ABFRL shares: Nuvama downgrades stock to 'Hold' citing growth concerns post-demerger

Nuvama Institutional Equities has downgraded Aditya Birla Fashion and Retail Ltd (ABFRL) shares to 'Hold' from its earlier 'Buy' call, citing sluggish growth in the company's core portfolio following its recent demerger.

ABFRL, post-demerger, now comprises Pantaloons, Ethnic Wear, the Luxury Collective, and the digital-first TMRW brands. The company recently separated its lifestyle business into a new entity, Aditya Birla Lifestyle Brands Limited (ABLBL), which is expected to be listed by the end of June 2025.

While newer segments within ABFRL such as ethnic and digital brands have shown strong performance, the company's core retail operations continue to lag. Nuvama highlighted that Pantaloons and the Style Up segments reported a 1 per cent year-on-year (YoY) decline in revenue, with like-to-like (LTL) sales contracting by 1.6 per cent YoY in FY25.

"Profitability has improved broadly due to initiatives such as lower markdowns and store closures. However, given the realisation of these low-hanging fruits, further margin expansion relies on operating leverage, which is not yet evident," Nuvama said in its recent note. The domestic brokerage has revised its target price for the stock to Rs 84.

On the operational front, ABFRL undertook a rationalisation exercise, closing over 50 stores on a gross basis, and around 12 stores on a net basis during FY25. Despite these closures, the company posted a strong EBITDA margin improvement — from 2.2 per cent in Q4 FY24 to 11.9 per cent in Q4 FY25 — primarily driven by higher productivity in Ethnic wear and margin gains in Pantaloons.

The company's losses narrowed significantly on the back of improved operating performance, and it plans to expand the Style Up format by adding 25–30 stores this year and scaling to 250 stores over the next two to three years.

The newly formed ABLBL entity, on its part, registered tepid growth of 2.5 per cent YoY. This was led by a 4 per cent rise in the Madura portfolio and 2.7 per cent growth in other segments including American Eagle, Reebok, and Van Heusen Innerwear. However, intersegment eliminations weighed on topline growth, although they had a positive impact on gross margins.

ABLBL's profitability was further supported by an accounting gain from the non-provisioning of depreciation worth Rs 148 crore on an asset held in the demerger, which will now be accounted for in the demerged entity's books. The company is expected to carry a debt of Rs 7,000–8,000 crore, which management aims to repay over the next two to three years.

Meanwhile, shares of ABFRL were last seen trading 1.25 per cent lower at Rs 86.90 on Wednesday.