Aditya Birla Fashion & Retail Ltd (ABFRL) announced the demerger of Madura Fashion and Lifestyle business into a separate listed entity on April 1st 2024 after stock exchange hours. Investors were thrilled with the vertical demerger news as the ABFRL stock price zoomed 10% on April 2nd, 2024.
Madura and Pantaloons To Split Up and List Separately
Madura Fashion & Lifestyle business segment (MFL), consists of lifestyle brands viz Louis Phillippe, Van Heusen, Allen Solly and Peter England, casual wear brands, American Eagle & Forever 21, sportswear brand Reebok and the innerwear business under Van Heusen. Thus, post demerger, there will be two separately listed companies, Madura Fashion & Lifestyle and the remaining ABFRL which will comprise Pantaloons, Style Up, Ethnic portfolio and TMRW. While Pantaloons is a private label value format business, Ethnic portfolio comprises designer-led celebrity brands and TMRW is a digital-first brands portfolio. ABFRL has been acquiring majority stakes in designer-led celebrity brands such as Sabyasachi, Shantnu & Nikhil, House of Masaba, Jaypore and also developed its own brand TASVA with Tarun Tahiliani which constitutes Ethnic portfolio. The latest acquisition was TCNS Clothing which has a credible presence in the premium ethnic womenswear category with its popular brands, W, Aurelia, Wishful and Elleven.
Madura with larger revenue pie to unlock its value
But why has the company taken this decision to create two separately listed companies operating in the same highly competitive apparel industry. If Madura segment is a premium lifestyle business, so is Ethnic portfolio clubbed with Pantaloons. So separating luxury and premium business from the value format is not the reason. Just to bring a little more clarity, ABFRL is separating its standalone business which comprises Madura segment and Pantaloons. ABFRL’s total standalone revenues for 9MFY24 stands at Rs 9,499 crore of which Madura segment constitutes 67% of the total standalone revenue pie and Pantaloons the remaining 33%. Pantaloons reported revenues of Rs 3,349 crore and Madura revenues came in at Rs 6,346 crore for the period 9MFY24. Ethnic business and TMRW revenues in 9MFY24 stood at Rs 838 crore and Rs 307 crore respectively which added to standalone business gives consolidated numbers for 9MFY24.
After incubating and funding Style Up, Ethnic portfolio and TMRW over the past 3-4 years and now clubbing with Pantaloons, the Madura segment with stronger cash flows is being separated. While the new businesses take time to bear fruit, the Madura segment will be able to chalk its own growth plan. For instance, TMRW with an annualized run rate of Rs 600 crore will take at least three years to be profitable. As the businesses list separately, markets will discover value as per their distinct growth strategies, financial fundamentals and expansion plans.
Consolidated Debt A Concern
ABFRL reported a stable December Quarter 2023 with 16% YoY growth in consolidated revenues and operating profit rising 27% YoY. Revenues and operating profit stood at Rs 4,167 crore and 553 crore respectively in December Quarter 2023. The company reported a net loss of Rs 78 crore impacted by high depreciation and increased interest cost due to higher borrowings in Q3FY24 versus the same quarter last year. Moving on to revenue performance of individual business segments, Madura segment reported revenue growth of 2% YoY compared to 12% YoY revenue growth for Pantaloons in Q3FY24. Madura reported lower growth on a higher base of corresponding December Quarter 2022. Madura revenue grew 19% YoY in Q3FY22. Ethnic business and TMRW reported strong growth rates of 190% YoY and 265% YoY in Q3FY24 on a lower base in corresponding December Quarter 2022.
Vertical demerger will help both businesses to pursue their distinct branding, positioning and expansion strategies according to their distinct customer base. Madura segment’s premium customer base is completely different from Pantaloons & Style Up value and masstige fashion retail play. And both businesses will also raise funds as per their distinct requirements. While everything looks good and the street is happy with the ABFRL management’s decision, what about the consolidated total debt of Rs 4,800 crore. How will it be apportioned among both the companies? Investors are awaiting more details from the ABFRL management.
