Aditya Birla Fashion's tactical shift during festive season yields margin beat: Report

ABFRL earnings analysis: Amid the festive fervour that typically marks heightened consumer spending, Aditya Birla Fashion and Retail Limited (ABFRL) navigated a mixed performance in its third-quarter earnings, characterised by a muted yet in-line topline alongside an unexpected margin beat.

The company's strategic manoeuvring, including reduced participation in discounting channels and a festive season shift, contributed to a margin outperformance, defying earlier estimates.

ABFRL's third-quarter revenue rose 5 per cent to Rs 3,500 crore primarily propelled by a 12 per cent growth in its Pantaloons segment and a 16 per cent consolidation contribution from TCNS and Direct-to-Consumer (D2C) businesses. Despite these gains, like-to-like (LTL) sales remained sluggish for Pantaloons and Lifestyle, attributing the subdued growth to factors such as delayed winters, fewer weddings and strategic restraint in discounting channels.

The company's Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) also known as operating profit margin witnessed an expansion, hitting 16.2 per cent, surpassing expectations by 280 basis points. This margin enhancement was primarily fuelled by gross-margin gains, attributed to the strategic reduction in discounting participation, brokerage firm Emkay said in a note.

“While ABFRL's performance during the festive season showcased a nuanced approach to profitability over sheer revenue growth, challenges persist, particularly in the face of subdued demand and competitive pressures. Pantaloons, Athleisure segments, and tier-2/3 towns encountered greater hurdles compared to premium formats, prompting the company to reassess its expansion strategies,” Emkay said.

Looking ahead, ABFRL aims to curtail expansion efforts and refocus on metro and tier-1 cities, foreseeing rationalisation of loss-making stores in smaller towns. Despite the company's confidence in its ability to effectively liquidate inventory and manage debt levels, the path to sustained growth remains dependent on macroeconomic tailwinds and market dynamics, the Mumbai-based brokerage said.

In light of these developments, analysts maintain a cautious stance, citing the lack of immediate catalysts for a turnaround. Despite the margin beat and potential upsides such as Pantaloons/TCNS turnaround and Direct-to-Consumer value-creation initiatives, prolonged weakness could necessitate further equity dilution, Emkay added.

Aditya Birla Fashion and Retail shares ended 1.2 per cent higher at Rs 4,521.