It’s expected to post FY19 revenue/PAT of Rs 74/3.2 bn; target price pegged at Rs 157
Investors were mainly playing ‘Arvind’ for the scale-up of its B2C ‘Brands & retail’ business which requires relatively lower capital intensity (vs textiles) and commands far better valuation multiples (15-20x Ebitda). Investors viewed the mainstay business, textiles (80% of consolidated Ebitda) as strong cash cow which funded the ‘Brands & retail’ scale up.
Post the demerger, Arvind Ltd has 2 key businesses: (i) Textiles; denims, wovens, garments (85/95% of FY19e revenue/ Ebitda), and (ii) Advance Materials (AMD – Technical textiles) (8/5% of FY19e revenue/Ebitda).
Our view: We expect the demerged Arvind to post FY19 revenue/Ebitda/PAT of Rs 74 bn/Rs 8.3 bn/Rs 3.2 bn. It will now invest the cash flows to grow the textiles business. Management has guided for annual capex of Rs 5 bn and Rs 120 bn revenue over next 4 years (10-12% CAGR).
We expect 12% revenue and 20% Ebitda CAGR over FY19-21 on (i) Verticalisation – 50% of textile capacity to be consumed in-house (10% currently) by increasing garmenting capacity; implies high asset turns, relatively lower capex vs. fabrics, and incremental margin plus better ROCE; (ii) Differentiated products – capacities in place for active wear, athleisure and will be looking to sell to Nike, Adidas, Lulu lemon; and (iii) Technical textiles has hit critical mass with FY19e revenue of Rs 6 bn (up 25% y-o-y) and Ebitda margin of 10%.
We value the demerged Arvind Ltd at Rs 157 (6x EV/Ebitda FY20e; implies 10x PE). At 6x, the DCF implies 8% revenue growth over FY19-29; 3% terminal value and 12% WACC. Comparable Asian peers trade at 10x EV/Ebitda, while Indian textile companies trade at 6-7x.