Reduced debt, better business outlook spark rally in Aditya Birla Fashion

ABFRL has also extended its presence in the fast-growing ethnic wear category through its recent investments in designer labels
Shares of apparel retailing major, Aditya Birla Fashion and Retail (ABFRL) advanced more than 5 per cent on Monday, extending its run of gains for an 8th straight day – most since April 2015 – as the street rejoices the reducing debt burden and improving business outlook for the company.

Rising debt levels and adverse working capital cycle have acted as a key overhang for the stock in recent years. ABFRL's net debt increased by 28 per cent to Rs 2,500 crore in FY20 as compared to Rs 1,953 crore in FY18. This was primarily led by higher capex, inorganic investments for expansion in ethic wear with investments in designer labels "Jaypore" and "Shantanu & Nikhil", losses from Fast Fashion and other business segments, and fresh unsold inventory due to Covid-19, said market experts.

However, the company has taken various steps to address these issues. The cumulative fund raise of Rs 2,500 crore via rights issue (Rs 1,000 crore) and deal with Flipkart (Rs 1,500 crore) is expected to reduce the overall debt by 90 per cent to Rs 250 crore by the end of this financial year. Better inventory management is seen aiding the working capital cycle. Move to 12 season model (introducing new products every month) from 4 season (every quarter) model, increasing share of private labels in Pantaloons business and shift of sourcing to Bangladesh for Pantaloons is expected to improve the inventory turnover and receivable days for ABFRL, said Antique Broking in a recent report.

Benefits of these moves have already started to reflect on the company’s financials. Operating performance in Q3 exceeded the street’s expectation by a huge margin. Earnings before interest, tax, depreciation and amortisation (EBITDA) stood at Rs 369 crore versus consensus estimate of Rs 259 crore. Margins expanded by close to 200 basis points over the previous year to roughly 18 per cent. Subsequently, ABFRL was able to report its first quarterly net profit (Rs 66 crore) since September 2019. Net sales were down 20 per cent over the corresponding quarter at Rs 2,060 crore but higher than expectations of Rs 1,952 crore.

Additionally, the management remains confident about the business outlook as it expects the impact of the pandemic to wear down over the next few quarters. In view of the strong recovery, and to leverage its competitive position, it accelerated the network expansion plan by adding close to 300 stores in the first nine months of FY21. Moreover, ABFRL has also extended its presence in the fast-growing ethnic wear category through its recent investments in designer labels (Sabyasachi and Tarun Tahiliani).

In this backdrop, most brokerages have increased their earnings estimates and upped target price for the stock. However, a near 29 per cent rally in the stock over the last one month leaves limited scope for near-term upside. Corrections could provide a better entry in the counter.


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