Arvind Fashions Ltd - Rights issue at rescue yet again - ICICI Securities

Key takeaways from Arvind Fashions' (ARVINDFA) Q3FY21 result: 1) Overall sales recovery at 86% in Q3FY21 with online sales growing 130% YoY owing to stronger festive season, winter shopping and increased footfalls; 2) power brands achieved sales recovery of 97%; however pre-IndAS116 EBITDA margin was low at 5.6% owing to higher discounting; 3) company plans to further raise Rs2bn equity via rights issue to fund future growth / working capital needs; and 4) net debt though declined by Rs1.4bn to Rs9.2bn as of Dec'20-end is likely to increase in Q4FY21 owing to working capital requirement. Accordingly, net debt to EBITDA is likely to remain high at >3x even in FY23E. We broadly maintain our FY22E-FY23E EBITDA and increase our FY23E DCF-based target price of Rs132/sh (earlier: Rs118) on half-yearly rollover. Maintain REDUCE.

- Revenue declined 14% YoY; increased 2.1x QoQ to Rs9bn on account of stronger festive season and winter shopping, increased footfalls across stores and continued traction in online channel. Power, specialty retail and emerging brands have registered sales recovery of 97%, 70% and 79%, respectively. EBOs and department stores achieved sales recovery of 69% and 65%, respectively, in Q3FY21, while online sales grew 130% YoY in Q3FY21. Management mentioned offline sales recovery improved MoM basis in Jan'21 and expects overall revenues in Q4FY21 to be higher on YoY basis.

- Pre-Ind AS 116 EBITDA increased 17% YoY to Rs340mn with an EBITDA margin of 3.8% in Q3FY21. Gross margin was lower by 300bps owing to higher discounting on lower fresh inventory and channel mix change. USPA brand is back to annualised run rate of Rs10bn revenue with double digit EBITDA margin, TH/ CK registered 36% YoY growth in EBITDA (highest ever) with double-digit margin, while Unlimited registered positive EBITDA on 68% sales recovery and cost optimisation. EBITDA (post Ind-AS 116) declined 36% YoY to Rs739mn in Q3FY21.

- Management is targeting structural cost reduction of Rs1.2bn-1.5bn p.a. by optimising store operating cost and closing tail stores, warehouse consolidation, reduction in headcount and overall overheads control. In Q3, total cost reduced by 16% YoY (reduced by 63% and 38% in Q1 and Q2, respectively) and company maintained its guidance of 35-40% reduction in fixed costs in FY21.

- Company plans to further raise Rs2bn equity via rights issue to fund future growth / working capital needs. Promoter group intend to fully subscribe their rights entitlements and have reserved their right to subscribe additional equity shares, in the event of under subscription. Net debt though declined by Rs1.4bn to Rs9.2bn as of Dec'20-end is likely to increase in Q4FY21 owing to working capital requirement. Accordingly, net debt to EBITDA is likely to remain high at >3x even in FY23E.

Source : Equity Bulls

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