Flipkart’s storefront and cheque just the tailwind ABFRL needs | Economic Times

Mumbai: The Upper Crust is all set to rule the Web.Louis Philippe, Van Heusen, Peter England and Allen Solly — collectively the biggest brands in men’s executive wear in the country — will now have a wider online play after Flipkart announced a partnership with Aditya Birla Fashion and Retail (ABFRL).Flipkart’s ownership of about 8 per cent in the company that leads in India’s formal wear can strengthen its balance sheet and accelerate growth, besides reducing leverage. Hence, a re-rating is on the cards.For the record, Flipkart will invest Rs 1,500 crore through the preferential allotment of shares by ABFRL. The promoters will now own 55.1 per cent. The stock climbed more than 4 per cent Monday to a high of Rs 171.9 on the NSE before ending 2.3 per cent lower at Rs 161.2, mirroring the late-afternoon selloff amid concerns of a second pandemic wave in Europe and the US.ABFRL’s net debt rose to Rs 3,250 crore in the June quarter. With a total capital infusion Rs 2,245 crore — the rights issue of Rs 746 crore and preferential allotment of Rs 1,500 crore — would strengthen the balance sheet and result in a significant decline in debt to Rs 1,012 crore in FY21. The debt to equity ratio of the company is expected to decline from 2.1 to 0.4 by the end of FY21.“Cash inflows from the deal would support the company’s operations in a challenging demand scenario when physical retailers have faced the heat with store closures and weak discretionary demand,” said Bharat Chhoda, analyst, ICICI Securities. “The strategic tie-up with Flipkart would enable ABFRL in the accelerated pursuit of its omnichannel growth ambitions over the long term with the immediate benefit of deleveraging the balance sheet.”78882477ABFRL has declined 21 per cent in the past one year. According to analysts’ estimates, it could rally up to 30 per cent. The debt reduction would cut down interest outflow. With steady cash flow generation from FY22 onward, debt to EBITDA ratio is likely to decline to 0.7 times in FY23 from 6 times in FY20, said analysts.However, the company is expected to report negative free cash flow of Rs 690 crore in FY21 over operational losses.“Factoring in the reduced leverage and potential e-commerce traction, we revise up target multiples from 15 times to 18 times FY22 estimated EV/EBITDA,” said Nihal Mahesh Jham, analyst, Edelweiss Securities. “Any more visibility on improvement in formal wear demand can drive further rerating.”Analysts believe ABFRL will be able to accelerate its e-commerce sales by getting more prominently featured at Flipkart’s online marketplaces, including Myntra. It can also potentially utilise Flipkart’s supply chain to reduce time-to-customer and receive useful data from Flipkart and Myntra to improve the relevance and time-to-market of its products.“We believe ABFRL is on track toward returning to pre-Covid levels of revenue by the March 2021 quarter,” said Garima Mishra, analyst, Kotak Securities. “We also believe bigger brands will gain share as smaller brands and unorganised sectors continue to face supply-chain challenges.”