ABFRL demerger: What's next for ABFRL stock after 12% rally? Kotak shares target price

The board of Aditya Birla Fashion and Retail (ABFRL) recently proposed the demerger of Madura Fashion & Lifestyle into a separate listed entity, which sent the stock soaring 12 per cent on Tuesday. Madura’s business may see multiple re-rating, said Kotak Institution Equities. But the brokerage said it would wait for strategic direction from the management, given ABFRL's proclivity to make acquisitions.

In the past few years, ABFRL used Madura’s cash flows and fund raises to acquire new businesses.

"With Madura’s cash flows no longer at ABFRL’s disposal after the demerger, reliance on an external fundraise would increase and may result in further equity dilution for shareholders," Kotak Institutional Equities said adding that Madura’s re-rating contingent on capital allocation clarity.  We await more clarity on the exact scheme details, including financials of the demerged entity. Existing shareholders will get a mirror shareholding in both entities after the demerger.

After the demerger, ABFRL would comprise value formats, ethnic brands, luxury brands and TMRW.  The other entity will house Madura, consisting of: four lifestyle brands (Louis Philippe, Van Heusen, Allen Solly and Peter England). It would also have casual wear brands such as American Eagle and Forever, a sportwear brand (Reebok) and the innerwear business (Van Heusen).

Kotak Institutional Equities noted that most of the businesses are currently non-cash flow generative and would require growth capital in the next 12 months, implying dilution for shareholders.

It said the core intent of this demerger is to unlock Madura’s value and that unlocking can happen only once investors get clarity on Madura’s capital allocation plans.

For now, the brokerage has retained its fair value of Rs 220 on the stock.

"Operationally, Madura was already being run as a separate entity, with few arms-length transactions with Pantaloons.  We reckon ABFRL is undertaking the demerger exercise to unlock value from Madura—a low growth, but healthy cash flow business. We currently value this business at Rs 17,000 crore (EV) based on 12.5 times March 2026 EV/EBITDA multiple versus higher valuations (20-35X EV/EBITDA) of other retailers who exhibit superior growth, margins, clearer capital allocation and more," Kotak said.

Kotak said the bigger concern will be the non-Madura entity, which in its view, may be saddled with a lion’s share of the current consolidated debt of Rs 2,800 crore. In such a situation, ABFRL may be compelled to raise capital immediately in this entity, resulting in dilution of existing shareholders.

 

Kotak suggested a fair value of Rs 220 on the stock.