Morgan Stanley has upgraded Aditya Birla Fashion Retail (ABFRL) to ‘Overweight’, as the brokerage believes that it is at the cusp of improving fundamentals (led by profitability improvement), and sees an opportunity for valuation re-rating. The brokerage has a target price of Rs 131, implying an upside of 53%.
Morgan Stanley on ABFRL: High risk-to-reward ratio
The global broker sees a high risk-to-reward ratio favourable in ABFRL as it believes Aditya Birla Group’s commitment to improve fundamentals in the fashion business is in line with its focus to scale the consumer business. “We view ABFRL as a self-help story with management taking corrective actions to improve growth and profitability. Improvement will likely be gradual and dependent on consistent execution, noting that a change in customer perception takes time,” said Morgan Stanley.
Morgan Stanley on ABFRL: Management focuses on profitability improvement
Plus, the demerger helped both entities to strategically focus. ABFRL focuses on improving profitability, while Aditya Birla Lifesstyle Brands (ABLBL) focuses on growth acceleration. “We think profitability improvement will precede top-line growth improvement. ABFRL is also a good play on India’s fast-growing luxury market via its designer-led ethnic and luxury businesses,” stated the international broker.
Morgan Stanley on ABFRL: Cases for re-rating
The brokerage thinks the worst in terms of performance is now behind it, and expects fundamentals to improve across its businesses. At 10x F27 enterprise value to EBITDA, Morgan Stanley believes risk-reward is attractive, with opportunity for valuation re-rating should ABFRL’s performance improve (in base case) and upside potential if it delivers on its stated target (in bull case).
Morgan Stanley on ABFRL: Other analysts not confident on ABFRL
However, given ABFRL’s track record, investors have limited confidence in the stock, as 80% of sell-side analysts have Underweight/Equalweight ratings.
Overall, Morgan Stanley estimates ABFRL to deliver 14% revenue and 27% EBITDA from F27-28, and thinks it is well capitalised to fund its growth plans. Moreover, senior management for both companies stated that the focus over the next five years will be on organically scaling existing businesses by improving top and bottom-line growth. Both have also stated that they have no plans to acquire or raise further capital (excluding ABFRL subsidiary TMRW) in the next five years, which should allay market concerns on capital allocation.