Aditya Birla Fashion and Retail : Looking up, finally

Aditya Birla Fashion and Retail Ltd (ABFRL), formed from the amalgamation of Madura Garments Lifestyle Retail and Pantaloons Fashion and Retail Ltd, has been a laggard for much of the time since its creation. In the first two fiscal years after the merger (FY17 and FY18), the stock gained just 7% even as the Sensex galloped 30%.

Soon after the merger, Madura Garments, which houses the brands business, came under pressure from online retailers due to deep discounting, necessitating reorganization. Restructuring of the value format business under Pantaloons also took longer.

But things seem to be finally falling into place.

Competition from online retailers has abated. The recent quarterly results show steady improvement in the company’s profitability helped by margin expansion at the two core businesses—Madura Fashion and Lifestyle, and Pantaloons (see chart).

The new businesses—the fast-fashion segment, innerwear and others—continue to lose money. But losses at the fast-fashion segment reduced considerably last quarter. Importantly, the company’s core businesses—Madura and Pantaloons—are on the mend. The Madura brands business has stabilized and the last three quarters showed a steady rise in revenue. Profitability at Pantaloons, which has been a bugbear, rebounded in the June quarter.

According to analysts, the company is adopting a three-pronged strategy at Pantaloons. One is to raise the share of private labels. Another is to expand the value chain by offering higher-priced products. The third is to take the format to more locations, beyond the cities.

“ABFRL’s management had their sights set on a much larger business given the wider appeal of the Pantaloons brand. Key margin and ROCE drivers would be: upping own-brands contribution to 75-80% over the next three years (vs 63% currently), better product management which would not only lower obsolescence but also ensure freshness of store inventories, overall costs control and better leverage of common costs as the business gains scale,” analysts at JM Financial Institutional Securities Ltd said in a note. ROCE is return on capital employed.

The measures are expected to further help improve Pantaloons’ profitability. According to Prabhudas Lilladher Pvt. Ltd, the ABFRL management is targeting 10% margin for the Pantaloons business in three years. Last fiscal year, margins at Pantaloons stood at 6%. Profitability at the Madura brands business is also expected to see incremental improvement.

Not surprisingly investors are excited. The stock gained almost 40% over the last two months, compared to the 4% rise in the Sensex. While earnings recovery should support the stock, investors would also do well to keep track of the new businesses and progress on loss reduction. “One part of the company that is still in a to-be-fixed mode is the fast fashion piece,” added analysts at JM Financial.


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