With a market capitalisation of Rs. 6,306 crores, the shares of the company started Thursday’s trading session on a higher note at Rs. 475. The shares hit a high of Rs. 476.65, gaining around 1 percent, and currently trading at Rs. 473.50 apiece.
Having a look at the latest financial statements published by the company, the revenues and profits have shown a positive movement.
The revenue of Arvind Fashions Ltd increased by around 45 percent from Rs. 3,056 crores during FY21-22 to Rs. 4,421 crores during FY22-23. In addition, during the same period, the net profits showcased a transition from a net loss of Rs. 237 crores to a net profit of Rs. 87 crores.
Due to increasing operating revenue and profits on a YoY basis, the profitability metrics of the company improved with the return on equity (RoE) increasing from a negative 16.68 percent during FY 21-22 to a positive 10.78 percent in FY 22-23, and, the return on capital employed (RoCE) zoomed from 1.81 percent to 20.15 percent during the same timeframe. Furthermore, the net profit margin transformed from a negative 3.41 percent during FY21-22 to a positive1.99 percent during FY22-23.
Edelweiss one of the well-known brokerage firms has given a ‘Buy’ target on the company’s stock with a target of Rs. 660 indicating a potential upside movement of around 41 percent compared to its current market price.
The investment rationale for providing such a recommendation pertains to a strong portfolio of brands. Arvind Fashions has a portfolio of marquee brands that command huge brand recall among its consumers.
It has a portfolio of five industry-leading brands i.e., USPA (mid-premium category) Tommy Hilfiger (premium category), Calvin Klein (super-premium which acts as a bridge between the premium and luxury segments), Arrow (mid-premium and premium) and Flying Machine (value to mid-premium). All these brands have achieved sizeable scale, with good visibility among consumers.
The brokerage firms expect the company’s USPA brand to reach Rs. 2,000 crores in revenue in FY24 and its PVH portfolio (Tommy Hilfiger and Calvin Klein ) posted sales of Rs. 1,000 crores in FY23 and the broker expects that these brands should grow at a healthy rate going forward. With a double-digit pre-Ind EBITDA margin, however, these three brands are generating healthy operating cash flows.
The apparel company aims to scale up its Arrow and FM brands given the huge potential for growth and margin improvement. The brokerage firm expects a 12 percent consolidated revenue CAGR over FY23 to 26 led by store expansion, premiumisation, and expansion into adjacent categories.
Furthermore, the brokerage firm highlighted the improving operating metrics. The company’s focus shifted to its core brands, margin expanded by 500 base points over the last five years, aided by portfolio rationalisation and greater operating efficiencies.
The management is eyeing a 100 to 150 base points expansion over the next couple of years, led by an improvement in gross margin and positive operating leverage. The working capital cycle significantly improved from 72 days in FY20 to 43 days in FY23.
Moreover, the Inventory has rose from the lows of 2x to 4x and the company aims to improve it to 4.5 to 5x. A superior retail channel mix and better collections led to a fall in debtor days to 46 days in FY23 from 74 days earlier.
As a result of margin expansion and an improved working capital cycle, the apparel company posted a double-digit RoCE in FY23. Further, aims to achieve more than 20 percent of RoCE in the medium term driven by further improving margin and the working capital cycle.
Resulting to this, the brokerage firm expects an EBITDA and PAT CAGR of 22 percent and 91 percent respectively over FY23 to 26 driven by margin expansion and lower debt levels.
Moreover, the brokerage firm also mentioned about the valuation of Arvind Fashions. The company has been focusing on portfolio rationalisation and operational efficiencies rather than growth. This led to better margin and return ratios.
The broker expects that the apparel company’s brands USPA, Arrow, Calvin Klein, and Tommy Hilfiger to benefit from the ongoing premiumisation drive in India. On the other hand, the management is also focusing on portfolio extension and a foray into adjacent categories which are growing at a healthy rate. These extensions are expected to provide a strong lever for growth and margin expansion.
Given the growth opportunities, execution capabilities, quality management, category extensions, and improved operational performance the brokerage firm initiated coverage with a ‘BUY’ rating with a target price of Rs. 660.
Hedqaurted in Ahmedabad, Arvind Fashions was incorporated in 2016. The company operates in the branded apparel, beauty and footwear space. It has a portfolio of several owned and licensed global brands across different segments.
Written By Vaibhav Patil
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