The sharp fall in the stock price is mainly due to the rising leverage concerns amidst the pandemic. The company had a debt of Rs 2,500 crore at the end of March 2020 with an operating profit of Rs 470 crore, implying a debt/EBITDA multiple of 5.3. When it is above four, it raises concerns.
After the rights issue, the proceeds of Rs 1000 crore would be utilised to reduce debt. Analysts expect the net debt to reduce by 25% to Rs 1,900 crore by the end of FY21. They estimate 15-25% sales decline and a similar quantum of cost reductions for the year as demand slows due to the pandemic. To counter the sales decline, the company’s management has taken cost cutting initiatives including re-negotiating rental costs, salary cuts and lowering of other expenses such as sales and advertisements.
One risk to ABFRL’s business model is that if work from home continues to be the norm in the future, then it may affect the company’s sales since its brands are positioned as more formal and high end.
Assuming a normalisation of business activities in another year, the company may report EBITDA of Rs 600 crore, similar to what was estimated for FY20 before the COVID-19 outbreak. The rights issue price then implies the enterprise value (EV) to be 20 times the FY22 EBIDTA. In the past, the EV/EBIDTA has remained above 30. Its peer Trent, which owns the ‘Westside’ retail chain is available at 40 times FY22 EV/EBIDTA. Although the two companies are not exactly comparable, Trent remains the closest peer.
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