Arvind Ltd - Chola Wealth Direct

Arvind Ltd
Sector: Textile/ mid cap
Initiating Coverage
22 October 2014
Sensex
26,768
Nifty
7,990
Price: INR 297
Target Price: INR 342
MARKETPERFORMER
Background: Arvind Ltd is the flagship company of the Lalbhai Group, established in 1931. Arvind’s business is broadly classified into Textiles, Brand &
Retail and others. Textiles, Brand & retail and others which accounts for 69%, 28% and 3% of the revenue respectively. In India, Arvind sells international
brands such as Arrow, US Polo Associate, Tommy Hilfiger (JV brand), Calvin Klein (JV brand), IZOD, Elle, Cherokee, GANT, Hanes, Billabong, Wonderbra,
Ed Hardy, Geoffrey Beene, Nautica etc. Company has a strong distribution network of 858 stores with a retail space of ~1.55mn sq.ft. (Brands: 741 stores
with ~0.75mn sq.ft retail space & MegaMart: 158 stores with ~0.79mn sq.ft. retail space).
52 Week High/Low
INR 341.4/77.5
Bloomberg code
ARVND IN
Reuters code
ARVN.BO
Issued Equity
(shares in mn)
Mkt. Cap in INR mn
Mkt. Cap in mn USD
258
INR 76,678
$ 1,257
Avg. Daily Vol. (‘000)
Revenue growth aided by brand & retail segment
We estimate Arvind’s revenue to grow at a CAGR of 16.9% between FY14-17E to INR 109.5bn led by
traction in brand & retail business, which is estimated to grow at a CAGR of 23% in FY14-17E. The
growth in brand & retail business would be aided by power brands (incl. 50% TH JV), which is
estimated to grow at CAGR of 25% to INR 20.85bn in FY17E and newer brands, which are estimated to
grow at CAGR of 34% to INR 7.1bn in FY17E. We have factored in a growth of CAGR 9.2% (FY1417E) for Megamart.
3,941.9
Shareholding
Sep13
Jun14
Promoters(%)
43.95
43.46
FII (%)
15.71
23.31
EBITDA margin to expand by 100bps
We estimate the company’s EBITDA margin to increase 100bps from 13.6% in FY14 to 14.6% in
FY17E. Between FY14-17E, we have factored in a 50bps margin expansion in the textile business,
expansion in Megamart to 5%, Power brands excl. TH’s margin to expand by 60bps to
Sep14 220bps
Jun14margin
Sep12
12.5%,
Tommy
43.45
43.46
63.35Hilfiger’s margin is likely to expand by 130bps to 11.5% and new brand business is
estimated
to
become profitable with EBITDA margin expanding from -10.1% in FY14 to 2.1% in FY17E.
23.56
23.31
9.21
DII (%)
19.42
13.68
14.30
Others (%)
Pledge (% of
promoter
holding)
20.92
19.55
0.40
0.41
Avg. Daily Vol. (bn)
INR 1.2/$ 0.02
1M
3M
Arvind
-7.78
24.2
183.9
Sensex
-1.90
3.35
27.19
Performance%
400
300
350
250
300
200
250
200
150
150
13.68
1.34
Nautica,
Hanes,
Calvin Klein, Elle and GANT – second line of power brands in making
19.55
26.10
The company is focussed on creating a second line of power brands; management expects Nautica,
Klein, Elle and Gant to attain power brand status over the next 3-4 years. Nautica and
0.41 Hanes,
0.41 Calvin
0.00
Hanes clocks a turnover of ~INR 900mn each and revenues from these brands are estimated to double
in FY15E and turn profitable. Calvin Klein (India) revenue is pegged at INR 1.25bn, which has been
growing at a CAGR of 30% over the last three years, with an EBITDA margin 8-9% and Company,
12M
expects this trend to sustain in the near term.
18.69
100
Outlook & Valuation
Currently the stock is quoting at EV/EBITDA of 9.6XFY15E, 8.1XFY16E & 6.9XFY17E respectively.
We initiate coverage on Arvind with MARKETPERFORMER rating and 18-month target price of INR
342 per share indicating an upside of 15%.
Risk: Delay in Turning around of Megamart and other business; unfavorable currency movement;
adverse cotton price movement; delay in capacity expansion; slowdown in domestic and export
markets.
Valuation Summary
Y/E March ( INR mn)
100
50
50
0
0
Arvind
Relative SENSEX (RHS)
Sathyanarayanan M +91-44-30007361
[email protected]
Revenue
EBITDA
PAT
EPS
EPS growth (%)
FCF / Share
PE
P/ BV
EV / EBITDA
EV / Sales
Dividend Yield (%)
ROCE (%)
ROE (%)
Net Debt / Equity
1
FY14
FY15E
FY16E
FY17E
68,621
9,340
3,539
13.7
42.5
3.0
21.7
3.0
11.2
1.5
0.8
15.6
14.6
1.1
79,927
11,163
4,604
17.8
30.1
7.0
16.7
2.6
9.6
1.3
1.0
16.2
16.6
1.0
93,380
13,311
5,475
21.2
18.9
10.8
14.0
2.3
8.1
1.2
1.2
17.0
17.3
0.9
1,09,567
15,995
6,688
25.9
22.1
12.2
11.5
2.0
6.9
1.0
1.5
18.5
18.3
0.8
Industry overview:
Textile & Apparel (T&A) market in India is estimated at INR 5.7tn as on 2013 and is expected to grow at a CAGR 9% to INR 13.5tn
by 2023. Domestic market constitutes 62% of the T&A industry; and is estimated at INR 3.54tn, while the exports stands at INR
2.16tn.
Exhibit 1: Indian Textile & Apparel Market
Indian Textile &
Apparel market
(INR 5.7tn)
Domestic
Market
(INR3.54tn)
Technical
Textile
Apparel
(INR 2.46tn)
Exports
(INR 2.16tn)
Home Textile
Apparel
Textiles
(INR 240bn)
(INR 840bn)
(INR1.32tn)
(INR 840bn)
Men's wear
Women's wear
Boys Wear
Girls Wear
(INR 1.04tn)
(INR 930bn)
(INR 258bn)
(INR 240bn)
Source: Industry sources
Domestic Market is further classified into Apparels (INR 2.46tn), Technical textiles (INR 840bn) and Home Textile (INR 240bn).
Textiles account for bulk of the exports and is estimated at INR 1.32tn and apparel exports is estimated at INR 840bn.
Domestic Apparel market is broadly classified into Men’s wear (INR 1.04tn), Women’s wear (INR930bn) and Kids wear segment
(INR 498bn).
Men’s wear segment is currently estimated at INR 1.04tn and is expected to grow at a CAGR of ~8.6% to INR 2.36tn by 2023. Shirts
(INR 283bn), Trousers (INR 222bn) and Denim (INR 95bn) are the top 3 segments which accounts for ~57.9% of the men’s wear
segment.
2
Exhibit 2: Category Growth in Men’s wear
300
283.3
16%
14%
13%
12%
12%
10%
9%
9%
8%
8%
7%
6% 6%
70.2
68.7
60.7
50.3
46.3
4%
3%
21.6
19.1
12.3
2%
0%
14%
222.3
250
200
150
7%
8%
100
95.1
50
0
Market Size (INR bn) - LHS
CAGR (2013-23) - RHS
Source: Industry source, CSEC Research
The most promising high growth categories in the men’s wear segment are Denim, Active wear and T-shirts which are expected to
outperform the overall industry growth. Men’s Denim segment, which is currently estimated at INR 95bn, is expected to grow at
CAGR of 14% to INR 352.5bn by 2023. Men’s Active wear segment, which is currently estimated at INR 21.6bn, is expected to grow
at CAGR of 13% to INR 73.3bn by 2023. Men’s T-shirt segment, which is currently estimated at INR 60.7bn, is expected to grow at
CAGR of 12% to INR 188.5bn by 2023.
Women’s wear segment, which is currently estimated at INR 930bn, is expected to grow at CAGR of ~9.4% to INR 2.28tn by 2023.
Saree (INR 325.3bn), Salwar Kamez (INR 251.5bn) and Innerwear (INR 108.8bn) are the top 3 segments which accounts for
~73.7% of the women’s wear segment.
Exhibit 3: Category growth in Women’s wear
350
300
250
325.3
15%
251.5
11%
200
150
100
50
15%
6%
108.8
15%
12%
10%
8%
5%
56.3
30.6
8%
24
9%
8%
15.5
10.8
10.6
8.9
5.9
0
Market Size (INR bn) - LHS
3.9
16%
14%
12%
10%
8%
6%
4%
2%
0%
CAGR (2013-23) - RHS
Source: Industry sources, CSEC Research
The most promising high growth categories in the women’s wear segment are Innerwear and Salwar Kamez which are expected to
outperform the overall growth. Women’s innerwear market is one of the fastest growing categories within women’s apparel segment
and it is more dynamic, with many design variation and regular introduction of innovative products. Women’s innerwear segment,
which is currently estimated at INR 108.8bn (CY13), is expected to grow at CAGR of 15% to INR 440bn (CY23). Salwar Kamez,
which is estimated at INR 251.5bn (CY13), is expected to grow at CAGR of 11% to INR 714bn (CY23).
3
Kids wear segment, which is currently estimated at INR 498bn, accounts for ~20% of the domestic apparel segment. Kids wear
segment, which is expected to grow at CAGR of ~10% to INR 1.3tn by 2023. Within Kids wear segment boys wear commands a
share of ~52% and is currently estimated at INR 256.8bn (CY13). Boys wear segment, which is expected to grow at CAGR of ~9.2%
to INR 616.7bn (CY23). Girls segment, which is estimated at INR 241.2bn, is expected to grow at CAGR of 10.7% to INR 665.5bn
(CY23).
Exhibit 4: India’s per capita expenditure on apparel is lowest amongst global peers but set to grow ~3.8X
Per capita (USD)
2000
1643
1500
1,221.00
1050
831
1000
1080
814
804
663
781
686
500
740
454
273
272
377
109
36
China
India
138
0
Australia
Canada
2012
Japan
EU - 27
2025
United
States
Russia
Brazil
Source: Statista, CSEC Research
Key Growth Drivers:
No of Household
Exhibit 5: Number of ultra HNI household to triple
350000
300000
250000
200000
150000
100000
50000
0
329000
81000
FY12
100900
FY13
FY18E
No of Ultra HNI Household
Source: Kotak Mahindra Wealth Management study 2013
4
Exhibit 6: Growing working class population in India
67
66
65
64
63
62
61
60
2003
2006
2009
2012
Working Age (15-64) % of total
Source: World Bank, CSEC Research
2013
Company Overview:
Arvind Ltd is the flagship company of the Lalbhai Group, established in 1931. Arvind’s business is broadly classified
into Textiles, Brand & Retail and others.
% of total revenue
Exhibit 7: Business segments
4%
100%
80%
60%
5%
5%
3%
4%
22%
23%
27%
27%
28%
41%
39%
36%
41%
41%
32%
33%
33%
29%
28%
FY10
FY11
FY12
FY13
FY14
40%
20%
0%
Denim
Other Textiles
Brands & Retail
Other
Source: Company, CSEC Research
Textile Business:
Textile business accounts for ~69% of the revenue. Company manufactures denim, woven, knits, khakis and
garments. Around ~94% of the textile revenues comes from denim (41%), woven (39%) and garments (14%).
Exhibit 8: Textile business segments
% of textile revenue
120%
2%
1%
7%
8%
6%
6%
80%
24%
22%
15%
13%
14%
14%
60%
31%
34%
33%
32%
39%
39%
43%
43%
45%
47%
42%
41%
FY09
FY10
FY11
FY12
FY13
FY14
100%
40%
20%
0%
Denim
Woven
Garments
Source: Company, CSEC Research
5
Others
Denim:
Company is the pioneer in denim manufacturing in India, with current capacity of ~108-110mn mtrs p.a (market share
of ~10.8%). In the last 5 years denim revenues have grown at a CAGR of 17% to INR18.9bn; while the denim volumes
have grown at a CAGR of 9% to 105mn mtrs. Denim’s EBIT margin for the last 3 years is in the range of 18-19%.
Denim realisation has grown at a CAGR of 7% from INR 126.5 per meter in FY09 to INR 180 per meter in FY14; while
the Industry’s average realisation is around INR 120-130 per meter. Company’s focus on niche premium denim
segment has fetched a premium realisation over its peers.
Exhibit 9: Arvind’s focus on niche denim segment fetches premium realization
180.00
105
89.2
40
88
60
172.98
200
150
95.9
119.43
96.4
80
126.57
67
Mtrs in million
100
167.05
140.98
100
50
20
0
Realisation per Mtr
120
0
FY09
FY10
FY11
FY12
Volume (mn mtrs) - LHS
FY13
FY14
Realisation (INR) - RHS
Source: Company, CSEC Research
Currently the company is operating at a capacity utilisation of ~95%, while the industry’s capacity utilisation is ~ 60%.
Company exports ~42% of the denim fabrics to global apparel manufacturers, while the company consumes ~ 9.5%
(~10mn mtrs) for garmenting. Company’s key clientele include GAP, Levi’s, Armani Exchange, Hugo Boss, Esprit,
Wrangler etc.
Exhibit 10: Strong growth in denim, despite operating in an excess capacity scenario
20,000
25.1%
18.0%
23.4%
17.9%
19.2%
25.0%
15,000
18,900
15,430
FY10
16,020
FY09
13,590
11.8%
10,510
5,000
20.0%
8,480
10,000
30.0%
15.0%
10.0%
5.0%
0
0.0%
FY11
FY12
Revenue (INR mn) - LHS
Source: Company, CSEC Research
6
FY13
FY14
EBIT Margin - RHS
Woven:
Arvind is the largest player in woven segment in India, with a capacity of ~110mn mtrs. Company manufactures
~103.3mn mtrs of woven fabrics, of which ~21% are exported, ~71% are sold domestically and ~8% is consumed
internally for garmenting. In the last 5 years woven revenues have grown at a CAGR of 24% to INR17.97bn; Woven
volumes have grown at a CAGR of 15% from 68mn mtrs in FY11 to 103.3mn mtrs in FY14. EBIT margin for the last 3
years is in the range of 18.7-20.4%. Company’s key clientele include GAP, Van Heusen, Arrow, Hugo Boss, Calvin
Klein, Esprit, Park Avenue etc. Company’s top 5 customer accounts for ~20% of its woven revenues.
Exhibit 11: Leading player in Woven segment
20,000
15,000
14.2%
13.3%
25.0%
20.4%
19.4%
18.7%
20.0%
15.0%
11.7%
10,000
8,190
9,870
10,990
14,310
17,970
5,000
6,150
10.0%
FY09
FY10
FY11
FY12
FY13
FY14
5.0%
0
0.0%
Revenue (INR mn) - LHS
EBIT Margin - RHS
Source: Company, CSEC Research
Garments:
Garments, which is a part of Arvind’s verticalization strategy, manufactures jeans, shirts & knitted garments from its
garment plants situated in & around Bangalore. Company has also set-up plants for manufacturing suits through JV
Company Arvind Goodhill Suit Manufacturing Pvt. Ltd. Company currently has a garmenting capacity of ~15mn pcs,
which is predominantly exported (~90-95%). In FY14, Company sold ~14.3mn pcs of garments with an average
realisation of INR 470/ piece and EBIT margin of 13.1%. Company plans to expand the garment capacity to ~25mn pcs
by the end of FY15.
Exhibit 12: Garment Business
8000
10.7%
-8.0%
6000
4.2%
1.1%
13.1%
10.0%
2.2%
5.0%
4000
6720
5040
4600
4580
5260
0.0%
4620
2000
15.0%
0
-5.0%
-10.0%
FY09
FY10
FY11
Revenue (INR mn) - LHS
Source: Company, CSEC Research
7
FY12
FY13
FY14
EBIT Margin - RHS
Brand & Retail Business:
Arvind through its subsidiary company Arvind Lifestyle Brands Ltd is selling in-house branded garment and is a
licensee for various international brands in India. International brand portfolios include Arrow, US Polo Associate,
Tommy Hilfiger (JV brand), Calvin Klein (JV brand), IZOD, Elle, Cherokee, GANT, Hanes, Billabong, Wonderbra, Ed
Hardy, Geoffrey Beene, Nautica etc. In-house brand portfolio includes Flying Machine, Colt, Excalibur, etc.
Exhibit 13: Brand & Retail Portfolio
Company operates apparel retail stores like Arvind Store which offers the entire gamut of apparel retailing from
premium shirting & suiting fabrics, Studio Arvind (custom tailoring unit), Arvind Denim Lab (exclusive denim concept
which offers other factory made custom made denims) and readymade Garments (in-house brands & licensed brands).
Company also operates Megamart, a value retail store. In 1QFY15, company operates 158 Megamart stores,
occupying 796,467sq.ft of retail space. Currently brands like Ruggers, Skinn, Elitus, Donuts, Karigiri, Mea CASA,
Aurburn Hill, Colt, Leisha, Bay Island, Excalibur and Edge are exclusively sold through MegaMart. Ruggers, Elitus and
Cheeroke are the top 3 brands which put together contribute a revenue of INR 3bn and contribute ~54% to
MeagaMart’s revenue. Private labels constitute ~40% of the MegaMart’s revenue, which are generally high margin and
company aims to take the revenue share of private labels to 60%.
Company also operates the specialty retail stores under licensing agreement with international brands like
Debanhams, Next, Club America, Calvin Klein, GAP and The Children’s Place.
Brand & Retail business accounts for ~28% of the total revenue. Revenues from Brand and Retail business grew at a
CAGR of 23% from INR 6.79bn in FY09 to INR 19.15bn in FY14; while the EBIT margin has improved from -2.2% in
FY09 to 2.2% in FY14. Low margin in Brand & Retail business is largely attributed to the low margin in the retail
business and losses from the newly acquired brands; while the margin in the power brands are quite healthy.
8
Exhibit 14: Strong revenue growth in B&R segment, while margin at low single digit
5.5%
25000
2.2%
2.9%
20000
15000
-2.2%
10000
6,793
3.2%
1.8%
13,235
14,043
19,154
6.0%
4.0%
2.0%
9,418
0.0%
7,127
5000
-2.0%
0
-4.0%
FY09
FY10
FY11
FY12
Revenue (INR mn) - LHS
FY13
FY14
EBIT Margin - RHS
Source: Company, CSEC Research
Arvind has classified Arrow, US Polo Associate, Tommy Hilfiger and Flying Machine as power brands. Sales of power
brands (Tommy Hilfiger sales reflect 100% of the top-line of the JV Company) have grown at a CAGR of 40.3% from
INR 2.18bn in FY09 to INR 11.85bn. Power Brands’ EBITDA margin has improved tremendously from 2.4% in FY09 to
11.5% in FY14.
Exhibit 15: Strong traction in power brands, with healthy margin
14,000
12,000
9.60%
10,000
9.40%
10.50%
11.50%
8.00%
6,000
2,970
4,770
7,590
9,190
11,850
2,000
6.00%
2.40%
2,180
4,000
12.00%
10.00%
7.40%
8,000
14.00%
FY09
FY10
FY11
FY12
FY13
FY14
0
4.00%
2.00%
0.00%
Revenue (INR mn) - LHS
Source: Company, CSEC Research
9
EBITDA Margin - RHS
Megamart:
According to our estimate, Megamart’s sales has grown at a CAGR of 18.7% from INR 2.8bn in FY10 to INR 5.6bn in
FY14; while the EBITDA grew at a muted pace of CAGR 5.6% from INR 125.4mn in FY10 to INR 156mn in FY14.
EBITDA margin contracted from 4.5% in FY10 to 2.8% in FY14.
Exhibit 16: Megamart – undergoing major restructuring
1.5%
5.0%
2.8%
2.7%
6.0%
5.0%
4.0%
3.00
3.0%
1.00
5.2
5.1
3.7
2.00
5.6
4.00
2.0%
Margin %
4.5%
5.00
2.8
Revenue (INR bn)
6.00
1.0%
0.00
0.0%
FY10
FY11
FY12
FY13
Revenue (INR bn) - LHS
FY14
EBITDA margin - RHS
Source: CSEC Research
Other Brands:
Revenue from other brands grew at a CAGR of 141.6% from INR 102mn in FY10 to INR 3.5bn in FY14, the growth
was aided by series of acquisitions of brand license by the company leveraging its relationship with these global
brands. Between CY10-14, company has acquired, Indian operating license for 14 new brands. Most of these brands
are in the investment phase consequently higher spending on promotional expense on these brands has dented the
operating margins.
Exhibit 17: Strong growth on account of series of acquisitions
4,000
INR mn
3,000
2,000
1,000
0
FY10
FY11
FY12
FY13
-1,000
Revenue (INR mn)
Source: CSEC Research
10
EBITDA (INR mn)
FY14
Exhibit 18: Brand Acquisition timeline
2014
2013
2012
2011
2010
2009
2007
2006
2004
1999
1997
1995
1994
1993
1980
• Calvin Klein, The Children’s Place, GAP
• Ed Hardy, Hanes, Wonderbra
• Debenhams, Next, Nautica, Billabong
• Mossimo, Elle
• IZOD, Energie
• USPA
• Megamart large format, Cherokee
• Gant
• Tommy Hilfiger
• Wrangler
• Excalibur
• Megamart, Ruf n Tuf
• New Port
• Arrow
• Flying Machine
Other Business:
Other business comprises of real estate, technical textiles, telecom, engineering and fabrication. Revenues from other
business accounts for ~4% of the total revenue and it have grown at a CAGR of 23.5% from INR 1.23bn in FY09 to
INR 3.53bn in FY14.
11
Distribution Network:
Company has a strong distribution network of 858 stores with a retail space of ~1.55mn sq.ft. (Brands: 741 stores with
~0.75mn sq.ft retail space & MegaMart: 158 stores with ~0.79mn sq.ft. retail space). In FY14, company has added 128
branded stores, with 86,988 sq.ft retail space, while as a part of its restructuring exercise, the Company has shutdown
31 loss making MegaMart stores, while it has added 34,652 sq.ft retail spaces.
Exhibit 19: No of outlets
Exhibit 20: No of sq.ft
2000
0
754.5
158
796.5
166
500
717.2
189
200
1000
744.8
186
741
709.5
184
698
762.1
684
666.1
638
717.3
400
622
1500
647.8
600
682.2
No of Stores
800
No of sq.ft ('000)
1000
0
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15
Megamart
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15
Brands
Megamart
Source: Company, CSEC Research
Brands
Source: Company, CSEC Research
In 1QFY15, the Company was equipped with 810 exclusive key account counters, which contribute ~10.3% of brand
and retail sales. It is also one of the fastest growing channels for the company. According to our estimates, revenue
from key account counters grew at a CAGR of 39.5% INR 726mn in FY11 to INR 1.97bn in FY14.
2,500
12.0%
2,000
10.0%
8.0%
1,500
6.0%
1,000
4.0%
500
2.0%
0
0.0%
FY11
FY12
FY13
Revenue (INR mn) - LHS
FY14
% of B&R revenue - RHS
Source: Company, CSEC Research
12
% share
INR mn
Exhibit 21: Key account counter – the fastest growing channel
Exhibit 22: Key Clientele (Textile Business):
13
Management Profile:
Mr. Sanjay S Lalbhai (Chairman and Managing Director) is associated with Arvind for more than 35 years. He is a Science
Graduate with a Master’s degree in Business Management. He also holds directorships in Arvind Lifestyle Brands Ltd, Arvind Retail
Ltd, Arvind Brands & Retail Ltd, Amol Decalite Ltd, Adani Ports & SEZ Ltd, Arvind Worldwide Inc, USA, Arvind Worldwide (M) Inc,
Arvind Overseas (M) Ltd; Arvind Spinning Ltd, Mauritius and Arvind Textile Mills Ltd, Bangladesh.
Mr. Jayesh Shah (Executive Director & CFO) has been associated with the company since 1993. He is a commerce graduate and
Chartered Accountant. He holds directorships in many other companies.
Mr. Punit Lalbhai (Executive Director) holds an MBA from INSEAD (France) specialising in Strategy and General Management,
along with a Masters in environmental Science from Yale University and a Bachelors degree in Science (Conservation Biology) from
the University of California. He is currently serving as a board member for Sustainable Apparel Coalition, council member for Better
Cotton Initiative (Geneva) and member of CII for Family Business Network.
Mr. Kulin Lalbhai (Executive Director) holds an MBA from Harvard Business School along with a Bachelors degree in Science
(Electrical Engineering) from Stanford University. He is passionate about the retail industry and B2C business, and has researched
extensively on Disruptive Business Models and online space.
Mr. J Suresh (MD & CEO – Arvind Brands & Retail) oversees the brand and retail business for Arvind. He has been instrumental
in strengthening the lifestyle brand portfolio and establishing Megamart as a leading value retail chain in apparels. Prior to joining
Arvind, he held several senior positions during his 18-year old stint in HUL and served as a member of the management committee
of the F&B business.
14
Investment Rationale
Woven and garmenting to aid growth in textile business
Company’s textile revenues have grown at a CAGR of 19% from INR 19.7bn in FY09 to INR 46.5bn in FY14. The growth was
largely aided by the woven, denim and other segments such as voiles and knits.
Going forward, we estimate textile revenue to grow at a CAGR of 14.4% from INR 46.5bn in FY14 to INR 69.6bn in FY17E.
The growth in textile segment would be largely aided by strong growth in woven and garmenting. We have estimated that these two
segments to contribute ~70% of the incremental textile revenue between FY14-17E. We estimate woven segment to grow at a
CAGR of ~15% from INR 17.9bn in FY14 to INR 27.6bn in FY17E, aided by healthy volume growth of CAGR 12% on the back of
steady momentum in woven fabric. Woven division is currently operating at a capacity utilisation of ~94-95%. In order to aid growth,
company is expanding its woven capacity from 110mtpa to 132mtpa and this incremental capacity would come on stream in
3QFY15.
69.6
60.5
52.5
0.0
10.0
5%
5.0
0%
0.0
FY15E FY16E FY17E
Textile Business - LHS
INR bn
25.3% 35.0%
30.0
30.0%
25.0
25.3% 25.3%
10.0
25.0%
8.0
20.0%
6.0
9.6%
15.0%
13.2
10.5
8.4
6.7
2.0
10.0%
5.0
4.0
0.0
FY13
Source: Company, CSEC Research
15.0%
10.0%
10.0
5.0%
5.0
0.0%
0.0
% Growth - RHS
-3.7%
15.0
5.0%
FY14 FY15E FY16E FY17E
Garment Revenue - LHS
20.0
25.0%
22.5%
8.2% 8.2%
20.0%
8.2%
0.0%
-5.0%
FY13 FY14 FY15E FY16E FY17E
Denim Revenue - LHS
Source: Company, CSEC Research
15
23.9
33.3%
Exhibit 26: Denim Revenue – CAGR 8% (FY14-17)
22.1
Exhibit 25: Garment Revenue – CAGR 25% (FY14-17)
12.0
% Growth - RHS
Source: Company, CSEC Research
Source: Company, CSEC Research
14.0
Woven Revenue - LHS
% Growth - RHS
20.4
FY14
10%
18.9
FY13
15.0
15.4
46.5
20.0
15%
37.0
40.0
27.6
20.0
23.6
20%
8.1%
16.9%
20.2
25.0
16.9% 35%
30%
25.6% 12.3%
25%
20%
15%
10%
5%
0%
FY13 FY14 FY15E FY16E FY17E
30.2%
18.0
25%
13.0% 15.1%
60.0
INR bn
30.0
INR bn
25.6%
INR bn
80.0
Exhibit 24: Woven Revenue – CAGR 15% (FY14-17)
15.2% 30%
14.3
Exhibit 23: Textile Revenue – CAGR 14.4% (FY14-17)
% Growth - RHS
We estimate garment segment to grow at a CAGR of ~25% from INR 6.7bn in FY14 to INR 13.2bn in FY17E, led by a volume
growth of CAGR 16% in FY14-17E. Company is also increasing the garment capacity from ~15mn pcs to 25mn pcs by end of FY15.
Given the excess capacity situation in denim segment, the Company undertook a conscious move not to expand its denim capacity
further. We estimate denim revenue to grow at a CAGR of 8% from INR 18.9bn in FY14 to INR 23.9bn in FY17E, with a muted
volume growth of CAGR 3%.
Megamart to Power Megamart – shifting gears
Megamart’s revenue which was growing at healthy rate of 30%+ YoY between FY10-12, started to witness multiple challenges in
the form of slowdown in domestic economy, unfavourable excise duty changes and rising cotton prices, which hampered both the
sales growth and profitability. EBITDA margin of Megamart came down from 4.5% in FY10 to 1.5% in FY12. To address these
challenges, the Company repositioned Megamart as a value retailer from discount retailer, rationalised the stores by closing the loss
making stores and opening Power Megamart stores (10,000+ sq.ft), increased the share of high margin private labels and focused
on improving the operational efficiencies.
In the last two years company has downsized Megamart by 27% from 216 stores in FY12 to 158 in 1QFY15. Management has been
opening more and more Power Megamart format stores which have resulted in increase in Megamart retail area, which grew by
~15.4% from 0.69mn sq.ft in FY12 to 0.79mn sq.ft in 1QFY15.
Power Megamart format is expected to breakeven within 1-2 years and total capex per store is INR 2,800 per sq.ft (including
security deposit). According to the management, currently ~20-25% of the retail areas are currently under Power Megamart format,
which operates at an EBITDA margin of ~8% due to higher private label offering and higher operational efficiency. Company plans
to increase the area share of Power Megamart to ~50% by FY15. Management is hopeful of completing the restructuring exercise
by FY15.
8000.0
5.0%
FY13
Megamart Revenue - LHS
INR
0.60
7400.0
0.40
7200.0
1.0%
7000.0
0.0%
6800.0
EBITDA Margin - RHS
Source: Company, CSEC Research
7600.0
2.0%
FY15E FY16E FY17E
1.00
0.80
8,058
7.3
6.5
6.0
5.6
FY14
0.90
7800.0
4.0%
3.0%
0.71 0.75
0.81 0.84
7,737
3.5%
8200.0
7,430
2.8%
6.0%
7,430
2.7%
5.0%
4.1%
Exhibit 28: Revenue per sq.ft to grow
7,267
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
5.2
INR bn
Exhibit 27: Megamart Revenue – CAGR 9.2% (FY14-17)
0.20
0.00
FY13 FY14 FY15E FY16E FY17E
Revenue per sq.ft (LHS)
sq.ft - mn (RHS)
Source: Company, CSEC Research
We believe that the tailwind benefit in the form of anticipated economic recovery, zero excise duty on readymade garments, stable
cotton prices, coupled with higher proportion of larger-format Power Megamart stores is likely to result in EBITDA margin expansion
which is bound to increase from 2.8% in FY14 to 5% by FY17. We estimate revenue from Megamart to grow at a CAGR of 9.2%
between FY14-17E.
16
Nautica, Hanes, Calvin Klein, Elle and GANT – second line of power brands in making
The company is focussed on creating a second line of power brands; management expects Nautica, Hanes, Calvin Klein, Elle and
Gant to attain power brand status over the next 3-4 years. Nautica and Hanes are having a turnover of ~INR 900mn each and the
sales of these brands are expected to double in FY15 and turn profitable.
Company recently acquired 49% stake in Premium Garments Wholesale Trading Pvt. Ltd, the licensee of Calvin Klein trademark in
India for a consideration of INR 0.9bn. Calvin Klein (India) revenue is pegged at INR 1.25bn, which has been growing at a CAGR of
30% in the last three years, with an EBITDA margin of 8-9% and Company expects this trend to sustain in the near term.
New brands likely to turn profitable by FY17
We have estimated that EBITDA losses from the existing portfolio of new brands at ~INR 350mn, with negative EBITDA margin (10.1%) in FY14. The losses were primarily attributable to higher promotional expenses, higher commissions, brokerage & discounts
and higher rentals.
According to our estimate, advertisement & promotional (A&P) expense, rent and commission, brokerage & discounts accounts for
6-7%, 6% and 5.7% of brands revenue. We expect, A&P spend to remain elevated in the near term, while the higher spend on
commission, brokerage & discounts and higher rentals to moderate going forward on account of operating leverage. We have
estimated that the Commission, brokerage & discount expenses of Brands business has grown at a CAGR of 25% from INR 308mn
in FY10 to ~INR 745mn in FY14, while as a percentage of sales it declined from 12.2% in FY10 to ~5.7% in FY14 and we expect it
to decline further to ~4.5% in FY17E.
Exhibit 29: New brands to turn profitable by FY17
2.1%
8000
-1.9%
6000
0.0%
-5.0%
-10.1%
4000
5.0%
-0.3%
-10.0%
2000
-18.0%
-15.0%
0
-20.0%
FY13
FY14
FY15E
New Brands (INR mn) - LHS
FY16E
FY17E
EBITDA Margin - RHS
Source: Company, CSEC Research
Nautica and Hanes, which contributes ~ 51% of the new brand sales, are expected to turn profitable by end of FY15 and brands
such as Elle and Gant, which is currently loss making is expected to turnaround in mid FY16. We expect the losses from this new
brand business to subside and turn profitable by FY17E. We estimate an EBITDA margin of -1.9% (FY15E), -0.3% (FY16E) and
+2.1% (FY17E).
17
Demerger of real estate business to unlock value
Arvind has announced de-merger of Arvind Infrastructure Ltd (AIL), a real estate arm of Arvind Ltd. The share swap ratio for the
demerger is 1:10 for existing company’s shareholders. The entire process is expected to complete by March 2015. AIL is curren tly
managing 11 projects covering 360 acres in Ahmedabad and Bangalore with 5.3mn sq.ft under development with a cumulative
revenue potential of INR 26bn. Management has guided for revenue of INR 1.5bn and PAT of INR 200mn for AIL in FY15.
Management has an internal target to achieve a turnover of INR 10bn at AIL over the next five years.
In addition to AIL’s real estate assets, Arvind Ltd, has a land bank of 250 acres in vicinity of Ahmedabad and 25 acres within
Ahmedabad. Company expects proceeds of INR 5bn through the monetisation of most of the land bank over the next three years
and plans to utilise these proceeds to strengthen its brand portfolio and pare down debt.
18
Financials
Revenue growth aided by strong growth in Brand & Retail segment
Arvind’s revenue has grown at a CAGR of ~18.9% from INR 40.8bn in FY11 to INR 68.6bn in FY14. The growth was largely aided
by strong growth in Brand & Apparel business, which grew at a CAGR of ~26.7% from INR 9.4bn in FY11 to INR19.2bn in FY14.
Textile business grew at a CAGR of 15.4% from INR 30.3bn in FY11 to INR46.5bn in FY14, while other business grew at a CAGR of
23% from INR 1.9bn in FY11 to INR3.5bn in FY14.
Exhibit 30: Revenue to grow at 16.9% CAGR
17.3%
100
16.8%
30
16.5%
25
INR bn
80
60
7.5%
20
15
40
68.6
79.9
93.4
109.6
10
52.9
20
120
35
FY13
FY14
FY15E
FY16E
FY17E
0
5
0
Revenue (INR bn) - LHS
5.4
100
Growth % - RHS
Source: CSEC Research
Revenue (INR bn)
29.7%
Percentage
120
Exhibit 31: Segment revenues
4.7
80
4.1
60
40
20
2.0
14.0
37.0
3.5
19.2
24.0
46.5
52.5
35.5
29.0
60.5
69.6
0
FY13
FY14
Textile Business
FY15E
Brands & Retail
FY16E
FY17E
Other Business
Source: CSEC Research
Going forward, we estimate Arvind’s revenue to grow at a CAGR of 16.9% between FY14-17 to INR 109.5bn led by traction in brand
& retail business, which is estimated to grow at a CAGR of 23% in FY14-17E. The growth in brand & retail business is aided by
power brands, which is estimated to grow at CAGR of 25% and newer brands, which is estimated to grow at CAGR of 34%. We
have factored in a growth of CAGR 9.2% for Megamart. We estimate textile business to grow at a CAGR of 14.4% between FY1417E, aided by garments (25% CAGR) and woven fabrics (15% CAGR) and other business (15% CAGR).
EBITDA margin set to expand going forward
Company’s EBITDA margin expanded 100bps from 12.6% in FY10 to 13.6% in FY14. The margin expansion was mainly on account
of sharp margin expansion in textile business to the tune of 340bps, despite currency headwinds and rising cotton prices. Textile
business EBITDA margin expanded from 15% in FY10 to 18.4% in FY14.
In Brand & Retail segment, the margins fell by 50bps from 6% in FY10 to 5.5% in FY14, as the strong margin expansion in the
Power Brands were offset by the losses in the new brand business and margin pressure in the Megamart business. Power Brands
(incl.100% share of Tommy Hilfiger) EBITDA margin expanded 410bps from 7.4% in FY10 to 11.5% in FY14. According to our
estimates, the losses from the newly acquired brand grew at a CAGR of 89% from ~INR -28mn to ~INR -350mn. Megamart’s
EBITDA margin fell by 170bps from 4.5% in FY10 to 2.8% in FY14.
19
Exhibit 32: EBITDA margin to expand 100bps between FY14-17
20.0
15.0%
14.6%
14.3%
14.5%
14.0%
15.0
14.0%
13.6%
10.0
13.5%
13.0%
13.0%
6.9
9.3
11.2
13.3
16.0
5.0
FY13
FY14
FY15E
FY16E
FY17E
12.5%
0.0
12.0%
EBITDA (INR bn) - LHS
EBITDA Margin - RHS
Source: Company, CSEC Research
Going forward, we estimate the company’s EBITDA margin to increase 100bps from 13.6% in FY14 to 14.6% in FY17E. Between
FY14-17E, we have factored in a 50bps margin expansion in the textile business, 220bps margin expansion in Megamart, Power
brands excl. TH’s margin to expand by 60bps, Tommy Hilfiger’s margin is likely to expand by 130bps and new brand business is
expected to become profitable with EBITDA margin expanding from -10.1% in FY14 to 2.1% in FY17E.
Return ratios set to expand going forward
Arvind’s return ratios such as RoCE and RoE expanded by 204bps and 303 bps respectively in FY14 aided by improvement in the
margin, turnover ratio and leverage factors. Going forward, we expect the trend to continue and we have factored in RoCE and RoE
to expand by 293bps and 365bps respectively between FY14-17E, aided by margin expansion and higher operating efficiency.
FY13
FY14
FY15E
FY16E
FY17E
0.0
RoCE %
18.3
5.0
17.3
5.0
16.6
10.0
18.5
10.0
17.0
15.0
16.2
15.0
15.6
20.0
13.5
20.0
14.6
Exhibit 34: RoE to expand 365bps (FY14-17)
11.6
Exhibit 33: RoCE to expand 293bps (FY14-17)
FY13
FY14
FY15E
FY16E
FY17E
0.0
RoE %
Source: Company, CSEC Research
Source: Company, CSEC Research
20
Valuation
We have valued Arvind using SOTP methodology, given the diversified nature of business segments. We have valued the B2B
business i.e. textile business at 5.1XFY17E EV/EBITDA, while the matured Brand business such as Power brands and Calvin
Klein at 10.6XFY17E EV/EBITDA, in-line with the global premium brands. We have valued Megamart at 13.5 XFY17E
EV/EBITDA, in-line with Shoppers Stop. As the Other new brands are still in the nascent investment phase, we believe EBITDA
doesn’t reflects the true value for these new brands, hence we value these other new brands using 2.1XEV/sales.
Currently the stock is quoting at a P/E multiple of 16.7X FY15E, 14X FY16E and 11.5XFY17E EPS of INR 17.8, INR 21.2 and INR
25.9 respectively. In terms of EV/ EBITDA it is quoting at 9.6X, 8.1X & 6.9X and on P/BV basis, the company is quoting at 2.6X,
2.3X & 2.0X to FY15E, FY16E & FY17E respectively.
The company’s transformation from B2B to B2C business model and improved fundamentals has called for a re-rating, which is
evident given the 184% surge in the stock price in the last one year. We feel the sharp rally in the stock has priced in the
turnaround of Megamart & new brands and de-merger of AIL. However, Company could positively surprise the market with faster
than anticipated turnaround in the Megamart & new brands business and acquisition of more profitable brands which we have not
factored in our valuation.
We initiate coverage on Arvind with MARKETPERFORMER rating and 18-month target price of INR 342 per share indicating an
upside of 15%.
Valuation
Textile
Megamart
Power brand excl.
TH
TH
CK
Other New brands
Land at parrent
AIL
EV
Net Debt
Shares o/s
Target Price
CMP
Return
Methodology
EV/EBITDA
EV/EBITDA
Multiple X
FY17E
Value
Value per share
5.1 13193.0 67284.1
260.6
13.5
362.6
4895.2
19.0
EV/EBITDA
EV/EBITDA
EV/EBITDA
EV/sales
NAV
NAV
10.6
10.6
10.6
2.1
2320.7
263.3
154.8
7107.0
24598.9
2791.1
1640.4
14924.6
2620.0
2500.0
121254.3
33054.7
258.2
95.3
10.8
6.4
57.8
10.1
9.7
469.7
128.0
342
297
15.0%
21
Relative Valuation:
Company
Year
End
OPM (%)
NPM (%)
P/E
P/BV
EV/EBITDA
EV/Sales
ROE (%)
Div Yield
(%)
Arvind*
Mar 16
14.25
5.86
14.0
2.3
8.1
1.2
17.3
1.20
Raymonds
Mar 16
11.00
3.60
13.22
1.57
6.83
0.75
11.77
1.19
Vardhman Textiles
Mar 16
18.30
8.20
4.87
0.64
4.33
0.79
14.57
2.43
Welspun India
Mar 16
22.87
9.20
5.26
1.53
4.04
0.93
31
2.23
17.39
7.00
7.8
1.2
5.1
0.8
19.1
2.0
Average
Global Players
Adidas
Dec 15
9.30
4.90
15.34
1.84
8.33
0.78
12.3
2.75
H&M
Nov15
20.70
13.40
20.36
8.22
12.78
2.63
42.9
4
Hugo Boss
Dec 15
23.90
14.80
15.96
6.79
10.27
2.46
43.8
4.42
Inditex
Jan 16
23.80
14.60
22.8
5.62
12.89
3.06
26.4
2.81
Lululemon
Jan 16
23.30
14.37
19.2
3.77
10.24
2.39
20.2
0
Next
Jan 16
23.56
15.80
14.3
20.97
10.22
2.41
166.76
5.06
Nike
May 16
16.10
10.60
20.68
4.55
13
2.1
28.95
1.34
PVH
Jan 16
15.05
8.10
13.14
1.66
9.57
1.44
13.84
0.14
Ralph Lauren
Mar 16
18.20
10.20
16.02
3.06
8.21
1.5
19.34
1.25
19.32
11.86
17.53
6.28
10.61
2.09
41.61
2.42
Average
Source: *CSEC Research, Bloomberg
Risk:
Delay in turnaround of Megamart and other new brand business
Adverse currency movement
Adverse cotton price movement
Delay in capacity expansion
Slowdown in domestic and export market
22
Financials (Consolidated)
Income Statement (Abstract)
Per Share Ratios
INR(million)
Particulars
Net Revenue
Growth (%)
Operating Expenditure
FY14
FY15E
FY16E
FY17E
Particulars
FY14
FY15E
FY16E
FY17E
Adjusted EPS (INR)
13.7
17.8
21.2
25.9
Cash EPS
22.4
27.7
33.1
39.9
68,621
79,927
93,380
1,09,567
29.66
16.48
16.83
17.33
BV/Share (INR)
100.0
114.3
131.3
152.1
93,572
FCF/Share(INR)
3.0
7.0
10.8
12.2
DPS (INR)
2.3
3.0
3.6
4.4
59,281
68,764
80,069
EBITDA
9,340
11,163
13,311
15,995
Growth (%)
35.87
19.52
19.24
20.17
Depreciation
Other Income (net of
interest)
2,252
2,542
3,082
3,616
Key Ratios
-2851
-2851
-2929
-3090
Particulars
Dividend payout
(%)
FY14
17.14
17.00
17.00
17.00
EBITDA margin (%)
13.61
13.97
14.25
14.60
Tax Paid
FY15E
FY16E
FY17E
548
1,168
1,825
2,601
Tax Rate (%)
Reported PAT (after
min. interest)
13.45
20.24
25.00
28.00
3,539
4,604
5,475
6,688
PBT Margin (%)
5.94
7.22
7.82
8.48
Adjusted PAT
3,539
4,604
5,475
6,688
RoCE (%)
15.57
16.23
16.99
18.50
Growth (%)
42.46
30.10
18.93
22.15
RoE (%)
14.63
16.64
17.27
18.28
Current Ratio
1.10
1.13
1.18
1.23
Net Debt/Equity
1.09
1.03
0.93
0.84
Inventory Days
87
85
83
80
Debtor Days
54
54
54
54
Creditor Days
77
75
73
70
CCC*
63
64
64
64
2.18
2.63
3.01
3.44
Balance Sheet (Abstract)
INR(million)
Particulars
FY14
Share Capital
2,582
2,582
2,582
2,582
23,248
26,934
31,320
36,678
Reserves & Surplus
Net worth
FY15E
FY16E
FY17E
Interest Cover Ratio
25,830
29,515
33,902
39,260
Current Liabilities
33,188
36,634
40,501
44,726
DuPont Analysis
Non-Current Liab
14,373
15,044
15,791
16,581
Total Liabilities
73,632
81,432
90,434
1,00,806
Net Fixed Assets
Other Non-Current
Assets
Cash & marketable
securities
30,274
33,207
35,728
38,686
Particulars
Net Profit Margin
(%)
6,934
6,934
6,934
6,934
1,663
1,090
1,317
1,581
Other Current Assets
34,762
40,202
46,455
53,605
73,632
81,432
90,434
1,00,806
Total Assets
Particulars
Cash flow from
operations
Cash flow from
investing
Cash flow from
financing
Free cash flow
Net change in cash
FY14
FY15E
FY16E
FY17E
4,121
7,274
8,380
9,718
-5,740
-4,776
-4,903
-5,854
1,239
-2,642
-3,251
-3,600
772
1,799
2,778
3,144
-380
-143
227
264
23
FY16E
FY17E
5.16
5.76
5.86
6.10
1.01
1.03
1.09
1.15
Leverage factor
2.81
2.80
2.71
2.61
14.63
16.64
17.27
18.28
RoE (%)
Valuation Ratios
Particulars
INR(million)
FY15E
Asset Turnover
P/E
Cash Flow statement (Abstract)
FY14
FY14
FY15E
FY16E
FY17E
21.7
16.7
14.0
11.5
P/BV
3.0
2.6
2.3
2.0
EV/Sales
1.5
1.3
1.2
1.0
EV/EBITDA
11.2
9.6
8.1
6.9
Div Yield (%)
0.79
1.02
1.21
1.48
*CCC – Cash Conversion Cycle
Cholamandalam Securities Limited
Member: BSE,NSE,MSE
Regd. Office: Dare House,2 (Old) # 234) N.S.C Bose Road, Chennai – 600 001.
Website : www.cholawealthdirect.com
Email id – [email protected]
CIN U65993TN1994PLC028674
Chola Securities is a leading southern India based Stock broker. Our focus area of coverage within the Indian market is Mid and small caps with a focus on
companies from southern India.
Our Institutional Equities services are carried out in partnership with RCCR, a boutique Investment research and Corporate Advisory firm founded by a
team with extensive experience in the Asset management industry.
RESEARCH
Srinivasan V
Head of Research*
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Sathyanarayanan M
Consumption
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Murugesa S
Engineering & Cement
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Michel Charles C
Technicals
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Rajasekhar R
IT & Auto Ancillary
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Karthikeyan P
Macro & Financial Services
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Sreedevi K
Associate
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Venkat Chidambaram
Head of FII Business & Corporate Finance*
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Lakshmanan T S P
Sudhanshu Kumar
Santosh Kumar Sharma
Chennai
Institutional Equities*
Mumbai
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+91 - 9953175955
+022 - 22617210
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Nikesh
Sathyanarayana N
Muthiah A N
Baskaran S
Saravanan
A Jaganathan
V Kumar
Maneesh Gupta
Sunil Kumar
AHMEDABAD
BANGLORE
CHENNAI - HO
CHENNAI - Nungambakkam
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CHENNAI - Ambattur
COIMBATORE
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GURGAON
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0124 4054521 /8860745674
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Srinivasa Reddy D V
Sudipta Bhaumik
Riken B Mehta
Pravin S
Deepak V Kshirsagar
Sivaraman G
M N Chandra Sekhar
HYDERABAD
KOLKATA
MUMBAI
MADURAI
PUNE
SALEM
VIZAG
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0891 - 6642718
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Shakil Ahmed Choudhury
Compliance Officer
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