Sell Arvind - Nirmal Bang - Arvind Arm Buys 49% Stake in Calvin Klein Licensee In India

Arvind Brands and Retail (ABRL), a subsidiary of Arvind, has acquired a 49% stake in Premium Garments Wholesale Trading (PGWT), the licensee of Calvin Klein (CK) trademark in India, at an expensive valuation of ~16x/1.4x FY14E EV/EBITDA and EV/sales, respectively, assuming a 9% EBITDA margin on revenue of Rs1.25bn. With limited assets and debt of a mere Rs200mn, a major portion of the EV of Rs1.8bn will be reported as goodwill on ARBL's books. At the acquisition price of Rs1.8bn, PGWT is expected to post less than a 6% RoCE in FY14. We remain concerned over aggressive capex and poor allocation of funds by Arvind. Following the acquisition, we have increased our revenue/net profit estimates by 1.0%/1.3%, respectively, for FY15 and 1.1%/0.7%, respectively, for FY16, but expect a marginal moderation in RoCE. We have retained our Sell rating on Arvind with a SOTP-based target price of Rs126, valuing the stock at 7.2x/5.1x FY16E P/E and EV/EBITDA, respectively.

Expensive stake acquisition: PVH Corp, New York, is the owner of CK trademark worldwide. ABRL has replaced PVH's earlier joint venture (49%) partners, (Murjani Group and Matrix Partners) in PGWT, the licensee of CK trademark in India. At an EV of Rs1.8bn, ABRL acquired a 49% stake at an expensive valuation of ~16x/1.4x FY14E EV/EBITDA and EV/sales, respectively, assuming ~9% EBITDA margin on revenue of Rs1.25bn. In the past, Arvind entered into a licensing agreement to market and sell Hanes brand with no upfront consideration, but only royalty payment to the brand owner. In the case of stake acquisition in PGWT, ABRL will pay ~Rs800mn and also continue to pay royalty to the brand owner.

Brief details about CK brand: Calvin Klein Inc is one of the leading fashion design and marketing studios in the world. It designs and markets women's and men's designer collection apparel and a range of other products that are manufactured and marketed through an extensive network of licensing agreements and other arrangements worldwide. In India, the jeans segment accounts for 90% of PGWT's sales and men's innerwear forms the balance 10%. Jeans for men category contributes 80% to jeans revenue, with the women's category accounting for 20%.The company has 41 EBOs (exclusive brands outlets) of ~1,000sqft each and plans to add 15 EBOs every year. ABRL plans to sell CK branded apparel in department stores also. As per ABRL's management, PGWT is expected to report ~30% three-year revenue CAGR at Rs1.25bn in FY14E with a high single-digit margin. With the stake acquisition in PGWT, ABRL will strengthen its bridge to the luxury segment, particularly CK denim jeans (sold at ~Rs7,000/jean pant compared to Rs1,400/jean pant of Flying Machine brand) and CK inner-wear segment.

Weak turnaround in case of past acquisitions: In September 2012, Arvind acquired India businesses of British fashion retailers Debenhams and Next and also American brand Nautica from Planet Retail, which posted FY12 revenue of Rs700mn, for a total sum of ~Rs550mn, valuing the acquisitions at ~0.8x P/S. These three brands were incurring losses at the time of acquisition and they continue to do so even after 18 months of operations under Arvind. The company had planned aggressive Rs1.5bn expansion to ramp up total outlets from 16 at the time of acquisitions to 131 (including 70 shop-in-shop) in three years. With these acquisitions continuing to incur losses, the expansion plan got delayed. We continue to remain concerned over aggressive capex by Arvind and also its effectiveness.

Source : Equity Bulls

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