Aditya Birla Fashion's Q4 FY24 gives out mixed signals

Aditya Birla Fashion Ltd (ABFRL), a leading Indian apparel company, presented a financially perplexing picture in the March quarter of FY24.

Losses mount despite revenue rise

ABFRL's Q4 FY24 results were a cause for concern. The company reported a net loss of Rs 266.35 crore, significantly wider than the loss of Rs 194.54 crore in the same quarter last year. This paints a grim picture of mounting losses. However, there's a twist -- revenue grew by 18.3 per cent year-on-year. In fact, the total revenue of the company stood at Rs 3,406.65 crore, rising 18.29 per cent from Rs 2,879.73 crore last year. Earnings before interest, tax, depreciation and amortization or EBIDTA for the quarter was at Rs 283.7 crore growing by 47.1 per cent. And EBITDA margins have improved by 8.3 bps YoY vs 6.7 YoY. So, why the loss despite a rise in sales?

Rising costs and integration woes

Several factors seem to be behind the losses. The company statement acknowledges ‘negative operating leverage on the back of sluggish sales’, implying rising costs outpaced revenue growth. Additionally, the recent acquisition of TCNS Clothing Company might be causing integration challenges, impacting profitability.

The ABLBL brand basket includes lifestyle brands like Louis Phillippe, Van Heusen, Allen Solly, Peter England, and Simon Carter. Youth western brands like American Eagle and Forever 21. Sportswear brand Reebok and innerwear business operating under the Van Heusen brand.

As per reports, lifestyle brands recorded 2 per cent YoY growth, reaching Rs 1,564 crore; EBITDA was Rs 305 crore, a 36 per cent YoY growth due to better gross margins and cost management. EBITDA margin rose 19.5 per cent, up by 480 bps compared to the previous year. All these brands are focusing on upgrading products, innovations, and expanding into new high-quality categories as part of their premiumization efforts.

On the other hand American Eagle recorded another quarter of strong performance with 27 per cent sales growth, led by strong distribution expansion. The brand opened six new stores in the quarter to exit at 65 stores, along with being available across 120+ departmental doors.

Bright Spots, segment growth and strategic moves

Despite the headline loss, there were positive aspects. ABFRL's Madura Fashion & Lifestyle segment, with popular brands like Peter England, witnessed robust growth of 30 per cent. This indicates continued customer demand for their established brands. Furthermore, ABFRL recently announced a strategic demerger, separating its innerwear business into a new entity. This move, according to management, aims to create "two separate growth engines", potentially boosting profitability in the long run.

ABFRL's management is confident about the company's future. Kumar Mangalam Birla, CEO, stated in an earnings release, "The strategic de-merger of ABFRL is paving the way for the creation of two separate growth engines...". This de-merger refers to the separation of the company's innerwear business into a distinct entity. Management believes this restructuring will improve operational efficiency and profitability.

However, analysts remain cautious. While acknowledging the positive aspects, they emphasize the need for ABFRL to control costs and streamline operations. The success of their restructuring efforts and the impact of the TCNS Clothing integration will be crucial factors to watch in the coming quarters. ABFRL's Q4 FY24 financials are a story with an uncertain ending. The losses raise concerns, but growth in core segments and strategic moves offer a glimmer of hope. Investors should closely monitor ABFRL's progress in the coming quarters to see if they can successfully navigate the current headwinds and translate growth into profitability.