CSEC Research: Arvind - Buy

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 Arvind

·         Arvind’s business is broadly classified into Textiles (69%), Brand & Retail (28%) and others (3%). In India, Arvind sells international brands such as Arrow, US Polo Associate (USPA), Tommy Hilfiger (JV brand), Calvin Klein (JV brand), IZOD, Elle, Cherokee, GANT, Hanes, Billabong, Wonderbra, Ed Hardy, Geoffrey Beene, Nautica etc.

·         Company has a strong distribution network of 945 stores with a retail space of ~1.63mn sq.ft. (Brands: 800 stores with ~0.79mn sq.ft retail space & MegaMart: 145 stores with ~0.84mn sq.ft. retail space) and 923 key account counters.

·         In October 2013, Ralph Lauren Corp had instituted a suit in the US district court against US Polo Association, USA (USPA) and Arvind Ltd alleging breach of agreement between Ralph Lauren, USPA and Arvind Ltd on account of non-compliance in respect of disclaimers to be printed on USPA products sold in India. Company has informed that the suit has been amicably settled without admission of liability of any party. Under the terms of settlement Arvind Lifestyle Brands Ltd, subsidiary of Arvind Ltd shall pay US$3.2mn (INR 0.77 per share) in full settlement and satisfaction of the dispute between the parties.

·         Strong traction in power brands to continue and we expect the revenue to grow at a CAGR of 25% from INR 11.85bn in FY14 to INR 23.15bn in FY17E with a margin improvement of 50 bps.

·         Megamart restructuring is expected to complete by 1HFY16 and its revenues is expected to grow at a CAGR of 9.2% from INR 5.6bn in FY14 to INR 7.3bn by FY17 and margins are expected to increase from 2.8% to 5%.

·         Company is creating a second line of power brands and expects the newly acquired brands to breakeven by early FY16 and contribute to the bottom line.

·         Outlook & Valuation: Currently the stock is quoting at EV/EBITDA of 7.7XFY16E & 6.5XFY17E respectively. We rate Arvind as a BUY with a target price of INR 330 per share indicating an upside of 24%.

·         Risk: Delay in Turning around of Megamart and other business; unfavorable currency movement; adverse cotton price movement; delay in capacity expansion; slowdown in domestic and export markets.

Regards,

CSEC Research