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Stock Recommendation | ARVIND LTD – BUY – Target Price : 452
Publish date: NOVEMBER 5, 2018
Arvind reported inline Q2FY19 results on like to like basis with margin in advance materials and apparel business improved on yoy.
■ Consolidated Net Sales (including discontinued operations of branded apparel & engineering) grew by 11.6% to Rs 30.5 bn as compared to our expectation of Rs 28.6 bn, driven by 6% yoy growth in textiles segment, 21% yoy growth in advance material business segment and 13% yoy in branded apparel (on like to like basis, adjusted for Ind AS changes).
■ Textiles business grew at slower pace due to decline in denim volume on back of lower demand while growth in Branded apparel business was slower at 13% due to shift in festive season.
■ EBITDA margins for the quarter grew by 110 bps yoy on like to like basis to 9.1% driven by sharp improvement in the margin of advance materials by 800 bps, 60 bps improvement in EBITDA margins of branded apparel, etc.
■ The company has broadly maintained its guidance at consolidated level including discontinued operations.
■ We have updated our estimates based on restated segmental breakup given by the company for all entities.
■ The stock is presently trading at FY19E/20E PE of 19.0x/13.5x based on revised EPS of Rs. 17.2/24.2 respectively. We maintain BUY recommendation on the stock with revised SOTP based target price of Rs 452 (Vs Rs 450 earlier).
Consolidated Net Sales (including discontinued operation of branded apparel & engineering) grew by 11.6% to Rs 30.5 bn as compared to our expectation of Rs 28.6 bn, driven by 6% yoy growth in textiles segment, 21% yoy growth in advance material business segment, 9% yoy growth in branded apparel (13% on like to like basis, adjusted for Ind AS changes) and 2% in engineering segment and 161% in others segment. Textiles business grew at slower 6% yoy rate led by decline in denim volume while garments segment grew by 15% on yoy basis. Decline in denim business is due to lower consumer demand faced by its customers in the quarter led by high base of last year due to festive season. Further, the industry is facing over supply, aggression in pricing and higher credit offered by some of the peers (who have surplus capacity) which impacted the volumes in the segment.
Branded apparel business grew by 13% yoy on like to like basis to Rs 11.6 bn (Vs reported Rs 12.3 bn). The segmental reported revenue for the quarter stated higher due to IndAS and GST related adjustment. Adjusted EBITDA for the segment grew by 21% to Rs 760 mn. Power brands for the quarter grew at 13% yoy, Unlimited grew by 4% and other brands grew by 20%. In the quarter, the growth in branded apparel business was impacted due to shift in festival season to Q3 from Q2 in last year. As per management, LTL (like to like) was double digit in July, with tepid August and negative LTL in September 2018. The growth in branded apparel business is expected to be strong in H2FY19 particularly in Q3FY19 due to major festivals in the month of October and November 2018. Growth in unlimited is expected to pickup in coming quarter as the company is focusing on increasing sales after rolling out stores aggressively in the previous quarters. The company expects 12% LTL growth in 5 week of festival season as LTL has improved in Dusshera.
EBITDA margins for the quarter grew by 110 bps yoy to 9.1% resulting EBITDA growth of 27.2% on yoy. This was driven by sharp improvement in the margin of advance materials segment (by 800 bps), 60 bps improvement in EBITDA margins of branded apparel and other segment reporting positive margins as against loss in the last year same quarter. Branded apparel business reported improved margins on account improvement in margins in other brands and unlimited business. The margins in power brand was 30 bps lower in the quarter due to increased ad spend by 90 bps while sales grew at slower pace for the segment. But the management is positive on improving margins in power brand to ~15% by FY20E in the longer run. The company has maintained its guidance of 100bps improvement in margins in branded apparel segment with its brands turning profitable or breaking even at operating level, except GAP which is reporting losses.
The margins in the textiles segment declined by 70 bps yoy on account of lower drawback rate, decline in volume of denim segment and lower margins in Euthopia due to low price currency hedge. As per management, the margins in H2FY19 in the textiles segment would improve as realization would be near to market rate.
The company has maintained revenue guidance of ~10% for Arvind Ltd (the continued business of textiles, advance materials and others) with slower growth rate of 5-6% in textiles due to lower denim sales. On the other hand, Advance materials segment is expected to grow at 24% on yoy. The company has maintained 100bps improvement in EBITDA margins in Arvind led by sharp improvement in margins of advance material segment (from -1% in FY18 to 9% in FY19E) while textiles margins is expected to be lower by 80bps.
The company has guided for ~20% growth in branded apparel business (Arvind Fashions) as against earlier guidance of 20-24% yoy growth driven by Power Brands to maintain momentum, improved sales in Unlimited and traction in Innerwear business on full year basis. The company expects 100 bps improvement in margins in the business despite increase in marketing investment by about 0.5%. Revenue growth guidance for engineering business is maintained at 10-12% with flattish margins.
■ As per company, Certified order from NCLT expected in 1st week of November 18 and expect the demerger to become effective by end of November 18 with 29th November likely to be the record date. Likely listing of Arvind Fashions & Anup Engineering is expected in early February 2019.
■ The company has reported strong performance in advance material which was earlier part of textiles and others segment. The segment is expected to grow at over 20% in the longer run and has potential to achieve Rs 10 bn revenue.
■ The company has net debt of Rs 35.6 bn at the end of Q2FY19. As per management, the debt across businesses is expected to remain at these level by the end of FY19 on consolidated basis.
■ The company has maintained capex guidance of Rs 15 bn for continued operations.
We have updated our estimates based on restated segmental breakup given by the company for all entities. In our projections, we have included performance/ estimates of discontinued operation for like to like comparison based on the breakup given by the company for discontinued operations of branded apparel and engineering. We will come out with separate financial numbers for each of the businesses once demerger process gets completed and branded retail business under Arvind Fashions Ltd and engineering business under Anup Engineering Ltd gets listed.
We expect company’s revenue and PAT to grow at a CAGR of 14.8% and 40.9%, respectively in FY18-20E driven by revenue CAGR of 9.1% CAGR in Arvind (continued operations), 18% in Arvind Fashions and 12.5% in Anup Engineering with EBITDA CAGR of 11.9% in Arvind, 38% in Arvind Fashions and 8.3% in Anup Engineering.
The stock is presently trading at FY19E/20E PE of 19.0x/13.5x based on revised EPS of Rs. 17.2/24.2 respectively. We have valued Arvind on sum of the parts basis (SOTP) where we have assigned FY20E EV/EBITDA multiple of 15x to the branded apparel business, 8x to the textile business and 12x to the engineering business. We maintain BUY recommendation on the stock with revised SOTP based target price of Rs 452 (Vs Rs 450 earlier).
Arvind Ltd, founded in 1931 by Lalbhai family, is a leading textiles company with interest in Textiles, Branded Apparel and Accessories, Engineering, etc. The company manufactures and sells about 300 million meters (mn mtr) of fabrics and over 30 mn pieces of garments (FY18). In branded apparels business, the company’s own brands such as Flying Machine, Colt, Ruggers and Excalibur, etc. It also has a portfolio of licensed brands which includes US Polo Association, Arrow, Tommy Hilfiger (TH), Gap, Calvin Klein (CK), Hanes, Gant, Nautica, Izod, Ed Hardy, Elle, Cherokee, The Children’s Place, Aeropostale, etc. It also owns the value chain ‘Unlimited’ and is the franchise partner of the world’s largest beauty retailer ‘Sephora’. In engineering business, it designs and manufactures critical process equipment for petrochemical, fertilizer, power and other process industries.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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