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Motilal Oswal Bullish On This Midcap Aditya Birla Group Stock, Suggests Buy For Robust 21% Gains

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Motilal Oswal assigned a buy call on Aditya Birla Fashion & Retail Limited (ABFRL) stock for decent returns of up to 21% with a target price of Rs 380 apiece. ABFRL is a mid-cap Aditya Birla group's Fashion and Retail sector company having a market cap of Rs 29,552.47 crore. Below are the key takeaways of the report:

 

Stock Outlook & Returns

Stock Outlook & Returns

ABFRL's stock last traded at Rs 314.65 per share on NSE, trading 0.80% down from the previous close. The stock recently recorded its fresh 52 week high at Rs 359.50 on 1 November 2022. The 52 week low was recorded on 20 June 2022 at Rs 221.30. The stock fell by 4.31% in a month. Over the past 1 year, it zoomed by 19.07%. It has given 41.61% positive returns in the past 3 years, and 93.16% positive returns in the past 5 years.

Catering to the digital native customer
 

Catering to the digital native customer

To cater to the preferences of the digital, native, young customer, ABFRL is building a portfolio of ~30 D2C brands in the Lifestyle categories, including Beauty & Personal Care. ABFRL, with a host of brands across value chain and product categories, could grow it organically. Similar to the inroads in the ethnic wear segment, the idea is to take part in the growth stories of small brands by providing support (capital, supply chain, technology, and backend support) to improve their market offerings.

 

Acquires eight D2C brands

Acquires eight D2C brands

TMRW, ABFRL's subsidiary, recently announced acquisition of majority stakes in eight digital-first lifestyle brands across categories (see exhibit 2) for a total cash consideration of INR2.9b. The segment now has achieved a revenue run-rate of over INR7b and is on track to cross annual rate of over INR15b in the next 12 months. This would be a contribution of ~10% on ABFRL's FY24E consolidated revenues.

 More to follow, aim to create larger scale

More to follow, aim to create larger scale

The company plans to scale up by adding another 10-12 brands over the next 12 months and create a portfolio of ~30 new-age, digital first brands over the next three years. In the initial round of building its portfolio, ABFRL plans to infuse INR5-6b capital from its balance sheet for both organic and inorganic growth, including loss funding. Post this, with a reasonable number of brands in the portfolio and revenue scale, it may look for a strategic investor for the incremental growth.

 More to follow, aim to create larger scale

More to follow, aim to create larger scale

The company plans to scale up by adding another 10-12 brands over the next 12 months and create a portfolio of ~30 new-age, digital first brands over the next three years. In the initial round of building its portfolio, ABFRL plans to infuse INR5-6b capital from its balance sheet for both organic and inorganic growth, including loss funding. Post this, with a reasonable number of brands in the portfolio and revenue scale, it may look for a strategic investor for the incremental growth.

ABFRL – a play on multiple growth categories

ABFRL – a play on multiple growth categories

The lifestyle and apparel space has opened up a host of new growth categories in the recent past, viz., value category, occasion wear, and online space. While a few companies have concentrated on select categories to drive operational focus, some large conglomerates such as Birla Group, Reliance, and Tata have tried to include a wider landscape to offer balance sheet support. ABFRL's strong execution capability is reflected in its ability to scale up a series of strong brands in the last 10 years. Management has reiterated its focus to achieve its FY26 revenue/EBITDA targets of INR210b/23.5b, which should gradually reduce the loss funding in new businesses and turn them profitable.

 Leverage position in control

Leverage position in control

After a series of fund raise (right issue and preferential issues), ABFRL has reduced its net debt to INR2.4b as on Sep'22 from its peak net debt of INR24b as on Mar'20, despite the recent series of acquisitions. The internal accrual (PAT + Depreciation on pre-Ind AS basis) of INR6b/INR10b in FY23/FY24 should well take care of the organic growth capex. The additional INR14.5b from GIC should take care of the D2C funding and yet keep enough capital for new growth engines.

Valuation and view

Valuation and view

Motilal Oswal has said, "We value ABFRL on a SoTP basis to arrive at our TP of INR380, assigning an EV/EBITDA ratio of 15x to the Lifestyle brands, given the strong recovery and improved profitability; 15x to Pantaloons; and an EV/sales ratio of 1x to Other businesses on a FY24E basis. On a pre-Ind AS 116 EBITDA of INR12.5b for FY24E, this works out to be EV/EBITDA of ~29x. An improved balance sheet, healthy cash flows, and a strong overall performance remain key tailwinds for the stock. We reiterate our Buy rating on the stock."

 Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.

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