We note that at our blended target EV/Ebitda multiple, a reverse SOTP on Arvind Fashion (AFL) segments assuming a reasonable 0.5x EV/sales multiple for speciality retail and emerging brand values the core Power brands business at 16x EV/Ebitda — a reasonable ask given 15%+ revenue CAGR, 18-20% Ebitda CAGR and 25-30% RoCE over FY19-21 and a long runway for growth.
AFL is a lifestyle powerhouse with a strong portfolio of fashion brands and robust retail presence in value fashion and prestige beauty.
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We bake in 16% revenue CAGR and 34% Ebitda CAGR over FY19-21E aided by 210 bps expansion in Ebitda margin (led by operating leverage/cost efficiency-led gains in power brands and both speciality retail and emerging brands turning profitable as a portfolio). We expect OCF to turn positive in FY19 and FCF in FY20 driven by low capex intensity and improving profitability. RoCE is expected to inch up from 8% to 17% over FY19-21.
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The Indian apparel market at $56 billow is the second-largest retail market behind food and grocery. We estimate organised apparel penetration to grow from the current 24% to 37% by FY21 driven by (1) young demographics, (2) rising urbanisation, (3) increasing affluence with growing middle income segment, (4) greater brand awareness, (5) improved availability driven by expansion from both offline and e-commerce players and (6) accelerated formalisation of the sector through note ban and GST.
We expect power brands to deliver a steady 16% CAGR in revenue over FY19-21 led by US Polo and Flying Machine. We bake in 17.5% CAGR over FY19-21 in US Polo revenues driven by sub-category led growth and small-town distribution expansion. Within other power brands, we expect Flying Machine to deliver higher 18-20% CAGR over FY19-21 led by differentiated offerings.