12 March 2016

Arvind Ltd. Initial Coverage

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Imprinted a niche in the textile arena Rating: Buy

Equity research | Textiles Coverage initiation

Recommendation Buy Investment Rationale

Target price (INR) 326
CMP (INR) 274  Strategic shift from B2B to B2C business to provide scalability: Over the
Duration 12 Months past few years, Arvind has made a definitive move to change its business
profile significantly with a thrust on brand and retail (transformed itself from a
Market data
pure B2B player to significant B2C player). The revenue contribution from the
Market cap. (Rs. Crores) 7,076
brand and retail business is consistently on an uptrend (grown at a CAGR of
Beta 1.5
23% over FY11-15) led by its multiband (across price points) and multichannel
52 week H/L (Rs.) 365.7/216.3
strategy. Further, the company is leveraging its brand strength to expand its
All time High (Rs.) 365.7
range of offerings along with brand extensions. Moreover, with its focus on
Decline from 52WH (%) 25.1
expanding in speciality retail like GAP, Aeropostale, etc, we expect the
Rise from 52WL (%) 26.6
contribution from brands & retail business to further increase to 38% of the
overall revenues by FY18 from 30% in FY15.
Share price performance
 Steady textile business: We expect the textile business to witness steady
growth of ~7% CAGR over FY15-18E led by its woven (~6% CAGR) and
garments business (23% CAGR) with EBITDA margin of 17.3%. Further,
Arvind is planning to increase its garment capacity to ~40 million pieces over
the next couple of years. As against its spinning and weaving business,
garmenting is a high ROCE business with better asset turnover. We believe
higher proportion of garmenting business in the mix would lead to an
improvement in ROCE of textiles business going forward.
 Capitalising on Power Brands: With an impressive gamut of brands across
price points & categories coupled with 4 Power brands (revenue of more than
Source: NSE Rs. 200 Crores) like Arrow, US Polo, Tommy Hilfiger and Flying Machine
(account for ~57% of overall Brand & Retail revenue in FY15), it provides
Shareholding Pattern (%)
Arvind a key competitive advantage. Further, addition of more brands to its
power brand portfolio would set the stage for future growth. The company is
Promoters 43.8 expecting revenue from the power brands to nearly double to Rs. 2,500
Crores over the next three years led by strong brand recall and favorable
Public 56.2 demographics. Overall, we expect the brands revenue to grow at a CAGR of
22% over FY15-18E.
Valuation: With strong growth in brands & retail business and steadily growing
Others - textiles business, we expect revenue and Adj. PAT to grow at a CAGR of ~11%
and ~10% over FY15-FY18E. We initiate coverage on the stock with a BUY
* As of December’ 2015
rating with a target price of Rs. 326 (based on SOTP), valuing textiles and
brands & retail business at 7x/14x FY18E EV/EBITDA respectively, implies a
potential upside of 19% over the next 1 year.
Y/E FY15 FY16E FY17E FY18E
Revenue (Rs.Cr) 7,851 8,304 9,388 10,688
Adj. Net profit (Rs.Cr) 395 347 414 527
Adj. EPS (Rs.) 15.3 13.4 16.0 20.4
Adj. P/E (x) 17.1 20.4 17.1 13.4
P/BV (x) 2.5 2.4 2.1 1.9
ROE (%) 14.9 12.1 13.1 14.9

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 Arvind Ltd.

Arvind Ltd – Company Overview e

Arvind Ltd is India’s Incorporated in 1930, Arvind Ltd is a part of Lalbhai group and is India’s largest textile company. Over
largest textile company the years, Arvind has gained the reputation of being India’s largest cotton textiles manufacturer (with
with an installed fabric
capacity of over 200 an installed fabric capacity of over 200 million meters per annum) and also as one of the leading
million meters per annum. denim fabric manufacturers in the world (with an installed capacity of over 110 million meters per
annum). It operates under four segments that includes Textiles (fabric, yarn and garments), Brands &
Retail (retailing of branded garments), Real Estate (real estate development) and Others (electronics,
technical textile, construction and project activity). Arvind has carved a niche for itself with brand
names like Arrow, Flying Machine, USPA, New Port, Mega Mart and The Arvind Store.

The company is constantly reinventing itself from being a fabric manufacturer to becoming a branded
and retail player. This has put Arvind as India’s leading one-stop solution provider for leading global
and domestic apparel brands. Top international brands under its portfolio include GAP, USPA,
Tommy Hilfiger, Calvin Klein, Arrow, GAP, Nautica, Hanes, etc. while its own brands include Flying
Machine, Excalibur, Newport etc. Further, the company has forayed into retailing. Besides, it has also
ventured into Technical Textiles on its own and in joint venture with leading global players.

Arvind business mix Arvind brands

Source: Company, In-house research

Outlook of the textiles and apparel industry remains bright

India has emerged as one of the largest producers of textiles and apparels in the world. It is also
The domestic textile and ranked as the world's second largest exporter of textiles and clothing. According to India Brand Equity
apparel industry to Foundation (IBEF), the domestic textile and apparel industry is expected to witness a remarkable
witness a remarkable
growth to reach US$ 141 bn by 2021 from US$ 67 bn in 2014 mainly led by rising disposable income
growth to reach US$ 141
bn by 2021 from US$ 67 & aspiration towards brands, increasing spending power and favorable demographics. Interestingly,
bn in 2014. the exports are likely to more than double to US$ 82 bn by 2021 from US$ 40 bn in 2014. The present
scenario of competitive input costs, favorable government policies and rich availability of cotton,
provides compelling opportunity for the domestic textile and apparel industry. Given Arvind's strong
capabilities across the textile and garments value chain, we believe it is well positioned amongst
peers to benefit from this opportunity.
Brands & Retail business at an inflection point

The brand & retail business of Arvind operates through Arvind Brand & Retail (ARBL), a wholly-
owned subsidiary of Arvind. The brand business of the company has an unmatched portfolio of
owned & licensed brands and retail formats with presence across value, premium and bridge to luxury

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brands. The company has a rich bouquet of reputed brands under its portfolio along with a strong
multitude of power brands, providing Arvind a key competitive advantage. The revenue contribution
The revenue contribution from the brand and retail business is consistently on an uptrend (grown at a CAGR of 23% over
from the brand and retail
business is consistently
FY11-15). The company is leveraging its brand strength to expand its range of offerings through
on an uptrend (grown at brand extensions. Moreover, with its focus on expanding in speciality retail like GAP, Aeropostale,
a CAGR of 23% over etc, we expect the contribution from brands & retail business to further increase to 38% of the
FY11-15). overall revenues by FY18 from 30% in FY15.

On the retail front, the company has completed the restructuring of Megamart stores. Further, the
company has adopted a strategy of branding its large format Megamart stores of more than 10,000
sq ft as “Unlimited” to overcome its discount format image. The store will also extend its offerings
from its earlier brands like Geoffrey Beene and Cherokee to premium brands like Arrow and US
Polo along with an added focus on women and kids wear. We believe the higher proportion of
larger format stores would boost revenue of the overall brands and retail segment going ahead.
Further, after pulling out from the unsuccessful ventures like Debenhams, the company is now
focusing more on the speciality retail like GAP, The Children Place, Aeropostale, etc. The company
plans to augment the GAP stores count to 33 over the next five years and also plans to open 45
Aeropostale stores by 2020. We believe with the enhanced retail coverage, Arvind is looking to up
its play in the fast growing retail space which would spur the next leg of growth. We expect the
revenue of the ‘brands & retail’ business to grow at a CAGR of ~22% over FY15-18E and the
blended EBITDA margin to grow to 7.6% in FY18 from 5.4% in FY15.

Unmatched portfolio of owned & Brands & Retail revenue to grow at CAGR of ~22%
licensed brands and retail formats

Strong distribution reach with multichannel strategy

The company is betting big on the brands & retail space and is constantly making category
extension of its existing brands and rapid expansion of its distribution footprint. Arvind has a strong
distribution network across retail, departmental stores, multi-brand outlets (MBOs) and other
channels. As on Q3FY16, the total store count stood at 998 - MegaMart (95) and others (903)),
which enables it to reach to the masses. Among its unmatched distribution reach, the contribution
from exclusive brand outlets (EBOs) and departmental stores stand at ~30-35% each followed by
MBOs (~30%) and e-commerce (~5%), thus enabling it to target large audience. This not only
provide scalability to its existing brands but also enables quick rollout of new brands. In next 4-5
years, the company is planning to enhance its reach to almost 300 cities (from ~150 cities in FY15)
with over 3 million square feet of retail space (from ~1.4 million square feet in FY15). We believe
Arvind’s focus on expanding its network reach would spur the next leg of growth for the company
going ahead.

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More power brands to drive the next leg of growth

Arvind has clearly articulated its power brands status as brands having revenue of more than Rs.
200 crores coupled with double digit margins, positive free cash flow and ROCE of more than 20%.
Currently, the company Currently, the company has 4 power brands under its portfolio includes Arrow, US Polo, Tommy
has 4 power brands
Hilfiger and Flying Machine (contributed ~57% of overall Brand & Retail revenue in FY15). The
under its portfolio having
dominance in the revenue from power brands has grown steadily over FY10-FY15 at a CAGR of 35% and EBITDA
respective space. margins grew impressively from 7.4% in FY10 to 11.4% in FY15. From the bouquet of growth brands
like GAP, Calvin Klein, Gant, Nautica, Hanes, The Children’s Place and Megamart, the company is
trying to move more brands into the power brand kitty. Hence, this transition (of brands) will act as a
key growth trigger for the company going forward. The company is expecting the revenue from the
power brands to nearly double to Rs. 2,500 Crores in the next three years led by strong brand recall
and rising demographics.

Revenue from power brands grew at a robust pace of 35% CAGR over FY10-15

Source: Company, In-house research

Category expansion and extension to aid growth

After establishing strong presence in the menswear segment, the company successfully diversified
into womenswear and kids-wear segment with brands like Elle, Next, Cherokee, etc. Further, the
company has positioned Cherokee (unisex brand) at lower end and US Polo at mid segment and
GANT at top end to capture the entire spectrum in kids wear. Further, with Nautica the company has
also entered into sportswear. Moreover, it has forayed into the high growth innerwear segment with
the acquisition of Hanes brand and has further consolidated its presence in the innerwear segment
with brands such as CK, US Polo and Tommy Hilfiger.

The company has leveraged its brand strength to expand its range of offerings with brand extensions
to consolidate its market share. For example; under the Arrow brand, the company has extended its
offerings from only mens-wear earlier to sportswear and women’s wear categories. Similarly, under
the US Polo brand it strengthened its portfolio by introducing women’s wear, footwear, luggage and
kid’s garments. This is a key positive for the company and puts it at a distinct advantage. Further,
brands extension opportunity exists for brands like Calvin Klein, GAP, among others. We believe
product extension of its existing brands will further aid the company in capturing higher scalability in
the apparel business.

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Strong portfolio that straddles across consumer segments and price points

Source: Company, In-house research

Textiles business: On a firm footing

Arvind is a vertically integrated textile company in India and has gained the reputation of being among
the largest manufacturers of denim globally with a rich marquee clientele includes; GAP, Lee, Wrangler,
Levi’s, among others. The company has a denim capacity of 108 million metres and that for wovens
Arvind has a denim and garmenting the capacity stand at 132 million metre and 25 million pieces respectively in FY15. The
capacity of 108 million
textile business of the company is a cash cow, generating free cashflow and steady returns. The textile
metres and that for
wovens and garmenting division of the company comprises of five sub-segments - denim, woven, garment, knits and voiles.
the capacity stand at 132
million metre and 25 In order to drive further growth in its textiles business, Arvind is investing in high asset turnover
million pieces processing and garment manufacturing. The company has a garmenting capacity of 25 million pieces in
respectively in FY15. FY15 and is planning to increase its garment capacity to ~40 million pieces over the next couple of
years. The current captive consumption of fabrics for garments is ~5% and it is eyeing to increase the
contribution to 25% going ahead.

The fabric manufacturing generally is highly capital intensive business with lower ROCE as compared
to the garment business. With asset turnover of the garmenting business generally more than double
than that of the fabrics business, we believe higher proportion of garmenting business in the mix would
lead to an improvement in textiles segment ROCE going forward.

Textiles revenue to grow at a CAGR of ~7% over FY15-FY18E

Source: Company, In-house research

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Return ratios to stay elevated

Source: Company, In-house research

Financial performance trend

Source: Company, In-house research

Working capital to sales to remain stable

Source: Company, In-house research

Revenue & Adj. PAT to grow at a CAGR of ~11% and ~10% respectively over FY15-18E

We expect Arvind’s revenue to post 11% CAGR over FY15-18E driven by strong growth in brands &
retail segment and retail business. In line with steady revenue growth, EBITDA is estimated to grow at
~11% CAGR to Rs. 1,394 Crores in FY18E. Overall EBITDA margins are expected to remain steady at
13% led by improvement in margins of the brands and retail segment coupled with higher contribution
from garmenting business. Despite the higher capex, we expect the net debt to equity to reduce from
1% in FY15 to 0.9% in FY18E on the back higher operating cashflow and the working capital to sales is
likely to remain steady at 24.4% in FY18E. Moreover, we estimate ~10% CAGR in Adjusted PAT over
FY15-18E in line with sales growth. We expect the return ratios to remain strong with ROE and ROCE
of 14.9% and 16.6% in FY18E.

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Key risks:

 Lower than expected margin expansion in brands.

 Sharp increase in cotton prices – key raw material will put pressure on margins.
 Appreciation of Indian currency against USD could adversely affect its revenues and also make
global players more competitive.
 Economic slowdown in the global economy could hamper growth prospects, given its huge
dependence on textiles exports.

Figure 1: Peer analysis Relative Price Chart

Vardhman Aditya Birla

Arvind
Textiles Fashion

CMP (Rs.) 274 768 150

M.Cap (Rs.
7,076 4,887 11,502
Crores)

EPS (FY15) 15.3 71.3 (24.6)

P/BV (FY15) 2.5 1.4 4.0

Figure 2: Profit & Loss Account (Consolidated)

Y/E (Rs.Cr) FY15 FY16E FY17E FY18E

Total operating Income 7,851 8,304 9,388 10,688
Raw Material cost 3,565 3,706 4,171 4,733
Employee cost 802 922 1,042 1,186
Other operating expenses 2,472 2,622 2,965 3,376
EBITDA 1,013 1,054 1,210 1,394
Depreciation 212 259 287 312
EBIT 801 795 923 1,082
Interest cost 395 398 425 425
Other Income 93 95 100 105
Profit before tax 499 491 597 761
Tax 107 143 179 228
Profit after tax 392 349 418 533
Minority Interests (3) 2 4 6
P/L from Associates - - - -
Adjusted PAT 395 347 414 527
E/o income / (Expense) (54) 3 - -
Reported PAT 341 350 414 527

Source: Company data; Arvind; In-house research

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Figure 3: Balance Sheet (Consolidated)

Y/E (Rs.Cr) FY15 FY16E FY17E FY18E

Paid up capital 258 258 258 258
Reserves and Surplus 2,466 2,734 3,064 3,498
Net worth 2,724 2,992 3,322 3,756
Minority Interest 35 37 41 47
Total Debt 3,095 3,545 3,545 3,545
Other non-current liabilities 54 56 59 62
Total liabilities 5,907 6,629 6,967 7,410
Net fixed assets 3,213 3,549 3,762 3,995
Capital WIP 96 - - -
Investments 59 59 59 59
Total Net Current Assets 1,968 2,431 2,537 2,727
-Net CA 1,885 2,025 2,315 2,604
-Cash 83 406 222 123
Deferred tax assets (Net) (47) (47) (47) (47)
Other non-current assets 619 637 657 676
Total Assets 5,907 6,629 6,967 7,410
Source: Company data; Arvind; In-house research

Figure 4: Cash Flow Statement (Consolidated)

Y/E (Rs.Cr) FY15 FY16E FY17E FY18E

Pre tax profit 445 491 597 761

Depreciation 212 259 287 312

Chg in Working Capital (314) (156) (306) (306)

Others 346 303 326 321

Tax paid (131) (143) (179) (228)

Cash flow from operating
558 755 725 860
activities
Capital expenditure (597) (500) (500) (545)

Chg in investments (3) - - -

Other investing cashflow 12 95 100 105

Cash flow from investing
(587) (405) (400) (440)
activities
Equity raised/(repaid) - - - -

Debt raised/(repaid) 405 450 - -

Dividend paid (60) (79) (84) (93)

Other financing activities (394) (398) (425) (425)

Cash flow from financing
(49) (27) (509) (518)
activities
Net chg in cash (77) 323 (185) (99)
Source: Company data; Arvind; In-house research

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Figure 5: Ratio Analysis (Consolidated)

Y/E FY15 FY16E FY17E FY18E

Valuation(x)
P/E 17.1 20.4 17.1 13.4
EV/EBITDA 9.7 9.7 8.6 7.6
EV/Net Sales 1.2 1.2 1.1 1.0
P/B 2.5 2.4 2.1 1.9
Per share data (Rs.)

EPS 15.3 13.4 16.0 20.4

DPS 2.5 2.5 2.7 3.0
BVPS 105.5 115.9 128.6 145.5
Growth (%)

Net Sales 14.4 5.8 13.1 13.8

EBITDA 11.2 4.1 14.8 15.2
Net profit 6.8 -12.3 19.3 27.3
Operating Ratios
EBITDA Margin (%) 12.9 12.7 12.9 13.0
EBIT Margin (%) 10.2 9.6 9.8 10.1
PAT Margin (%) 5.0 4.2 4.4 4.9
Return Ratios (%)

RoE 14.9 12.1 13.1 14.9

RoCE 15.9 14.3 15.2 16.6
Turnover Ratios (x)

Net Sales/GFA 1.6 1.5 1.5 1.6

Sales/Total Assets 1.0 1.0 1.0 1.1
Sales/Working Capital 4.5 4.2 4.3 4.3
Source: Company data; Arvind; In-house research

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Rating Criteria

Large Cap. Return Mid/Small Cap. Return

Buy More than equal to 10%. Buy More than equal to 15%.
Hold Upside or downside is less than 10% Accumulate* Upside between 10% & 15%.
Reduce Less than equal to -10% Hold Between 0% & 10%.
Reduce/sell Less than 0%.
* To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell.

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