Aditya Birla Fashion Q2 Results Review - Long Road To Recovery; Maintain 'Hold': Axis Securities

Axis Securities Report

Aditya Birla Fashion and Retail Ltd.’s revenue grew by 11% YoY and the growth was led by network expansion and category expansion. Its Ebitda, however, de-grew by 38% YoY owing to negative operating leverage, led by the subdued performance of Pantaloons business and continued investment in TMRW and ethnic business.

This impacted Aditya Birla Fashion’s profit after tax and saw a decline of 271% YoY. The management highlighted that discretionary spends continues to remain under pressure and has not seen any meaningful recovery.

However, it expects demand to revive in H2 FY24, led by strong festive and wedding seasons.

Outlook:

We like the management’s strategy of revamping product strategy through new launches and acquisitions, renewed brand positioning, and digital transformation to increase contribution from online sales (along with next-generation digital-first brands under its technology-led ‘House of D2C Brands’ venture TMRW).

These would be key growth drivers in the long term. However, all these initiatives will take time to bear fruit. Moreover, short-term vagaries such as –

1. slowdown in discretionary spends,

2. Sharp increase in debt,

3. Increase in marketing spends and

4. Investment in TCNS Clothing Co Ltd. will have a near-term impact on the balance sheet and return ratios.

Valuation and recommendation:

We maintain a 'Hold' rating on the stock with the revised target price of Rs 205/ share to account for near-term challenges – a slowdown in discretionary spends, a sharp increase in debt, an increase in ad-spends, and TCNS acquisition.

Key risks to our estimates and target price

• Increase in competitive intensity; weakening of demand environment.

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