Q1FY24 Review: Aditya Birla Fashion: Net debt rises further

7 Aug 2023 , 11:44 AM

ABFRL posted a weak performance, with consolidated Ebitda declining by 38% – a third consecutive quarter of sharp Ebitda decline amid a weak demand environment. LTL sales declined by 3%/8% in Lifestyle brands (retail) and Pantaloons, respectively. Net debt has risen to Rs21bn from an already-high level in FY23 (Rs14bn); management expects it to rise further to Rs28bn in FY24. Analysts of IIFL Capital Services downgrade their adj. Ebitda estimates by 12%/3%/1% for FY24/25/26 respectively and downgrade their stock rating from BUY to ADD in light of near-term risks. 

Broadly in-line results on weak expectations: 

ABFRL posted a weak set of results, which were broadly in line with their estimates. Net sales grew 11% with LTL sales declined in Lifestyle brands (retail portion) of 3% and Pantaloons of 8% respectively. While a subdued demand environment persisted for Pantaloons, in Lifestyle brands, the ceremonial and wedding related portfolio was impacted by lower wedding dates during the quarter. Ebitda (post IND AS) declined by 38%, due to negative operating leverage and losses in ethnic and D2C businesses. 

Net debt increases further: 

ABFRL’s net debt, which stood at Rs14bn in FY23, increased further to Rs21bn at Q1FY24-end. This was driven by limited Ebitda generation during the quarter, investments towards working capital, capex and interest payments. Further, management guided towards a net debt of Rs28bn in FY24, including outlay towards TCNS acquisition and equity infusion by GIC. 

Downgrade rating to ADD: 

Analysts of IIFL Capital Services downgrade their adj. Ebitda estimates by 12%/3%/1% for FY24/25/26 to factor in the weak Q1 performance. They are building in a steady recovery across business segments and forecasting combined losses of ~Rs3.5bn in FY24 in the 3 segments, which are in investment phase – Innerwear & Athleisure, Tasva and D2C. Net debt guidance of Rs28bn in FY24 is higher than their estimate of <Rs20bn. The margin-recovery story is likely to play out with demand recovery and moderating losses in the new businesses. However, the current performance in Pantaloons and rise in debt levels at a time when ABFRL would be integrating the large business of TCNS in its fold, raise concerns and near-term risks. Analysts of IIFL Capital Services downgrade their rating from BUY to ADD on the stock.