Disruptions due to Covid-19 elevated woes in an already challenging FY20 for the company. Revenues for the quarter fell 39% YoY to Rs. 710.5 crore. As per management estimates, the company lost sales worth Rs. ~300 crore due to Covid-19 disruptions. Lower gross margins, negative operating leverage led it to report EBITDA loss of Rs. 92.3 crore. Also, exceptional expense worth Rs. 60.7 crore (pertaining to provision of margins on sales return & inventory dormancy) and higher finance cost (up 36% YoY) led the company to report net loss worth Rs. 226.0 crore. Significantly higher losses in FY20, bloated total debt by 53% YoY to Rs. 1210 crore (D/E: ~1.7x). To address the balance sheet concerns, the company has proposed a rights issue worth Rs. 400 crore and sold a minority stake in Arvind Youth Brands that houses brand 'Flying Machine' for cash consideration worth Rs. 260 crore. Quantum of reduction in overall debt is likely to be lower than the cash infused in the business as part of proceeds will be utilised towards funding operational loses and payment to suppliers. Currently, 75% of stores are operational with June sales reaching 30% of pre-Covid levels. We remain cautious on the outlook given the highly levered balance sheet and ambiguous demand environment.
Valuation & Outlook
The company has adopted multiple initiatives to sharply rationalise fixed overheads, going forward. It expects cost reduction of ~35% in FY21E, with 15% reduction to be structural in nature. Expected cash infusion (Rs. 660 crore) may provide some cushion but higher anticipated losses will restrict debt reduction ability. Factoring in the elongated Covid-19 impact, we cut our earnings estimates sharply in FY21/22E. Given the balance sheet stress and challenging market scenario, we reiterate our REDUCE rating on the stock with a revised target price of Rs. 150 (10.5x FY22E EV/EBITDA).
For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_ArvindFashion_CoUpdate_Jul20.pdf