Aditya Birla Fashion-TCNS Deal: What Analysts Make Of Acquisition

Shares of Aditya Birla Fashion and Retail Ltd. fell after mixed analyst commentary on its plan to acquire TCNS Clothing Co.

The retail arm of Aditya Birla Group made an open offer on May 5 to acquire 29% from public shareholders of TCNS Clothing at Rs 503 per share, according to an exchange filing. It plans to buy an additional 1.41 crore to 1.98 crore equity shares, representing 22% to 30.81%, at the same price from the promoters of TCNS Clothing.

In all, Aditya Birla Fashion will spend at least Rs 1,650 crore to buy 51% of the apparel maker.

After the deal, TCNS Clothing will be merged with Aditya Birla Fashion. Investors will get 11 shares of Aditya Birla Fashion for every six held in TCNS for the remaining 49% stake.

"The transaction will see a share dilution of 5.7% for Aditya Birla Fashion. Also, given the expected inflow pending from GIC, a global institutional investor (Rs 1,450 crore), debt should not increase significantly," Nuvama Institutional Equities said in a May note.

But Motilal Oswal Financial Services expects "TCNS's earnings revival would be challenging and that building scale internally could have been a good alternative for ABFRL."

The entire deal values TCNS clothing at Rs 2900 crore, a marginal discount to the current market capitalisation, Equirus said in a note.

Shares of Aditya Birla Fashion and Retail Ltd. fell 4.78% to Rs 214.2 apiece as of 9.05 a.m. against a 0.17% rise in the benchmark NSE Nifty 50 Index.

Brokerages' View

Nuvama Institutional Equities

• Maintains 'buy' on Aditya Birla Fashion and Retail.

• While the acquisition price at 14 times FY24 EV/Ebitda seems reasonable, TCNS's brands are facing growth issues; scale-up will allow value creation.

• This acquisition will aid ABFRL in filling the mid-market ethnic wear segment.

• Given that TCNS has been lagging in recovery and underperforming for more than two years now, only a successful turnaround can create shareholder value.

• ABFRL has limited its cash outgo to Rs 1,600 crore, which can potentially be financed from the pending inflow from GIC, thus limiting any debt raise.

Motilal Oswal Financial Services

• Revised rating to 'neutral' on Aditya Birla Fashion and Retail with a target price of Rs 245.

• TCNS is the leading player in the women's ethnic wear market, with an estimated revenue of over Rs 1,200 crore for FY23.

• TCNS has four brands—W, Aurelia, Wishful, and Elleven—with 660 plus EBOs, 2,300 plus large format stores, and 1100+ multi-brand outlets on a pan-India basis, which is more than double the reach of its peers.

• But the market remains highly crowded, with a large section of unorganised players catering to highly price-conscious female consumers. This may have led to a weak 2% revenue CAGR (FY19–23E) in TCNS.

• ABFRL has invested in multiple new businesses, with a long tail of businesses that are presently loss-making or yet to stabilise, and TCNS may be one of them.

• While the lifestyle segment continues to deliver a healthy performance, a sluggish recovery in the Pantaloons segment and incremental investments in new businesses could drag down profitability for ABFRL.

• Assuming an 8% Ebitda margin in TCNS for FY25E, the company would be valued at par with ABFRL. However, the acquisition could potentially have an 18% impact on earnings per share.

Equirus

• Maintains 'long' on the stock as, after a 30% price correction in the last six months, current valuations for ABFRL at 13 times FY24E EV-Ebitda look attractive.

• Under ABFRL's execution capabilities, a successful turnaround of TCNS is expected, which otherwise was lagging its peers, thereby adding to shareholder value in the long run.

• With GIC funding of Rs 1,450 crore expected, this deal will most likely not significantly add to debt levels.

• A large part of ABFRL's ethnic wear portfolio was skewed towards premium and ultra-premium brands.

• With the TCNS acquisition, ABFRL will address women's mid-premium and mass ethnic wear needs, which were largely served through private labels like Pantaloons.

• ABFRL has guided scaling up its ethnic revenues to over Rs 5,000 crore over the next three years.