Emkay sees over 20% upside in Aditya Birla Fashion shares, dubs Reebok deal as game changer - know why?

Aditya Birla Fashion and Retail Limited (ABFRL) shares have outperformed the key indices BSE Sensex and Nifty50 over a 1-year period by over 40 per cent. On 14 December, the company approved acquisition of exclusive online and offline rights for Reebok for the Indian market and purchase of certain assets of Reebok India Company. The news triggered the prices of this stock followed by corrections over the next three consecutive sessions.  

Equity research firm Emkay Global Financial Services has a positive view on this stock and this is what it recommends. 

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ABFRL shares ended at Rs 269.20 on Friday, down by almost 1.8 per cent from the previous closing price. The correction was inline with over market fall during the week gone by.  

Emkay recommended this stock for a price target of Rs 340 at a price of Rs 283 with a likelihood of a 20 per cent upside. 

Reebok is the fourth-largest brand in the Indian sports/active-wear market after Puma, Adidas and Nike, with Rs 4.3 bn in revenues in FY20, the Emkay report said. The topline for these companies stood at Rs 14 bn, 12 bn and 8 bn in FY20.  

Reebok has seen a 5 per cent CAGR in FY15-20 versus -1 per cent, 9 per cent and 16 per cent CAGR for Nike, Adidas and Puma in India, the report said.  

Reebok’s EBITDA margins have been on an improving trajectory at 17 per cent in FY20 vs (-) 11 per cent in FY15. 

1. Company has entered into an agreement to acquire the exclusive online and offline distribution rights for the global brand ‘Reebok’ for the Indian/ASEAN markets. The transaction also involves the purchase of certain inventory and other net current assets of ‘Reebok India Company’ to the tune of Rs 0.8-1.0 bn.  
2. The foray into the fast-growing sports segment increases the addressable market, and is a key positive, it said. (industry size estimated at USD 10-14 bn in FY22-24E with growth seen at a 14 per cent CAGR).  
3. Strong online and physical retail presence through Pantaloons/MBOs should help expand the brand’s distribution significantly. 
4. Brand has struggled with lower growth, probably due to a lack of proper expansion/positioning in the market.  
5. “We see the transaction as EBITDA/EPS accretive, which can add 5-7% to our EBITDA/EPS estimates in the forecast period. We believe that better margins will offset the impact of slightly higher capital employed on ABFRL’s RoIC,” it said. 
6. Faster recovery trends, an aggressive expansion outlook and potential margin gains should drive healthy revenue/EBITDA CAGRs of 11-25 per cent in FY20-24E for ABFRL (exReebok transaction).  

What to watch out for? 

ABFRL will need to invest in the brand for growth,  

The transaction is effective upon the completed transfer of global ownership of ‘Reebok’ brand from Adidas to Authentic Brand Group, USA, and is expected to close by Q4FY22.  

(Disclaimer: The views/suggestions/advises expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)