSIE:17.2/15.2/2%) resp. This was a consequence of (1) sharper normalisation of rental bills and (2) elevated marketing spends. EBITDA declined 21.6% (3-year CAGR: 2%) to INR4.36bn (HSIE: 4.59bn). ABFRL added 79/29store additions (net) in 9MFY23. (total store count: 2,601/396 stores). APAT declined 94% YoY to INR112mn.
● Outlook: ABFRL’s topline performance continues to track broadly as expected. Profitability leaves us wanting for more. That said, the recent stock price correction (-30% since Nov-22) gives a reasonable entry point as valuation now seems palatable. We upgrade the stock to a BUY rating with an unchanged TP DCF-based TP of INR300/sh, implying 20x Dec-24 EV/EBITDA.
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