Q1FY18 RESULT UPDATE RETAIL EQUITY RESEARCH Arvind Ltd Textiles BSE CODE: 500101 NSE CODE: ARVIND Bloomberg CODE: ARVIND:IN SENSEX: 32,159 HOLD Rating as per Midcap 12months investment period CMP Rs. 413 TARGET Rs. 414 RETURN 0.1% 13 th September 2017 Mixed performance; Brands shine Arvind Ltd is India s largest textile company with an installed fabric capacity of over 200 million meters per annum. It is also one of the leading branded apparel & retail company with an array of strong global & Indian brands. Arvind reported healthy revenue growth of 17.6% YoY on consolidated basis in Q1FY18 led by strong growth in brands business. EBITDA margin however came in weaker than expected ( 370bps YoY to 8.4%) knocked down by higher cotton prices coupled with rupee appreciation and change in mix in favour of low margin branded apparel business. Management has guided for robust revenue growth of 13% in FY18E led by strong growth in brands & retail apparel business (22-25%) (like-to-like basis) and ~8% growth in textiles. We expect revenue CAGR of 15% over FY17-19E. We tweak our EBITDA margin for FY18E/19E to factor in cost & currency pressure coupled with sharp miss in Q1FY18. Hence, we recommend HOLD with a revised TP of Rs. 414 (SOTP basis), valuing textiles and B&R business at 7.5x/20x FY19E EV/EBITDA respectively. Brands drive revenue growth Arvind reported 17.6% YoY growth in consolidated revenue in Q1FY18 mainly driven by traction in brands business. While Brands & retail apparel (B&R) business reported a strong revenue growth of 40% YoY due to consolidation of Tommy Hilfiger and Calvin Klein, liketo-like (LTL) sales growth of this business stood at 20%. Unlimited reported a stellar performance in Q1FY18 with revenue growth of 39% YoY while power brands grew by 18%. On the other hand, Textile business grew by 9% YoY primarily led by garments (17%) and denim (11%) businesses. Continued margin pressure Despite healthy growth in revenue, EBITDA succumbed to pressure owing to 370bps YoY contraction in textile margin due to higher cotton prices and rupee appreciation. As a result, EBITDA margin declined by 325bps YoY to 8.4%. B&R s EBITDA margin on the other hand rose by just 60bps YoY to 2.9% on the back of advancement of end-of-season-sales (EOSS) & de-stocking in wholesale channel. Power brand margin fell by 20bps YoY to 8.9%. Net profit however declined by 10% YoY due to lower interest and tax charges which partially offset the 25% increase in depreciation. Guidance maintained Management has guided for revenue growth of ~13% in FY18E with B&R business expected to grow strongly by 22-24% (excluding Tommy Hilfiger and Calvin Klein) and by 40% (including consolidation of Tommy Hilfiger and Calvin Klein). Further the company is planning to add 100 power brand stores, 30-40 Unlimited stores and 8-9 speciality stores in FY18. As a result, the management expects 150bps (LTL basis) improvement in EBITDA margin for B&R business in FY18E. Further the management expects textile business to grow by only 8% in FY18E due to currency headwinds as the company has significant exposure to export markets. The margin in textiles is also expected to remain muted in FY18E owing to currency & cost pressure. As a result, we expect EBITDA margin to remain under pressure in FY18E. However, company s focus on local sourcing coupled with the benefit of operating leverage, improving performance of Unlimited and speciality retail will augur well for margin going ahead. Hence, we expect the overall EBITDA margin to improve to 10.9% in FY19E. Outlook & Valuation We tweak our PAT estimates to factor in the impact of weak profitability in the textile business. However, strong traction in B&R business and commencement of Ethopia plant bode well for the company going ahead. Hence, we recommend HOLD rating on the stock with a revised TP of Rs. 414 (earlier Rs. 419) based on SOTP. Company Data Market Cap (Rs. cr) 10,670 Enterprise Value (Rs. cr) 13,438 Outstanding Shares (cr) 25.8 Free Float 57% Dividend Yield 0.6% 52 week high Rs. 426 52 week low Rs. 308 6m average volume (lakh) 15.7 Beta 1.1 Face value Rs. 10 Shareholding % Q3FY17 Q4FY17 Q1FY18 Promoters 43.8 43.1 42.9 FII s 22.1 24.3 25.4 MFs/Insti 16.4 15.3 13.8 Public 12.5 12.5 12.5 Others 5.2 4.8 5.4 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return 11% 5% 27% Absolute Sensex 3% 11% 12% Relative Return* 8% (6%) 15% *over or under performance to benchmark index Consolidated (Rs.cr) FY17 FY18E FY19E Sales 9,199 10,578 12,065 Growth (%) 15.2% 15.0% 14.1% EBITDA 941 1,045 1,314 Margin(%) 10.2 9.9 10.9 PAT Adj 332 345 529 Growth (%) 6.1% 4.1% 53.2% Adj.EPS 12.8 13.4 20.5 Growth (%) 6.1% 4.1% 53.2% P/E 32.1 30.9 20.2 P/B 3.0 2.8 2.5 EV/EBITDA 14.4 13.0 10.2 RoE (%) 10.7 9.3 13.1 D/E 0.8 0.7 0.6
Quarterly Financials (Consolidated) Profit & Loss Account (Rs cr) Q1FY18 Q1FY17 YoY Q4FY17 QoQ Sales 2,475 2,104 17.6 2,465 0.4 EBITDA 207 244 (15.3) 231 (10.2) Margin (%) 8.4 11.6 (325bps) 9.4 (99bps) Depreciation 86 69 25.0 83 4.4 EBIT 121 175 (31.2) 148 (18.4) Interest 61 89 (31.1) 59 5.0 Other Income 16 17 (2.0) 28 (42.6) Exceptional Items (7) (0) - (9) (22.5) PBT 69 103 (33.2) 109 (36.9) Tax 14 32 (57.3) 13 3.6 PAT 55 71 (22.4) 96 (42.5) Minority Interest 5 3 59.9 (3) (275.0) Reported PAT 60 74 (19.2) 93 (35.9) Adjustment 7 0-9 (22.5) Adj PAT 67 74 (10.0) 102 (34.7) No. of shares (cr) 25.9 25.8 0.1 25.8 0.1 EPS (Rs) 2.6 2.9 (10.1) 4.0 (34.8) Segmental Revenue (Rs cr) Q1FY18 Q1FY17 YoY Q4FY17 QoQ Textiles 1,557 1,425 9.3 1,460 6.7 Branded Apparels 774 554 39.6 828 (6.6) Arvind Internet 2 0 876.5 3 (38.7) Others 24 28 (15.1) 64 (62.7) Unallocable 129 114 12.6 141 (8.5) Less: Inter segment revenue 11 18 (40.6) 31 (65.7) Total 2,475 2,104 17.6 2,465 0.4 Source: Company, Geojit Research Sum-of-the-parts Valuation EBITDA(Rscr)(FY19E) Basis Multiple (x) Value (Rscr) Value/share (Rs) Textiles 1,019 Mar-19 EV/E 7.5 7,643 296 Brands & Retail 296 Mar-19 EV/E 20 5,443 211 Enterprise Value 1,313 13,086 506 Less: Net Debt 2,402 93 Target Price 10,684 414 Change in estimates Old estimates New estimates Change % Year / Rs cr FY18E FY19E FY18E FY19E FY18E FY19E Revenue 10,578 12,065 10,578 12,065 - - EBITDA 1,212 1,443 1,045 1,314 (13.8) (8.9) Margins (%) 11.5 12.0 9.9 10.9 (160bps) (110bps) PAT 459 605 345 529 (24.8%) (12.6) EPS 17.8 23.4 13.4 20.5 (24.7%) (12.4)
Consolidated Financials Profit & Loss Account Balance Sheet Sales 7,851 7,984 9,199 10,578 12,065 % change 14.4% 1.7% 15.2% 15.0% 14.1% EBITDA 1,013 950 941 1,045 1,314 % change 11.2% -6.2% -1.0% 11.1% 25.7% Depreciation 212 239 294 348 378 EBIT 801 711 646 697 936 Interest 395 359 288 258 240 Other Income 93 82 78 61 66 PBT 499 434 436 500 763 % change 17.8% -13.0% 0.4% 14.6% 52.6% Tax 107 125 100 150 229 Tax Rate (%) 21.5% 28.7% 22.9% 30.0% 30.0% PAT 392 309 336 350 534 Minority Interest 3 3 (4) (4) (4) Reported PAT 341 311 350 345 529 Adj* (54) (1) 18 - - Adj PAT 395 313 332 345 529 % change 6.8% -20.9% 6.1% 4.1% 53.2% No. of shares (cr) 25.8 25.8 25.8 25.8 25.8 Adj EPS (Rs) 15.3 12.1 12.8 13.4 20.5 % change 6.8% -20.9% 6.1% 4.1% 53.2% DPS (Rs) 2.5 2.4 2.4 2.7 3.5 Cash 83 61 54 40 56 Accounts Receivable 1,166 768 814 936 1,067 Inventories 1,845 1,920 2,383 2,698 2,989 Other Cur. Assets 896 926 836 871 905 Investments 59 424 277 277 277 Gross Fixed Assets 5,291 3,881 4,346 4,771 5,171 Net Fixed Assets 3,211 3,458 3,654 3,732 3,754 CWIP 96 147 96 100 100 Intangible Assets 2 18 18 18 18 Def. Tax (Net) (47) 124 144 144 144 Other Assets 619 278 313 313 313 Total Assets 7,929 8,125 8,589 9,130 9,624 Current Liabilities 2,022 1,838 1,926 2,199 2,466 Provisions - - - - - Debt Funds 3,095 3,488 2,822 2,822 2,622 Other Liabilities 54 97 121 121 121 Equity Capital 258 258 258 258 258 Reserves and Surplus 2,466 2,388 3,310 3,572 3,992 Shareholder s Fund 2,724 2,646 3,568 3,830 4,251 Minority Interest 35 56 151 158 164 Total Liabilities 7,929 8,125 8,589 9,130 9,624 BVPS (Rs.) 105.5 102.5 138.1 148.2 164.5 Cash flow Pre-tax profit 445 441 420 502 764 Depreciation 212 240 297 348 378 Changes in W.C (303) (186) (245) (200) (188) Others 335 274 178 197 174 Tax paid (131) (119) (107) (150) (229) C.F.O 558 650 543 697 898 Capital exp. (597) (616) (454) (430) (400) Change in inv. (3) (17) 173 - - Other invest.cf 12 131 310 61 66 C.F - investing (587) (502) 29 (369) (334) Issue of equity 0-3 - - Issue/repay debt 405 286 (854) - (200) Dividends paid (70) (65) (61) (84) (109) Other finance.cf (384) (371) 331 (258) (240) C.F - Financing (48) (151) (581) (342) (548) Chg. in cash (77) (3) (9) (14) 16 Closing cash 83 61 54 40 56 Ratios Y.E March FY15 FY16 FY17 FY18E FY19E Profitab. & Return EBITDA margin (%) 12.9 11.9 10.2 9.9 10.9 EBIT margin (%) 10.2 8.9 7.0 6.6 7.8 Net profit mgn.(%) 5.0 3.9 3.6 3.3 4.4 ROE (%) 14.9 11.7 10.7 9.3 13.1 ROCE (%) 15.9 13.2 11.4 11.4 14.5 W.C & Liquidity Receivables (days) 53 35 32 32 32 Inventory (days) 116 119 126 124 122 Payables (days) 72 63 65 65 65 Current ratio (x) 2.0 2.0 2.1 2.1 2.0 Quick ratio (x) 1.1 1.0 0.9 0.8 0.8 Turnover &Levg. Gross asset T.O (x) 1.6 1.7 2.2 2.3 2.4 Total asset T.O (x) 1.0 1.0 1.1 1.2 1.3 Adj. debt/equity (x) 1.1 1.3 0.8 0.7 0.6 Valuation ratios EV/Net Sales (x) 1.7 1.8 1.5 1.3 1.1 EV/EBITDA (x) 13.5 14.9 14.4 13.0 10.2 P/E (x) 27.0 34.1 32.1 30.9 20.2 P/BV (x) 3.9 4.0 3.0 2.8 2.5
Recommendation Summary (last 3 years) Dates Rating Target 2-Nov-16 HOLD 431 7-Feb-17 ACCUMULATE 419 13-Sep-17 HOLD 414 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhijit Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion. REGULATORY DISCLOSURES:
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