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Retail companies have had a challenging time during the covid-19 pandemic that is ravaging the country and Aditya Birla Fashion and Retail Ltd (ABFRL) is no exception. Shares of the company are now 29% lower than its pre-covid highs seen in February 2020.

One worry for investors has been the debt. As on 30 June, ABFRL’s net debt stood at 1,200 crore, up from around 650 crore at the end of FY21. The sequential increase in debt is because of the losses incurred in the June quarter (Q1FY22) and increase in working capital requirements.

However, some experts believe that ABFRL’s debt is not as troublesome now as earlier. “ABFRL’s debt has historically been a concern, as investors typically don’t prefer apparel firms with a lot of debt. However, ABFRL’s debt seems more than manageable after the recent fund raise," said Jay Gandhi, analyst at HDFC Sec-urities Institutional Research.

Pandemic pain
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Pandemic pain

Meanwhile, ABFRL’s Q1 sales were severely hit because of the impact of the second covid wave. Standalone revenues fell as much as 57% vis-à-vis Q4FY21. The performance of Pantaloons was subdued. Further, earnings before interest, tax, depreciation and amortization (Ebitda) slipped into a loss of 162 crore versus a profit of 257 crore in Q4.

However, the recovery has been encouraging after Q1 and the outlook is also upbeat. “We believe that ABFRL is likely to sustain a stronger recovery versus peers and faster growth ahead," said analysts from Emkay Global Financial Services Ltd in a report on 25 August. “(This would be) driven by strong digital presence (up 2.5 times year-on-year in Q1FY22), agility in design/casualization across brands, aggressive expansion with 400/60 store additions for Lifestyle/Pantaloons in FY22, and expansion into a new segment, ethnic wear," said the broker.

Even so, uncertainty surrounding the potential adverse impact of the third covid wave that could hit the country is a risk for all retail firms and ABFRL isn’t immune to this. So far this calendar year, the ABFRL stock has increased by around 20%, pretty much similar to the gain in the Nifty 200 index.

Analysts reckon valuations of the ABFRL stock are reasonable. “For investors, execution remains the key. It would also help if the company manages to improve profitability and efficiency of the Pantaloons format," said Gandhi.

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