Buy Aditya Birla Fashion & Retail, target price Rs 268: Phillip Capital

Phillip Capital has given a buy rating to Aditya Birla Fashion and Retail Limited (ABFRL) with a target price of Rs 268 over a one-year period. According to the brokerage, the current Covid-19 pandemic offers a long-term opportunity to buy retail stocks at attractive valuations, given the steep 40 per cent correction in stock prices.

The brokerage cut revenue estimates by 4-12 per cent across retail companies for FY21 based on expected store closures, gradual revival in demand, and delay in new store openings. The operating profit estimates have been cut by 6-16 per cent across companies and PAT (sharply) by 9-60 per cent based on lower operating leverage, trimmed FY22 estimates (factoring in lower store openings), and marginally lowered our target multiples , factoring current uncertainty. While near-term pain could persist for a couple of months, underlying long-term growth drivers remain intact for the retail sector.

The company’s share price moved up by 5.89 per cent from its previous close of Rs 160.45. The last traded stock price is Rs 169.95. Incorporated in 2007, Aditya Birla Fashion and Retail is a largecap company with a market cap of Rs 12452.82 crore.



Investment Rationale

Companies that are high on fashion and with long buying cycles would be dented by the high inventory, which would lead to higher discounting in end-of-season sales. On the other hand, companies that have more ‘seasons’ and buy only two months in advance would be the least affected; they can simply stop buying for the second half of the Spring Summer 2020 season.

While there would be a significant impact in the near term (Q4FY20 and Q1FY21) due to store closures and low footfalls across states, the long-term story remains intact. Companies with lower dependence on malls and metro cities, better supply chains, omni-channel presence, just-in-time sourcing, healthy cashflows, and strong customer loyalty would emerge stronger. The brokerage maintains high conviction buy in ABFRL.

Financials

For the quarter ended 31-12-2019, the company has reported consolidated sales of Rs 2582.74 crore, up 11.91 per cent from last quarter sales of Rs 2307.78 crore and up 13.20 per cent from last year's same quarter sales of Rs 2281.55 crore. The company has reported net profit after tax of Rs -37.64 crore in the latest quarter.