ABFRL had reported steep losses for the three quarters to September, thanks to the Covid-led disruptions, only to come back to the green in the December quarter.
A big trigger for the stock, of late, has been a substantial improvement in the company’s operating cash flow.
Analysts expect a reduction in debt levels and demand recovery to help the company report profit in FY22. The company’s focus on ethnic and inner wear segments, store expansion and ramp-up of e-commerce channels would be key drivers for the stock, they say.
In January, ABFRL acquired a 51 per cent stake in Sabyasachi Couture that runs the eponymous designer brand for Rs 398 crore. Sabyasachi – who has dressed celebrities including Deepika Padukone, Nita Ambani and Oprah Winfrey, among others – sells products for upwards Rs 2 lakh on an average.
The company has also tied up with fashion designer Tarun Tahiliani to form a new entity that will soon launch a contemporary men’s ethnic wear brand. As part of the deal, ABFRL will acquire a 33 per cent stake in Tahiliani’s existing luxury couture business, with the option to increase it to 51 per cent in the next few years. In the past, the company acquired companies and brands such as women’s ethnic wear Jaypore and men’s ethnic wear Shantanu & Nikhil in 2019.
“The success or failure of ABFRL’s five-year vision would, in our view, be in a significant manner defined by the way its ethnic wear business plan evolves. This is a segment that is viewed to be a sizeable one and where ABFRL believes it has a right to win, given the understanding of the segment that it has built within Pantaloons,” said JM Financial, noting that Pantaloons already houses an Rs 750 crore ethnic wear business within itself.
Kotak Securities has modelled ethnic wear into its forecasts for the stock and ascribed FY2023 EV/sales of 2 times to this business to arrive at a new fair value of Rs 250.
Not overly ‘formal’
Since its listing back in 2016, a lot of investor debates on the stock has been around the likely terminal value for the business, especially considering its large dependence on formal menswear as a category.
The company management said the share of formal wear in their revenue pie is not more than 55 per cent, with Louis Philippe, Van Heusen deriving 48 per cent and 45 per cent of their revenue from casuals, sports and leisure wear, while Allen Solly derives only 5 per cent share of revenue from formalwear.
ABFRL has a network of more than 3,025 stores for brands including Louis Philippe, Van Heusen, Allen Solly and Peter England.
Capital infusion & debt reduction
The recent capital infusion of Rs 2,250 crore – including a Rs 1,500 crore worth of equity infusion by Flipkart and Rs 750 crore worth of proceeds from the recently-concluded rights issue – coupled with the internal cash flows, have helped ABFRL to substantially reduce its outstanding debt to Rs 580 crore as of February end from Rs 2,593 crore at the end of December, 2020.
High debt, analysts said, was weighing on the company’s performance. They now see more legs to the recent rally.
Edelweiss, which attended the company’s maiden annual investors’ meet on March 2, said ABFRL’s controlled working capital cycle, recovery in profitability and steady free cash flow (FCF) generation would result in debt/Ebitda ratio declining to 0.8 times by FY23 from nearly four times in FY20. The brokerage has a ‘buy’ rating on the stock with a price target of Rs 249. Axis Capital has initiated coverage of the stock with a price target of Rs 240.
Profit likely in FY22
Analysts said the company delivered healthy revenue growth of nearly 32 per cent compounded annually and Ebitda growth of 52 per cent over FY13-20. Profit levels, they said, improved till FY19, but has remained subdued due the Covid-19 led lockdown announced towards the fag end of FY20.
“While Covid-19 is likely to impact revenues and profitability in FY21E, we expect revenue growth to revive to 7 per cent and Ebitda to 14 per cent over FY20-23. PAT may turn positive in FY22 on account of revenue stability backed by strong brand recall for lifestyle brands, expected growth in Pantaloons and innerwear segment and its Pan-India distribution network,” said Axis Securities.
The brokerage expects e-commerce channels to penetrate newer cities and deleveraging of balance sheet through capital infusion to result in high ROE and ROCE due to the company’s asset light business model.
The company is targeting 15 per cent annual revenue growth over FY20-26 with a 360 basis points margin expansion to 11 per cent resulting in 3.4 times FY20 Ebitda and pre-tax RoCE of 25 per cent by FY26. The management is expecting FCF generation of Rs 1,000 crore, after taking care of a capex of Rs 2,000-25,00 crore over FY22-26.
The company is looking to raise its revenue from innerwear segment to Rs 1,500 crore by FY26 with 15 per cent Ebitda margin. It has already invested Rs 300 crore in this segment over the past five years and is looking to invest a similar amount over the next five. ABFRL said this segment will breakeven in FY23 against FY20 Ebitda loss of Rs 48 crore.
ABFRL expects revenue from ethnic wear to touch Rs 2,000 crore by FY26 with 11 per cent Ebitda margin. The lifestyle brand’s business is seen growing at 11 per cent CAGR over FY20-26. For this, ABFRL had launched Peter England Red stores exclusively for tier-4/5 towns. It will be scaling up to 1,000 such stores from 300 currently over the next three years. ABFRL also plans to open 500 Allen Solly Prime stores in next three years.
What brokerages say
ICICIdirect said the new businesses, including innerwear and ethnic wear, are expected to grow over 30 per cent CAGR on a low base and constitute 22 per cent of revenue by FY26 from less than 10 per cent in FY20.
“These new businesses, which are incurring Ebitda loss currently, are likely to contribute over 20 per cent to the overall Ebitda by FY26, as they attain scale and benefit from operational efficiencies; while the online/omni-channel platform is likely to grow fastest and constitute 8-10 per cent of FY26 revenue from 3 per cent in FY20,” it said. The brokerage gas a price target of Rs 232 for the stock.
Kotak said its price target of Rs 250 bakes in quicker store expansion and, thus, revenues and Ebitda growth for Pantaloons. It said the ethnic wear business led to expectation of a 4-9 per cent revenue upgrade over FY2022-23. It values the business at two times FY2023 sales compared with TCNS Clothing’s 2.5 times expected FY2023 sales. It has also increased its valuation of the innerwear business to three times FY2023 sales.