Will ABFRL stock hit Rs 200 mark after big Flipkart deal?

NEW DELHI: Shares of Aditya Birla Fashion and Retail saw a round of profit taking in Friday afternoon trade after rallying 14 per cent earlier in the day.

The stock, which was up 14 per cent intraday, settled with 7.5 per cent gains at Rs 165.05. This is even as the closing price was far lower than Rs 205, that price at which Flipkart valued the stock at for acquiring 7,31,70,732 shares, or 7.8 per cent stake, in the retail firm on a preferential basis.

On Monday, the stock fell one-and-a-half per cent to trade at Rs 162 in the first half.

Analysts said since the allotment price in a preferential issue is derived by using a Sebi formula, investors must not read too much into the price itself. What gains the strategic investor brings to the table and its impact on the company’s earnings is what should matter, they said. They are not sure if the stock would hit the Rs 200 mark in the near future.

“In the past, Amazon too had bought a stake in Shoppers Stop. It was seen as a win-win situation for both. But things didn’t pan out as expected. The fresh development surely is positive, but one needs to wait and see how much impact it has on ABFRL’s earnings,” said Umesh Mehta of Samco Securities.

Amazon had bought a 5 per cent stake in Shoppers Stop in 2017.

Deepak Jasani of HDFC Securities said it is not clear whether the ABFRL stock will cross the Rs 200 mark in the near term, as the retailer may report unexciting numbers for at least two more quarters.

“For one, any block investment requires a premium, which Flipkart is paying. Secondly, such an investment is done with a long-term strategic view. There has been a trend among online retail players to explore for online-offline mixing opportunities. It remains to be see how much benefit each of them will derive from such an alliance,” Jasani said.
Earlier this year in August, Reliance Industries’ unit Reliance Retail Ventures announced acquisition of the retail and wholesale businesses and the logistics and warehousing businesses from the Kishor Biyani-promoted Future Group for Rs 24,713 crore.

Jasani said while the fresh news may protect the downside on the ABFRL stock in the near future, whether the stock will offer decent returns from here on would depend on how soon the company can improve its fundamental performance. As a disclaimer, this analyst said he does not have any financial exposure to the stock.

In a note, ICICIdirect said that the cash inflows from the deal would support the company’s operations in a challenging demand scenario when physical retailers have faced the heat with store closures and weak discretionary demand.

"ABFRL’s deal with Flipkart would enable it to have preferential access to online platforms and provide required thrust to its omni-channel growth ambitions. The deal will create an enviable combination of leading offline
retailer of marquee brands and leading fashion e-tailer," the brokerage said.

Aditya Birla Fashion and Retail owns brands like Pantaloons, Allen Solly and Peter England. The company has been hit hard by Covid-19, with June quarter losses shooting up to Rs 400 crore against a Rs 140 crore loss reported for March quarter.

December quarter also was not good for the company, as it reported a standalone loss of Rs 33 crore. Except for the March quarter of 2019, the company has not reported standalone double-digit PAT margin in at least eight years. Sales rose in double digits or high single digits during the same period, data compiled from corporate database Ace Equity showed.

"Owing to bloated operational losses in FY21, we expect the company to report negative FCF of Rs 690 crore. However, capital infusion worth Rs 2,245 crore (initial two tranches of rights issue worth Rs 746 crore and preferential allotment Rs 1500 crore) would strengthen the balance sheer and result in a significant decline in debt by Rs 1,760 crore to Rs 1,012 crore in FY21. The same would lead to a substantial reduction in interest outflow, going forward," ICICIdirect said.

In an earnings preview, HDFC Securities said given the high exposure to high-price point brand business Madura and high formal apparel exposure, the company’s recovery is likely to be an uphill task. HDFC Securities expects ABFRL revenues to fall 55 per cent in Q2 compared with a 85 per cent decline reported for the June quarter.

The brokerage expects September quarter Ebitda losses to more than halve to Rs 146 crore. ABFRL said the investment agreement inter alia provides for some rights, such as pre-emption rights and right of first refusal, which are for a limited period of 1-5 years from the date of allotment of equity shares or if the investor’s equity shareholding falls below a certain threshold.

A person in the know told ET that Amazon was also initially in discussion with the Birla group for an investment in its fashion business, but those talks may have fallen through.