Downgrade to ADD on Aditya Birla Fashion and Retail - Growth gets dearer; Leverage could bite! - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities.

Aditya Birla Fashion and Retail (Q4FY20): Growth gets dearer; Leverage could bite! Downgrade to ADD
(TP Rs 120 , CMP Rs 108 , MCap Rs 84 bn)

ABFRL delivered a reasonable FY20 (pre-COVID). Normalized revenue/EBITDA grew 12/15% to Rs. 90.8/7.1bn resp as both Madura and Pantaloons performed well. Rep. Revenue/Adj. EBITDA, however grew 7.7%/declined 16% YoY to Rs. 87.4/4.7bn resp. as the lockdown disrupted demand in Mar-20. For 4Q, Revenue declined 5% to Rs. 18.2bn (HSIE: Rs. 17.63bn). However, margins disappointed (-3.1% vs HSIE: -1%).

Growth while reasonable, has been dearer with WC Cycle getting elongated to 38 days (FY19: 13 days) and Capex up 1.9x YoY. This in turn, has pushed up Net Debt/Equity to 1.8x (FY19: 1.1x) and this leverage could seriously bite in a tough year wherein demand prediction remains a crystal ball gazing exercise. While Mgt is confident of allaying some of these concerns. (Note: BoD has approved a Rights Issue of Rs. 10bn - primarily to de-lever), we prefer being cautious and would like to see some execution on the deleveraging exercise before being more constructive on the name. Hence, we downgrade ABFRL to an ADD (Earlier BUY) with a DCF-based TP of Rs. 120/sh (earlier Rs. 180/sh) -implying 23x FY22 EV/EBITDA. The TP cut largely tracks EBITDA cuts.

Lifestyle brands clocks 12% (Pre-COVID) growth, underpined by Retail: While Lifestyle brands declined by ~5.3% YoY to Rs 10.7 bn (vs. est. Rs. 10bn). Pre-COVID growth stood at 12%. Revenue decline was cushioned by its Retail channel growth (6.5% YoY). Pain in wholesale channel continues (declined 16.6% YoY) and only got exacerbated by the lockdown. EBITDAM declined 877bp to 6.2% (normalized: 12.7%, HSIE: 7.9%) given 1. the loss in sales in Mar-20. 2. Decline in higher margin channels (MBOs). The format added 127 stores in 4Q (stores: 2,253). Fast fashion continues to lose relevance in portfolio. People brand's migration into Pantaloons is now complete. Other biz grew 42% YoY (normalized growth 48%).

Pre-COVID print for Pantaloons healthy: Pantaloons rev declined 1% (SSSG: -11.7%) to Rs. 6.26bn (HSIE: 6.65bn). Revenue/SSSG for Jan+Feb grew at 19/9.5% resp. EBITDAM impact more severe in Pantaloons given higher fixed cost base. EBITDAM stood at -6.1% (-812bp contraction, HSIE: -2.2%). For FY20, the format grew 10% YoY (2.7% SSSG) with an EBITDAM of 6.3%.

WC cycle worsens, Leverage could bite: WC Cycle was already elevated given the stress in MBOs, it has only worsened during the ongoing health crisis. WC Cycle nearly tripled to 38 days (FY20). Consequently, Leverage inched up to 1.8x (vs 1.1x in FY19) and could certainly bite in a tough year where significant demand destruction is expected. While BoD has approved a Rs. 10bn Rights Issue (primarily to retire debt), the capital raised could quickly be absorbed in covering 1. Fixed Costs, 2. Further deterioration in WC Cycle, if any. That said, Mgt is expects to get leaner on both counts and expects inventory rationalization to be a big source of cash release in FY21.

Shares of Aditya Birla Fashion and Retail Ltd was last trading in BSE at Rs.118.35 as compared to the previous close of Rs. 108.05. The total number of shares traded during the day was 294749 in over 5318 trades.

The stock hit an intraday high of Rs. 119.5 and intraday low of 102.25. The net turnover during the day was Rs. 33061861.

Source : Equity Bulls

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