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 of a wide portfolio of branded men, women, and kids’ readymade apparel, footwear, innerwear, and other accessories via EBOs, MBOs, LFS, and e-commerce platforms. Via a combination of capital raises, portfolio rationalisation (exiting of non-performing and non-core brands), and margin improvement (more than 300bp expansion over FY20–23), the management turned around the business. We expect a revenue/EBITDA CAGR of 12%/22% (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. We initiate coverage with a ‘BUY’ rating and TP of INR660 (11x FY26E EV/EBITDA), which offers an upside potential of 48%.
Portfolio rationalisation led to focus on core brands
Over the years, ARVINDFA 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. We expect USPA to reach ~INR2,000cr in revenue in FY24. Its PVH portfolio (TH and CK) posted sales of INR1,000cr in FY23 and should grow at a healthy rate going forward. With a double-digit pre-Ind AS EBITDA margin, these three brands are generating healthy operating cash flows. It aims to scale up its Arrow and FM brands given the huge potential for growth and margin improvement. We expect 12% consolidated revenue CAGR over FY23–26 led by store expansion, premiumisation, and expansion into adjacent categories.
Improving operating metrics
With the focus shifting to its core brands, margin expanded by ~500bp over 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. 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. It 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. As a result of margin expansion and an improved working capital cycle, it posted a double-digit RoCE in FY23. ARVINDFA aims to achieve more than 20% RoCE in the medium-term driven by further improving margin and the working capital cycle. We expect an EBITDA/PAT CAGR of 22%/91% over FY23–26 driven by margin expansion and lower debt levels.
Valuation deserves a premium multiple given its better overall performance
ARVINDFA choose to focus on to portfolio rationalisation and operational efficiencies rather than growth. This led to a 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 INR660.
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