Aditya Birla Fashion charts expansion plan as lifestyle brands grow

Brokerages have mixed views about company raising funds, citing equity dilution and capital allocation risk.

Notwithstanding the disruption in the first half of Q4FY22, a strong sales rebound in March helped apparel retailer Aditya Birla Fashion and Retail (ABFRL) post a better-than-expected performance for the quarter. Aided by robust demand for wedding, office, and casual wear, the company posted its highest-ever revenue of Rs 2,283 crore for the March quarter. While March saw a 50 per cent year-on-year (YoY) jump in sales, the company ended the quarter with 25 per cent growth.

Growth was led by the lifestyle segment (Madura), which accounted for 58 per cent of its consolidated revenues in the March quarter. Its lifestyle brands comprising Louis Philippe, Van Heusen, Allen Solly, and Peter England witnessed 34 per cent growth on the back of strong demand and expansion. Its area and number of stores rose 6-7 per cent compared to last year.

The lifestyle brands, according to the company, continue to gain market share on the back of network expansion, portfolio extension, and operational improvements. Operating profit for the Madura segment was higher at 77 per cent YoY, led by a revival in the wholesale segment, a 13 per cent increase in retail like-for-like growth, as well as a 580-basis point margin improvement to 23.3 per cent. The overall margin improved by 370 basis points to 17.6 per cent, helped by an improvement in the product mix and cost rationalisation efforts. The company expects margins to moderate, given the higher marketing expenses and normalisation of costs.

The company announced that it will raise funds to the tune of Rs 2,195 crore from GIC of Singapore, which will take a 7.5 per cent stake in ABFRL. The fundraising will happen in a staggered manner with the price at Rs 289 apiece or at an 8 per cent premium to the stock price on Tuesday. The company, which is raising Rs 770 crore in the first tranche, is looking at a Rs 700-800 crore expansion in FY23 with the focus being on the expansion of stores under different formats and improving backend/digital infrastructure.

While the capital infusion is expected to strengthen its balance sheet (current debt at Rs 500 crore) and fund growth, brokerages have mixed views on this. Aliasgar Shakir and Harsh Gokalgandhi of Motilal Oswal Research say: “The recent announcement of Rs 2,200 crore preferential issue to GIC (in addition to the rights issue and a strategic stake sale to Flipkart, coupled with improved working capital efficiencies) should further reduce its leverage position (excluding lease liability) of Rs 500 crore and fuel growth in a wide array of new categories.”

The brokerage has a “buy” rating on the stock with a target price of Rs 350, which implies an upside of 36 per cent.

Ambit Capital, on the other hand, believes the company’s fundraising decision reaffirms the thesis that ABFRL’s strategy of driving growth (organically/inorganically) across multiple categories like ethnic, innerwear, and direct-to-consumer will be a drag on overall profitability/cash flows. In the past two years, this is the third fundraise, of a cumulative Rs 4,700 crore and an overall dilution of 26 per cent. Part of these funds was utilised towards acquisitions, repayment of debt, and funding of losses.

The brokerage has a “sell” rating with a target price of Rs 204, which indicates a 20 per cent downside. While valuations are at a discount to other discretionary players, this should be seen along with the subdued returns profile of ABFRL and risk of leverage, they add.

While capital allocation will be a challenge and needs to be closely monitored, the company’s execution across various formats and brands and network expansion have resulted in strong growth in the past. Investors with a longer-term investing horizon can consider the stock on dips.