Brokerage house Nuvama Institutional Equities has downgraded ABFRL to ‘Hold’ from ‘Buy’, with a revised target price of Rs 84. It believes the stock is fairly valued post-demerger and “core portfolio growth is still lagging.”
A week back, Aditya Birla Fashion Retail (ABFRL) shares fell 66% in a single day to adjust for the de-merger. The company spun off its lifestyle portfolio into a different entity called Aditya Birla Lifestyle Brands Ltd. (ABLBL), which will be listed by the end of June 2025.
Nuvama on ABFRL: Core portfolio growth lagging
ABFRL has Pantaloons, Ethnic, Luxury Collective, and TMRW brands after the de-merger. The brokerage said that the fashion retailer’s new segments are showing improvement, but core portfolio growth is still lagging.
ABFRL recorded a revenue growth of 9.2% year-on-year, driven by strong growth of the Ethnic and digital portfolio. The company’s Pantaloons and Style Up segment reported a contraction of 1% YoY, as like-for-like sales fell 1.6% YoY. Post this, management carried out a store rationalisation drive and closed about 12 stores on a net basis and 50-plus stores on a gross basis in FY25.
Nuvama on ABFRL: Pantaloons still most critical asset
Despite the contraction in sales, Pantaloons remains the most critical asset within the demerged ABFRL entity. “However, there has been limited indication of growth acceleration in this format so far. The recent margin improvement primarily stems from store network rationalisation, a strategy that appears to have been fully utilised by FY25,” said Nuvama.
Nuvama on ABFRL: Margin pressures to continue going forward
The brokerage firm expects margin pressures may come up again as revenues grow, given that retail demand in the apparel sector continues to be weak amid intense competition. Moving forward, a key focus will be on how ABFRL manages to sustain a healthy balance sheet while pursuing store network expansion.
Profitability has improved broadly due to initiatives such as lower markdowns and store closures. “However, given the realisation of these low-hanging fruits, further margin expansion relies on operating leverage, which is not yet evident,” said Nuvama.