Aditya Birla Fashion - Demerger To Separate The Cash Generating, Cash Guzzling Businesses: Systematix

Systematix Research Report

Aditya Birla Fashion and Retail Ltd. board approved the recently announced demerger of Madura Fashion and Lifestyle business into a newly incorporated company named Aditya Birla Lifestyle Brands Ltd.

After the demerger, Aditya Birla Lifestyle will house the four core brands Van Heusen, Louis Phillippe, Allen Solly and Peter England in addition to American Eagle, Forever 21 and Reebok while Aditya Birla Fashion would continue to run the value retail businesses of Pantaloons and Style Up, luxury brands like The Collective, digital brands under TMRW and the complete ethnic wear portfolio of TCNS and designer brands.

Madura Fashion and Lifestyle business has a strong portfolio of apparel brands, follows an asset light franchise-driven business model, generates strong cash flows coupled with high return on capital employed and should witness a re-rating post demerger while the remaining business can see tepid investor interest for now given an unclear path to profitability, higher capital requirement and therefore lower return ratios and upcoming dilution for existing shareholders.

We will ascribe a separate fair value to both businesses post getting a detailed picture of the balance sheet split, but do so see value unlocking especially for Aditya Birla Lifestyle. The stock is currently trade at 14 times and 10.8 times FY25E and FY26E enteprise value/ Ebitda.

We have a Hold rating on the stock with a target price of Rs 267, which we will review post announcement of Q4 and FY24 results.

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