Aditya Birla Fashion Demerger: Analysts Highlight Dismal Track Record Of Success

In the world of investments, decisions are often shaped by number of factors, from market trends to company strategies and investors carefully assess these while allocating funds. Aditya Birla Fashion & Retail Ltd. recently caught the attention of investors and analysts after the company announced demerger plans on Monday.

ABFRL plans to vertically demerge its Madura Fashion and Lifestyle business into a separate listed company and the move that has sparked both curiosity and caution among the investors.

The fashion vertical of Aditya Birla Group said that the demerger would create opportunity to unlock value but analysts remained cautious about the proposed demerger plans.

Research firm Citi too has said that the investors are expecting the demerger and the fundraising to benefit them and ease their concerns about the complexity of the business and capital allocation.

The brokerage firm, however, cautioned that it does not see an imminent improvement in demand trends, compounded by high operating and financial leverage.

Dhruv Bajaj, an analyst took to social media platform X (formerly known as Twitter) explaining the rationale behind the demerger plans and the financial needs of two business plans.

While Madura Fashion is expected to boast a robust balance sheet and return on equity due to its omni-channel sales strategy, Pantaloons, with its multi-brand outlets, requires substantial capital for growth, Bajaj explained in a thread post on X.

Louis Phillippe, Van Heusen, Allen Solly, and Peter England are the four lifestyle brands that make up Madura Fashion. Other brands include American Eagle and Forever 21, Reebok and Van Heusen. The planned demerging company collectively contributed to approximately 60% of consolidated revenue and 75% of consolidated segment Ebitda, boasting a margin of 15.6% in the first nine months of FY24.

Bajaj underscores the fashion industry's challenges, including vulnerability to economic downturns and inventory losses due to rapidly changing trends. He also highlights that, despite the group's ambition, its expansion strategies through mergers and acquisitions have a dismal track record of success.

Shares of ABFRL snapped a three-day winning streak and were fluctuating between gains and losses. Among the analysts tracked by Bloomberg, 10 have a 'Sell' rating on the stock, while nine have a 'Hold' rating and five have a 'Buy' rating.