Poised For Growth Ahead

The Indian textile sector is one of the oldest industries in the country’s economy. Indian textile and apparel industry accounts for 13 per cent of the global industry, which is pegged at a massive USD 110 billion (USD 70 billion is domestic consumption and remaining USD 40 billion is exports). India is the world’s second largest textile and garment manufacturer and has world's sixth largest apparel market by value. According to industry body FICCI, the global industry is expected to grow at a CAGR of 8.7 per cent to USD 223 billion by 2021. Indian apparel demand is at the cusp of significant growth as the economy crosses USD 2000 GDP per capita. The domestic market is expected to grow to USD 141 billion by 2021. One of the significant players driving this growth forward would be Arvind Ltd, a company that has been defining and shaping many collections and trendsetting styles across the ramps and retail outlets of the fashion capitals of the world.

Company Intro

About 85 years ago in British India, when three brothers of the Lalbhai clan decided to set up a mill to produce superfine fabric in the year 1931, not many would have thought that that very foundation would make Arvind Ltd one of India’s largest integrated textile and apparel company with a strong presence in branded garments. Arvind is one of the largest manufacturers and exporters of textiles products with a turnover of more than USD 1.3 billion, with an unmatched portfolio of owned and licensed brands.

The company’s portfolio of brands include owned brands such as Flying Machine, Colt etc, while licensed product brands include global names such as Tommy Hilfiger, Calvin Klein, Arrow, Nautica, US Polo Assn, Hanes, Gap and Aeropostale, to name a few.

Textiles

Textiles business is the oldest and the biggest revenue generator for Arvind as it currently contributes more than 60 per cent of the company’s revenues. In Q2FY17, the textiles revenues grew by 9 per cent. In the textile business, Arvind saw its garment segment continue its growth momentum by registering a strong growth of 20 per cent, whereas the woven segment saw a 11 per cent rise in sales. However, the denim business witnessed a degrowth of 4 per cent.

The company’s Technical Textile segment is a high margin, high returns along with high barriers of entry into this segment. The company plans to become an established player in this segment as it usually takes time for companies to build relationships with clients in this segment.

As far as the garment segment is concerned, the company plans to set up two garment facilities, one in France and the other in Ethiopia. According to the company’s management, Ethiopia is one of the lowest cost manufacturing destination in the world. Once the unit starts to function, it will help the company cater to the African markets and also spread its presence in the Middle-East and European markets.

Branded Apparels

Arvind Fashions, which houses brands business, is a very interesting mix of bridge to luxury brands along with brands that cater to the masses. The company has a very unique combination of owned brands, licensed brands and speciality retail. Arvind is well on course to become a leading player across men's, women’s and kid’s apparel and accessories categories in the coming future. Arvind has an array of brands under its kitty which gives the company an advantage in terms of cost benefits and risk diversification.

According to estimates, the apparel market is likely to grow at 1.5x of overall market with the rising per capita income in the country. Shift in the markets is likely to favour growth of Arvind’s international brands portfolio across categories and price-points. The growth of apparel business would be led by favourable demographics of the country, increasing urbanization and increasing access to trends, people’s affinity towards branded merchandise complemented by ever-increasing disposable income in the hands of masses.

Arvind has built a strong portfolio for segments across the income pyramid i.e dividing Indian markets by income segment namely Value (Unlimited), Main Stream (Izod, Arrow, Ed Hardy, The Children’s Place), Premium (Gant, Calvin Klein, Gap).

Arvind E-commerce

Staying with the times, the company also has its presence in the e-commerce space with its own OMNI channel platform NNNOW.com, which was started in May 2016. The entry of Arvind in the e-commerce space holds importance as online sales of apparels are expected to account for 12 -16 per cent of companies’ sales by 2022 (from current 3-4 per cent). The company intends to spend USD 10 million in FY17 in order to ramp up its online platform. Additionally, the company is also in advanced talks with several third party brands to join the NNNow.com for their respective brands. Recently, it has been widely speculated that company would also look out for acquisition of troubled online ventures.

Unlocking Value

Arvind recently announced its decision to raise about Rs 740 crore by diluting 10 per cent stake in its brand business arm, pegging its enterprise value at Rs 8,000 crore. The entire stake sale was purchased by Multiples, PE firm founded by Renuka Ramnath. Arvind’s brand portfolio is among the strongest in India. The company expects to use the funds raised to retire part of its debt and explore new investment opportunities. The transaction also helped Arvind unlock value that the brand business has achieved in a short span of time. The valuation received by Arvind’s brands is beyond expectation as with an enterprise value of Rs 8,000 crore it surpasses market capitalisation of many big retailers. Arvind’s retail arm is four times the market cap of Future Lifestyle, double that of Shoppers Stop and Rs 1,500 crore more than Trent.

The valuation of retail arm is also close to the market cap of the parent company, which stands slightly more than Rs 10,000 crore. 

Financials

Financially, Arvind has been performing well with revenue CAGR of 14.5 per cent over the last five years, led by strong performance from the company’s textiles and branded apparels businesses. During the same period, the company’s EBITDA CAGR grew by a strong 15.32 per cent due to operational efficiency achieved by the firm. Due to the solid operational performance, Arvind has been very well able to maintain a steady margin in the range of 12-13 per cent. However, when it comes to profitability, company’s CAGR of PAT witnessed a degrowth of 4.5 per cent over the last five years. Nevertheless, Arvind seems to have bounced back strongly in terms of profits when seen over the last two financial years.

On a quarterly basis, Arvind reported a rise in income from operation by 19.11 per cent in Q2FY17 to Rs 2331.13 crore as against Rs 1957.13 crore in the corresponding quarter of the previous fiscal. The consolidated EBITDA for the quarter ending September 30 grew marginally by 2 per cent at Rs 232.34 crore vis-a-via Rs 227.7 crore achieved in the same quarter of last fiscal. The margin for the quarter remained at 10 per cent, witnessing a fall of 167 basis points year-on-year. Profits after tax and exceptional item saw a negligible increase of 1.47 per cent in Q2FY17 at Rs 71.7 crore, compared to Rs 70.66 crore in the corresponding quarter previous fiscal.

As for segment-wise revenue breakup, the textile business contributed 61 per cent of the total revenue earned in Q2FY17, representing a growth of 9 per cent year-on-year, thereby contributing 17 per cent to EBITDA growth, up from 15.9 per cent in Q2FY16. On the other hand, the branded apparel business now accounts for 32 per cent of the total income from operation, which saw a whopping jump of 33 per cent on a yearly basis.

Arvind’s total debt for the quarter ending September 30 stood at Rs 3425 crore i.e reduction of Rs 350 crore over the last 6-month period. The company has  successfully pared down its debt over the past years, which was clearly reflected in the financing cost taking a downward trajectory over the last five quarters. The debt to equity ratio of the company currently stands at 1.2, down from 1.7 at the end of H1FY16.

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Conclusion

Indian apparel demand is at the cusp of significant growth as the economy crosses USD 2000 GDP per capita. Arvind will be one of the biggest beneficiaries in the textile and apparels sector in the country fuelled by five powerful platforms, viz. long lasting international brands relationship, strong distribution footprints, strong sourcing capabilities and next generation omni-channel capabilities would help Arvind maintain its high growth trajectory. The company’s renewed focus on high margin business and shifting focus from B2B to B2C also augurs well for the future performance. Valuation-wise, the company is currently trading at a high P/E multiple of 28.31 compared to that of SRF & Indo Count which are trading at a P/E of 26.10 and 11.73. High valuation multiples of Arvind are justifiable given its superior business and diverse product profile across the markets. Therefore, Arvind qualifies on all counts, thereby making it a strong case for a ‘BUY’ at this juncture.