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  • 5 factors that can drive a 50% gain in Arvind stock

    Publish Date: October 10, 2018

    It could very well be called ‘paanch ka dum’. Shares of Arvind Ltd., the flagship company of Lalbhai Group, could go up 50% from current levels if five factors play out well. The stock could touch Rs 450 if these engines start revving. Let us see which five factors can take Arvind shares up, up, and away.

    Demerger boost

    It is widely known that when a company demerges its unit, more value is created. Arvind Ltd. is also witnessing a demerger process and this is at its final stage. The process of the demerger is with regard to Arvind’s branded apparel and engineering business. The hearing process is already complete; only the decision is awaited. In the branded apparel business, the company has its international licensed brands (such as US Polo, Arrow, Tommy Hilfiger, Calvin Klein, etc) and in-house brands (such as Flying Machine, Colt, Ruggers, etc). The listing of demerged apparel and engineering businesses under the names Arvind Fashions and Anup Engineering, respectively, is expected in the next few months. This could drive the stock up.

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    Festive fervour

    It is expected that Arvind’s branded apparel business will pick up pace in the second half of this financial year on account of festive demand. The company has already witnessed 14% growth in the apparel business in the first quarter. In the second quarter, the segment may grow at a moderate rate. It is likely to be stronger in the second half of the year (Q3 and Q4). The third quarter will see business arising from major festivals in the months of October and November.

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    The company management told us that it is positive on achieving its 20–24% revenue growth guidance for the branded apparel business. The company’s power brands like Arrow, US Polo, and Flying Machine are doing well. In addition, GAP and Sephora are said to be performing well too. The company’s retail stores under the brand name ‘Unlimited’ are also profitable. The company is positive on the apparel business and aims to clock revenue of Rs 9,000 crore in the next four to five years.

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    Merry margins

    Arvind Ltd. is positive on improving the margins of its branded apparel business. This improvement in margin, which should have a direct bearing on its profit, is based on an improvement in operating leverage and all of its brands turning profitable. The company has maintained a 10% growth guidance in the textile business with a flattish margin. But it is projecting the branded and retail business to see 20–24% growth, with 100 bps improvement in the margins. We have assumed revenue compound annual growth rate (CAGR) of 17% in the branded apparel business, 8.9% in the textiles, and 17.5% in engineering. Our estimates show that there will be a 200 bps EBITDA (earnings before interest, tax, depreciation and amortisation) margin improvement in the branded apparel business, 160 bps in textiles, and 90 bps in engineering in the period from FY18 to FY20.

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    Engineering energy

    We feel that Arvind Ltd.’s engineering business can achieve high growth in the longer run. While the company has projected 10–12% growth in revenue in the engineering business with margins at the 20% level, this growth guidance is based on the current order book and the near-term pipeline. In the long term, the company is positive on the business. It aims to target revenue of Rs 1,000 crore in the next five to six years. Arvind Ltd. has built up a capability to manufacture critical process equipment, and it caters to big clients in the oil and gas, petrochemicals, fertilisers, and pharma sectors. It also has a net cash balance sheet and has been generating healthy cash flows, which is a hallmark for any good business.

    Advance materials

    Arvind Ltd. is well positioned to benefit from the huge growth potential of advance materials. The company has reported strong performance in advance material, which was earlier part of the company’s textiles and others segment. This segment is expected to grow at a faster pace in the long run. We feel it has a potential to achieve Rs 1,500 crore revenue in the next four to five years, up from Rs 480 crore in FY18. Arvind Ltd. is catering to various segments under this division. These include human protection products such as firefighting jackets, bulletproof jackets, etc. It also deals in composite products for railway coaches and automobiles, as well as in belting for industries. This segment can give a good boost to its business and may help the stock go higher.

    Valuations: We maintain a 'buy' recommendation on the stock with a revised sum of the parts analysis-based target price of Rs 450.

    Investors should also note that among the risks and concerns highlighted by us are any major revision in licensing terms of foreign brands, lower export incentives, and raw material or forex volatility.

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