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Business News/ Market / Mark-to-market/  The Arvind-Calvin Klein affair
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The Arvind-Calvin Klein affair

Triggers for a sharp outperformance by Arvind stock appear limited in near-term

Arvind’s shares have gone up 12% after the joint venture announcement. Premium
Arvind’s shares have gone up 12% after the joint venture announcement.

A subsidiary of textile and apparel firm Arvind Ltd has entered into a joint venture (JV) with Calvin Klein Inc. It has acquired a 49% stake by replacing the earlier JV partners. The JV is expected to focus on the expansion and distribution of the existing Calvin Klein jeans, apparel, accessories and innerwear.

Arvind will shell out about 90 crore for this deal. According to the company, the deal has been valued at an enterprise value (EV) of about 180 crore, at 8-10 times FY15 EV/Ebitda multiple. Ebitda stands for earnings before interest, tax, depreciation and amortization.

However, analysts worry that the deal is expensive based on this year’s estimates. “At an EV of 180 crore, the company has acquired 49% stake at an expensive valuation of about 16 times/1.4 times FY14E, EV/Ebitda and EV/sales, respectively, assuming about 9% Ebitda margin on revenue of 125 crore," pointed out a note from Nirmal Bang Institutional Equities.

But shareholders do not seem to be too perturbed. Arvind’s shares have gone up 12% after the JV announcement. For one, the size of the deal is comparatively smaller. Let’s consider what’s on the table for Arvind with the Calvin Klein tie-up? Calvin Klein is a very well recognized brand and will be a good addition to Arvind’s brand portfolio. Arvind expects the deal to strengthen and enhance its position in the jeans and innerwear category.

The company also maintains that there is scope for margin improvement from the current high single-digit margin that Calvin Klein enjoys in India. All this will of course boost earnings to that extent and offer scope for enhanced scale of operations.

Meanwhile, at the current price, Arvind’s shares trade at about ten times its estimated earnings for the next financial year. While valuations do not appear demanding, investors seem to be factoring in much of the positives. Triggers for a sharp outperformance appear limited in the near-term.

Analysts remain cautious on the growth of the brands and retail business on account of weak consumer sentiment. The company derived 28% of its consolidated revenue from the brands and retail segment for the nine months ended December but its contribution to profits is much smaller.

Arvind’s textile business drives most of its remaining financial performance. High debt on the books is another concern.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 26 Mar 2014, 07:55 PM IST
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