Buys India Businesses Of Two UK Retailers, Nautica Brand
Arvind has acquired India businesses of British fashion retailers Debenhams and Next and also American brand Nautica from Planet Retail having FY12 revenue of Rs700mn for a total sum of ~Rs550mn, valuing the acquisitions at ~0.8x P/S. As per the management, these brands are making marginal profit at the store level, but losses at EBITDA/PAT levels due to corporate overheads. Due to the losses coupled with aggressive Rs1.5bn expansion, we believe the latest acquisitions would exert pressure on free cash flow and return ratios in the near term. Accordingly, we have increased our revenue estimates by 0.8%/1.7% but cut EBITDA and PAT estimates by 0.8%/3.5% and 10.9%/22.8% for FY13E/FY14E, respectively. We have rolled forward our valuation to FY14 estimates (from FY13) and factored in lower free cash flow/return ratios due to aggressive capex. We have retained our Buy rating on Arvind with a revised SOTP-based TP of Rs92 (from Rs97 earlier
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Arvind has acquired India businesses of British fashion retailers Debenhams and Next and also American brand Nautica from Planet Retail having FY12 revenue of Rs700mn for a total sum of ~Rs550mn, valuing the acquisitions at ~0.8x P/S. As per the management, these brands are making marginal profit at the store level, but losses at EBITDA/PAT levels due to corporate overheads. Due to the losses coupled with aggressive Rs1.5bn expansion, we believe the latest acquisitions would exert pressure on free cash flow and return ratios in the near term. Accordingly, we have increased our revenue estimates by 0.8%/1.7% but cut EBITDA and PAT estimates by 0.8%/3.5% and 10.9%/22.8% for FY13E/FY14E, respectively. We have rolled forward our valuation to FY14 estimates (from FY13) and factored in lower free cash flow/return ratios due to aggressive capex. We have retained our Buy rating on Arvind with a revised SOTP-based TP of Rs92 (from Rs97 earlier
Expanding its reach: Arvind caters to all segments of consumers - mass market, premium market and bridge to luxury market. However, its presence in bridge to luxury market was limited, with only two brands Gant and Energie. With the latest acquisition of brands (in India), particularly Nautica, its portfolio in bridge to luxury market will strengthen. Debenhams will enable Arvind to foray into bridge to luxury department stores and Next will facilitate entry into apparel specialty retail chain. This will strengthen Arvind’s market share in women and kids wear segment. The management has stated that apparel specialty segment is growing fast and the company is planning to compete with brands like Zara etc. Brief details about brands: Next is UK-based most valuable retailer with ~US$5.3bn revenue and 500 stores in the UK and 180 stores spread across 30 countries. In India, Next started its operations in September 2006. Debenhams is UK’s leading lifestyle department store with ~US$3.4bn revenue and 169 stores in the UK and 66 international franchise stores in 25 countries. It offers a unique combination of own brands and international brands. Established in 1983, Nautica, with revenue of ~US$1.6bn, is a global lifestyle brand in the casual wear space with 200 stores spread across 70 countries. Aggressive Brands and Retail division’s growth to pressure free cash flow, RoCE: Currently, Debenhams/Next/Nautica have 2/3/11 stores in India (see Exhibit 2) and Arvind would set up 6/9/30 stores, respectively, apart from 70 shop-in-shop (SIS) stores for Nautica in the next three years. Arvind plans to increase total stores to 131 (stores plus SIS) from 16 currently in the next three years. Including acquisition costs of ~Rs550mn, Arvind would invest Rs1.5bn on these brands over the next three years and increase its revenue from Rs700mn in FY12 to Rs3,000mn/Rs5,000mn in FY15E/FY17E, respectively. The management plans to increase B&R division’s revenue from Rs16bn to Rs50bn over FY12-FY17E, including Rs20bn from inorganic growth opportunities. It has planned an investment of Rs10bn over the next five years. Such an aggressive capex plan for the B&R division would exert pressure on free cash flow and RoCE. We have increased our capex estimates for FY13E/FY14E but cut free cash flow assumptions from Rs2,468mn/Rs2,017mn to Rs794mn/Rs247mn, respectively, for the same period.
Valuation
Arvind trades attractively at 7.9x/6.6x FY13E/FY14E P/E and 5.8/5.1x EV/EBITDA, below the mean of 8.1x/6.5x, respectively. We have rolled forward our valuation to FY14 estimates from FY13 and reduced our target multiple for textile/B&R divisions to 5.0x/7.0x EV/EBITDA from 5.5x/8.0x, respectively, to factor in lower free cash flow and pressure on return ratios. Resuming operations after a strike by the workers recently, its textile plants are running at full capacity since 1 July 2012 and hence margins are expected to bounce back to 16.0% in 2HFY13 from 14.7% in 1QFY13, while its B&R division has witnessed improvement in margins as well as revenue on a sequential basis. Following better performance on sequential basis, we expect a re-rating of the valuation multiple. Based on 5.0x FY14E EV/EBITDA of textile business and 7.0x FY14E EV/EBITDAE of B&R business, we have valued core business at Rs82 per share. Arvind has a huge land bank of ~500 acres and it is planning to monetise it, either through developing land parcels or selling land parcel in bits and pieces. According to the management, the value of its land after development will be around Rs10bn i.e. Rs39 per share. We have valued the land parcel at 25% (earlier 33%) of its net asset value of Rs39 in our target price. The management expects to receive Rs1.0bn-1.5bn cash flow from its real estate venture each year in FY13E/FY14E, which should support its cash flow. We have retained our Buy rating on the stock with a revised SOTP-based TP of Rs92 (from Rs97 earlier).
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