Kotak Securities Ltd has issued a note of caution over the demerger of Madura Fashion & Lifestyle from Aditya Birla Fashion and Retail Ltd as following this move, the latter is expected to shoulder most of the existing Rs 2,500 crore debt.
"We believe the operating EBITDA (pre-Ind AS) of the new Aditya Birla Fashion would be Rs 6-7 billion, indicating a fairly high debt-to-EBITDA ratio for the entity," the brokerage stated.
Kotak believes the demerger will unlock the true value of Madura only when investors gain clarity on Madura's capital allocation plans. For now, the firm has retained a target price of Rs 220 for Aditya Birla Fashion shares with a 'reduce' rating.
As of 03.11 pm, shares of Aditya Birla Fashion were 0.1 percent lower at Rs 235. The stock has gained over 9 percent in the past six months.
Also Read | Aditya Birla Fashion share price jumps 15% on demerger plan
On April 2, Aditya Birla Fashion's shares closed 12 percent higher after the company's board authorised the management to evaluate the vertical demerger of Madura from Aditya Birla Fashion into a separate listed company.
Post-demerger, Aditya Birla Fashion will include value formats like Pantaloons and Style Up, along with ethnic and luxury brands, and TMRW (which generates less cash flow). Previously, the company relied on Madura's cash flow and funds raised to develop new businesses. Without Madura's cash flow, Aditya Birla Fashion may need more external fundraising, leading to possible shareholder equity dilution, Kotak noted.
Meanwhile, Madura will encompass four lifestyle brands (Louis Philippe, Van Heusen, Allen Solly, and Peter England), casual wear brands (American Eagle and Forever 21), sportswear brand Reebok, and innerwear business Van Heusen. Madura had been functioning as a separate entity, with minimal interactions with Pantaloons.
Kotak emphasised the importance of waiting for more details on the demerger, including the financials of the new entity. The existing shareholders will receive shares in both entities post-demerger.
Although Madura's business might see some valuation improvement, Kotak still chose to keep a cautious view until more details about the management's strategy are revealed.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
