Buy Aditya Birla Fashion and Retail; target of Rs 140: ICICI Securities

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ICICI Securities research report on Aditya Birla Fashion and Retail

The Covid-19 pandemic had an unprecedented impact on the retail industry, forcing a temporary closure of physical stores from mid-March onwards in India. The same materially impacted ABFRL’s performance in Q4FY20. Revenue for the quarter de-grew 5.1% YoY to Rs 1817.4 crore, with revenues for March halving YoY. The management estimates loss of Rs 339 crore leading to gross margin loss of Rs 200.0 crore. Given the fixed cost nature of the business and fairly short period to correct, profitability was severely dented. Hence, the company reported EBITDA loss of Rs 57.0 crore. ABFRL is mulling aggressively reducing operating expenses through: a) shift from fixed cost rental model to revenue sharing model, b) significantly lowering advertisement spends & c) optimising employee and other overheads. The management will be curtailing capex (by 50-60%) and optimise working capital cycle (selling existing inventory in ensuing season), as it focuses on maintaining liquidity. The company has proposed a rights issue worth Rs 1000 crore to strengthen the balance sheet.

Outlook

Owing to a sharp increase in working capital requirements (NWC days: 38 days vs. 14 days in FY19), net debt increased to Rs 2500 crore (debt/EBITDA: 6.0x) as on FY20E. The management highlighted that the company has adequate access to banking lines due to lineage of Aditya Birla Group and no long term debt repayment obligation over the next year. Furthermore, to de-leverage the balance sheet, the company has proposed a rights issue worth Rs 1000 crore to bring debt/equity ratio below 2.5x by FY22E. We believe that with its strong brand patronage and large distribution reach it will be able to revive its revenue growth post normalisation of situation. We reiterate BUY rating with a target price of Rs 140 (1.4x EV/sales).

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