Aditya Birla Fashion shares fall 4% post TCNS Clothing acquisition announcement; Motilal Oswal downgrades stock

Shares of Aditya Birla Fashion and Retail closed 3.76 per cent lower at ₹206.15 on BSE on May 8, extending the losing run into the third consecutive session, ahead of the company’s conference call with the analysts and institutional investors.

The conference call is in the wake of the acquisition of 51 per cent of the expanded share capital of TCNS Clothing Company.

In a BSE filing on May 5, Aditya Birla Fashion and Retail said it had acquired between 1,41,92,448 to 1,98,76,757 equity shares of TCNS Clothing, representing between nearly 22 per cent and 30.81 per cent of the expanded share capital of TCNS, at a consideration of ₹503 per shares.

As per the BSE filing, Aditya Birla Fashion will acquire up to 29 per cent of the expanded share capital of TCNS, subject to the minimum level of acceptance and after that, Aditya Birla Fashion will acquire shares which when aggregated with the equity shares acquired earlier, will result in holding 51 per cent shares of TCNS.

The acquisition is expected to be completed within 9-12 months. The value of the promoter stake and open offer consideration for TCNS is ₹1,650 crore for a 51 per cent stake, making this one of the largest deals in the Indian fashion space.

TCNS Clothing is India’s leading women’s branded apparel company, with a net worth of about ₹635.68 crores as on September 30, 2022. The total turnover of the company, as per Aditya Birla Fashion’s BSE filing, was ₹933.03 crores as on December 31, 2022.

Aditya Birla Fashion’s announcement fetched mixed reviews from brokerage firms. Brokerage firm Motilal Oswal Financial Services downgraded the stock to a ‘neutral’ with a target price of ₹245.

Motilal underscored Aditya Birla Fashion announced the acquisition of TCNS clothing in a two-step deal for a total value of ₹2900 crore i.e., 10 per cent below its current market cap of ₹3,220 crore with ₹1,650 crore of cash payout for 51 per cent stake and 5.4 per cent dilution for the remaining 49 per cent stake.

“Aditya Birla Fashion’s strong execution capability is reflected in its ability to scale up a series of strong brands in the decade. While the Lifestyle segment continues to deliver a healthy performance, a sluggish recovery in the Pantaloons segment and incremental investments in new businesses could drag down profitability in the near term,” Motilal said.

“Expanding the ethnic wear segment and Reebok brand, as well as turning around the newly established D2C segment, could prove to be a challenging journey for the company. The inclusion of TCNS in this portfolio may further accentuate the near-term profitability risks,” said Motilal Oswal.

Motilal pointed out that assuming an 8 per cent EBITDA margin (Pre IND-AS 116) in TCNS on FY25E, the company would be valued at par with Aditya Birla Fashion. However, the acquisition could potentially have an 18 per cent impact on earnings per share (EPS) i.e., ₹0.7 impact on EPS.

“We revise our rating to neutral with a target price of ₹245. We factor in a revenue/EBITDA CAGR of 19 per cent/27 per cent over FY23-25E. We value Aditya Birla Fashion on the SOTP basis, assigning EV/EBITDA of 10 times to Lifestyle Brands, 10 times to Pantaloons, and EV/sales of one time to other businesses on FY25,” said Motilal Oswal.

On the other hand, Nuvama Wealth Management has maintained a buy call on Aditya Birla Fashion stock with a target price of ₹341.

Nuvama said, unlike other mergers and acquisitions, this transaction does not need to be looked at from an EPS accretion/dilution perspective or synergies.

“The key aspect is the fit of the brand and more importantly, turnaround, given that TCNS had been lagging peers in recovery and underperforming for more than two years now. Only a successful turnaround of the same can create shareholder value,” said Nuvama.

Nuvama underscored that from a valuation perspective, the transaction is happening at 14 times and 11 times FY24 and FY25 EV EBITDA (post-IND AS), respectively, which is a reasonable entry price.

“Successful apparel retailers/brands trade at valuations in excess of 30 times. Even from a financing perspective, Aditya Birla Fashion has limited cash outgo of ₹1,600 crore, which can potentially be financed from the pending inflow from GIC, thus limiting any debt raise,” said Nuvama.