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Arvnd 20150205-mosl-ru-pg014
1. 5 February 2015
3QFY15 Results Update | Sector: Textiles
Arvind
Niket Shah (Niket.Shah@MotilalOswal.com); +91 22 3982 5426
Atul Mehra (Atul.Mehra@MotilalOswal.com); +91 22 3982 5417
BSE SENSEX S&P CNX
CMP: INR288 TP: INR360 (+25%) Buy28,851 8,712
Bloomberg ARVND IN
Equity Shares (m) 258.2
M.Cap. (INR b) / (USD b) 74.3/1.2
52-Week Range (INR) 341/135
1, 6, 12 Rel. Per (%) -1/12/50
Avg Val INRm/Vol â000 813/3,363
Free float (%) 56.5
Financials & Valuation (INR Billion)
Y/E MAR 2015E 2016E 2017E
Net Sales 78.9 91.7 106.4
EBITDA 10.3 12.4 14.5
Adj PAT 3.8 4.5 5.7
EPS (INR) 14.7 17.5 22.1
Gr. (%) -0.9 18.5 26.7
BV/Sh.(INR) 111.8 125.9 144.0
RoE (%) 13.9 14.7 16.4
RoCE (%) 15.0 16.1 17.3
P/E (x) 19.5 16.5 13.0
P/BV (x) 2.6 2.3 2.0
Estimate change
TP change
Rating change
Beat on all counts; investment phase in Brands business is behind
Results above estimates: Arvind (ARVND) reported a revenue of INR20.7b (est. of
INR19.8b), compared to INR17.7b in 3QFY14, marking a YoY growth of 16.9%. Textile
business grew by 9.3% YoY to INR12.9b, against INR11.8b in 3QFY14. While Denim and
Woven businesses grew 12% each during the quarter, Garments business grew 4%.
Brands and Retail business grew by 21.1% to INR6.6b, against INR5.4b in 3QFY14.
EBITDA stood at INR2.9b (est. INR2.7b), against INR2.5b in 3QFY14, marking a YoY
growth of 13.3%. EBITDA margin for 3QFY15 stood at 13.9% (est. 13.6%), against
14.3% in 3QFY14, a YoY decline of 40bp. Management highlighted that a decline in
cotton prices is already reflected in 3QFY15 numbers. Textile margins grew 40bp YoY
to 18%, while Brands and Retail margins declined 110bp to 7%. PAT for 3QFY15 posted
a YoY growth of 6.8% and stood at INR1.09b (est. INR938m).
Brands and Retail - investment phase is behind: Brands business grew by 31%
during the quarter, led by 25% growth in power brands. MegaMart (MM) performance
though was subdued, with revenue declining 3% YoY. Like-to-like (LTL) growth was
impacted due to a weak Diwali and stood at 1.9% (Brands) and -2.3% (Retail)
respectively. Margins in Brands business declined 50bp YoY to 8.5%, even as Power
Brands margins improved 60bp YoY to 13.4%. MM margin declined 400bp YoY from
7.4% to 3.4%. Management highlighted that all brands are now profitable and the
investment phase for newer brands is behind. Thus, going forward, margins in the
Brands business is expected to improve further. Also, MM businessâ restructuring,
which is under progress, should drive an improvement in the retail business as well.
Valuation and view: We expect ARVNDâs revenue/PAT to post 16.6%/23.4% CAGR
over FY15E-17E. With the right focus on more value accretive brands and Retail
business, we believe capex intensity in the business will reduce, going forward. Thus,
we expect return ratios, which are at a decade high currently, to rise further (RoCE
from 15% to 17.4% and RoE from 13.9% to 16.6% over FY15E-17E), thus warranting a
re-rating. Maintain Buy with a target price of INR360 (9x FY17E EV/EBITDA).
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
2. 5 February 2015 2
Arvind
Results above estimates
n Arvind reported revenues of INR20.7b (est of INR19.8b) as compared to
INR17.7b in 3QFY14, marking a YoY growth of 16.9%.
n Textile business grew by 9.3% YoY to INR12.9b as against INR11.8b in 3QFY14.
n Brands and retail business grew by 21.1% to INR6.6b as against INR5.4b in
3QFY14.
n EBITDA stood at INR2.9b (est INR2.7b) as against INR2.5b in 3QFY14, marking a
YoY growth of 13.3%. EBITDA margins for 3QFY15 stood at 13.9% (est 13.6%)
against 14.3% in 3QFY14, a YoY decline of 40bps.
n PAT for 3QFY15 stood at INR1.1b (est INR938m) as compared to INR1.02b in
3QFY14 marking a YoY growth of 6.8%.
n Ecommerce contributed 5% of total sales; Key account contributed 37%; own
stores contributed 35% while balance 23% was contributed by MBOâs.
n Management indicated that âCreyateâ is gaining positive traction and it is
currently launched in three cities viz. Delhi, Ahmadabad and Bangalore.
n Creyate is clocking revenue of ~INR10m/month and management believes that
it will be ~INR5b business in next 4-5 years. Management plans to spend 8-10%
of its top line in A&P after launching the brand in at least 8-10 cities.
n ARVND is planning to launch Omni ecommerce platform just before next Diwali
in FY16E.
n Company has made VRS offer to 900 employees of a spinning plant and 98% of
them accepted the offer. Plant is reduced to 10% of operations and as a result
one time hit of INR250m will be taken in 4QFY15 for the same.
Exhibit 1: Quarterly revenue trend
Source: Company, MOSL
Exhibit 2: Quarterly EBITDA trend
Source: Company, MOSL
Exhibit 3: Quarterly PAT trend
Source: Company, MOSL
11,566
13,246
14,052
14,061
14,905
17,182
17,743
18,791
17,726
19,646
20,737
-4.5
5.6
16.3 12.3
28.9 29.7 26.3 33.6
18.9
14.3
16.9
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15
Revenues (INR m) Revenue growth (YoY)
1,291
1,647
1,909
2,027
2,029
2,328
2,543
2,482
2,190
2,421
2,882
11.2
12.4 13.6 14.4 13.6 13.6 14.3 13.2 12.4 12.3
13.9
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
EBITDA (INR m) EBITDA Margins (%)
325
648
754
758
676
900
1,022
941
905
933
1,091
-46.8
4.0
-69.0
8.9
108.3
39.0 35.6 24.1 33.9
3.6 6.8
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
PAT (INR m) PAT Growth(YoY)
3. 5 February 2015 3
Arvind
Denim business grew at 12%
n During the quarter Denim business grew at 12% to INR4.9b.
n Denim realizations grew 2% from INR179/m in 3QFY14 to INR182/m in 3QFY15.
n Export business is driving the realization higher as export customers are opting
for differentiated fabric.
n Management believes that 4Q growth will be muted due to weakness in retail
market affecting volumes and also due to recent fall in cotton prices.
n Management believes that cotton prices will remain at current level since it is
close to MSP.
Exhibit 4: Denim volume growth
Source: Company, MOSL
Exhibit 5: Denim realization grew by 2%
Source: Company, MOSL
Exhibit 6: Denim Installed Capacity (m mtr)
Source: Company, MOSL
Exhibit 7: Denim quantity sold and capacity utilization trend
Source: Company, MOSL
Exhibit 8: Denim realizations to remain steady
Source: Company, MOSL
Exhibit 9: Denim margin to sustain
Source: Company, MOSL
9
9
7
10
13
10
9
12
12
11
11
12
15
14
13
13.6
15
16
16.4
15.6
15
1521.0 24.0
21.0 23.0
26.6 25.0 25.0
28.4 27.6 26.0 26.0
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
Exports Domestic Total (MnMtrs)
166
170 170 171 171
180 179 179 177 177
182
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
Realizationper Mtr
120
96 96
108 108 108 108 108 108 108
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15EFY16EFY17E
Denim
67
88 96 96 89
105 109 110 112
70%
92%
89% 89% 83%
97% 101% 102% 104%
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Qtysold Capacityutilisation%
115 116
139
164 169 177 179 181 186
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Realisation(INR per metre)
12%
25%
23%
18% 19% 18% 18% 18% 19%
FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E
Margins %
5. 5 February 2015 5
Arvind
Garments growth below expectation
n Garment business posted a modest growth of 4% from INR1.79b in 3QFY14 to
INR1.86b in 3QFY15.
n Garments sales were lower than expected as due to slippage of garment
contracts to 4QFY15.
n Company is planning to add 7m capacity in 4QFY15 taking the total capacity to
25m.
Exhibit 16: Garment capacity (m pieces)
Source: Company, MOSL
Exhibit 17: Garment capacity utilization trend
Source: Company, MOSL
Exhibit 18: Garment realization improving steadily
Source: Company, MOSL
Exhibit 19: Garment margins are expected to improve
Source: Company, MOSL
Brands posts strong growth while growth in retail business was weak
n Brand and retail delivered a top line growth of 22% to INR6.6b. Brand revenue
grew 31% while Mega Mart retail de-grew by 3%.
n However EBITDA margins declined 120bps to 7% on account weak Diwali season
and de-growth in MM sales.
n Brand and retail margins are expected to improve in 1QFY16 due to benefit of
low cotton prices which will be reflected from May 15 onwards.
n Newly acquired brands are at breakeven level and will be EBITDA positive from
next quarter.
n ARVND is targeting to launch newly acquired brand viz. GAP in Jun 15 and The
Childrenâs Place in Aug 15.
n MM restructuring is on track and company has not closed any stores in 3Q due
to Diwali; however management believes itâs restructuring will be completed
over next two quarters.
19 19
10 10 10 10
25 25 25
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Installedcapacity
8
19
13
10 10
12
13
15
18
42%
100%
130%
100% 100%
110%
52% 60%
70%
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Qtysold Capacityutilisation
277
352
460
504
546
584 590 608
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Realisaiton(INR)
4.0%
-8.0%
1.0%
2.0%
11.0%
13.1% 13.5% 14.0% 14.0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Margins (%)
6. 5 February 2015 6
Arvind
Exhibit 20: Strong growth in Brand business Exhibit 21: EBITDA margin trend in brand business
Exhibit 22: Store addition continue to be strong
Source: Company, MOSL
Exhibit 23: Space addition (msf) trend
Source: Company, MOSL
Exhibit 24: Total stores in brands segment (ALBL)
Source: Company, MOSL
Exhibit 25: Total sq ft and revenue per sq ft
Source: Company, MOSL
Exhibit 26: Total Megamart stores
Source: Company, MOSL
Exhibit 27: Total sqft area for Megamart
Source: Company, MOSL
2,743
3,463
4,172
3,663
3,685
5,015
5,439
5,014
4,660
6,470
6,610
9.0
6.0
19.0 17.0
34.3
44.8
30.4
36.9
26.5 29.0%
21.5%
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
Revenues (INR m) Revenue growth (YoY)
30
208
275
249
92
251
446
236
163
343
463
1.1%
6.0%
6.6% 6.8%
2.5%
5.0%
8.2%
4.7%
3.5%
5.3%
7.0%
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
EBITDA (INR m) EBITDA Margins (%)
370
419
455
641
622
638
684
698
741
761
800
209
208
206
197
184
186
189
166
158
146
145
579 627 661
838 806 824 873 864 899 907 945
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
Brands MM Total
0.35
0.39
0.47
0.63
0.65
0.67
0.71
0.72
0.75
0.77
0.79
0.71
0.70
0.73
0.71
0.68
0.72
0.76
0.74
0.80
0.81
0.84
1.06 1.09 1.20 1.34 1.33 1.38 1.47 1.46 1.55 1.58 1.63
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
Brands MM Total
228
352
570
698
848
948
1,048
FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Number of stores
214,844 330,943
630,248 717,236
858,299 969,109
1,103,476
19,363 18,825
12,060
15,685
18,509
20,730
23,217
FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Total sqft Revenue per sq ft
200
216
197
166
151 161
181
FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Number of stores
617,154 691,770 710,133 744,785 785,883
921,721
1,139,842
6,433
7,430 7,397 7,613
8,146 8,553 8,724
FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Total sqft Revenue per sq ft
7. 5 February 2015 7
Arvind
Power brands continue to report robust growth
n Power brands revenues grew by 25% to INR3.6b while power brand margins
expanded 60bps to 13.4%.
n Management expects power brands to grow at 25-30% going forward.
Exhibit 28: Power brands contribution growing
Source: Company, MOSL
Exhibit 29: Power brands margins trend
Source: Company, MOSL
Focus will be to improve debt metrics
n Debt on books currently stands at INR34b.
n Capex for next two years will be INR5b annually, of which INR2.5b will be
towards textile business and balance INR2.5b will be towards brands business.
n Management is focused on improving Debt-EBITDA from 3x to 2.5x over FY15-17
Exhibit 30: Debt to Equity
Source: MOSL
Exhibit 31: Debt to EBITDA
Source: MOSL
2,180 3,940 6,200 7,840 11,850
78%
86%
90%
92% 94%
FY10 FY11 FY12 FY13 FY14
Power brands (INR m) Power brands % of total brands
7.4
9.3 9.5
11.2 11.6
FY10 FY11 FY12 FY13 FY14
2.1
1.6
1.2
1.0 1.0 1.0 1.0 1.0 0.9
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Debt Equity (x)
7.5
5.4
4.2
3.5 3.6
3.2 3.2
2.8 2.4
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Debt/EBITDA (x)
8. 5 February 2015 8
Arvind
Valuation and view
We value ARVND at 9x FY17E EV/EBITDA, at a premium to long term average
multiple of 7.7x, which we believe is justified considering:
n Indiaâs best brand portfoliosâ, preferred partner for foreign brands
ARVND has evolved into a brand power house catering with a portfolio of ~30
brands with 13 owned (Flying Machine, Excalibur and Ruggers etc) and 17 licensed
brands (Arrow, US Polo, Gant and Hanes etc), Tommy Hilfiger, Calvin Klein (JV), The
Children's Place and GAP. Having a large portfolio of brands, against running a single
brand, has numerous advantages. Advantages begin from sourcing to sharing
common administration costs to better bargaining while scouting for brandsâ retail
space. ARVND purchases 20m garments annually for its brands and retail business
from 35 dedicated vendors. It is one of the few players which can take space across
floors in a mall, act as an anchor tenant due to its presence across store formats and
categories. Other synergies between textiles and brands segment include training,
distribution, HR and IT costs. These advantages ensure ARVND being a preferred
partner for global brands looking to enter India with terms favorable to ARVIND (at
least 20 years license term with royalty agreements of less than 4% of revenues).
n Focus shifts from B2B to B2C; brands and retail to form 36% of revenues
As against earlier focus on denims, currently management is committed to shifting
business focus from B2B to B2C. Thus, we expect share of brands and retail to
improve from 28% in FY14 to 36% in FY17. Gauging its portfolio of brands and
presence across all segments (value, premium and luxury), a thrust on B2C will
benefit ARVND from the rising disposable income and increased spending power
across all segments and demographics of the country, and also by being a direct
beneficiary of Indiaâs consumption story.
n Return ratios at decade high
With the right focus on more value-accretive brands and retail business, we believe
capex intensity in the business will reduce going forward. Thus, we expect return
ratios which are at decade high currently to improve further going forward (RoCE
from 15% to 17.4% and RoE from 13.9% to 16.6% over FY15E-17E), thus warranting
a re-rating.
Exhibit 32: EV/EBITDA (One year forward)
Source: Company, MOSL
8.7
19.6
7.7
6.6
4.3
0.0
5.0
10.0
15.0
20.0
25.0
Mar-01
Apr-02
May-03
Jun-04
Jul-05
Aug-06
Aug-07
Sep-08
Oct-09
Nov-10
Dec-11
Dec-12
Jan-14
Feb-15
EV/EBDITA(x) Peak(x) Avg(x) Median(x) Min(x)
11. 5 February 2015 11
Arvind
Corporate profile
Exhibit 41: Shareholding pattern (%)
Dec-14 Sep-14 Dec-13
Promoter 43.5 43.5 43.8
DII 14.8 14.3 18.2
FII 21.1 23.7 19.3
Others 20.7 18.6 18.6
Note: FII Includes depository receipts
Exhibit 42: Top holders
Holder Name % Holding
LIC of India 6.4
Multiples Pvt Equity FII I 3.1
Government Pension Fund Global 2.2
Dimensional Emerging Markets Value Fund 1.4
Multiples Pvt Equity fund 1.1
Exhibit 43: Top management
Name Designation
Sanjay S Lalbhai Chairman & Managing Director
Jayesh K Shah CFO & Director
Punit Lalbhai Executive Director
Kulin S Lalbhai Executive Director
Exhibit 44: Directors
Name Name
Sanjay S Lalbhai Vallabh Bhanshali*
Jayesh K Shah Punit Lalbhai
Renuka Ramnath* Kulin S Lalbhai
Bakul H Dholakia* Samir Mehta*
Dileep C Choksi*
*Independent
Exhibit 45: Auditors
Name Type
Sorab S Engineer & Co Statutory
Exhibit 46: MOSL forecast v/s consensus
EPS
(INR)
MOSL
forecast
Consensus
forecast
Variation
(%)
FY15 14.7 15.9 -7.4
FY16 17.5 20.3 -13.7
FY17 22.1 24.1 -8.3
Company description
Arvind Ltd, flagship of the Lalbhai group, is Indiaâs
largest textile company. It is also the largest cotton
textile manufacturer, with an installed fabric
capacity of over 200mmtrs per annum. Company is
the preferred supplier to internationally renowned
brands like Polo, Armani Exchange, Diesel, and GAP
among others. It makes a strong statement among
international brands and retail business and has
one of the robust brand portfolios in India (28)
along with Megamart, the fastest growing value
retail chain.
Exhibit 40: Sensex rebased
14. 5 February 2015 14
ArvindDisclosures
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