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Aditya Birla Fashion: A difficult year

27 Sep 2023 , 10:11 AM

Recommendation: Add; Target price: Rs 220


ABFRL had a sub-par FY23 with soft demand in Pantaloons in H2, investments in new businesses including acquisitions and rise in working capital resulting in FCF outflow of Rs14bn — leading to a sharp rise in debt levels. On the other hand, Lifestyle brands posted a strong recovery. As the company continues to invest in new businesses amid a soft consumption environment, debt levels are expected to rise further in FY24. Maintain ADD rating with a target price of Rs220. 

A mixed bag performance in core businesses: 

In FY23, Lifestyle brands posted a strong recovery, with walk-ins per sq.ft improving vs FY20 and conversion sustaining at a high level. However, in Pantaloons walk-ins per sq.ft were down 14% vs FY20 with overall Value Fashion segment under pressure. However, the retail area addition in Pantaloons has remained steady with the format adding retail area at a 3yr Cagr of 9%. LTL volume / value growth (in 3yr Cagr terms) was 13%/18% in Lifestyle brands, but was down 8%/1.5% in Pantaloons. 

Net debt rises significantly: 

Negative operating leverage in Pantaloons and normalisation of working capital (WC) from a low level in FY22, resulted in negative cashflow from operations (excluding inorganic activity) even in the core business (standalone books). Losses and WC investments in new businesses, organic capex (towards store additions, IT, etc), acquisitions (House of Masaba, D2C) — resulted in FCF outflow of Rs14bn during the year (at a consolidated level). Consequently, despite equity infusion from GIC of Rs7bn, net debt rose sharply from Rs5bn in FY22 to Rs14.2bn in FY23. 

Near-term challenges:

In FY23, adj. Ebitda margin at 2.4% is at its lowest, and is likely to pick up in the medium term with demand recovery in Pantaloons and moderation of losses in new businesses. However, FY24 is likely to be a difficult year with continued investments in new businesses (innerwear, Tasva, D2C), integration of TCNS business from H2 and a soft demand environment in H1. Management has guided for a net debt level of Rs28bn in FY24 (after equity infusion of Rs14bn from GIC).

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