Arvind Mills - Acquires 49% stake in Calvin Klein India for INR0.9b - Motilal Oswal

Re-iterates Arvind's transformation into a brand power house

Arvind buys 49% in CK India JV; parent PVH to own balance 51%

Arvind Brands and Retail Ltd (100% subsidiary of Arvind Ltd) has entered into an agreement to purchase 49% stake in Calvin Klein India from erstwhile JV partners (Murjani Group and Matrix Partners) for a consideration of INR0.9b. While Arvind will own 49%, the balance 51% will continue to be owned by Calvin Klein's global parent Phillips Van Heusen Corp (PVH). The deal values CK India at an Enterprise Value of INR1.8b, at 8-10x FY15 EV / EBITDA multiple.

Calvin Klein is well known and a highly scalable brand

Calvin Klein brand is one of the top three most coveted brands globally. CK India revenues stand at ~INR1.25b and have grown at a 30% CAGR over the last 3 years with an EBITDA margin of ~8%-9%. CK runs 41 stores in India with an average store size of 1,000 sq. ft each, all of which are franchise based apart from having 34 shops in shops. It derives 90% of revenues come from Jeans (80% men's and 20% from women's), while balance 10% come from Innerwear. Around 70% of revenues come from EBOs while balance 30% comes from MBOs and departmental stores. Management plans to add around 15 EBOs p.a. over next 2 years and also leverage its existing departmental stores and MBOs network to attain 30-35% CAGR. With most store additions being added in franchise model complimented with aggressive scale up across MBOs, margins are set to improve to 14% in FY15 with capex intensity remaining low. Arvind and PVH will have equal managerial involvement in growing the CK brand in India.

CK acquisition to further drive product extensions

Post CK acquisition, Arvind will command a 90% market share in one of the fastest growing 'Bridge To Luxury' segment (with a strong portfolio of Tommy Hilfiger, Gant, Nautica and CK). With brands like Calvin Klein, Tommy Hilfiger, US Polo, Ed Hardy and Flying Machine, Arvind has a complete portfolio of denim brands with price points from INR750 to INR10,000. CK as a brand has universal appeal and hence Arvind plans to introduce CK accessories immediately; followed by formal wear and suits in the medium term. Meanwhile Arvind now has a very strong innerwear portfolio spanning brands like Hanes, CK, US Polo and Tommy which it plans to scale up to INR1.5b sales / INR5.0b by FY15 / FY18.

Valuation and view: maintain Buy

While we upgrade our EBITDA assumptions marginally, we believe that the acquisition of CK provides huge scalability potential with improvement in brands and retail margins going forward. Given decade high return rations and increased contribution from brands and retail segment, we value ARVND at 6x FY16E EV/EBITDA and arrive at a target price of INR215. Maintain Buy.

Source : Equity Bulls

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