Aditya Birla Fashion: cash crunch overshadows Q2
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Aditya Birla Fashion and Retail Ltd’s lacklustre performance in the September quarter (second quarter or Q2) did no damage to its stock. The stock, which fell sharply after demonetization, gained slightly after the results announcement last week.
Revenue increased 13%, driven by the company’s value format business Pantaloons. Madura Fashion & Lifestyle, which constitutes premium brands and generates three-fifths of Aditya Birla Fashion and Retail’s revenues and operating profits, grew by a tepid 5%.
Prolonged end-of-season sales and deep discounting continue to weigh on the premium brands business. According to analysts, on a like-to-like basis or excluding new stores, revenues are down 10% at this division.
Comparatively, Pantaloons registered a respectable 6.2% growth on a like-to-like basis. This helped it post higher operating profit or earnings before interest, taxes, depreciation and amortization. But operating profit at the premium brands business dropped 15% due to expenses related to new businesses. This suppressed total profit, which grew just 7%.
Nevertheless, while the results were unexciting, there was no major negative surprise. The premium brands business remains the pain point and Pantaloons continues to see improvement. The company is trying to revive the premium brands business. But the recovery was expected to be gradual, most probably from the next fiscal year, as it is contingent on moderation in discounts.
Of course, what was unexpected was demonetization. Aditya Birla Fashion and Retail said it experienced a sharp drop in cash sales (around 45% of sales are in cash) and slowdown in overall consumption. It fears the impact can persist for at least one quarter. Analysts say it could last for more than a quarter and one broking firm has even pared revenue estimates for the company. “We have reduced our FY17/18E revenues by 8.5%/8.7%, factoring in a decline in consumption in the coming couple of quarters,” Emkay Global Financial Services Ltd said in a note. JM Financial Institutional Securities Ltd fears a hit to organic growth and profitability in the current fiscal year.
Most of the damage to the stock was done before the Q2 results, when demonetization was announced and the stock lost 16%. More correction can be in store if the sales disruption lasts for more than two quarters or the premium brands business doesn’t improve.
Much depends on the cash crunch and how consumer sentiment pans out. “No major incremental bad news would have meant good news to us but for the fact that the demonetization-led disruption in the country is likely to have quite a severe impact on the businesses’ performance over the coming two quarters, in our view,” added JM Financial.