Redefined business model yielding consistent results
About the stock: Arvind Fashions Ltd. (AFL) is a multi-brand apparel company. The company operates high value global brands such as US Polo, Tommy Hilfiger, Arrow and Calvin Klein under license agreement while it has its own in-house leading denim brand Flying Machine. The company operates through 1025 Retail outlets with over ~13.3 Lakh sqft store space and also through 9000+ MBOs and departmental stores. Q4FY26 Performance: AFL’s revenues grew by 14.8% YoY to Rs.1364.8cr in Q4FY26. Mid-teen revenue growth was driven by 15% growth in retail business (LTL growth of 7.8%) and 46% growth in the online business B2C business. Gross margins improved marginally by 19bps YoY to 54.1%. This along with better channel mix led to 51bps expansion in the EBIDTA margins to 13.9%. Consolidated EBIDTA grew by 19.2% YoY to Rs189.2cr. PAT from continuing operations grew by 56% YoY to Rs42cr vs. Rs25cr in Q4FY25.
Investment Rationale:
• Revenues to grow by 12-15% in FY27: AFL’s revenues grew by 14% YoY to Rs5,266.2cr driven by 14% growth in the retail business (driven by high single digit LTL growth) and Online B2C grew by 45% coupled with strong growth in adjacencies under key brands. Management has guided for 12- 15% revenue growth for FY27 driven by sustained retail expansion (to add 1.3-14 lakh sq.ft p.a.), high single digit retail LTL growth and 20-25% growth in online B2C business. On the brand front, premium brands such as US Polo and Tommy Hilfiger are expected to grow in mid-teens while Calvin Klein will maintain double digit growth. Flying Machine has witnessed good recovery in FY26 and expected to deliver double digit LTL growth on its retail platform. Arrow to witness recovery in FY27.
• EBIDTA margins to expand by 30-40bps in FY27: AFL’s EBIDTA margins improved by 35bps YoY to 13.4% in FY26. Its gross margins improved by 90bps YoY due to better mix, strong sourcing capabilities and higher sales of low discount products. Despite global uncertainties and volatility in the raw material prices, management expects EBIDTA margins to grow by 30- 40bps in FY27. Advance inventory procurement for SS26, higher dependence on domestic sourcing, selective price hikes and increase in the contribution from D2C channel will help the company to mitigate with near term cost pressure and achieve consistent margin expansion in FY27.
• Redefined business model driving desire results: AFL transformed its business into profitable and efficient business model by rationalising its product portfolio to 5 marque brands, increased focus on scaling up direct- to-consumer sales and strengthening balance sheet by better working capital management. Transformation is delivering desire results 1) registering high single digit to low double digit LTL retail growth for last six quarters 2) High margin D2C business (Retail + Online B2C) contribution increased from 50% in FY24 to 56% in FY26 expected to further improve to 60% over the next two-three years 3) Revenue growth trajectory improved from mid-single digit in FY24 to mid-teens in FY26 and 4) RoCE improved to 26% in FY26 from 19% in FY24.
Rating and Target Price:
Premiumisation and D2C play will help AFL revenues/EBIDTA/PAT to grow by 14%/18%/38% respectively. We recommend Buy with a price target of Rs.595 (valuing at 9x its FY28E EV/EBIDTA).
