Aditya Birla Lifestyle Brands eyes double-digit growth as emerging brands lift margins

Investment View and Rating

Motilal Oswal Financial Services retains a Neutral rating on Aditya Birla Lifestyle Brands and revises its target price to Rs 105 from Rs 110. The broker sees a balanced portfolio comprising scaled, highly profitable Lifestyle Brands and currently sub-scale but high-potential Emerging Brands.

A sustained period of double-digit revenue growth and improving Emerging Brands profitability are the key potential catalysts for a re-rating. The target price of Rs 105 is based on 15 times September 2028 estimated pre-Ind AS EV/EBITDA, valuing Lifestyle Brands at 8 times EBITDA and Emerging Brands at 1 times revenue.

1QFY27 Operating Performance

Aditya Birla Lifestyle Brands reported 1QFY27 revenue of Rs 20.5 billion, up 11 per cent year on year and broadly in line with Motilal Oswal's estimate. Growth was below the approximately 16 per cent reported by Arvind Fashions.

Lifestyle Brands revenue was supported by 7 per cent retail like-for-like growth and strong e-commerce performance. Retail revenue grew around 9 per cent, while wholesale was affected by lower primary sales despite healthy secondary sales. The Lifestyle Brands network exceeded 2,950 stores across 4.5 million square feet.

Emerging Brands, comprising Reebok, American Eagle and Van Heusen Innerwear, delivered 19 per cent revenue growth, led by around 11 per cent retail like-for-like growth and more than 30 per cent e-commerce growth.

Margins and Profitability

Gross margin declined 155 basis points year on year to 61 per cent, missing the broker's estimate by 135 basis points because of an adverse channel mix and higher inventory provisioning. Operating leverage offset much of this pressure, with employee costs increasing 6 per cent and rent increasing 1 per cent.

Reported PAT was below estimate owing to higher depreciation and finance costs and lower other income.

Management Commentary and Growth Outlook

Management said demand remained broadly consistent with 4QFY26, although occasion wear moderated slightly because Adhikmaas affected the peak wedding period. Management remains alert to household-budget inflation but has not observed a meaningful change in demand momentum.

• Management expects a 3-4 per cent cost increase in 2HCY26 from raw-material prices, logistics and minimum-wage increases.
• The cost increase is expected to be largely mitigated through calibrated price increases, productivity gains and cost rationalisation.
• The company targets 150-200 net store additions in FY27, equivalent to around 5-6 per cent area growth.
• Steady-state retail like-for-like growth of 7-8 per cent is expected to support early double-digit revenue growth.

Reebok, which has about 200 stores, could potentially double revenue again over the next 3-3.5 years through retail expansion, wholesale and smaller-town expansion. BIS approvals remain an operational challenge. Reebok is developing domestic sourcing alternatives while retaining BIS-certified overseas factories.

Broker Estimates and Valuation Framework

Motilal Oswal estimates revenue, reported EBITDA and adjusted PAT CAGR of approximately 8 per cent, 10 per cent and 18 per cent, respectively, over FY26-29. The broker expects about 165 net annual store additions, mid-single-digit like-for-like growth and scaling Emerging Brands to support growth.

Improved Emerging Brands profitability is expected to drive approximately 85 basis points of blended EBITDA-margin expansion. The broker estimates cumulative operating cash flow of around Rs 17 billion and free cash flow of around Rs 8 billion over FY26-29. These cash flows could support higher shareholder payouts and deleveraging from FY26 net debt of Rs 7.3 billion.