ABFRL: Multiple headwinds likely in near term, investors advised caution

Rs 1,000-cr rights issue, lower costs to help pare Rs 2,500-cr debt

The Aditya Birla Fashion Retail (ABFRL) stock jumped 9 per cent on Thursday after the firm announced deleveraging and cash generation plans that include a rights issue, liquidating inventory, and cutting capital expenditure by 60-70 per cent in FY21.

Net debt, which had decreased from Rs 1,891 crore in FY18 to Rs 1,645 crore in FY19, surged to Rs 2,516 crore in FY20. This was driven by the higher inventory build-up on account of Covid-19, rise in working capital requirements due to business growth, short payments cycle to vendors, and spend on acquisitions.
 

The firm is looking to raise Rs 1,000 crore via a rights issue in 2-3 months. Proceeds from the issue, in which the promoters intend to participate fully, will be used largely to pay off debt, which is expected to reduce by up to 50 per cent.

In addition, the management is looking to convert all fixed rental contracts to a revenue-share model, operate with 25-30 per cent lower manpower at stores (given social distancing norms), and cut back on discretionary spends such as promotions, communication and travel by 50-70 per cent.

 

 

Garima Mishra and Shubhangi Nigam of Kotak Institutional Equities Research — who have retained their ‘buy’ call on the company — believe liquidity concerns are overdone.

“We believe cost reduction, coupled with inventory unwinding, should free up additional cash in FY21. Even if we don’t assume the equity fund raise, we believe ABFRL can close FY21 with the same debt as of March 2020.”

On the operational front in the March quarter, ABFRL delivered a reasonable performance in its key segments of Madura and Pantaloons. In January and February, the two segments recorded same-store sales growth of 9.5-10 per cent each, led by a robust end-of-season sales. However, the lockdown led to a sharp fall in footfalls, resulting in overall revenue decline of 5 per cent in Q4.

While analysts are positive on medium-term prospects considering its portfolio and brand mix, the near term could see multiple challenges due to slow recovery in demand and higher leverage, with net-debt-to-equity rising to 1.8x now, from 1.1x in FY19. Investors should be cautious and take exposure only after significant deleveraging and with a faster pace of recovery.