Buy Arvind; brand & retail profit to jump 4x in 3 years: Motilal Oswal

We recently interacted with Jayesh Shah, CFO of Arvind and the key highlights are as follows. The management expects 10-12% growth in textile business in FY16, driven by growth in denim (4%), woven (10%) and garments (35%). The management is looking to double revenues and margins in the brands and retail business over the next […]

We recently interacted with Jayesh Shah, CFO of Arvind and the key highlights are as follows. The management expects 10-12% growth in textile business in FY16, driven by growth in denim (4%), woven (10%) and garments (35%).

The management is looking to double revenues and margins in the brands and retail business over the next three years, thus quadrupling its Ebitda for the segment. The company believes margins in Q1FY16 for brands business will be lower on a y-o-y basis. However, the company is confident of achieving its guidance of 150 bps improvement in brands and retail margins in FY16.

Arvind plans to open six GAP stores by FY16-end and 15 stores by the end of FY17. Similarly, ‘The Children’s Place’ launch is likely by Q3FY16. We believe GAP provides a scalable opportunity for the company to expand its brands and retail business.

The management is confident of ‘brands and retail’ turning free cash flow positive (on the back of quadrupling of Ebitda) by FY18; post which, subject to board and shareholder approval, this business could be demerged.

Arvind will launch its e-commerce portal by November 2015; the portal will host its entire brand portfolio and as well as private labels. Further, management is looking forward to exclusive international brand tie-ups for e-commerce.

We believe business mix change in favour of brands and retail will reduce capex intensity and drive improvement in return ratios—thus warranting a re-rating. We maintain ‘buy’ with a target price of Rs 340.

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