Rahul Arora Puts A Buy On Renuka Ramnath’s Favourite Stock

Renuka Ramnath’s investment strategy is to find reputed and well managed companies that are growing at a steady pace and to hold them for a long time.

This simple but effective strategy has helped Renuka Ramnath rake in big gains for her Multiples Equity Fund.

Multiples is one of the largest shareholders of Arvind Ltd. As of 31st March 2015, it holds 108,00,000 shares which are worth about Rs. 257 crore at the CMP of Rs. 238.

Multiples bought a large part of the stock (98 lakh shares) on 1st January 2014 at Rs. 149 each. At the CMP of Rs. 238, gains of nearly 60% are on the table.

Arvind reported so-so Q4FY15 results. The stock has been weak and has lost about 22% in the past three months.

Rahul Arora of Nirmal Bang has advised that the time is opportune to take advantage of the weakness in the stock. The points that he has made in support of his investment thesis can be summarized as follows:

(i) Market perception is changing that Arvind is not just a “textiles” player but is a “retail brands” player with four power brands such as Tommy Hilfiger, Arrow and Flying Machine;

(ii) The brand retail division enjoys a 5-5.50 margin currently. This will improve to about 8.5% over the next two years;

(iii) Though the company has high debt at present, it is expected to have an operational cash flow of about Rs 900 crore or so over the next two years which will help to repay the debt;

(iv) Aggressive capex is not expected in the foreseeable future;

(v) The return on capital employed overall is expected to go up on a pre-tax basis by about 200 basis points;

(vi) Arvind is at a very substantial discount (EV to EBITDA or EV to sales) in comparison to V-Mart, Shoppers Stop, Kewal Kiran etc;

Rahul has advised a buy on the basis that there is a 35-40 percent upside from the current price.

It should be noted that Arvind is the franchisee in India of GAP, the US based apparel retailer giant. According to a news report, GAP is targeting Rs 1,000 crore revenue in the next 5-6 years as it readies to debut in the country.

“Gap will be a Rs 1,000 crore revenue opportunity in the next 5-6 years. Gap’s first store will be launched in Delhi on Saturday,” Arvind Lifestyle Brands’ Managing Director, J Suresh was quoted as saying.

On future plans, Suresh said: “We are looking at opening 10 stores with an investment of Rs 100 crore by mid of next year. Store openings will depend on space availability but we plan to focus on Delhi, Mumbai and Bangalore for Gap’s first 10 stores.”

Arvind Lifestyle Brands plans to open 40 stores in five years in top 15 cities of the country.

“Only after we have opened 40 stores, we will think at opening stores at smaller towns,” he added.

The report also added that Gap’s full range of clothing and accessories for men, women and kids will be available in its stores in the country.

So, one has to agree with Rahul Arora that Arvind does sound like an interesting investment opportunity.