After an almost 18 percent rise in Arvind Fashions just in January, brokerage house Nuvama sees another 38 percent upside in the next 1 year. The brokerage believes the firm is perfectly positioned for a valuation re-rating.
The brokerage has initiated coverage on the stock with a ‘buy’ rating and a target price of ₹660.
Arvind Fashions (ARVINDFA) has a strong portfolio of brands like U.S. Polo Assn. (USPA), Arrow, Tommy Hilfiger (TH), Calvin Klein (CK), and Flying Machine (FM). It is into designing, sourcing, marketing, and selling a wide portfolio of branded men's, women's, and kids’ readymade apparel, footwear, innerwear, and other accessories via EBOs, MBOs, LFS, and e-commerce platforms.
"Arvind Fashions choose to focus on portfolio rationalisation and operational efficiencies rather than growth. This led to better margin and return ratios. We expect its USPA, Arrow, CK, and TH to benefit from the ongoing premiumisation drive in India. The management is focusing on portfolio extension and a foray into adjacent categories which are growing at a healthy rate. These extensions are expected to provide a strong lever for growth and margin expansion. Given the growth opportunities, execution capabilities, quality management, category extensions, and improved operational performance, we initiate coverage with a ‘BUY’ rating and TP of ₹660," said the brokerage.
The brokerage expects revenue and EBITDA CAGR of 12 percent and 22 percent (ex-Sephora) over FY23–26, led by retail footprint and margin expansion. This counter deserves a valuation re-rating given its portfolio of marquee brands, lean balance sheet, and ample room for margin expansion, said the brokerage.
The brokerage has gained 44 percent in the last 1 year. It has already jumped 18 percent in the 10 sessions of January after an almost 7 percent fall in December.
It gave positive returns in 6 of the 12 months last year and was in the red in the remaining 6 months. It gained the most in November, jumping over 36.5 percent, followed by June, up 24.6 percent. Meanwhile, it shed the most in February, down 13.3 percent, and January, down 7.5 percent.
The stock hit its 52-week high of ₹493.70 last week, on January 12, 2023. It has now advanced 89 percent from its 52-week low of ₹261.05, hit on March 14, 2023.
In the September quarter, the firm reported a rise of 32 percent in net profit at ₹37 crore, compared to ₹28 crore, in the corresponding period last year. Its revenue from operations in the second quarter of the current fiscal stood at ₹1,266.9 crore, registering a growth of 7.2 percent, compared to ₹1,181.8 crore in the year-ago period.
On the operating front, the company's earnings before interest, taxes, depreciation, and amortisation (EBITDA) in the September quarter came in at ₹147.3 crore, registering a growth of 26.8 percent, compared to ₹116.2 crore in the year-ago period.
Arvind Fashion's gross margin registered an expansion of ~510 basis points (bps) year-on-year (YoY) to 49.5 percent led by retail LTL growth of 9 percent and higher retail channel mix by 400 bps. EBITDA margin improved by 50 bps despite higher advertising spending of 100 bps YoY.
Strong portfolio of brands: ARVINDFA has a portfolio of marquee brands that command huge brand recall among its consumers. These brands will benefit from the rise in per capita income in India and the current premiumisation play. The management has a clear strategy for expanding the footprint of these brands and entering Tier II and III cities in India where the potential remains untapped given the absence of many options for consumers. It has a portfolio of five industry-leading brands — USPA (mid-premium category) TH (premium category), CK (super-premium - which acts as a bridge between the premium and luxury segments), Arrow (mid-premium and premium) and FM (value to mid-premium). All these brands have achieved sizeable scale, with good visibility among consumers). Its next step will be to grow these brands, noted the brokerage.
Portfolio rationalisation led to focus on core brands: The brokerage noted that over the years, Arvind Fashions has exited multiple loss-making brands. Brand consolidation resulted in a healthy debt reduction and margin expansion. The focus is on running and expanding its core brands. Nuvama expects USPA to reach ₹2,000 crore in revenue in FY24. It expects a 12 percent consolidated revenue CAGR over FY23–26 led by store expansion, premiumisation, and expansion into adjacent categories.
Improving operating metrics: As per the brokerage, with the focus shifting to its core brands, the margin expanded by 500 bps over the last five years, aided by portfolio rationalisation and greater operating efficiencies. The management is eyeing a 100–150bp expansion over the next couple of years, led by an improvement in gross margin and positive operating leverage. The working capital cycle significantly improved to 43 days in FY23 from 72 days in FY20. Inventory turns rose to 4x from the lows of 2x. The firm aims to improve it to 4.5-5x. A superior retail channel mix and better collections led to a fall in debtor days to 46 days in FY23 from 74 days earlier, stated Nuvama. As a result of margin expansion and an improved working capital cycle, it posted a double-digit RoCE in FY23. The firm aims to achieve more than 20 percent RoCE in the medium term driven by further improving margin and the working capital cycle, added the brokerage.
Over FY23–26, Nuvama expects a 12 percent revenue CAGR (ex-Sephora) led by: i) aggressive store expansion, ii) premiumisation, iii) growth in its adjacent categories, and iv) focus on the growing Arrow and FM brands.
It sees operating margin touching 14 percent in FY26 and a margin expansion of 340 bps over FY23–26 aided by exiting non-performing brands, scaling up of its current brand portfolio, operating leverage, and premiumisation.
It forecasts a 91 percent PAT CAGR over FY23–26. With improved financials, it expects enhanced return ratios and a RoCE and RoE of 23 percent and 20 percent by FY26.
In the last 24 months, the firm has rationalised its portfolio and now has an array of strong brands that cater to value, mass premium, and super-premium categories, observed Nuvama. Despite selling some of its brands over the years, EBITDA CAGR stood 15 percent in the last five years, with a 480bp expansion EBITDA margin on account of operating leverage due to scaling up of marquee brands, full price sell-throughs resulting in higher gross margin and better operational efficiencies, it noted.
It expects a margin expansion to play out on account of its adjacent categories and scaling up to ₹1,000 crore (from ₹500–600 crore inFY24), which will lead to the economics of scale; premiumisation in brands such as USPA, TH, and CK; and scaling up of Arrow and FM driven by store expansion. Arrow and FM have room to expand the margin as they scale up, added Nuvama.
The stock deserves a premium multiple, given its portfolio of brands which are market leaders; enough room for margin expansion; high double-digit return ratios; and expansion plans that provide ample scope for growth, said the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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