Aditya Birla Fashion - Business On Track But It Is Getting Bumpy: Motilal Oswal

Motilal Oswal Report

Aditya Birla Fashion and Retail Ltd.’s stock price has fallen 35% from the Nov-22 peak. We deliberate on the business outlook and concerns that may be overplaying.

As per recent media articles, Aditya Birla Fashion is contemplating to acquire a majority stake in TCNS Clothing Co. Ltd. (women’s branded apparel retailer that owns brands such as W, Elleven and Aurelia) from promoters and private equity investors (holding 61% stake). At the current market cap of Rs 29 billion, the investment could be to the tune of Rs 12 billion 15 billion for a 51% stake and could be funded through a combination of cash and share swap (without taking leverage of GIC’s Rs 14.5 billion equity infusion likely in the next 18 months).

TCNS Clothing’s FY23E revenue/Ebitda of Rs 12.5 billion/Rs 1.6 billion (as per BBG estimates) represent only 10% of Aditya Birla Fashion’s consolidated revenue/Ebitda as TCNS has been witnessing weak earnings for the last few years. While TCNS has built a decent scale, it operates in a crowded women ethnic wear market that is catering to highly price- and design-conscious women consumers. Therefore, we believe that earnings revival at TCNS may be a challenging journey and that building the scale internally could be a good alternative for Aditya Birla Fashion.

Aditya Birla Fashion’s strong execution capability is reflected in its ability to scale up a series of strong brands in the last 10 years. While the Lifestyle segment continues to deliver a healthy performance, a sluggish recovery in the Pantaloons segment and incremental investments in new businesses could drag down profitability in the near term. Scaling up the Reebok segment and turning around the newly set-up direct-to-consumer segment/ethnic wear remain key monitorables.

We factor in a revenue/Ebitda compound annual growth rate of 18%/27% over FY23-25E.

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