The textile industry in India is poised to report healthy growth in the time to come. With rising income levels, favorable demographics and the organized retail channel gaining market share, we expect the branded apparel segment to witness robust growth. The company's track record of scaling up licensed brands like Tommy Hilfiger and Arrow in India should allow the company to attract newer licensed brands.
The textile industry in India is poised to report healthy growth in the time to come. With rising income levels, favorable demographics and the organized retail channel gaining market share, we expect the branded apparel segment to witness robust growth. The company's track record of scaling up licensed brands like Tommy Hilfiger and Arrow in India should allow the company to attract newer licensed brands.
The textile industry in India is poised to report healthy growth in the time to come. With rising income levels, favorable demographics and the organized retail channel gaining market share, we expect the branded apparel segment to witness robust growth. The company's track record of scaling up licensed brands like Tommy Hilfiger and Arrow in India should allow the company to attract newer licensed brands.
Brand powerhouse Quality play on the textiles and branded retail segment: With improving economic growth in the developed economies, increasing currency competitiveness and favorable policy support, the textile industry in India is poised to report healthy growth in the time to come. Arvind Ltd (Arvind), with its leadership position in the textile industry, should benefit from the above growth trends. Also, with rising income levels, favorable demographics, and the organized retail channel gaining market share, we expect the branded apparel segment to witness robust growth in the time to come. With a solid pedigree, strong brand portfolio, extensive distribution network and management focus on growth and expansion, Arvind is well poised to participate in the growth opportunity in this segment. Solid brands portfolio, extensive retail reach to drive strong growth: Arvinds track record of scaling up licensed brands like Tommy Hilfiger and Arrow in India should allow the company to attract newer licensed brands. The companys solid distribution network of over 1,500 Multi-Brand Outlets and c.894 retail stores will help it rapidly scale up new brands and register 2013-16E CAGR of 31% in the segments revenue. Textiles segment to support growth: With rising competitiveness, favorable exchange rate and Arvinds dominant global position (ranked amongst the Top 3 fully integrated Denim manufacturers globally), we expect the Textile segment to register c.16% CAGR over FY13-16E. The growth mix is likely to shift in favor of the garments and wovens business as the mature denims business grows at a relatively slower rate. Improved financial performance leads to return up-tick: We project an improvement of over 481bps in ROE to 16.4% by FY16. This will be driven by FY13-16E revenue CAGR of 21% and 132bps EBITDA margin expansion over the same time frame. Initiate with BUY and Mar15 TP of `200: The stock is currently trading at 6.5x FY15E/5.6x FY16E on a EV/EBITDA basis. We expect revenues and earnings to witness CAGR of 21% and 27% respectively over FY13-16E. We initiate coverage with a BUY rating and Mar15 target price of `200 based on 6.5x our FY16 EBITDA estimate, implying an upside of c.27%. 1.
JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters.
Please see important disclosure at the end of the report
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Investment Rationale Quality play on the textiles and branded retail segment: With improving economic growth in the developed economies, increasing currency competitiveness and favorable policy support, the textile industry in India is poised to report healthy growth in the time to come. Arvind, with its leadership position in the textile industry, should benefit from the above growth trends. Also, with rising income levels, favourable demographics, and the organized retail channel gaining market share, we expect the branded apparel segment to witness robust growth in the time to come. With a solid pedigree, strong brand portfolio, extensive distribution network and management focus on growth and expansion, Arvind is well poised to participate in the growth opportunity in this segment. Exhibit 2. Favourable drivers for growth (` bn)
0-4years, 9% 5-9 years, 11% 10-14 years, 11% 15-59 years, 60% 60+ years, 9%
Source: IMF estimates, Census of India, JM Financial
Favourable demographics: The Indian demographic age is ripe for consumption where style dominates utility. The median age of the Indian consumer is 26 years with maximum population lying in the age bracket of 15- 59 years; it is expected that India will add another 140 mn people in the consuming age group by 2020. This population has more aspirations, is more aware, has higher spending power and is expected to consume across a greater number of categories than the previous generation. Higher disposable income: According to the Indian census report, the number of households with an annual income of $7,000 or more is going to treble from about 30 mn today to 100 mn by 2020. There will be c.400 mn individuals in the middle to high income bracket by 2020. Solid brands portfolio, extensive retail reach to drive strong growth: Arvind has a solid track record of scaling up licensed brands (like Tommy Hilfiger and Arrow) in India and this should allow the company to attract newer recognized licensed brands in the time to come. The companys solid and growing distribution network of over 1,500 Multi-Brand Outlets and c.894 retail stores should help it rapidly scale up new brands and register 2013-16E CAGR of 31% in revenue, in the brands and retail segment. Arvind is working towards becoming the top three companies in the Brands and Apparel space in India, with the aim of c.`55bn revenues from brands and retail by 2018, implying 2013-18 CAGR of c.30%.
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Exhibit 3. Brands and Retail- way forward
Source: Company, JM Financial
Solid brands portfolio Strategy in place to expand Arvind has carried out extensive analysis of the developed world brand and apparel success strategies (refer Exhibit 4) and adopted a strategy suitable for the Indian market. Exhibit 4. Developed World Brand and Retail Strategy
Source: Company, JM Financial
In order to become a market leader, Arvinds strategy is to play the Multi Brand, Multi Price Point, Multi Channel Space and Specialty Retail Space (refer Exhibit 5). Exhibit 5. All-encompassing strategy
Source: Company, JM Financial Arvind Limited 7 March 2014
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By combining the multi-brand and specialty retail strategy, Arvind will encompass a unique portfolio that will cover the complete income pyramid in India. With Indian per capita income expected to reach around the apparel inflection point of $2,000-$2,500 by 2020, the strategy is expected to ensure solid revenue growth for the company. As testimony of the success of the hybrid strategy, Middle-East offers compelling evidence (refer Exhibit 6). Exhibit 6. Middle East- Brand Strategy example and Arvinds brand strategy
Source: Company, JM Financial
With sufficient evidence regarding the expansion strategy being pursued by the company, Arvind is well placed to cater to its addressable market size of c.170 mn households. Exhibit 7. Catering to all segments FY13 (%) Menswear, 82% Womenswear, 7% Kidswear, 6% Non-apparel, 5%
Source: Company, JM Financial
Brand strategy execution remains key The brands business is operated under the Arvind Lifestyle Brands Ltd (ALBL) and includes a wide range of owned and licensed international brands. The company plans to execute its group strategy by focusing on creating power brands, which have potential for high growth. Power brands are classified as any brand with more than `1bn in turnover, double digit margins, positive free cash flow and growth of over 20%. Currently, Arrow, US Polo, Tommy Hilfiger and Flying Machine are categorized as power brands and recorded `9.2bn revenue in FY13 with a healthy 10.5% EBITDA margin. The Power Brands segment has recorded 43% revenue CAGR during FY09-13. Total stores for Power brands have quadrupled to 487 (excl. JV) in the last three years. Its recent acquisition of operating licenses for more international Power brands are classified as any brand with more than `1bn in turnover, double digit margins, positive free cash flow and growth of over 20%.
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apparel brands Billabong, Nautica and Hanes - will help expand its offerings in the premium segments. The company is also looking to enter the specialty retail segment shortly. Exhibit 8. Power Brands performance (` mn/%) 36% 61% 59% 21% 0% 10% 20% 30% 40% 50% 60% 70% 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 2009 2010 2011 2012 2013 Power Brands revenue YoY Growth (%)
Management expects the brands and retail segments margins to increase from c.5% in FY13 to 12% by FY16 driven by: Increase in number of high margin power brands to six by FY15 (Nautica and Hanes being added). Company plans to focus on investing in Nautica and Hanes in FY14 and Ed Hardy and Next in FY15. Improvement in power brands margins (Arrow and US Polo enjoy c.14% margins). Retail footprint strength ensures brand reach Arvind has managed to expand the stores in its brand segment from 81 in FY08 to 487 stores in FY13, implying 43% CAGR. The retail stores have expanded at a CAGR of 18% to 197 stores at the end of FY13. The JV with Tommy Hilfiger has also displayed solid growth registering store CAGR of 41% to 189 stores at the end of FY13. Exhibit 9. EBOs contribution is largest to retail revenue (%) EBO, 57% MBO, 16% Departmental stores, 15% Other Institutional Sales, 12%
Source: Company, JM Financial
The retail business was previously run by Arvind Retail Ltd. which was amalgamated with Arvind Lifestyle Brands Limited (ALBL) in FY13. The retail Arvind Limited 7 March 2014
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business includes value retail chain, Megamart, which sells its own and other licensed international brands. Megamart operates 197 stores which have been reduced from 216 in FY12 as the company decided to shut down non- profitable stores. The company has also repositioned the Megamart business model as Fair price or Value retail from discount store earlier in 2012 to adjust for the impact of unfavorable excise duty changes. Private labels constitute c.40% of total sales, which the company wants to increase to 60% to improve overall margins. Exhibit 10. Extensive Brand Portfolio Source: Company, JM Financial
With the latest addition of fashion retailers Debenhams and Next, the company is expected to expand its positioning from value to bridge to premium segments in the time to come. Extensive distribution network to ensure successful Brand penetration Arvind has a solid distribution network comprising 894 retail stores across 192 cities. It has presence through 1,500 MBOs. Exhibit 11. Solid distribution network (` mn/%) 24 192 74 894 0 100 200 300 400 500 600 700 800 900 1000 2005 Jun-13 No. of towns No.of stores Sales Channel CAGR 30%
The company is also aggressively expanding its new retail format The Arvind Store which will be positioned as a premium fabric retail and custom clothing set-up, consisting entirely of Arvind licensed brands. With already 100 stores opened, it aims to grow its store count to 400 stores by FY17-18. Exhibit 12. Store exhibits
Source: Company, JM Financial
Exhibit 13. Store exhibits
Source: Company, JM Financial
To add to Arvinds strength is the fact that the company is one of the few players which can take anchor space, ground floor, first floor & upper floor stores in all grades of malls. It is a virtuous cycle as Arvinds existence across the spectrum Brands allows it to take extensive space at malls and become an important customer for the mall developers. This allows it to leverage these relationships to get more brands. Exhibit 14. Arvind has strong leverage as anchor tenant at malls
Source: Company, JM Financial Virtuous cycle - extensive brand portfolio makes Arvind an important customer for mall developers, thereby allowing it to leverage these relationships to get more brands.
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Textiles segment to aid margin and support growth: With rising competitiveness, favorable exchange rate and Arvinds dominant global position (ranked amongst the Top 3 fully integrated Denim manufacturers globally), we expect the Textile segment to register 16% growth in revenue over 2013-16E. Arvind is the largest player in denim segment in India with around 13% market share. It is also the leading supplier (c.50% market share) to domestic and international denim brands in India. The company plans to expand its denim capacity to 140mn metres by FY18 from 108mn metres currently, with bulk of the expansion likely to come post FY15. The company is currently operating at c.90% capacity utilization in denim. The Denim segment revenue has witnessed 14% CAGR over FY08-13. Exhibit 15. Integrated textile operations strength
Source: Company, JM Financial
Large capacity addition of around 250mn metres in low-end manufacturing has taken place over the last 2-3 years. This has resulted in a situation of intensified competition in the denim segment, with possible pressure on realizations. The company has worked towards improving its product mix to ensure better pricing, protect margins and avoid competition. Arvinds Denim business is focused in high value added segment (`170 per meter), where average realizations are much higher (commoditized business: `120 per meter). The companys pricing is mostly driven by demand, with a relatively low correlation with the price of cotton, which is the largest cost component (constituting c.40% of total cost). Exhibit 16. Textile segment details Textile Segment Exports as % of business Customer Profile Customer concentration Fabric Denim 45%-50% Local Distributors, Ready-made Exporters, Internal Garmenting Units GAP is biggest (17% of volume). 35%-40% would be top 5 customers. Customers include Levis, Lee, and Wrangler etc Woven 25%-30% Local Distributors, Ready-made Exporters, Internal Garmenting Units Biggest customer is Madura garments. Customers include Marks and Spencers, Next, Gap Inc., Levi's, DuPont and INVISTA. Knits 60% Biggest customer is Shahi Exports. Other customers include Marks & Spencer, Eddie Bauer, Zara, Josepha Banks Voiles 0% Sold primarily through distributors Garments 100% The goods are primarily sold to vendors (most times Bangladesh and Sri Lanka) of International brands Customers include Gap Inc, Patagonia, Tommy Hilfiger, Quicksilver, Brooks Brothers, Silver Jeans, Calvin Klein, FCUK, Pull & Bear, Jack & Jones, Energie, Esprit, S.Oliver, Mexx, Sisley, Benetton, Coin Source: Company, JM Financial Arvind Limited 7 March 2014
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Arvind is the largest woven fabric manufacturer in India. The companys success in the segment is driven by its ability to produce wide range of finishes and delivering the same in relatively short lead time. Woven segments installed capacity is expected to reach c.150mn metres in FY18E from c.90mn metres in FY13. Exhibit 17. Textile segment break-up Financial Performance (` mn/%) Sales FY09 FY10 FY11 FY12 FY13 Denim 7,865 10,513 13,586 16,019 15,428 Wovens 5,713 8,190 9,867 10,991 14,305 Knits 487 556 1,095 1,486 1,497 Garments 4,625 5,261 4,576 4,602 5,045 Voiles 1,622 1,788 2,108 2,281 2,691 Total 20,312 26,307 31,232 35,381 38,966 Less: Intersegment 738 1,985 951 1,154 1,832 Net Textiles sales 19,575 24,322 30,281 34,226 37,134
Garments will be the fastest growing category The Garment business is slated to become a key growth driver of the textile segment. Revenue growth has been tepid at only 2% CAGR over FY09-13, but EBITDA margin has almost increased by three times to c.11% during the same period. We expect the company to demonstrate strong growth in the mid- term and slightly improve its margin. It is also more than doubling its capacity from 8 mn pieces per annum to 18 mn pieces by setting up a greenfield denim garments plant, which is likely to become operational by FY15. Apart from the companys owned capacity, it also outsources garment manufacturing. The garment industry is highly labour-intensive albeit it requires less time to set up a facility. Quick turnarounds, high service levels, and strong customer relationships built through fabric operations are expected to support Arvinds further penetration into garmenting. Improved financial performance leads to return up-tick: We project an improvement of over 481bps in ROE to 16.4% by FY16. We expect the company to report: - Revenue CAGR of 21% over FY13-16E on account of healthy double-digit growth in all the major product categories in textiles, and brands & retails. However, the brands & retails and textile businesses should lead the growth with expected CAGR of 31% and 16% respectively during this period. - We estimate an improvement of 132bps in EBITDA margin to 14.3% over FY13-16 on the back of a) higher realization in textile segments owing to Arvind Limited 7 March 2014
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better product mix in denims, and b) margin improvement in Megamart and addition of brands to Power Brands, offset by higher pre-operating expense related compression in the brands business. - We expect tax rate to increase for Arvind in FY13-16E as the MAT credit that the company was availing declines. However, we expect the company to witness lower interest cost despite rising debt as new borrowings for capex will be entitled for 5% interest subvention under the Technology Upgradation Fund Scheme (TUFS) launched by the central government. We expect repayment of the high-cost old debt and additional debt at lower cost to restrict further increase in financing cost. Exhibit 18. Key financial parameters (%) 12% 14% 16% 16% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% FY13 FY14E FY15E FY16E ROE (%)
Real estate: The management has started to monetize c.400 acres of land in and around Ahmedabad. The company is following a two-pronged strategy to monetize its land bank. It has entered into a JV for c.150 acres of land development and plans to monetize the balance by either outright sale or development. In June 2010, the company had announced a 50:50 JV with B Safal group to develop 1mn sqft in East Ahmedabad. In May 2011, the company entered into a 50-50 JV with Tata Housing to develop 134 acres of land (9mn sqft) for a township in the outskirts of western Ahmedabad. The company expects cash flows of c.`1bn every year over next five to six years through these land related activities.
The companys revenues witnessed CAGR of 15% between FY08 and FY13, while adjusted net profit grew at a higher rate of 73%. Exhibit 21. Historical revenue trend (` mn/%) 23% 2% 17% 27% 21% 7% 0% 5% 10% 15% 20% 25% 30% - 10,000 20,000 30,000 40,000 50,000 60,000 FY08 FY09 FY10 FY11 FY12 FY13 Net sales YoY % growth
Source: Company reports, JM Financial
Arvind derives majority of its revenue from the textiles segment, which formed c.70.2% of revenues in FY13. The other major segment is Brands and Retail (c.26.5% of FY13 revenues). Exhibit 22. Revenue composition (%)
Revenue growth has been led by the textile segment which has witnessed a CAGR of 13% over FY08-13. Exhibit 23. Segment revenue growth (%)
FY09 FY10 FY11 FY12 FY13 CAGR(FY08-13) Textiles -3% 24% 24% 13% 8% 13% Brands and Retail 14% 5% 32% 41% 6% 19% Others 29% 8% 43% 18% 7% 20% Net sales 2% 17% 27% 21% 7% 15% Source: Company reports, JM Financial Arvind Limited 7 March 2014
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Raw material is the key cost element for Arvind, forming c.45% of total cost of the company. Exhibit 24. Cost break-up analysis for FY13 (%) COGS, 45% Employee Cost, 11% Power and fuel, 8% Stores Consumed, 6% Advertisement, 2% Other Expenses , 18% Interest (net), 6% Depreciation, 4%
Source: Company, JM Financial
Arvind has managed to increase its EBITDA and net profit between FY08-13 at a CAGR of 15% and 73% respectively. This has been led by solid topline growth and consistent margin performance. Net profit has grown at a significantly higher rate primarily due to the MAT tax credit available with the company, which has led to a lower tax rate for the company.
Financial Outlook We estimate Arvinds earnings to witness CAGR of 27% over FY13-16E. We believe this will be driven by strong top-line growth (21% CAGR over FY13-16E) and c.132bps EBITDA margin expansion over the same period. Exhibit 26. Financial projections, FY13-16E (`mn, except per share) Particulars FY13 FY14E FY15E FY16E CAGR Net sales 52,925 66,548 79,289 92,662 21% YoY % growth 7% 26% 19% 17% EBITDA 6,874 9,090 11,057 13,258 24% YoY % growth 18% 49% 14% 14% EBITDA margin % 13% 14% 14% 14% PAT 2,484 3,437 4,249 5,092 27% YoY % growth 2% 38% 24% 20% PAT margin % 5% 5% 5% 5% EPS 9.6 13.3 16.5 19.7 27% YoY % growth -43% 38% 24% 20% Source: Company reports, JM Financial
Revenues to witness 21% CAGR in FY13-16E on the back of Brands & Retail growth: We estimate revenues of the company to witness CAGR of 21% in FY13-16E driven by Brands & Retail CAGR of c.31%. We expect the Textiles segment to witness c.16% CAGR during the same period. Albeit at a small base, the real estate segment is expected to see c.30% CAGR in FY13-16E. Exhibit 27. Segment level sales performance (%/` mn) 6% 40% 28% 26% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 FY13 FY14E FY15E FY16E Brands and Retail YoY growth %
As the company continues to witness solid growth in the Brands and retail segment, we expect its contribution to increase from 27% of total sales in FY13 to 34% by FY16E. Exhibit 28. Segment level sales break up (%)
FY13 FY14E FY15E FY16E Textiles 70% 68% 66% 63% Brands and Retail 27% 30% 32% 34% Real Estate 0% 1% 1% 1% Others 5% 3% 3% 2% Less: Intersegment 1% 1% 1% 1% Net Sales 100.0% 100.2% 100.0% 100.0% Source: Company reports, JM Financial
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EBITDA and earnings to witness 24%/27% CAGR in FY13-16E on the back of strong topline growth and margin expansion: We expect EBITDA growth to outpace revenue growth over FY13-16E, driven by EBITDA margin expansion of c.132bps. We forecast Arvinds earnings to witness a CAGR of 27% over FY13-16E. Exhibit 29. EBITDA and net profit margin (%/` mn) 13.0% 13.7% 13.9% 14.3% 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 FY13 FY14E FY15E FY16E EBITDA EBITDA margin %
Valuation and Recommendation Exhibit 30. One year forward P/E and EV/EBITDA 0 50 100 150 200 250 M a r - 0 7 A u g - 0 7 J a n - 0 8 J u n - 0 8 N o v - 0 8 A p r - 0 9 S e p - 0 9 F e b - 1 0 J u l - 1 0 D e c - 1 0 M a y - 1 1 O c t - 1 1 M a r - 1 2 A u g - 1 2 J a n - 1 3 J u n - 1 3 N o v - 1 3 ( ` / s h a r e ) 91 4x 5.5x 7.0x 8.5x 10.0x 11.5x 1 year forward P/E band
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 M a r - 0 7 A u g - 0 7 J a n - 0 8 J u n - 0 8 N o v - 0 8 A p r - 0 9 S e p - 0 9 F e b - 1 0 J u l - 1 0 D e c - 1 0 M a y - 1 1 O c t - 1 1 M a r - 1 2 A u g - 1 2 J a n - 1 3 J u n - 1 3 N o v - 1 3 9 3.0x 1 7.0x 6.0x 5.0x 4.0x 8.0x E V
( `
M n ) 1 year forward EV/EBITDA band
Source: Bloomberg, JM Financial
Arvind shares are currently trading at 6.5x FY15E/5.6xFY16E on a EV/EBITDA basis. We initiate with BUY and a Mar15 TP of `200: Our target price implies a potential upside of c.27%. We believe our target multiple is justified based on: Established leadership position in the textile segment and strong presence in the brands and retail space through a solid portfolio of reputed international brands (U.S. Polo, Tommy Hilfiger, Arrow etc.) Strong visibility of revenue and earnings growth (FY13-16E CAGR of c.21% and c.27% respectively). The target multiple is in-line with the historical 5-year average EV/EBITDA multiple of 6.5x. EBITDA margin expansion of c.132bps over FY13-16E and improving ROE profile of 481bps to 16.4% by FY16E. High quality management team focused on growth and execution. Arvind Limited 7 March 2014
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Peer comparison Exhibit 31. Peer Comparison
Mkt Cap Sales growth (%) EBITDA Margin (%) EPS Growth (%) ROE (%) P/E (x) EV/EBITDA (x) Company name ` bn FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15 FY14 FY15 FY14 FY15 Arvind Ltd* 40.6 7 26 19 13 14 14 2 38 24 12 14 16 9 8 6 6 Future Retail India Ltd 20.3 (28) 8 3 8 8 9 98 7,408 63 0 1 2 47 23 9 8 Shoppers Stop Ltd 31.2 14 25 19 3 3 4 NA NA 257 (2) 1 7 77 36 18 13 Vardhman Textiles 21.4 7 22 14 20 22 0 152 70 (2) 22 18 18 4 3 4 3 Average NA 20 14 11 12 7 NA NA 86 8 9 11 34 18 9 8 Source: Bloomberg, * JM Financial estimates In the exhibit above, we have considered the financial performance and valuation of direct textile and retail peers for comparison with Arvind. We expect the company to continue to perform well, given its strong revenue and earnings growth and improving return profile. Arvind Limited 7 March 2014
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Key Concerns Volatility in input costs Raw material is the key cost element for Arvind, forming c.44% of net sales of the company. As the textile segment still comprises 70% of companys net sales, yarn is a key raw material for the company. Yarn prices are volatile and any sharp rise in yarn prices could lead to interim margin pressure on the company. Exhibit 32. COGS as % of net sales and cotton prices (%) 39% 46% 47% 49% 44% 0% 10% 20% 30% 40% 50% 60% FY09 FY10 FY11 FY12 FY13 COGS as % of Net Sales
Arvinds move towards higher value-added fabrics, especially in denim, should enhance the companys ability to pass on a cost hike (albeit with some lag) to the customers. Competition risk Competition from domestic and foreign players in the textile, apparel and retail segment can adversely impact the market share and profitability of the company. Competition in Textile segment: The textile industry has witnessed huge capacity addition of c.250 mn metres in the last 2-3 years. The capacity addition has been primarily focused in the low-value add manufacturing segment. To mitigate the above risk, Arvind is focusing on producing value-added higher margin products. Competition in Apparel and Retail segment: A growing number of international brands across formats are planning to foray into India (either through license or JVs), to leverage the countrys apparel growth potential. As a result, many competitors are keen to expand retail operations and scale up their brand portfolio. Several retail players like Shoppers Stop, Pantaloon retail are expanding their store footprint aggressively. Arvind, with its vertically integrated operations, solid distribution network and internationally recognized brand portfolio is well poised to participate in the attractive growth opportunity in this segment. Labour risk Arvind has a huge employee base of c.20,324 workmen and over 5,296 management staff owing to the labour-intensive nature of the retail and apparel industry. Any unrest in the large workforce could adversely impact the smooth functioning of the business operations of the company. Arvind Limited 7 March 2014
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In FY13, the companys operations were impacted by an unforeseen event of strike by its workmen at two of its manufacturing plants in the month of June 2012. The strike led to loss of production of 6.1mn meters of fabric which resulted in revenue loss of `950mn and EBIDTA loss of `350mn. The dispute with the workers was eventually resolved amicably with the company agreeing to hike the wages by c.16%. Over the years, Arvind has consistently invested in attracting and retaining an efficient and solid workforce. The employee benefits expenses constituted c.10% of sales for the last five years and all-in-all the company enjoys a harmonious relationship with its workforce. Exhibit 33. Employee expense trend (%/` mn) 10.7% 11.0% 10.5% 9.5% 8.9% 10.5% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% - 1,000 2,000 3,000 4,000 5,000 6,000 FY08 FY09 FY10 FY11 FY12 FY13 Employee Cost % of Total Revenue
Source: Company, JM Financial
Termination or change in terms of license agreement Arvind operates in the branded apparel space through a diverse portfolio of owned and licensed international brands. The company has pursued and will continue to follow the strategy of creating several large and high-growth Power brands (e.g. Arrow, US Polo, Tommy Hilfiger and Flying Machine). With many other strong growth brands in the portfolio (including those acquired recently) like Gant, Nautica, Elle, Billabong, Ed Hardy, Hanes and Wonderbra, the companys approach would be to gradually make these brands the next set of Power brands. Any termination or change in terms of license agreement can adversely impact the companys growth plans. We see two risks for the company: Due to unforeseen reasons, any termination or change in terms of agreement between Arvind and licensed brands could have an adverse impact on the business model of the company. The company currently pays certain % of sales as royalty to the licensed brands. Any increase in royalty payments can adversely impact the companys profitability. We believe the above risks are mitigated to a large extent by Arvind owing to its strong relationship with these brands and the solid performance the company has delivered over the years.
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Currency Risk The company earns c.30% of its revenues from exports (2013 share of exports c.28%), any sharp appreciation of `/$ could affect its export revenues. Exhibit 34. Export share of sales and `/$ trend (%) 63% 66% 69% 69% 72% 37% 34% 31% 31% 28% 0% 10% 20% 30% 40% 50% 60% 70% 80% FY09 FY10 FY11 FY12 FY13 India Outside India
35.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0 M a r - 0 8 J u n - 0 8 S e p - 0 8 D e c - 0 8 M a r - 0 9 J u n - 0 9 S e p - 0 9 D e c - 0 9 M a r - 1 0 J u n - 1 0 S e p - 1 0 D e c - 1 0 M a r - 1 1 J u n - 1 1 S e p - 1 1 D e c - 1 1 M a r - 1 2 J u n - 1 2 S e p - 1 2 D e c - 1 2 M a r - 1 3 J u n - 1 3 S e p - 1 3 D e c - 1 3 INR/USD
Source: Bloomberg, Company, JM Financial
The companys sales mix has been trending in favor of domestic business over the last 5 years. The above trend should assist the company in mitigating its hedging and currency risk. Moreover, the management has shifted to a strategy of hedging as soon as an order is received versus hedging on anticipation or order basis. This step should ensure much better currency risk management for the company. Macro risk The brands and apparel space being discretionary in nature can be impacted adversely by a slowdown in the economy, resulting in weak consumer sentiment and discretionary expenditure. Currently, Brands and retail segment constitute over 27% of the companys revenues and any slowdown in consumer segment can adversely impact the business and profitability of the company. India is expected to become worlds 5 th largest consumer economy by 2025. Indias brands and retail industry is one of the fastest growing industries in the country thanks to a burgeoning middle class and increasing purchasing power. The overall retail market is expected to grow at 10-12% in the time to come, with an expected market size of $1,440bn by 2021. More importantly, the share of organized retail in total retail has grown over the last 4-5 years from c.5% in 2007 to over 7% in 2013, and is expected to reach c.20% by 2021. This would translate into a CAGR of over 25% over the coming decade. Arvind is well poised to participate in the growth opportunity in this segment owing to its brand building strength, real estate and project management expertise, integrated operations and solid warehousing and logistics knowhow. Hence, the company is relatively less vulnerable to any slowdown in economic activities. Regulatory risk The textile industry is susceptible to policy decisions by the government with regard to incentives, sops and taxes. For example, the entire textile industry was hit in 2009 by the Madras High Court ordering the closure of some 700 bleachers and dyers in Tirupur (Tamil Nadu) for polluting a water source. Any such regulatory change concerning the industry can adversely impact the operations of the company. Arvind Limited 7 March 2014
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Industry Overview Global Textile & Apparel Industry Overview The textile and apparel trade was estimated to be $662bn in 2011 and is expected to witness 5% CAGR in the next 10 years. The EU, US, China, Japan and India are the biggest markets for apparel, but apparel production is primarily concentrated in China, India, Bangladesh, Vietnam and Turkey. Asian countries like China, India, Pakistan, Bangladesh, Thailand, and Indonesia are among the leading countries in terms of installed machinery capacity. China alone has a share of around 45% of worlds total installed capacity for spinning and weaving machinery. Overall trade is expected to grow at 5% until 2021. Textile trade is expected to grow at a slower rate due to increasing consolidation of textile manufacturing base near apparel manufacturing. Exhibit 35. Global Textile and Apparel trade projections (%)
Indian Textile & Apparel Industry Overview The Indian textile industry is one of the leading textile industries in the world, steadily improving in its capabilities and competitiveness vis--vis the other global economies. It chiefly consists of ginning, spinning, weaving and processing industries and plays a major role in the countrys economy. It contributes nearly 14% to the total industrial production of the country, nearly 4% to the countrys GDP and accounts for about 17% of its total foreign exchange earnings through textile exports. Employment in the Indian textile and apparel sector stands at 45 mn and with an additional employment of 60 mn in allied sectors, the total employment stands at c.105 mn. The Indian textile and apparel market size was estimated to be `2,730bn ($58bn) in 2011 and is projected to witness 9% CAGR to `6,640bn ($141bn) by 2021. The domestic home textile market is seeing CAGR of 8% and is projected to reach `408bn ($9bn) in 2021. The technical textiles market of India is estimated to be `646.5bn ($14bn) and reach `1607.5bn ($34 bn) by 2021, at a CAGR of 10%. Exhibit 36. Textile Industry Size and growth (%/$ bn) 58 93 141 31 50 82 0 50 100 150 200 250 2011 2016 2021 Domestic Exports $89 Bn $143 Bn $223 Bn 9.5% CAGR
Source: Technopak Analysis, JM Financial Arvind Limited 7 March 2014
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Currently, menswear is the biggest segment of the apparel market and contributes 43% to the Indian market. However, this contribution is expected to drop to 40% by 2021 due to faster growth of womens wear and kids wear. Exhibit 37. Textile Industry Categorization (%/$ bn) 43% 41% 40% 38% 38% 38% 10% 11% 11% 9% 10% 11% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2016 2021 Mens Womens Boys Girls
Exports constitute c.35% of the Indian textiles industry and this mix is expected to largely remain the same given the balance of strong domestic consumption growth and increasing global competitiveness. The industry saw low exports growth in 2012-13, due to weaker international demand partly compensated by a weak Indian Rupee. However, over the next 3-5 years, Indias share of global textile exports is poised to increase from current 4% to around 7%, driven by the improving competitiveness vis--vis other major exporters like China and Turkey. Exhibit 38. Product-wise and Country-wise exports break-up (%/`) Apparel, 39% Yarn, 16% Fabric, 14% Fiber, 14% Made-ups, 8% Others, 9%
USA, 57% UAE, 18% UK, 8% Germany, 7% France, 6% Others, 4%
Source: Company reports, JM Financial
The US and the EU nations account for almost two-thirds of Indias textile exports. The other major destinations are Bangladesh, Turkey, Japan, South Korea, Canada, Saudi Arabia and UAE. In order to keep the textile industry competitive and world class, there is a periodic need for installing new machinery, adopting latest technology and improving availability of accessories. Overall, going forward, the exports market is expected to continue growing at 10% CAGR for the next few years. In the mid-long term, the Indian textile industry is expected to grow strongly with growth being balanced from both domestic consumption as well as exports demand. In the near-term, domestic demand would depend on the macro- Arvind Limited 7 March 2014
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economic factors that are expected to gradually revive in FY13-14. On exports front, there are both positive and negative factors. Positive factors include the weak currency and decreasing cost competitiveness of China that are likely to give positive impetus to the Indian exports. At the same time, factors like slowdown and uncertainty in the global markets, volatile foreign exchange rates and increase in cotton and yarn prices are likely to negatively affect growth and profitability for the textile exports. Exhibit 39. Cotton production and INR/CNY movement 22.6 25.9 22.3 24 33 35.2 34 0 5 10 15 20 25 30 35 40 2007 2008 2009 2010 2011 2012 2013 Cotton Production (Mn Bales)
4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 J a n - 9 9 J u l - 9 9 J a n - 0 0 J u l - 0 0 J a n - 0 1 J u l - 0 1 J a n - 0 2 J u l - 0 2 J a n - 0 3 J u l - 0 3 J a n - 0 4 J u l - 0 4 J a n - 0 5 J u l - 0 5 J a n - 0 6 J u l - 0 6 J a n - 0 7 J u l - 0 7 J a n - 0 8 J u l - 0 8 J a n - 0 9 J u l - 0 9 J a n - 1 0 J u l - 1 0 J a n - 1 1 J u l - 1 1 J a n - 1 2 J u l - 1 2 J a n - 1 3 J u l - 1 3 CNY/INR
Source: Bloomberg, Company reports, JM Financial
Key growth drivers for the textile export sector: Strong cotton production as well as availability of wool, silk, jute; shift from agrarian to industrial workforce; demographic advantage of young workforce as compared to ageing workforce in China. Ability to adopt/develop technology and add infrastructure, also supported by the large & growing domestic market driving up efficiencies & innovation capability. Capacity constraints for China: with strong domestic demand growth. Currency advantage: Strong depreciation of INR/USD compared to strong relative appreciation of RMB/USD over the last decade. Improving regulatory environment and clarity on fiscal measures. Better compliance norms than some other SE Asian exporting markets. Better talent and entrepreneurial ability. Retail industry: sizeable and rapidly growing The story of growth of organized retail in India is expected to continue to gain momentum, with the additional boost of Ecommerce retailing (commonly known as E-tailing). The total size of Indias retail market is pegged at $490bn in 2012, of which organized retail has a low share of c.7% at $34bn, while e-Tailing is currently a nascent model at c.0.1% or $0.6bn. The overall retail market is expected to grow at 10-12% in the time to come, with an expected market size of $1,440bn by 2021. The more important trend though, is that while the share of organized retail in total retail has grown over the last 4-5 years from c.5% in 2007 to reach over 7% by 2013, it is expected that the combined growth of brick-and mortar retailing and e-tailing is expected to take this share to c.20% by 2021. That would translate into a CAGR of over 25% over the coming decade. Arvind Limited 7 March 2014
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Apparel industry: largest category of organized retailing Apparel as a category constitutes the largest share of organized retailing at c.30%, driven by factors like higher brand preference in apparel compared to categories like Food & Grocery where fresh availability is a more primary consumer need. Apparel is also a category that is more promptly being adopted by the internet buyer, compared to other large retail categories. Hence both trends put together, apparel is expected to be a large part of the India organized retail opportunity in 2021, both in the brick & mortar format as well as in e- tailing. In the shorter term, organized apparel retail witnessed some impact of softened consumer sentiments during the last year, reflecting in slower like-to-like (LTL) sales growth in the apparel stores and the overall industry growth of 4-5% in value terms over FY12-13. However, the gradual revival expected in the economy in the next few years, along with some major policy reforms in this sector, will facilitate improved profitability of the existing brands as well as promote entry of new brands that will further expand the market. Three specific drivers of short term recovery in apparel demand include: (a) Restoration of zero excise duty on readymade garments and made ups announced in the Union Budget 2013-14 (b) Faster clearance of investment proposal of foreign branded retail, and (c) Expected revival in the overall economy that will open up the unspent demand for apparels. Exhibit 40. Retail industry growth prospects (%/` bn) 93.0% 80.0% 6.9% 14.7% 0.1% 5.3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012 2021 Traditional Retail: Brick & Mortar Corporatized Retail: Brick & Mortar Corporatized Retail: E-tailing $490bn $1,440bn
Source: Company report, JM Financial
Arvind is well poised to participate in the attractive growth opportunity in the Textile and Apparel industry through its comprehensive presence (refer Exhibit below).
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Exhibit 41. Industry classification/size and Arvind presence (%/` bn)
Source: Company presentation, JM Financial
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Company background Arvind is the largest cotton textiles manufacturer in India, with annual installed textile capacity of >230 mn meters, and a leading player in branded garments and value retail in the domestic market. The company is the third largest Denim manufacturer in the world and largest in India for Woven. Its major business consists of textiles (Denim, Woven, Garments, Voiles etc), and manufacturing and selling licensed and owned branded garments through EBOs, MBOs and its value retail chain i.e. Megamart. The other businesses include: Technical Textiles, Engineering, Telecom Services (Syntel) and Real Estate. Its plants are located at Ahmedabad, Gandhinagar, Pune and Bangalore. Arvind aims to become a `130bn enterprise by 2018 through organic and inorganic expansion. Exhibit 42. Comprehensive product range
Source: Company presentation, JM Financial
Over the years, Arvind has setup a solid pan-India distribution network with presence of 894 retail stores and 1,500 MBOs across India. The company enjoys overseas retail presence in UAE and South Africa with 7 stores.
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Exhibit 43. Key milestones Year Event 1931 The inception of Arvind Limited at the hands of three brothers - Kasturbhai, Narottambhai and Chimanbhai Lalbhai 1934 Arvind establishes itself amongst the foremost textile units in the country. 1980 Arvind records highest levels of profitability. The new strategy Reno vision, points at changing the business focus from local to global, towards a high-quality premium niche market. 1988 Arvind enters the export market for Denims with a dual focus - Denim for leisure and Denim for fashion wear. 1991 Arvind emerges as the third largest manufacturer of denim in the world. 1997 Indias largest state-of-the-art facility for shirting, gabardine and knits is set up at Santej. 2005 Arvind creates a unique one-stop shop service on a global scale, offering garment packages to reputed national and international customers. 2007 Arvind expands its presence in the brands and retail segment by establishing MegaMart One of Indias largest value retail chains. 2010 Arvind launches The Arvind Store, a concept putting the companys best fabrics, brands and bespoke styling and tailoring solutions under one roof. Arvind launches its first major Real Estate projects. Arvind becomes one of Indias largest producers of fire protection fabrics. 2011 MEGAMART repositioned from discount to value retail model. 2012 Arvind acquires business operations of Debenhams, Next and Nautica. The company signs distribution agreement with surfwear brand Billabong. 2013 Arvind launches premium fabric brand Tresca with the aim of marking it a `250cr brand by 2017-18. Arvind enter into licensing agreement for Ed Hardy brand. Arvind acquires license for Hanes and Wonderbra brands. Source: Company, JM Financial
Ownership structure: Arvind is promoted by the Lalbhai family, who owns c.44% stake in the company.
Exhibit 44. Shareholding pattern Arvind Ltd (%)
Source: Stock exchange data, JM Financial
FIIs / DIIs 37.4% 43.8% 18.8%
Promoters
Public Float
Arvind Arvind Limited 7 March 2014
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Management The companys operations are managed by a high quality, professional team under the strategic guidance of Mr. Sanjay Lalbhai.
Mr. Sanjay S. Lalbhai, 58 years, is the Chairman and Managing Director of the Company. He is a Science Graduate with a Master's degree in Business Management and has been associated with the Company for more than 33 years. He also holds directorships in Arvind Lifestyle Brands Limited, Arvind Retail Limited, Arvind Brands & Retail Limited, Amol Decalite Limited, Torrent Pharmaceuticals Limited, Arvind Worldwide Inc., USA, Arvind Worldwide (M) Inc., Arvind Overseas (M) Ltd., Arvind Spinning Ltd., Mauritius and Arvind Textile Mills Limited, Bangladesh.
Mr. Jayesh K. Shah, 52 years, is the Wholetime Director with the designation of Director and Chief Financial Officer of the Company. He is a Commerce Graduate and a Chartered Accountant and has been with the company since 1 st July, 1993. He has a distinguished academic career and extensive administrative, financial, regulatory and managerial expertise. He also holds directorships in many other companies.
Mr. Kulin Lalbhai, 27 years, is an MBA from Harvard Business School (USA), along with a Bachelors degree in Science (Electrical Engineering) from Stanford University, USA. He has held several leadership positions during his academic role including serving as Co-President of Family Business Club at Harvard, Associate Director for Stanford Asia Technology Initiative and also served as Conference Co-Chair for the Harvard-India Conference. He is passionate about Retail Industry and B2C businesses and has researched extensively on Disruptive Business Models and Online space.
Mr. Puneet lalbhai, 30 years, is an MBA from INSEAD (France) specializing in strategy and general management, along with post graduate degree in masters of environmental science from Yale University, and bachelors degree in science (conservation biology) from University of California, US.
Mr. J. Suresh is the Managing Director & CEO of the Arvind Groups Brands & Retail Companies Arvind Lifestyle Brands Ltd. Suresh joined the Arvind Group in September 2005 and since then has strengthened the Lifestyle Brands portfolio of Arvind through organic growth and acquisitions and also aggressively grown Megamart as a leading value retail chain in apparels. Arvind Brands & Retail has now become a significant contributor to the Arvind Groups results. The Brands & Retail business is poised to be a `50bn business by 2018. Prior to joining Arvind, he has held several senior positions during his 18 year old stint in Hindustan Unilever Ltd and has served as a member of the management committee of the foods and beverages business. Appointed by JP Morgan Chase as CEO when they invested in MTR Foods, he was instrumental in growing a regional brand to a national brand with global presence. He is an MBA from IIM Bangalore and an Engineering Graduate from Madras University.
Mr. Aamir Akhtar is the CEO of Denim Business. He is a Masters in Business Administration with work experience of 28 years. A Sales and Marketing professional, he started his career with the Oil Industry. He worked for 4 years in Indian Oil Corporation (a Fortune 500 Company and also India's largest Public Sector Oil Company). This was followed by a 4 year stint in FMCG industry. He worked for Geep Industries, a manufacturer of torches and Arvind Limited 7 March 2014
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batteries that was later acquired by Gillette. Since last 20 years he has been working in the Textile Industry.
Aamir previously worked as Chief Manager Exports - Reliance Industries (also a Fortune 500 Company), Ahmedabad, India. In that assignment he was responsible for Sales and Marketing of Worsted, Blended and Polyester Fabrics and Yarns to Europe.
Mr. Susheel Kaul is the CEO of Wovens & Knitwear. He has been working with Arvind Ltd, and its group companies since 1993. He joined Arvind group as a Management Trainee after completing Post Graduation in Textiles from The Indian Institute of Technology, Delhi.
He has carried out diverse responsibilities across different businesses of the company. His assignments included Quality Assurance and Product Development, Operations and Business Process Reengineering. In 2002, he took over independent charge of Khakhis Business division. In 2007, he took over as the CEO of Shirting & Khakhis, called Wovens Businesses. He is credited with the successful turnaround of Wovens and Knits Businesses with exponential growth.
Mr. Ashish Kumar is the CEO of Garments Business. He is an accomplished management (MBA) professional with 20+years domain expertise in textiles/apparel leadership roles. Currently, he is heading the Garments business of Arvind as CEO. He has worked in various capacities with companies like DCM Shriram Industries, Kaybee Group and Piramal Group.
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