ABFRL hosted an analyst meet. The management spoke about the opportunities in the Fashion Apparel market, its five-year strategy, growth engines across businesses, and its hugely debated capital allocation plan.

·         ABFRL has built a portfolio of Apparel brands/businesses that should now sustainable drive growth for the next five years.

·         It targets to more than double revenue to INR210b, with EBITDA growth of over 3x over the next five years. Of this, nearly 25-30% is expected from new businesses (which is currently loss making).

·         Growth is expected from new store additions. The management highlighted 3-4x opportunities for store additions along with brand and product extensions across categories.

·         It now seems cognizant of previous capital allocation concerns and indicated that there may be no new white spaces left to be covered.

·         The management targets to deliver cumulative operating cash flow/FCF of INR40- 45b/INR20b over the next five years, which could offer a cushion on margin and capex intensity.

·         We revise our TP to INR230/share (INR220 earlier), based on 15x FY23E EV-toEBITDA, factoring in sharp deleveraging, along with a huge runway of growth over the next five years. Maintain Buy.

A platform for Fashion Apparel

The Fashion Apparel market, which stands at USD67b, is one of the large consumption baskets in India, with two-third still unorganized. Organized players have an opportunity to grow at 15% over the next five years, backed by 10% market growth and a shift from unorganized to the organized market at 58% from 67%. The management wants to leverage its experience and execution capabilities to target each sizeable sub-category, thus building a large Fashion Apparel platform that caters from Value to Luxury.

Ambitious targets over the next five years

The management is looking to more than double revenue to INR210b, with an EBITDA growth of over 3x over the next five years. Nearly 25% of this is expected to come from new businesses as Innerwear and Ethnic Wear garners scale, while other young brands streamline their model. The cash cow Lifestyle business, with its proven product/brand extension led growth in the last five years, is expected to nearly double EBITDA. Pantaloons should grow EBITDA by 3x, backed by strong growth in the Value Fashion market, coupled with margin improvement. Both Lifestyle and Pantaloons growth targets are achievable given their track record and stable business model, though growth in the latter has been a bit volatile in the past. The new ventures are in the growth phase and need to be streamlined. In the past, EBITDA has been nearly 20-25% below optimum levels due to the losses in new businesses. Therefore, improved rationality in these categories could offer a strong earnings upside.

Distribution ramp up, e-commerce, and product/brand extensions to drive growth

Based on its internal store mapping, the management said it will tap newer markets for stores by nearly 3-4x. Of this, Pantaloon is eyeing 250 stores in 100 new towns. Many existing stores of Lifestyle and Pantaloons are turning ‘Phygital’ (omnichannel). Lifestyle’s brand extension with PE Red and Allen Solly Prime is offering sharper price points in lower tier cities. New product categories in Casual and Athliesure Wear will be the new growth engines. Thus, high single-digit SSSG and new store additions should drive mid-teens growth in these categories. Innerwear and Ethnic Wear have huge scope to growth through deepening penetration.

Conscious over capital allocation; no white spaces left to be covered

Over the last five years, ABFRL has launched Innerwear, partnered with multiple smaller brands including fast fashion, and recently ventured into the Ethnic Wear category. While each of these may offer a strong growth opportunity in the long term, too many new businesses have certainly put leverage out of control and diluted earnings. The management now seems cognizant of this. It indicated that it may have covered most categories and does not plan to venture into any new white spaces over the next five years. This should keep capex under check. Cumulative operating cash flow/FCF guidance of INR40-45b/INR20b for the next five years seems slightly conservative as both margin and capex offers some cushion considering the limited operating leverage in existing businesses and high capex. This certainly offers room for better FCF and deleveraging.

See meaningful upside on strong deleveraging, healthy EBITDA growth

ABFRL’s huge leverage and poor Balance Sheet strength have been a key investor concern in the past. However, sharp deleveraging to INR2.5b of net debt in FY21, from the peak of INR32b in 2Q, supported by working capital unwinding, operating cash flows, and sizeable fund raise (INR10b/INR15b via a rights issue/stake sale to Flipkart) has improved Balance Sheet strength. We have valued ABFRL on a SoTP basis, valuing Lifestyle and Pantaloons at 15x FY23E (post Ind AS 116) and other businesses at 1x EV-to-Sales, to arrive at our TP of INR230. The management’s guidance till FY26 indicates: a) huge runway for growth and b) fair value of some of its loss-making ventures after it achieves reasonable scale of business. If we build in 20% lower EBITDA for the Lifestyle/Pantaloons business and 50% lower EBITDA for other segments, and discount it at 10% to arrive at a FY23E value, the TP works out to INR278/share (a potential upside of 44%). Despite the recent sharp rally, the stock offers good upside. Maintain Buy.