Reebok deal price, growth potential positive for Aditya Birla Fashion

The near term, however, could see higher investments in marketing, expansion

In a deal which will mark its entry into the sports/activewear segment, Aditya Birla Fashion and Retail (ABFRL) announced an agreement with US-based Authentic Brands Group (ABG) for the exclusive online and offline rights for the Reebok brand in India and the ASEAN region. As part of the deal, ABFRL will pay ABG about Rs 75-100 crore for the purchase of inventory and other current assets and liabilities.

Sportswear is the fastest growing segment in the footwear space with growth having accelerated over the last couple of years due to the pandemic. From $10 billion (Rs 76,000 crore) estimated sales in the current financial year, the segment is expected to hit the $14 billion (Rs 1.06 trillion) mark by FY24 growing at 14 per cent annually.

Analysts at Motilal Oswal Research believe that the deal is a highly value lucrative one as ABFRL gets a strong and established brand with high visibility for low upfront payment. Reebok has a steady, profitable business contrary to some of the companies that ABFRL has recently entered into deals with, they add. Since 2019, the company acquired Jeypore, Shantanu and Nikhil, Sabyasachi and Tarun Tahiliani–all in the ethinc wear space.

About 70 per cent of the sales of Reebok India comes from the footwear category and barring FY21 when revenues fell 26 per cent to Rs 316 crore, the topline has been around the Rs 400 crore mark. Operating profit margins have been rising in the FY16-FY20 period with the peak margin at just under 17 per cent. While the segment has potential, Reebok (fifth largest in India among global sports brands) trailed peers on the growth parameters. Motilal Oswal Research believes that this could be attributable to a lower focus by Adidas, which has grown 3x Reebok’s size in India. Adidas AG, which owned the Reebok brand sold it to ABG in August this year for $2.5 billion and the transaction is expected to be closed in Q1CY22.

While ABFRL’s move is a positive one it faces some challenges in the highly competitive sportswear segment. PhillipCapital India Research believes that ABFRL would need to be aggressive in store opening and spend more in advertising to drive revenue as Reebok India has been losing market share over the last few years. This coupled with the fact that the working capital requirement of the company is higher than the footwear industry average could impact cash flows. The extent of the royalty payment and minimum sourcing requirement from the parent company as compared to local manufacturing are the other issues, according to PhillipCapital Research. They highlight the case of Forever 21, an ABG brand, which had restrictions on local manufacturing impacting its profitability.

Most brokerages are positive on the ABFRL stock given the expectations that the company’s aggression on expansion, growth recovery, lower leverage post the rights issue and stake sale to Flipkart would drive stronger margin and profit growth. The stock, having gained 29 per cent over the last three months, is trading at upwards of 85 times its FY24 earnings estimates. Investors can consider it on dips.