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With a strong portfolio of 21 brands and aggressive 23.9% CAGR in retail
expansion at 1.58mn sq ft, we expect Arvind’s brands and retail business to
show 25.6% CAGR over FY11-14E at Rs19.1bn and increase its share from 22%
to 32.7% over the same period. Positive result of major capex of Rs4.3bn over
FY11-12 would be visible in FY13-14. Its stock is currently trading at 6.5x/4.9x
FY13/14E P/E and 5.2/4.2x EV/EBITDA, below the mean of 8.1x and 6.5x,
respectively. Strong 12.4% revenue CAGR aided by 104bps higher operating
margin, working capital efficiency and debt reduction by 26.5% should drive
profitability CAGR by 45.6% over FY11-14E, generate free cash flow of Rs5.2bn
over FY13-14E, improve adjusted RoCE by 303bps over FY11-14E and calls for
expansion of PE multiple. We assign a Buy rating to Arvind with a SOTP-based
TP of Rs117, valuing it at 9.1x/6.4x/1.2x PE, EV/EBITDA, P/B for FY13E.
Lower debt, interest rates to drive profitability: Bumper cotton production led to
softening of prices, which would reduce Arvind’s ex-cash working capital requirement
to 26.8% of sales in FY14E from 28.3% in FY11. Free cash flow of Rs5.2bn over
FY12-14E would reduce its debt by 26.5% to Rs16.2bn and its adjusted D/E ratio from
1.6x to 0.6x over FY11-14E. Lower debt, falling interest rates and improved credit
rating would prune interest costs from 6.4% to 3.3% of sales over FY11-14E and drive
net profit CAGR by 45.6% over the same period. Monetisation of real estate assets, as
and when it happens, would sweeten its cash flow and debt reduction programme.
Fast paced growth of B&R business: From a denim producer for corporate clients,
Arvind is turning into a brand power house catering to consumers directly. Aggressive
retail expansion, growth through multiple drivers like distribution expansion, new
brands launch and category expansion would drive the brands and retail (B&R)
division’s revenue CAGR by 25.6% to Rs19.1bn and increase its revenue share to
32.7% from 22% over FY11-14E. We expect its operating margin to rise by 140bps to
9.5%, which would increase segmental RoCE by ~109bps to 14.0% over FY11-14E.
Strong free cash flow and return ratios: With the decline in cotton prices and hence
working capital needs, a 104bps improvement in operating margin over FY11-14E and
lower capex, Arvind should generate positive free cash flow of Rs5.2bn over FY13-
14E. Following weak demand, we expect the performance of its textile and retail
divisions to remain muted in 1HFY13, thereby pruning consolidated margin by 20bps
to 14.2% and RoCE by 96bps in FY13E. However, with the revival in demand and soft
cotton prices, its revenue should grow 14.3%, operating margin should improve by
40bps and RoCE by 123bps in FY14E. Adjusted RoCE/RoE should improve from
11.7%/11.0% in FY11 to 14.8%/18.3%, respectively, in FY14E. Positive free cash flow
from FY13 onwards and improving return ratios should drive up the valuation multiple
Valuation
Currently, Arvind trades at 5.2x/4.2x its FY13/14 EV/EBITDA, below its 10-year median of 6.5x. We expect the
company to improve its EBITDA by 15.2% CAGR over FY11-14E as against 5.6% CAGR over FY06-11. Its
stock is trading attractively on other valuation parameters too, P/E at 6.5x/4.9x its FY13/14E EPS of
Rs12.8/17.3, respectively, below its two-year median of 8.1x. We expect the company to report RoE of
13.0%/14.1%/16.2% in FY12/13/14E against 3.7%/9.5% in FY10/11, respectively. Adjusted D/E ratio, which
was as high as 2.2x in FY09, should reduce to 1.1x in FY12E and to 0.6x in FY14E. Debt, in absolute
terms, should reduce by 26.5% to Rs16.2bn over FY11-14E. High debt increased volatility in net profit
and hurt the margins of the company, thereby capping its valuation in the past. Its stock is also
trading at 42.1% and 42.5% discount to its comparable peer Raymond on P/E and P/B basis,
respectively, based on FY13E financials, which is not warranted given the strong return ratios and
positive free cash flow and we expect the valuation gap to narrow down to 10-15% once the strong
performance is visible in FY13/14E.
Strong revenue CAGR of 12.4% supported by operating margin improvement of 104bps, working
capital efficiency and debt reduction by 26.5% should drive profitability CAGR by 45.6% over FY11-
14E, generate free cash flow of Rs5,244mn over FY12-14E, improve adjusted RoCE by 303bps over
FY11-14E and calls for expansion of the valuation multiple.
As Arvind has diversified its business model from a commodity denim fabric manufacturer to a consumercentric
business house with the focus on brands and retailing business, we have valued each of its divisions
separately based on the EV/EBITDA multiple. Peer textile manufacturer Vardhman Industries is trading at
5.3x, but it is expected to report subdued RoE of 8.7% for FY13E. Aarvee Denim, second largest denim
manufacturer (after Arvind), has been trading in the EV/EBITDA band of 4-7x. Arvind itself was trading in the
EV/EBITDA band of 5-8x during FY03-07 and at that time the company was a manufacturer of commodity
textiles i.e. denim. With a better margin and higher returns ratio of 16.7%, up 236bps over FY11-13E, we
expect Arvind’s textile division to command a premium to competitors like Vardhman Industries, Aarvee Denim
etc and we have valued it at 5.5x EV/EBITDA. Stocks of retailers like Pantaloon and Shoppers Stop are
trading in the range of 9-15.4x EV/EBITDA. The B&R business of Arvind is evolving and currently is smaller in
size compared to established players. Its retail area of 1mn sq ft, compared to 2.9mn sq ft of Shoppers Stop
(standalone), with sales of Rs19.2bn in FY12E, is 42% of Shopper Stop’s FY12E consolidated revenue. On
account of the evolving nature of its business, we have valued Arvind’s B&R business near the lower end of
Shoppers Stop’s valuation band of 9-15.4x. We have valued its textile division (66.4%/80.6% of FY13E
sales/EBITDA) at 5.5x, and high growth B&R business (29.0%/17.5% of FY13E sales/EBITDA) at 8x. Arvind
has a large land bank of ~500 acres and it is planning to monetise these assets, either through developing
land parcels or selling land parcel in bits and pieces. According to the management, the current value of its
land assets after development would be around Rs10bn i.e. Rs39 per share. We have valued the land parcel
at 33% of its net asset value of Rs39 in our target price. We assign a Buy rating to the stock with a SOTPbased
target price of Rs117, valuing it at 9.1x/6.4x/1.2x PE, EV/EBITDA, P/B respectively, for FY13E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Back in Vogue
With a strong portfolio of 21 brands and aggressive 23.9% CAGR in retail
expansion at 1.58mn sq ft, we expect Arvind’s brands and retail business to
show 25.6% CAGR over FY11-14E at Rs19.1bn and increase its share from 22%
to 32.7% over the same period. Positive result of major capex of Rs4.3bn over
FY11-12 would be visible in FY13-14. Its stock is currently trading at 6.5x/4.9x
FY13/14E P/E and 5.2/4.2x EV/EBITDA, below the mean of 8.1x and 6.5x,
respectively. Strong 12.4% revenue CAGR aided by 104bps higher operating
margin, working capital efficiency and debt reduction by 26.5% should drive
profitability CAGR by 45.6% over FY11-14E, generate free cash flow of Rs5.2bn
over FY13-14E, improve adjusted RoCE by 303bps over FY11-14E and calls for
expansion of PE multiple. We assign a Buy rating to Arvind with a SOTP-based
TP of Rs117, valuing it at 9.1x/6.4x/1.2x PE, EV/EBITDA, P/B for FY13E.
Lower debt, interest rates to drive profitability: Bumper cotton production led to
softening of prices, which would reduce Arvind’s ex-cash working capital requirement
to 26.8% of sales in FY14E from 28.3% in FY11. Free cash flow of Rs5.2bn over
FY12-14E would reduce its debt by 26.5% to Rs16.2bn and its adjusted D/E ratio from
1.6x to 0.6x over FY11-14E. Lower debt, falling interest rates and improved credit
rating would prune interest costs from 6.4% to 3.3% of sales over FY11-14E and drive
net profit CAGR by 45.6% over the same period. Monetisation of real estate assets, as
and when it happens, would sweeten its cash flow and debt reduction programme.
Fast paced growth of B&R business: From a denim producer for corporate clients,
Arvind is turning into a brand power house catering to consumers directly. Aggressive
retail expansion, growth through multiple drivers like distribution expansion, new
brands launch and category expansion would drive the brands and retail (B&R)
division’s revenue CAGR by 25.6% to Rs19.1bn and increase its revenue share to
32.7% from 22% over FY11-14E. We expect its operating margin to rise by 140bps to
9.5%, which would increase segmental RoCE by ~109bps to 14.0% over FY11-14E.
Strong free cash flow and return ratios: With the decline in cotton prices and hence
working capital needs, a 104bps improvement in operating margin over FY11-14E and
lower capex, Arvind should generate positive free cash flow of Rs5.2bn over FY13-
14E. Following weak demand, we expect the performance of its textile and retail
divisions to remain muted in 1HFY13, thereby pruning consolidated margin by 20bps
to 14.2% and RoCE by 96bps in FY13E. However, with the revival in demand and soft
cotton prices, its revenue should grow 14.3%, operating margin should improve by
40bps and RoCE by 123bps in FY14E. Adjusted RoCE/RoE should improve from
11.7%/11.0% in FY11 to 14.8%/18.3%, respectively, in FY14E. Positive free cash flow
from FY13 onwards and improving return ratios should drive up the valuation multiple
Valuation
Currently, Arvind trades at 5.2x/4.2x its FY13/14 EV/EBITDA, below its 10-year median of 6.5x. We expect the
company to improve its EBITDA by 15.2% CAGR over FY11-14E as against 5.6% CAGR over FY06-11. Its
stock is trading attractively on other valuation parameters too, P/E at 6.5x/4.9x its FY13/14E EPS of
Rs12.8/17.3, respectively, below its two-year median of 8.1x. We expect the company to report RoE of
13.0%/14.1%/16.2% in FY12/13/14E against 3.7%/9.5% in FY10/11, respectively. Adjusted D/E ratio, which
was as high as 2.2x in FY09, should reduce to 1.1x in FY12E and to 0.6x in FY14E. Debt, in absolute
terms, should reduce by 26.5% to Rs16.2bn over FY11-14E. High debt increased volatility in net profit
and hurt the margins of the company, thereby capping its valuation in the past. Its stock is also
trading at 42.1% and 42.5% discount to its comparable peer Raymond on P/E and P/B basis,
respectively, based on FY13E financials, which is not warranted given the strong return ratios and
positive free cash flow and we expect the valuation gap to narrow down to 10-15% once the strong
performance is visible in FY13/14E.
Strong revenue CAGR of 12.4% supported by operating margin improvement of 104bps, working
capital efficiency and debt reduction by 26.5% should drive profitability CAGR by 45.6% over FY11-
14E, generate free cash flow of Rs5,244mn over FY12-14E, improve adjusted RoCE by 303bps over
FY11-14E and calls for expansion of the valuation multiple.
As Arvind has diversified its business model from a commodity denim fabric manufacturer to a consumercentric
business house with the focus on brands and retailing business, we have valued each of its divisions
separately based on the EV/EBITDA multiple. Peer textile manufacturer Vardhman Industries is trading at
5.3x, but it is expected to report subdued RoE of 8.7% for FY13E. Aarvee Denim, second largest denim
manufacturer (after Arvind), has been trading in the EV/EBITDA band of 4-7x. Arvind itself was trading in the
EV/EBITDA band of 5-8x during FY03-07 and at that time the company was a manufacturer of commodity
textiles i.e. denim. With a better margin and higher returns ratio of 16.7%, up 236bps over FY11-13E, we
expect Arvind’s textile division to command a premium to competitors like Vardhman Industries, Aarvee Denim
etc and we have valued it at 5.5x EV/EBITDA. Stocks of retailers like Pantaloon and Shoppers Stop are
trading in the range of 9-15.4x EV/EBITDA. The B&R business of Arvind is evolving and currently is smaller in
size compared to established players. Its retail area of 1mn sq ft, compared to 2.9mn sq ft of Shoppers Stop
(standalone), with sales of Rs19.2bn in FY12E, is 42% of Shopper Stop’s FY12E consolidated revenue. On
account of the evolving nature of its business, we have valued Arvind’s B&R business near the lower end of
Shoppers Stop’s valuation band of 9-15.4x. We have valued its textile division (66.4%/80.6% of FY13E
sales/EBITDA) at 5.5x, and high growth B&R business (29.0%/17.5% of FY13E sales/EBITDA) at 8x. Arvind
has a large land bank of ~500 acres and it is planning to monetise these assets, either through developing
land parcels or selling land parcel in bits and pieces. According to the management, the current value of its
land assets after development would be around Rs10bn i.e. Rs39 per share. We have valued the land parcel
at 33% of its net asset value of Rs39 in our target price. We assign a Buy rating to the stock with a SOTPbased
target price of Rs117, valuing it at 9.1x/6.4x/1.2x PE, EV/EBITDA, P/B respectively, for FY13E.
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