Arvind. Institutional Equities. Event Update BUY

Transcription

1 Event Update Institutional Equities Arvind 3 July 2015 Reuters: ARVN.BO; Bloomberg: ARVND IN Arvind Lifestyle Inks Licencing Pact with US-based Aeropostale Arvind s subsidiary, Arvind Lifestyle Brands (ALBL), has signed a licensing agreement with Aeropostale Inc, the US-based largest youth specialty retailer. Arvind is expected to set up 30 standalone stores and 25 shop-in-shops of Aeropostale over the next three years, starting from March 2016, and aims to achieve revenue of Rs3bn in three-four years from this arrangement. The company will also launch Aeropostale e-commerce website to meet India s needs. Unlike some brands, where Arvind has to import garments and pay customs duty, the company has secured the licence to manufacture Aeropostale garments locally and therefore the margin from this venture will be high. With 40% of Indian s population below the age of 20, Arvind expects Aeropostale to be highly popular and also successful. As per Mr. R Geiger, chief executive officer of Aeropostale, India is a truly exciting retail market driven by its growing economy and vibrant youth culture. He said Aeropostale is extremely pleased to associate with Arvind Lifestyle Brands, a partner bringing great knowledge and expertise in building brands and operating licenced stores in India. Post tie-up with strong brands like Hanes, Calvin Klein, GAP, The Children s Place etc, the tie-up of Aeropostale with Arvind reaffirms the strength of brands and retail franchise built by Arvind. We expect operating margin of B&R (Brands & Retail) division to improve from 5.2% to 8.6% over FY15-FY17E owing to: 1) Power brands margin set to improve by 120bps, 2) New brands likely to turn EBITDA positive in FY16 as the company exited/trimmed lossmaking brands, 3) Restructuring of Megamart leading to significant margin expansion from 1.3% in FY15 to 4.5% in FY17E, 4) Benefit of lower or stable cotton prices, 5) Improvement in same-store sales growth (SSG) because of higher footfalls, and 6) Declining share of net store addition on a large base. If Arvind continues to acquire new brands, then there may be pressure on its operating margin in the near term, but will improve its brands portfolio and long-term revenue/profitability We continue to remain highly bullish on Arvind and have retained Buy rating on the stock with a target price of Rs354, up 30% from the current market price. Strengths developed by Arvind s B&R division in the past few years: Strong distribution footprint across retail, department stores, MBOs (multi-brand outlets) and other channels. High bargaining power with channels and strong distribution strength has led to faster ramp-up of new brands. It had a reach of 951 stores in FY15 compared to ~1,450 stores of Bata India (BIL), 649 of Reliance Fashion and Lifestyle (out of 2,621 stores of Reliance Retail), 72 of Shoppers Stop, 96 of Trent (83 Westside + 13 Zara), 134 of Pantaloon Fashion & Retail (including factory outlets), 108 of V-Mart Retail (VRL) and 75 of D-Mart (FY14). In a relatively short span, Arvind achieved a retail area of 1.59mn sqft in FY15 compared to 4.2mn sqft in case of Shoppers Stop, 2.3mn sqft of Pantaloon Fashion & Retail, 0.88mn sqft of VRL, ~2.5mn sqft of BIL and 12.5mn sqft of Reliance Retail. Arvind has mastered the learning curve of growing new brands, as 5 out of top 10 international brands in India have been built by the company. Strong go-to-market capabilities with real estate, customer relationships and a seamless supply chain. Ability to address diverse segments though a differentiated portfolio, which led to presence across market segments. Arvind already has a dominant position in many segments. Proven track record of building strong brands in India with expertise in products/design, speed-to-market, and international partnerships. With shared services in B&R division, common resources like manpower, finance etc, ready infrastructure and rationalized cost of building brands, Arvind has become the preferred partner for any new international player planning to enter India. With focused category expansion, the share of men s wear reduced from 100% in FY07 to ~55% in FY15 and the company developed new categories like women s wear, kid s wear, innerwear and accessories. Arvind has done brand extension by leveraging its existing brand equity to kid s wear, women s wear and innerwear. BUY Sector: Retail CMP: Rs272 Target Price: Rs354 Upside: 30% Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com Chitvan Oza chitvan.oza@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 70.1/ Wk H / L (Rs) 342/199 Daily Vol. (3M NSE Avg.) 2,355,616 One Year Indexed Stock Performance Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 ARVIND Price Performance (%) NSE CNX NIFTY INDEX 1 M 6 M 1 Yr Arvind 17.6 (3.6) 11.3 Nifty Index Source: Bloomberg Please refer to the disclaimer towards the end of the document.

2 Exhibit 1: Financial summary Y/E March (Rsmn) FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Revenue 32,612 40,846 49,251 52,925 68,621 78,514 88, ,513 YoY (%) EBITDA 4,099 5,296 6,022 6,874 9,340 10,129 11,498 13,683 EBITDA (%) Adj. PAT 433 1,420 2,447 2,484 3,703 3,954 4,002 5,259 FDEPS (Rs) YoY (%) RoE (%) RoCE (%) P/E (x) P/BV (x) EV/EBITDA (x) About Aéropostale Aéropostale is a mall-based specialty retailer of casual apparel and accessories, principally targeting 14 to 17-year-old young women and men through its stores and 4 to 12-year-old kids through its P.S. from Aéropostale stores. The company provides customers with a focused selection of high-quality, activeoriented, fashion and fashion basic merchandise at compelling values. It maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise. The company currently operates 914 Aéropostale stores in 50 US states and Puerto Rico, 75 stores in Canada and 97 P.S. from Aéropostale stores in 22 states. In addition, pursuant to various licencing agreements, licencees currently operate 20 Aéropostale and P.S. from Aéropostale stores in the Middle East, Asia and Europe With a strong portfolio of 31 global and Indian brands in its kitty, Arvind has not only successfully transformed itself from a commodity player in the textile industry to a B&R player, but also become a formidable player in the B&R space. Revenue share of B&R division increased from 20.3% in FY10 to 30.1% in FY15 and is expected to increase to 36.1% in FY17. Four power brands of Arvind alone are worth Rs40bn and if the company is successful in scaling up its other seven brands to power brand status, its portfolio comprising 11 power brands could be worth Rs100bn in the next three years. With improving capability and investment in garment business, asset turnover and return ratios of the textile division are also expected to improve. At the current market price, Arvind stock trades at 12.8x/7.5x FY17E P/E and EV/EBITDA, respectively, which is at a significant discount compared with other players. Strong 14.3%/25.2% consolidated/b&r revenue CAGR, respectively, aided by a 45bps improvement in operating margin, turnaround in Megamart, improvement in B&R division s operating margin from 5.2% to 8.6%, demerger of Arvind Infrastructure, working capital efficiency and a reduction in D/E ratio from 1.4x to 1.2x should drive PBT/PAT CAGR by 22.8%/15.3%, respectively, generate operating cash flow of Rs9.6bn, improve pre-tax RoCE by 191bps to 17.1% over FY15- FY17E, and calls for expansion of the valuation multiple. Based on 7.5x/15.0x FY17E EV/EBITDA, we have valued Arvind s textile/b&r businesses at EV of Rs78.2bn/Rs47.9bn, respectively. We have retained Buy rating on Arvind with a SOTP-based target price of Rs354, valuing it at 17.4x/9.2x/2.6x P/E, EV/EBITDA, and P/BV respectively, based on FY17E financials. The stock can provide a healthy 30% upside from the current market price. 2 Arvind

3 Financial statements of B&R subsidiary Exhibit 2: Income statement Y/E March (Rsmn) FY10 FY11 FY12 FY13 FY14 Net sales 5,366 7,949 11,883 12,941 17,479 % growth NA Raw material costs 2,877 4,138 6,436 6,477 9,241 Gross profit 2,489 3,811 5,448 6,464 8,238 Gross profit (%) Rent ,047 1,402 Royalty on sales Advt. & publicity costs Employee costs ,281 Other costs 1,120 1,697 2,676 2,925 3,265 Total expenditure 5,090 7,352 11,202 12,208 16,546 EBITDA % growth NA EBITDA margin (%) Depreciation EBIT Interest costs Other income Profit before tax (192) (300) Tax (1) (61) (85) Effective tax rate (%) (2.4) Net profit (131) (215) PAT margin (%) (1.0) (1.2) Exhibit 4 Key ratios Y/E March (Rsmn) FY10 FY11 FY12 FY13 FY14 Return ratios (%) RoCE RoE (5.2) (8.5) Margin ratios (%) EBITDA margin PBIT margin PBT margin (1.5) (1.7) PAT margin (1.0) (1.2) Turnover ratios Asset turnover ratio (x) Avg.inventory period (days) Avg. collection period (days) Avg. payment period (days) Ex-cash working capital (%) Solvency ratios (x) Debt-equity Interest coverage Debt/EBITDA Sales NA EBITDA NA PAT NA (100.0) 0.0 Exhibit 3: Balance sheet Y/E March (Rsmn) FY10 FY11 FY12 FY13 FY14 Equity Reserves 1,541 1,642 2,095 2,215 2,295 Net worth 1,942 2,043 2,505 2,489 2,574 Minority interest Short-term loans ,470 Long-term loans 936 1,663 2,058 3,075 4,177 Total loans 1,199 1,971 2,746 3,581 5,647 D/E (x) Deferred tax liability (8) (107) (192) Total liabilities 3,134 4,085 5,295 5,963 8,028 Gross block 2,137 2,610 3,147 3,525 4,309 Fixed asset turnover (x) Depreciation ,528 Net block 1,965 2,233 2,511 2,551 2,781 Capital work-in-progress Goodwill Long-term Investments Inventories 1,595 2,607 2,827 3,225 4,093 Inventory days Debtors 601 1,248 2,265 3,284 4,724 Debtor days Cash Loans & advances 689 1,110 1,156 1,641 2,098 Other current assets Total current assets 2,945 5,067 6,395 8,397 11,126 Creditors 1,782 2,768 3,378 4,401 4,822 Creditor days Other liabilities Provisions Total liabilities 1,794 3,224 3,962 5,004 5,879 Net current assets 1,150 1,843 2,433 3,393 5,247 Net current asset as % of sales Total assets 3,134 4,085 5,295 5,963 8,028 Exhibit 5: Key matrices Y/E March (% of net sales) FY10 FY11 FY12 FY13 FY14 Gross margin Net raw material costs Employee costs Power and fuel costs Rent Commission brokerage & discounts Royalty on sales Advertisement and publicity Sales promotion exp Contract labor Others Arvind

4 Exhibit 6: B&R division s details FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Revenue (Rsmn) ALBL - Brands 3,592 5,681 6,914 8,332 12,390 16,315 20,919 26,945 34,121 Power brands 3,100 5,120 6,700 7,840 10,680 13,340 16,675 20,844 26,055 Other brands ,710 2,975 4,244 6,101 8,066 ARL - Retail 3,022 3,985 5,131 5,688 6,760 7,295 8,576 10,041 12,260 Megamart 3,022 3,985 5,051 5,258 5,690 5,790 6,469 7,303 8,700 Other retail -Next, Debenhams, Arvind Store ,070 1,505 2,106 2,738 3,560 Total 6,614 9,666 12,045 14,020 19,150 23,610 29,495 36,986 46,380 ALBL - Brands Power brands Other brands (55.0) 14.0 (61.9) ARL - Retail Megamart Other retail -Next, Debenhams, Arvind Store Total EBITDA (Rsmn) ALBL - Brands ,074 1,252 2,026 2,917 3,999 Power brands ,251 1,520 1,983 2,636 3,425 Other brands 4 36 (182) (188) (177) (268) ARL - Retail (50) (24) Megamart Other retail -Next, Debenhams, Arvind Store (10) (140) (210) (99) (143) (55) (71) Total ,024 1,228 2,031 3,191 4,450 EBITDA (%) ALBL - Brands Power brands Other brands (85.0) (38.2) (10.4) (9.0) ARL - Retail (0.7) (0.3) Megamart Other retail -Next, Debenhams, Arvind Store - - (12.5) (32.6) (19.6) (6.6) (6.8) (2.0) (2.0) Total EBITDA growth (%) ALBL - Brands Power brands Other brands (107.7) (605.6) 3.3 (5.9) ARL - Retail (540.0) 53.0 (58.9) (100.0) , Megamart (540.0) 53.0 (54.0) (53.0) Other retail -Next, Debenhams, Arvind Store (52.7) 44.2 (61.8) 30.0 Total 95.0 (11.8) Like- to-like growth (%) Brands Megamart (3.8) No of stores Brands ,069 1,218 Megamart Total ,083 1,227 1,393 Brands Megamart (8.8) (15.7) (15.7) Total Store size (sqft) Brands 1, ,106 1, Megamart 3,301 3,086 3,203 3,605 4,487 5,949 6,000 6,300 6,500 Total area sqft (lakh) Brands Megamart Total Brands Megamart Total Revenue (Rs/sqft) Brands 26,806 31,930 25,336 17,337 18,390 22,140 24,797 27,059 30,057 Megamart 6,923 7,318 7,718 7,501 7,822 7,340 7,578 7,804 8,155 Total 11,593 13,379 12,989 11,866 13,667 15,474 17,377 19,148 21,063 Brands (20.7) (31.6) Megamart (2.8) 4.3 (6.2) Total (2.9) (8.6) Arvind

5 Apr-11 Apr-11 Jul-11 Jul-11 Oct-11 Oct-11 Jan-12 Jan-12 Apr-12 Apr-12 Jul-12 Jul-12 Nov-12 Nov-12 Feb-13 Feb-13 May-13 May-13 Aug-13 Aug-13 Nov-13 Nov-13 Mar-14 Mar-14 Jun-14 Jun-14 Sep-14 Sep-14 Dec-14 Dec-14 Mar-15 Mar-15 Jul-15 Jul-15 Apr-11 Apr-11 Jul-11 Jul-11 Oct-11 Oct-11 Jan-12 Jan-12 Institutional Equities Apr-12 Apr-12 Jul-12 Jul-12 Nov-12 Nov-12 Feb-13 Feb-13 May-13 May-13 Aug-13 Aug-13 Nov-13 Nov-13 Mar-14 Mar-14 Jun-14 Jun-14 Sep-14 Sep-14 Dec-14 Dec-14 Mar-15 Mar-15 Jul-15 Jul-15 Exhibit 7: One-year forward P/E band (Rs) x 18x 15x 12x 9x 6x (x) Median 8.5x Source: Nirmal Bang Institutional Equities Research Exhibit 8: One-year forward EV/EBITDA band (Rsbn) x 9x 8x 7x 6x (x) Median 6.5x 30 4 Source: Nirmal Bang Institutional Equities Research 5 Arvind

6 Financials (consolidated) Exhibit 9: Income statement Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E FY18E Net sales 52,925 68,621 78,514 88, , ,611 % growth Raw material costs 22,272 31,241 34,939 39,472 45,135 51,982 Power & fuel costs 4,298 4,343 4,882 5,884 6,790 7,857 Staff costs 5,656 6,793 8,023 9,061 10,456 12,098 Other expenses 13,825 16,904 20,542 22,919 26,448 30,602 epensesmfgmanufac Total expenditure 46,051 59,281 68,386 77,336 88, ,539 EBITDA 6,874 9,340 10,129 11,498 13,683 16,072 % growth EBITDA margin (%) Other income Extraordinary items - (164) (543) Interest costs 3,153 3,545 3,946 4,282 4,387 4,495 Gross profit 4,526 6,326 6,571 8,104 10,218 12,526 % growth (31.1) Depreciation 2,043 2,252 2,124 2,460 2,691 2,907 Profit before tax 2,483 4,073 4,448 5,644 7,527 9,618 % growth (49.9) Tax ,072 1,637 2,258 2,886 Effective tax rate (%) Net profit 2,481 3,526 3,376 4,007 5,269 6,733 % growth (43.1) 42.1 (4.2) Minority interest (3) (13) (35) Extraordinary items - (164) (543) Adjusted PAT 2,484 3,703 3,954 4,002 5,259 6,723 % growth Exhibit 11: Balance sheet Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E FY18E Equity 2,580 2,582 2,582 2,582 2,582 2,582 Reserves 19,959 23,248 24,656 27,875 32,321 38,200 Net worth 22,540 25,830 27,239 30,458 34,903 40,783 Minority Int Short-term loans 14,557 16,465 20,020 21,020 22,020 22,020 Long-term loans 10,051 13,455 13,941 14,641 15,441 15,441 Total loans 24,608 29,920 33,961 35,661 37,461 37,461 Deferred tax liability ,148 2,051 3,206 Liabilities 47,313 56,427 62,018 67,619 74,778 81,822 Gross block 41,591 44,775 49,868 54,668 59,808 64,603 Depreciation 15,988 17,063 19,187 21,647 24,338 27,245 Net block 25,604 27,712 30,682 33,022 35,470 37,357 Capital work-in-progress 2,076 1,347 1,300 1,640 1,794 1,938 Goodwill 1,341 1,215 1,101 1,101 1,101 1,101 Long-term Investments 678 1, Inventories 14,129 16,281 18,450 19,979 22,701 25,635 Debtors 8,735 10,093 11,658 13,737 15,852 18,341 Cash 1,856 1, ,675 1,941 2,214 Other current assets 7,915 14,028 15,147 16,878 19,477 22,536 Total current assets 32,635 42,066 46,089 52,269 59,972 68,726 Creditors 10,978 12,495 13,494 16,112 18,506 21,362 Other current liabilities 4,043 4,711 4,245 4,886 5,638 6,524 Total current liabilities 15,021 17,205 17,739 20,998 24,144 27,886 Net current assets 17,614 24,860 28,350 31,271 35,827 40,840 Total assets 47,313 56,427 62,018 67,619 74,778 81,822 Exhibit 10: Cash flow Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E FY18E EBIT 4,831 7,088 8,005 9,038 10,992 13,165 (Inc.)/dec. in working capital (2,895) (7,439) (4,320) (2,079) (4,290) (4,740) Cash flow from operations 1,937 (351) 3,685 6,958 6,702 8,424 Other income Depreciation 2,043 2,252 2,124 2,460 2,691 2,907 Deferred liabilities (131) ,154 Interest paid (-) (3,153) (3,545) (3,946) (4,282) (4,387) (4,495) Tax paid (-) (3) (548) (1,072) (1,637) (2,258) (2,886) Dividends paid (-) (498) (708) (768) (783) (813) (844) Share in profit/(loss) of (5) (10) (10) associates Net cash from ( P&L) operations 1,003 (1,814) 1,026 4,277 3,750 5,200 Capital expenditure (-) (3,157) (3,630) (5,047) (5,140) (5,294) (4,938) Net cash after capex (2,154) (5,444) (4,021) (863) (1,544) 262 Inc./(dec.) in short-term 1,044 1,909 3,554 1,000 1,000 - borrowing Inc./(dec.) in long-term 2,281 3, borrowing Inc./(dec.) in borrowings 3,325 5,312 4,041 1,700 1,800 - (Inc.)/dec. in investments (318) (490) Minority interest Equity issue/(buyback) - (0) (0) Cash from fin.activities 3,023 4,957 4,968 1,705 1, Others (1,233) 0-0- (0)- Opening cash balance 709 1,856 1, ,675 1,941 Closing cash balance 1,856 1, ,675 1,941 2,214 Change in cash balance 1,147 (193) (830) Exhibit 12: Key ratios Y/E March FY13 FY14 FY15 FY16E FY17E FY18E Per share (Rs) EPS Book value Valuation (x) P/E P/sales P/BV EV/EBITDA EV/sales Return ratios (%) RoIC RoCE (Post tax) RoCE (Pretax) RoE Margin ratios (%) Gross margin EBITDA margin PBIT margin PBT margin PAT margin Turnover ratios Asset turnover ratio (x) Avg. inventory period (days) Avg. collection period (days) Avg. payment period (days) Solvency ratios (x) Debt-equity Interest coverage Debt/EBITDA Growth(%) Sales EBITDA PAT Arvind

7 Rating track Date Rating Market price (Rs) Target price (Rs) 29 May 2015 Buy July 2015 Buy Arvind

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