Sales uptick, lower debt to help in Aditya Birla Fashion recovery

Cost reduction, higher private label sales to aid margins

A sequential recovery in the second quarter, cost rationalization, and deleveraging have helped the Aditya Birla Fashion and Retail (ABFRL) stock gain over 20 per cent since the beginning of October. After an 85 per cent fall in revenue to Rs 323 crore in the June quarter (Q1) due to the lockdown, sales recovered on a sequential basis to Rs 1,028 crore in Q2.

The reopening of stores, which reached 96 per cent of pre-Covid levels in September, and gradual increase in footfall cushioned the fall in Q2. Given the performance in the first half and a gradual recovery, analysts expect the company to post a 40 per cent decline in revenues in financial year 2020-21 (FY21). 

While growth across its lifestyle and Pantaloons segments was impacted given the dependence on the wholesale channel and gradual opening of the retail network, sales in the e-commerce segment tripled on a lower base. This was led by new products and digital marketing initiatives. Traction in the inner wear segment helped it gain market share. Aggressive store expansion, omnichannel sales, new categories, and higher private label sales are expected to aid in incremental sales and margins.

Given the pressure on the top line, the company continues to rationalise its cost structure. 

ABFRL pegs the cost savings in the first half of FY21 at Rs 870 crore, cushioning the impact from weak revenues. While employee costs were down 19 per cent year-on-year (YoY), the large part of the cost reduction was in rent and other expenses, which were down 46-47 per cent each.

Deleveraging its balance sheet is another positive for the company. The rights issue (Rs 1,000 crore) and the fundraising from the Flipkart deal (Rs 1,500 crore) is expected to strengthen its balance sheet and help it expand presence across current and new categories. 

The preferential issue will help Flipkart take a 7.8 per cent stake in ABFRL. The company’s net debt is expected to come down to Rs 2,000 crore levels by the end of FY21 from just under Rs 3,200 crore at the end of the September quarter.

Analysts at Antique Stock Broking believe the impact on operations due to Covid-19 and the fall in stock prices (43 per cent down from 52-week highs) offer a good opportunity to enter the stock.