Emkay Global Financial has given Buy recommendation for Aditya Birla Fashion and Retail with a target price of Rs. 340 in its research report issued on Dec 14, 2021

Emkay Global Financial’s report on Aditya Birla Fashion and Retail

ABFRL has entered into an agreement to acquire the exclusive online and offline distribution rights for the global brand ‘Reebok’ for the Indian/ASEAN markets. The transaction also involves the purchase of certain inventory and other net current assets of ‘Reebok India Company’ to the tune of Rs0.8-1.0bn. The foray into the fast-growing sports segment increases the addressable market, and is a key positive (industry size: USD10/14bn in FY22/24E; ~14% CAGR). However, the brand has struggled with lower growth, probably due to a lack of proper expansion/positioning in the market. ABFRL will need to invest in the brand for growth, but its strong online and physical retail presence through Pantaloons/MBOs should help expand the brand’s distribution significantly, in our view. Reebok is the fourth-largest brand in the Indian sports/active-wear market, with Rs4.3bn in revenues in FY20, after Puma/Adidas/Nike whose topline stood at Rs14bn/12bn/8bn in FY20. Reebok has seen a ~5% CAGR in FY15-20 vs. -1%/9%/16% CAGR for Nike/Adidas/Puma in India. Reebok’s EBITDA margins have been on an improving trajectory at ~17% in FY20 vs. -11% in FY15. The transaction is effective upon the completed transfer of global ownership of ‘Reebok’ brand from Adidas to Authentic Brand Group, USA, and is expected to close by Q4FY22. We see the transaction as EBITDA/EPS accretive, which can add 5-7% to our EBITDA/EPS estimates in the forecast period. We believe that better margins will offset the impact of slightly higher capital employed on ABFRL’s RoIC.

Outlook

We await the finalization of the contract before factoring the transaction into our estimates. Faster recovery trends, an aggressive expansion outlook and potential margin gains should drive healthy revenue/EBITDA CAGRs of 11%/25% in FY20-24E for ABFRL (exReebok transaction). We maintain our Buy rating with a TP of Rs340 on 30x Dec’23E preIndAS116 EBITDA.

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