Arvind’s Q4FY17 revenue, at Rs 24.7 billion (up 10% y-o-y), came in line with estimate driven by 8% and 22% growth in Textiles and Brand & Retail (B&R), respectively. B&R clocked healthy performance, yet again, riding 21% y-o-y spurt in power brands and 29% y-o-y growth in unlimited (30% LTL). While textiles EBITDA margin was impacted (down 260bps to 12.7%) by increase in cotton prices and INR appreciation, B&R margin jumped 350bps y-o-y to 7.1% driven by operating leverage benefits as well as turnaround in performance of ‘Emerging Brands’ & ‘Specialty Retail’ and increased domestic garments production.
While we trim FY19E EBITDA by 10% on lower textiles margin, the jump in B&R margins (along with revenue growth) remains a huge positive. We value Arvind on SOTP basis, yielding revised target price of Rs 493 (Rs 510 earlier). Maintain ‘Buy’ Textiles revenue jumped 8% y-o-y (Q3FY17: 8%) to Rs 14.6 billion, yet again driven by strong garment segment. While the segment’s growth was ahead of expectation, EBITDA margin contracted sharply in Q4FY17 (down 260bps y-o-y/470bps q-o-q) to 12.7% because of dual impact of higher cotton prices and rupee appreciation.
Management expects EBITDA margin to improve ~100bps from the reported Q4FY17 number—still significantly lower than earlier margin trajectory of 17-18%. B&R grew 22% y-o-y in Q4FY17 (FY17: 26%) to Rs 8.3 billion driven by 21% y-o-y jump in Power Brands (Q4FY17 revenue: Rs 5.2 billion) and 29% y-o-y growth in Unlimited (30% LTL).
B&R reported sharp margin improvement—expanded 350bps y-o-y and 270bps q-o-q—driven by operating leverage benefits as well as turnaround in performance of ‘Emerging Brands’ & ‘Specialty Retail’ and increased garments production. While we trim our FY19E EBITDA by 10% on lower textiles margin, the strong spurt in B&R margin along with growth is a huge positive. Management has raised B&R’s FY18 margin guidance to 150bps improvement.