Aditya Birla Fashion: Inorganic strategy to take a pause from hereon

9 May 2023 , 11:05 AM

Recommendation: Buy

Target Price: Rs. 250

ABFRL would be paying Rs. 16.5 billion in cash for a 51% stake and would acquire the remaining 49% stake via share swap. Post this transaction, management is expected to take a pause from acquisitions in this space and focus on scaling up existing business segments. Analysts at IIFL Securities estimate ~5% dilution in FY25 adjusted EPS due to this transaction.

The transaction

ABFRL’s acquisition of TCNS clothing involves 3 steps: i) Acquisition of ~22%-31% of the expanded share capital of TCNS from the promoters at Rs. 503 per share. ii) Open offer to minority shareholders of TCNS, constituting 29% of the expanded share capital at Rs. 503 per share. iii) Merger of TCNS clothing with ABFRL by issuing 11 ABFRL shares for every 6 TCNS shares held by the remaining shareholders. ABFRL would acquire 51% stake in TCNS via the first 2 steps (cash consideration of Rs. 16.5 billion) and acquire the remaining 49% stake via share swap (based on the third step).

Analysts at IIFL Securities estimate adjusted EPS dilution of ~5%

Even as TCNS delivers a robust performance pre-COVID – revenue CAGR of 39% over FY13-19 coupled with consistent double-digit EBITDA margins (barring few years) – performance post-COVID has been subdued. Management is confident of turning around the business in terms of both growth and the margin profile. Analysts at IIFL Securities estimate EPS dilution of ~5% in EPS (adjusted for IND AS 116) in FY25.

Focus on scaling up of new businesses

Acquisition of TCNS gives ABFRL an entry into the largest sub-segment within the ethnic wear space – Women’s Ethnic Wear — completes its Ethnic Wear portfolio. Management aspires to scale up the Ethnic Wear portfolio to a turnover of Rs. 50 billion by FY27 with consistent growth across TCNS, Tasva and other brands. Analysts at IIFL Securities are forecasting 10% sales CAGR and 10% EBITDA margin for TCNS in FY25. Their SOTP valuation yields a target price of Rs. 250. Delay in raising capital from GIC (Rs. 14.25 billion expected in March 2024) remains a risk.