Markets
Aditya Birla Fashion’s Q1 is forgettable, and its troubles are far from over
Summary
- Aditya Birla Fashion’s aggressive strategy of expansion, rising debt, and elevated inventory requirements make its balance sheet extremely prone to the vagaries of consumer demand, analysts say
Aditya Birla Fashion and Retail Ltd’s investors have many worries. To begin with, June quarter (Q1FY24) revenue performance is disappointing. Consolidated revenues increased by 11% year-on-year to almost Rs3200 crore. Here, the Pantaloons segment, which contributed 32% of the company’s consolidated revenue in Q1, put up a weak show with just 1% growth. This is despite Pantaloons’ retail network increasing by 17.5%. In comparison, the Madura segment fared better.
On a like-to-like basis, Pantaloons and Lifestyle brands (part of the Madura segment) growth fell by 8% and 3%, respectively. This implies that revenue growth was driven primarily by network expansion and new businesses (such as Reebok and TMRW), point out analysts from Kotak Institutional Equities.
Amid this, Ebitda declined by nearly 38% year-on-year and margin took a significant beating, contracting by 715 basis points to 9.15%. Ebitda margin was adversely impacted by higher marketing spends, increase in rental expenses on the back of store additions, and growth investments in subsidiaries.
Ebitda is earnings before interest, tax, depreciation, and amortization. One basis point is one-hundredth of a percentage point.
A sharp fall in Ebitda, coupled with higher depreciation costs and finance expenses, meant Aditya Birla Fashion reported a net loss of Rs161.6 crore. The company said Q1 net profit was affected by negative operating leverage, resulting from subdued sales for the Pantaloons business, as well as continued investments in TMRW and ethnic businesses.
Post results, analysts have cut earnings estimates. The company expects demand to recover in the second half of FY24. Investors need to watch how that pans out. Also, the debt scenario needs closer tracking, especially after the sharp quarter-on-quarter jump. The management told analysts that net debt at the end of Q1 stood at Rs2100 crore. This is a sharp increase from Rs1400 crore at the end of Q4FY23.
Against this backdrop, Aditya Birla Fashion’s shares were trading around 5% lower in Monday’s morning trade. Many analysts remain skeptical about the path ahead.
“Aditya Birla Fashion’s aggressive strategy of expansion (organic and inorganic), the rising debt, and elevated inventory requirements make its balance sheet extremely prone to the vagaries of consumer demand—a slight misstep can lead to (1) inventory liquidation-led margin loss or (2) derailed growth," said analysts from HDFC Securities in a report. The broking firm expects net debt likely to inch up to Rs2800 crore by exit FY24.
“We do not see Aditya Birla Fashion emerging from its investment phase anytime soon; a risky strategy, given its inflated debt situation," said Kotak’s analysts.
Until Friday, the Aditya Birla Fashion stock had fallen by 27% so far in CY23. The stock can be expected to be a laggard, unless, of course, demand revives meaningfully.
