Arvind - Inviting Valuations amid Growing Capacities - Karvy

Arvind underperformed the benchmark Sensex & BSE Mid-Cap Index over the last 1 year due to subdued consumer sentiment in FY13 coupled with pressure on margin seen in its Brands & Retail division. However, we are optimistic on consumer sentiment with some good signs coming from Q4FY13 numbers marked with improving margins. Again, compared to its peer-group, Arvind trades at lower valuations of 6.6x FY15E EPS & 5.0x FY15E EBITDA. Hence, we believe that the current valuations provide an attractive entry, as the stock would command higher valuations, going forward.

Diversified Denim & Woven Portfolio: Arvind has a diversified and premium portfolio in Denim & Woven segments. It is ranked amongst the Top-3 fully-integrated Denim manufacturers globally and is the largest woven manufacturer in India. Its Denim & Woven capacities are likely to grow by 7% & 15% CAGR respectively in FY13-15E.

Relief on Excise Duty to Aid Retail Biz: Arvind has a portfolio of ~29 brands - 13 owned, 15 licensed & 1 JV & also owns Megamart (retail chain). It plans to tie-up with growth segment brands, filling up vacant segments sans cannibalizing its existing portfolio. Moreover, the complete removal of Excise Duty from branded apparel should boost profitability in Brands & Retail (MegaMart) businesses.

Strong & Expanding Distribution Network: Arvind has strong distribution network comprising of ~750 retail stores across 150 cities. It has presence in 700 MBOs & 656 departmental store in India and 7 retail stores & 113 counters at departmental stores in Middle East & South Africa. It plans to increase its retail space by 15-18% YoY over next 2-3 years to tap growing retail potential.

Divestment in Realty Biz: Arvind is expecting Rs. 7-8 bn net cash-flow in six years period from sale proceeds of land and revenue from JV development, while a significant pipeline build-up and revenue booking will kick-in from FY14 onwards. We believe cash-flows from realty divestment would act as a cushion for expanding operations.

Outlook & Valuation

Arvind's revenue and EBITDA are likely to grow 13.5% & 15.1% CAGR, while its PAT would grow by 11.8% CAGR in FY13-15E on higher tax payments. At CMP of Rs. 80, the stock trades at 6.6x & 5.0x FY15E EPS & EV/EBITDA, respectively. Valuing at 5.5xFY15E EV/EBITDA, we initiate coverage on Arvind with “BUY” recommendation with target price of Rs. 103 per share, having 29% upside potential.

Source : Equity Bulls

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