Aditya Birla Fashion Turns To Consolidation Post Acquisition Spree

Aditya Birla Fashion and Retail Ltd. is targeting to drive more value in its existing businesses following a string of acquisitions in recent years.

"Our medium-term strategy will be to accelerate the current portfolio," Chief Executive Officer Ashish Dikshit told analysts on Monday, while elaborating on the proposed demerger of the Madura business into a new entity.

The rationale behind the demerger, he said, was to raise capital to fund the next phase of growth in the ethnic-wear portfolio, value retail and the luxury vertical, which includes The Collective and Galleries Lafayette. These businesses would be retained by Aditya Birla Fashion and Retail Ltd. This portfolio has a run rate of Rs 7,000 crore on an annualised basis.

The ethnic portfolio currently has a runway of Rs 2,000 crore, he said. The company hopes to reach Rs 4,000–5,000 crore in three years.

On the other hand, the remaining part of the business, which includes lifestyle brands, casual wear brands, the innerwear business under the Van Heusen brand, and Reebok, will be separated to create the new entity, Aditya Birla Lifestyle Brands Ltd. The Madura segment has a revenue run rate of Rs 8,000 crore on an annualised basis, according to the company.

Unlike ethnic, value retail and luxury, lifestyle and innerwear businesses are mainly cash flow-accretive on all fronts, according to Dikshit. Reebok also has the ability to self-fund its growth. "Over the last 10–15 years, the lifestyle brands have shown consistent growth."

The decision to split is in view of distinct capital structures, unlocking independent growth trajectories and value-creation opportunities.

Promoters of ABFRL remain committed to participating in the Rs 2,500 crore equity raise, the management said. "The preference for growth-related allocation will be in this order: ethnic wear, value retail and then, luxury."

The current split of capital employed has not been decided yet, the management said.

According to analysts, the proposed fundraise post-demerger would result in a 36% reduction in ownership for ABFRL. This would be based on the current valuation of the businesses, which is Rs 6,400 crore.

The current demerger is expected to be completed within 9–12 months.

Moreover, the TCNS merger is a pre-condition to this scheme, and the management expects to complete the process within four months.

All segments are run by separate CEOs. The management will announce an appropriate management structure for the two entities in the next six months.

ABFRL's total debt, which is estimated to be Rs 3,000 crore as of March 31, 2024, will be split between the two companies, with Rs 1,000 crore being transferred to ABLBL and the balance continuing to stay with ABFRL.

The post-demerger ABFRL debt of Rs 2,000 crore includes Rs 1500 crore of long-term debt, with the rest being short-term. ABLBL, with its healthy cash flows and return profile, is likely to eliminate debt over the next 2–3 years.

Analysts have given a thumbs up to the demerger, but with some caveats.

"The move should unlock value through better capital allocation and improved investor interest for the two businesses individually," Emkay Global said in a note. The debt allocation of Rs 1,000 crore to ABLBL, which is 33% of the total debt, is also in line with its asset mix and regulatory conditions.

"ABLBL has a strong track record of delivering low-teens earnings CAGR along with a healthy return profile of 25–30%, and the demerger has potential to drive a 15% re-rating," the brokerage noted. "But we will watch for margin gains in the remnant entity before turning constructive on the stock."

The allocation of Rs1000 crore of borrowings under the lifestyle business (ABLBL) may drive some uncertainty among investors given that Madura Brands has historically been seen as a high FCF/RoCE business and all the major acquisitions — barring Reebok—are housed under ABFR, according to analysts at Citi. "With no sign of demand trends improving bundled with high operating and financial leverage, we believe the impact on ABFRL’s growth and profitability will be highest among our coverage universes."

According to Nuvama Institutional Equities, the portfolio housed under ABFRL does offer a good runway for growth. "Although it would require cash flows to unlock growth as the company is still in the investment phase."

Furthermore, it sees this business trading at a significant discount until Pantaloons’ metrics scale up or the business turns cash flow positive.