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Shares of Aditya Birla Fashion and Retail Ltd (ABFRL) have risen by 7.6% since the Flipkart deal announcement on Friday. Flipkart will invest 1,500 crore in ABFRL for a 7.8% stake in it.

This is a relief for ABFRL, which has high leverage, a key overhang for the stock. Further, the covid-19 pandemic has wreaked havoc on demand.

“Funds infusion from the Flipkart deal and rights issue ( 750 crore of 1,000 crore), as well as inventory unwinding in FY2021, will help bring down ABFRL’s net debt to a more manageable level of 510 crore by March 2021," said Kotak Institutional Equities. At the end of June, ABFRL’s net debt stood at 3,250 crore.

The partnership with Flipkart should also benefit the company in boosting its e-commerce sales for both Madura and Pantaloons. “We believe ABFRL will be able to accelerate its e-commerce sales by getting more prominently featured at Flipkart’s online marketplaces that are leaders in online fashion," said Kotak.

Even so, revival in sales remains paramount. ABFRL’s standalone revenue fell by 85% year-on-year in the June quarter.

The company is relatively more vulnerable as apparel demand is discretionary in this environment. However, visibility has improved with most shopping malls resuming operations, though the formal wear category, where ABFRL has a high presence, may take longer to revive.

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