Buy Arvind Ltd - SPA Securities

Growth Upswing Propelled by Strong Domestic Demand

The Indian domestic Textile and Apparel market size in 2009 was US$ 47Bn and is expected to grow @ 11% CAGR to reach US$140Bn by 2020. The company derived ~67% of its business from domestic sales with 28% accounted by B2C and 72% by B2B model. Going ahead the company is in process of increasing its B2C share to 41% by FY13E due to better pricing power compared to B2B segment.

Advantage Brand 'Arvind'

Solid demand growth for apparel in the domestic segment has correspondingly led to increased fabric demand. Strong distributor network and an impressive bouquet of established brands developed over the last couple of years has helped the company's brand & retail business grow by 47% with the share of apparel & fabric retailing growing to 32% in FY11 from 28% in FY10.

Improving ROCE by way of Land Monetizing

The company has around 520 acres of surplus land around Gujarat which is expected to generate INR 10,000mn over the next 4 years. The amount will be used for capex funding and will help improve ROCE from 10.7% to 15.8% over FY11-FY13E. Debt/EBITDA multiple of 3.7x in FY11 is expected to improve to 2.1x by FY13E.

Expanding Product Line - Driving Growth Ahead

Arvind is planning to introduce new brands to occupy vacant segment opportunities. The company is planning to launch Brand 'Elle' in FY12 catering to the women's premium spaces as well as venturing into technical textiles. Going ahead, the company expects this segment to contribute INR 5,000mn by FY15E. Denim Fabric which constituted around 46% of Textiles sales and 33% of overall revenue is expected to come down below 30% on account of increased contribution by other segments, mainly brands & retailing.

Capacity Expansion to Push Up Volumes

Current denim capacity of 108mn mtrs will be increased to 117.6mn mtrs by FY12 while additional 12mn mtrs capacity would be added to the Woven division taking the total capacity to 84mn mtrs by FY12. Aggressive capacity expansion across the segments will result in volume expansion, thereby accelerating growth.

VALUATION AND RECOMMENDATION

We expect Arvind's topline and bottomline to grow at a CAGR of 20.5% & 66.8% respectively over the period FY11-13E coupled with margin expansion, due to aggressive growth in existing businesses and expansion in the high margin retail space and low gearing due to land monetization. We recommend a buy on the stock with a target of INR 108 implying a discount of 6x on FY13E earnings.

Source : Equity Bulls

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