Q4FY23 Review: Aditya Birla Fashion: Subdued demand impacts profitability

23 May 2023 , 11:36 AM

ABFRL reported a weak Q4FY23 with Ebitda decline of 48%, impacted by negative operating leverage in the core businesses. Net debt has increased sharply to Rs14bn in FY23 and is expected to remain at a high level in near term before moderating. Analysts of IIFL Capital Services downgrade their adj. Ebitda estimates by 15%/6% for FY24/25 to factor in the Q4 miss. Maintain BUY rating with a target price of Rs220.

A large miss: 

ABFRL reported a weak Q4FY23 performance. While sales grew 26.1% (4% above IIFLe) powered by accelerated growth in new business segments, Ebitda declined by 48% and was 29% below IIFLe; impacted by negative operating leverage in core businesses of Lifestyle brands and Pantaloons. Sales was subdued in lifestyle brands and Pantaloons owing to a soft demand environment, even as the company continued with brand investments and network expansion. Despite demand slowdown, the company added 25 stores in the Pantaloons format, taking the store count to 431.

Net debt would remain high in near term: 

Net debt in FY23 stood at Rs14.2bn — up from Rs5bn in FY22 driven by — lower margins, higher inventory towards year-end, higher capex levels, investments towards D2C brands, among others. While majority of these factors are temporary, net acquisition costs pertaining to the TCNS acquisition (Rs16.5bn for 51% stake partly offset by Rs14.25bn inflow from GIC towards FY24-end) coupled with an elevated level of capex in FY24, would keep net debt levels high in near term.

Adj. Ebitda downgrade of 15%/6%: 

Analysts of IIFL Capital Services downgrade our adj. Ebitda estimates by 15%/6% in FY24/25 to factor in a gradual recovery in margins of the core businesses as well as higher investments in new business segments. They forecast Ebitda margin to recover sharply from 2.9% in FY23 to 5.6% in FY25, with improvement in demand and moderation in losses of the new businesses. They SOTP valuation yields a target price of Rs220. 

Analysts of IIFL Capital Services maintain their BUY rating on the stock.