Aditya Birla Fashion and Retail – Acquires majority stake in Sabyasachi – ICICI Securities

ABFRL has announced the acquisition of 51{f2a9790f1f5b326f5addd27543ef870bdef34be2bb42188b5ff1576c2dc9b21c} stake in luxury designer ethnic brand Sabyasachi at an investment of Rs4bn. Sabyasachi clocked revenue of Rs2.7bn with ~20{f2a9790f1f5b326f5addd27543ef870bdef34be2bb42188b5ff1576c2dc9b21c} EBITDA in FY20, implying valuation of 3xsales or 15xEBITDA which seems reasonable. Through Sabyasachi, ABFRL will be able to tap luxury and will be a bridge to luxury ethnic wear segment including accessories and jewellery. While investors seem concerned with the likely increase in leverage / dilution (via rights, Flipkart issuances) amidst delayed demand recovery, ABFRL intends to balance both growth with reasonable price and maintain balance sheet strength. With improving growth / profitability and likely working capital release (of Rs8-10bn) in H2FY21, coupled with Rs15bn equity issuance to Flipkart and Rs2.5bn from rights issue, net debt is likely to come down to Rs4bn (before this acquisition) from Rs31.6bn as of Sep’20, in our view. We maintain BUY with DCF-based (Sep’22E) target price unchanged at Rs197/share. Key risks: Lower discretionary spends and increasing competition.

– ABFRL acquires 51{f2a9790f1f5b326f5addd27543ef870bdef34be2bb42188b5ff1576c2dc9b21c} stake in Sabyasachi Couture at an investment of Rs4bn. Sabyasachi is amongst India’s largest and most influential luxury designer brand with strong Indian roots and global appeal. The brand straddles categories such as apparel, accessories and jewellery and has a strong franchise in India, US, UK and the Middle East. ABFRL enjoys track record of scaling up businesses both organically (menswear, innerwear) as well as via acquisitions (Pantaloons).

– Acquisition of Sabyasachi in-line with ABFRL’s long-term strategy to build large ethnic wear portfolio, which will complement its strong and diverse portfolio in western wear. Coupled with previous acquisitions of Pantaloons, Jaypore and Shantanu and Nikhil, ABFRL intends to serve customers across key consumer segments, usage occasions (including relatively price inelastic but huge opportunity in wedding markets), geographies and across all price-points.

– ABFRL expects 20{f2a9790f1f5b326f5addd27543ef870bdef34be2bb42188b5ff1576c2dc9b21c}+ growth in Sabyasachi: Sabyasachi currently operates via five stores in India at Mumbai, Kolkata, New Delhi and Hyderabad as well as through select international retailers. With Rs4bn cash infusion, Sabyasachi will be well-funded for growth over the next 5-6 years. It intends to open 4-5 new stores in India as well as similar number of stores in international markets such as New York, London, Dubai etc over the next few years. While Sabyasachi will be managed independently by its current team, it intends to scale-up back-end, supply-chain and leverage ABFRL’s sourcing expertise. Sabyasachi is debt free and operates with 20{f2a9790f1f5b326f5addd27543ef870bdef34be2bb42188b5ff1576c2dc9b21c} EBITDA margin and has scope to improve the same with increasing scale.

– Striking balance between growth and leverage: ABFRL, on a steady-state revenue base of Rs90bn, generates >Rs5bn OCF sufficient for its organic growth. It intends to invest continuously to diversify its portfolio to capture huge growth opportunity and still maintain balance sheet strength.

Shares of Aditya Birla Fashion and Retail Ltd was last trading in BSE at Rs.150.1 as compared to the previous close of Rs. 152.5. The total number of shares traded during the day was 163592 in over 3245 trades.

The stock hit an intraday high of Rs. 157.55 and intraday low of 149.1. The net turnover during the day was Rs. 25014484.