Initiating Coverage September 18, 2015 Arvind Ltd...

September 18, 2015

ICICI Securities Ltd | Retail Equity Research

Initiating Coverage

Metamorphosing to brand powerhouse… Arvind (Arvind) continues to get strategically transformed from a textile manufacturer to a major garmenting and brand house with a portfolio of major brands, which capture the “Adopt the West” strategy. The company’s position as No.1 denim manufacturer coupled with its verticalisation strategy of garmenting capabilities and entrenched retail reach position it as the most favoured integrated textile player. Revenues are expected to grow at 13% CAGR in FY15-17 mainly driven by its brands business. However, restructuring of Megamart and scaling up of its existing brands would consolidate profitability at current levels. We believe Arvind is best suited to capture the immense growth opportunity in the branded apparel segment. Poised to capture “brand conscious” Indian apparel industry The Indian retail apparel industry is currently valued at | 250000 crore. Arvind over time has developed an enviable array of brands, which perfectly reflect western culture. With a variety of offerings at different price points, the company is well positioned to capture the rising per capita consumption of apparel. In FY15, Arvind Lifestyle Brands (ALBL) contributed ~30% of total revenues. Power brands like Arrow, US Polo, Tommy Hilfiger and Flying Machine contributed 60% of overall brand revenue. Newly acquired brands like The Children’s Place and GAP would continue its retail revenues growth momentum. We expect the contribution of ALBL to revenues to increase to 35% by FY17. Verticalisation strategy to aid in margin improvement Arvind’s business model is diversified across the value chain of textiles. With manufacturing capacity of 108 million metre (mm), it is the largest denim fabric manufacturer in India. Additionally, it has weaving and knitting capacity of 282 mm. Approximately 5% of fabrics produced are used for garmenting. Going ahead, majority of Arvind’s investments are marked towards increasing its garmenting capabilities. The strategy around the same is to provide residential accommodation to workers and improve efficiencies on the back of lower absentees and contracted labour. The management has a target of 25% captive usage of textiles by 2018, which we believe would be a tailwind for standalone margins. Megamart restructuring; monetising brands; warrant BUY Arvind has restructured its retail strategy for its Megamart stores. The company now plans to widen its offerings by increasing the size of the store rather than opening new stores. Furthermore, new stores from GAP and Children’s Place coupled with a host of probable power brands would enhance revenue visibility and aid profitability. Given the diversified business model and multiple positive triggers, we value Arvind’s standalone business at 4x EV/EBITDA and ALBL at 2x market capitalisation to sales. We recommend BUY with a target price of | 330.

Exhibit 1: Financial Performance (| crore) FY13 FY14 FY15 FY16E FY17ENet Sales (| crore) 5,292.5 6,862.1 7,851.4 9,022.3 10,045.6 EBITDA (| crore) 687.4 934.0 1,012.8 1,180.1 1,338.3 Net Profit (| crore) 248.4 353.9 341.1 398.5 500.8 EPS (|) 9.6 13.7 13.2 15.4 19.4 P/E (x) 13.8 21.1 20.8 17.8 14.2 Price / Book (x) 1.5 2.9 2.6 2.3 2.0 EV/EBITDA (x) 8.3 11.0 10.3 8.9 7.9 RoCE (%) 11.9 13.8 14.4 15.1 16.0RoE (%) 11.0 13.7 12.5 13.0 14.3RoIC (%) 10.8 13.4 13.4 14.1 15.1

Source: Company, ICICIdirect.com Research

Rating Matrix

Rating : Buy

Target : | 330

Target Period : 12 months

Potential Upside : 20%

Key Financials (| Crore) FY14 FY15 FY16E FY17E

Net Sales 6,862.1 7,851.4 9,022.3 10,045.6

EBITDA 934.0 1,012.8 1,180.1 1,338.3

Net Profit 353.9 341.1 398.5 500.8

EPS (|) 13.7 13.2 15.4 19.4 d

Valuation Summary (x) FY14 FY15 FY16E FY17E

P/E 21.1 20.8 17.8 14.2

EV / EBITDA 11.0 10.3 8.9 7.9

P/BV 2.9 2.6 2.3 2.0

RoNW (%) 13.7 12.5 13.0 14.3

RoCE (%) 13.8 14.4 15.1 16.0

Stock Data Particular AmountMarket Capitalization (in crs) | 7100

Total Debt (FY15) (in crs) | 3397

Cash (FY15) (in crs) | 83

EV (in crs) | 10415

52 week H/L (|) 341 / 216

Equity capital (in crs) | 258

Face value | 10

FII Holding (%) 14.7

DII Holding (%) 15.8

Price Performance Return (%) 1M 3M 6M 12MArvind Ltd (6.3) 17.19 (4.37) (18.19)K P R Mill Ltd (5.56) 27.36 44.17 137.14 Vardhman Textile 2.57 44.09 76.02 98.05

Price Movement

050100150200250300350400

Sep-15Jan-15Jun-14Nov-13Apr-13Aug-12

2,0003,0004,0005,0006,0007,0008,0009,000

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Price (R.H.S) Nifty (L.H.S)

Research Analyst

Bharat chhoda [email protected]

Ankit Panchmatia [email protected]

Nirav Savai [email protected]

Arvind Ltd (ARVMIL)| 275


Company Background Arvind Ltd is the flagship company of the Lalbhai Group that has been around since 1930. Arvind started as a superfine fabric manufacturer in the early 30s. Since then, the company has been constantly reinventing itself by venturing into new categories in textiles like denim, suiting, shirting, etc. Arvind has been a pioneer in India in launching domestic denim brands like Ruff & Tuff and Flying Machine. The company has also been licensing international brands like Arrow and US Polo in India. Currently, Arvind is considered India’s leading fully integrated textile, branded apparel & retail company, which has a strong presence across the value chain. The company is a market leader in manufacturing denim in India with total capacity of 108 million metre per annum (mmpa) of which 44% is export driven. The textile division comprises sub-categories like denim, woven, voiles and knits. The company also has garmenting capabilities with an annual capacity of ~22 million pieces as on Q1FY16. The brand & retail business of Arvind operates through Arvind Brand & Retail (ARBL) a wholly-owned subsidiary of Arvind. The brand business of Arvind comprises both company owned value brands along with premium and bridge to luxury international brands. Top international brands in Arvind’s portfolio include Tommy Hilfiger, Arrow, GAP, Nautica, Calvin Klein, US Polo, Hanes, etc. while its own Indian brand portfolio includes Flying Machine, Excalibur, Karigari etc. The company also operates large format retail stores like Megamart, Next and Arvind Store, which mainly focus on benefiting from the mall going culture in India. Recently, the company de-merged and independently listed its real estate arm, Arvind Infrastructure. The swap ratio was one share of Arvind Infrastructure for every 10 shares held in Arvind Ltd.

Exhibit 3: Arvind organisation structure…

Arvind Ltd Gross revenues (| 7644 crore)

S tandalone revenues ~ 65% of sales (| 4966 crore)

Arvind Lifestyle & Brands~ 30% of sales (| 2200 crore)

Fabrics~ 83% of standalone sales

(~ |4114 crore)

Grey yarn & others~ 3% of standalone sa les

(~ |135 crore)

Denim~ 39% of standalone sales

(~ |1927crore)

M isc. incom e & other subsida iries~ 5% of sa les (| 478 crore)

W oven~ 39% of standalone sales

(~ |1944 crore)

V oiles & knits~ 13% of m alt -based foods

sales (~ |635 crore)

Garm ents~ 14% of standalone sales

(~ |716 crore)

P ower brands~ 61% of ALBL (|1334 crore)

M ega M art~ 27% of ALBL (|588 crore)

Rem aining other brands (~ |278 crore)


Exhibit 2: Segment-wise revenue contribution (FY15)

Textile , 64%

Brands & Retail ,

30%

Real Estate, 1%

Others, 5%



Exhibit 4: Arvind milestone timeline….


Global textile industry - Trillion Dollar Baby by 2021 The total textile and apparel industry, which accounts for 4% of global trade, over a decade, grew at a CAGR of 5% to $800 billion approximately. According to autonomous trade bodies like UN Comtrade and CII Knowledge, the industry is likely to grow at a CAGR of 6.4% in 2015-21, catapulting the industry to a Trillion dollar baby by 2020. The growth rate in extremely mature markets like the US is expected to be in lower single digits. However, majority of the growth would be driven by developing nations like China, India, Brazil, Russia, etc. The lower growth in developed countries is on account of ageing population and increased spending on healthcare. However, younger countries like India and China with their domestic and export capabilities shouldered the responsibility of the industry’s growth rate. Textile, which entails activities like manufacturing yarn, fabric, spinning, weaving, etc. accounts for 40% of the total market with an estimated size of $325 billion. However, the other 60%, which is approximately $475 billion, is dominated by apparel, which includes manufacturing garments, apparel retail and fashion accessories. The textile industry has been a key sector and has played a major role in the initial development of the US, UK and Japan. Also, it has helped other Asian countries like Hong Kong, Singapore, Taiwan and Malaysia to industrialise successfully. The textile industry is currently playing a pivotal role in terms of foreign trade for developing nations like China, India, Vietnam and Bangladesh. Globalisation and a borderless digital world have helped major established brands to shift the origin of manufacturing vis-à-vis the point of sale of the same. The worldwide success of social networking sites and the power of digital content have made launching new products seamless. Further, with this social awareness, brands can be positioned much more easily.

Arvind Brands Ltd made subsidiary company of Arvind

1931 1985-86 1987-88 1992 2000 2003-04 2008 2010 2011 2012 2013 2014 2015

Incorporated as Arvind Mills raising a share capital of | 25 lakh

Garments Exports Division ‘Lifestyle Apparels’ established

Expands its presence in the brands and retail by establishing Megamart

Enters export market for Denims

Increases production of denim by modernising

Launches “The Arvind Store”

Implements first denim plant

Sets up joint venture for marketing Tommy Hilfiger brand

Signs distribution agreement with Billabong and acquires India operations of Debenhams, Next, Nautica

Signs agreement for licenses of Hanes

Buys 49% stake in Calvin Klein in India. Sets up joint venture (JV) and enters into a franchise arrangement with The Children's Place

Partnership with GAP and opened its first store in Delhi


Investment Rationale

India to keep up promising growth for textile Industry The Indian textile and apparel industry comprises ~13% of the global industry, which is estimated at $110 billion approximately. India is the world’s second largest textile & garment manufacturer and the world's sixth largest apparel market by value. The sector substantially contributes to India’s GDP, employment generation and merchandise exports. According to Ficci, the industry is expected to grow at 10.6% CAGR to $223 billion by 2021. Currently, of the total industry, ~$70 billion is domestic consumption while the remaining $40 billion is exports. However, majority of the growth is expected from export that is expected at $82 billion while domestic market is expected at $141 billion by 2021.

Advantage India – Favourable scenario to attain 2021 estimates Over the years, the Indian textile industry has continued to maintain its strategic importance in the country’s development. Apart from contributing ~6% of the total GDP, the industry accounts for 14% of the country’s industrial production and constitutes 13% of export earnings. India is the second largest producer of textile and garments, on the back of its manufacturing capacity. Currently, Indian capacity is estimated at 24% of the world’s spindle capacity and 8% of the global rotor capacity. India has the highest loom capacity (including handlooms) with 63% of the world’s market share. Apart from manufacturing capability, India has a heads on advantage in terms of raw material availability. The country’s geographic capabilities are well suited to cotton cultivation, which makes it the second largest producer of cotton and largest in terms of area under cultivation. Moreover, India’s favourable demographic capabilities, which are more skewed towards a younger population support the manpower intensive industry. Further, the higher proportion of younger population would lead to strong domestic demand. The textile industry is the second largest employer after agriculture. The textile sector is further boosted by favourable government policies, which would harness the entrepreneurial capabilities of the country. We believe that India would leverage these capabilities to enhance its share in the global textile trade and enable it to cope up with the growing domestic demand.

Exhibit 5: Indian favourable population

Source: Indian Census Bureau, ICICIdirect.com Research Exhibit 6: Target 2021 – Indian textile on a cusp of high growth phase

USD 110 BILLION

EXPORT37%

DOMESTIC63%

USD 223 BILLION

EXPORT37%

DOMESTIC63%

2014

202

1



Exhibit 7: Ingredients that make Indian textile industry more colourful!!!

Manpower Advantage

The textile sector is the second largest employer after agriculture. As per the National Skill Development Council report, the overall employment in the textile sector is likely to grow from an approximate 40 million in the current year to about 60 to 62 million by 2022. (Source: Ministry of Textiles)

Positive policy framework

The Technology Upgradation Fund Scheme (TUFS), makes funds available at cheaper rates to the domestic textile industry for technology upgradation of existing capacities as well as to set up new capacities. Over | 200000 crore has been sanctioned under the TUF Scheme till the year 2013

Manufacturing Base

The estimated installed spindlage has grown from 39 mn spindles in 2008 to 50 mn spindles in 2015. Over the last two decades, India has consistently invested in fresh capacities across the cotton value chain including Spinning, weaving, processing and confectioning capacities

Raw material availablity

World cotton production is approximately at 26 million tonnes in FY14. India and China contribute ~50% of global output. With a cultivation area of 116 lakh hectares; India is second largest cotton producer with 6.2 million tons per annum


India’s per capita textile consumption of clothing fibre is only 7.5 kg, which is lower than the world average of about 11 kg and much lower than the average of 31 kg in North America, 22 kg in Western Europe and 17 kg in China. Thus, Indian textile consumption is bound to grow rapidly with increasing per capita income, organised retail, a young population, etc. Additionally, rupee depreciation makes Indian products more competitive in global markets. Since 2009, the rupee depreciated ~37% vs. the US$. However, Competing nation China’s currency appreciated 6.7% approximately vs. the US$, adding extra fillip to the sector.

Exhibit 8: Rupee performance vs. Chinese yuan

5.5

6.0

6.5

7.0

Sep-

15

Sep-

14

Oct-1

3

Oct-1

2

Nov

-11

Dec-

10

Jan-

10

Jan-

09

40

45

50

55

60

65

70

75

USD/CNY USD/INR

Source: Bloomberg, ICICIdirect.com Research


Indian textile market to be dominated by apparels The large population bases of China and India have led to their inclusion among top apparel markets, even ahead of several developed economies. Though India is the sixth largest market by value, very often comparisons are drawn between the markets of China and India. However, it is interesting to note that India’s per capita spend on apparel is only a third of China’s $109 and a mere 3% of Australia’s per capita spent. Indian per capita spend on apparel is just $36, which is significantly below the global average of $153. According to India Brand Equity Foundation (IBEF), the current retail market is worth ~$525 billion and is expected to grow at a CAGR of 13% by 2020. Food & groceries (F&G) contribute the largest with 69% of the total retail market. Apparel is way behind with 8% of the retail pie. On the back of this, the current Indian apparel market is estimated at $42 billion (| 250000 crore). The Indian apparel market is expected to grow at a CAGR of 10% from the current $42 billion to $115 billion over CY14-25. The organised apparel market is expected to grow at a comparatively faster CAGR of 17% over the period compared to the unorganised market, which is expected to grow at a CAGR of 8%. Branded apparel is expected to outpace industry growth and grow at a CAGR of 22% over CY14-25. This would result in the share of branded garments of the organised apparel industry going up from 27% in CY12 to 50% in CY25.

Exhibit 10: Apparel market expected to touch US$ 115 billion…

42.054.4

79.4

115.8

0

20

40

60

80

100

120

140

2014 2017 2021 2025

US$

Bn

Indian Apparel market (US$ Bn)


Menswear dominates; Womenswear to overtake by 2025 The apparel market can be further classified as menswear, womenswear and kidswear. Menswear contributes largest with ~42% of the total market i.e. | 105000 crore. This is dominated by options like shirts (30%), trousers (24%) and denims (13%). Womenswear is a tad lower at 38% with a market size of | 95000 crore, with major contributions from salwar kameez (36%), saree (30%) and innerwear (13%). Kidswear contributes the remaining 20%, which is dominated by uniform for boys as well as girls. The second largest category in kids wear is t-shirts & ethnic wear, respectively, for boys and girls. Though the current market share of womenswear is low compared to menswear, it is expected to achieve parity by 2025. Kidswear is expected to grow at the fastest pace, albeit on a lower base. The expected CAGR for each category is 9% for menswear, 10% for womenswear and 11% for kidswear over 2014-25.

Exhibit 9: Global apparel market size & growth rate

Source: Images yearbook 2014, ICICIdirect.com Research

Exhibit 11: Apparel market growth outpacing unorganised segment

8 11.2

20.7

44.7

32.838.4

51.6

71.1

0

10

20

30

40

50

60

70

80

2014 2016 2020 2025

US$

Bn

Organised apparel market Unorganised Apparel Market


Exhibit 12: Indian apparel market - Audience wise

17.2

15.6

8.2

45.3

45.8

24.5

0 10 20 30 40 50

Menswear

Womenswear

Kidswear

US$ Bn

2014 2025



Arvind - One stop shop for apparel requirements

Arvind possesses the key ingredients that would enable it to capture the high trajectory growth opportunity in the apparel segment. Having diversity in offerings across menswear, womenswear and kidswear; positions the company as a one stop to shop for all the apparel requirements of a family. The company is equipped with probably the best portfolio of brands (both owned and licensed) in the Indian apparel industry coupled with a nationwide reach that would enable it to reach a large quantum of customers across various price points. The company has products with a price range starting from as low as | 400 to as high as | 15000, which provides a variety of choices and entry points for each and every customer.

Exhibit 13: Everything for everyone makes Jack happy..!!!

Mens Wear

Formal Casual Denim

Kids Wear(|44000 cr / $8 bn)

Brands

Inner Wear(|18000 cr / $3 bn)

Men Women Brands

Women Wear(|95000 cr / $15 Bn)Mkt. Size (|105000 cr / $18 bn)


In menswear, the company is well positioned with its power brands like Arrow, US Polo and Flying Machine. Additionally, the company also has entry level brands like Excalibur and Cherokee. For women, the company has positioned brands like Elle and Karigari. Arvind is betting big on kidswear, having an association with major brands like The Children’s Place (TCP) and GAP for kids. Furthermore, brands like Tommy Hilfiger and GAP are available across categories. Also, in the innerwear segment, the company is well positioned with brands like Hanes & Tommy Hilfiger. With these brands the company strategically covers the upper class and the middle class customer categories. In the menswear segment, the company is considered to be the second largest and aspires to be the largest. In the kidswear segment, it aspires to be the largest. Also, in innerwear, it aspires to be the second largest brand after Jockey.


Arvind well positioned to capture lifestyle category... Fashion is no longer considered to be only a function of necessity. However, for a majority of the younger population it has more to do with expressing their lifestyle and status. There has been a transition from “price sensitive” to “brand sensitive”. On the back of this, apparels have been able to grab a higher share of the wallet. Previously, apparels were purchased only during the festive season or during occasions. Also, these purchases were one-time and had a higher ticket size. We believe this need-based purchase has now been replaced with monthly purchases. Also, with the upward social mobility of an individual, previous basic categories like shirts, trousers, jackets, saree, salwar kameez, etc. are replaced by distinct categories like gymwear, casualwear, officewear, partywear, lounge wear, travel wear, etc. Greater awareness on the social networking sites and a borderless internet have created awareness on international brands, western trends and helped craft a more improved image and greater fashion consciousness than ever. In years to come, the apparel retail market is expected to get transformed into a more detail-oriented one wherein consumers will seek their own customisation with their signature embroidery or selected painting ob their garments. This would provide greater exclusivity as well as fashion orientation to customers.

We believe the current portfolio of brands with the company across multiple channels and price points is distinctly positioned given the consumer proposition. On the one hand, with Excalibur, the company captures the need base category, while, on the other, Arrow has positioned itself in the premium segment as the best-in-class style for premium consumers. With Flying Machine, the company tries to address the young population for casual clothing. However, with Newport it is clearly targeting the affordable denim market. Furthermore, with international offerings like Tommy Hilfiger, Calvin Klein and Nautica it is positioned in the aspirational bridge to luxury segment.

Exhibit 14: Transition...!!!



Arvind enabling ‘West to East’ fashion rebalancing

Over the past few years, the Indian economy has greatly been influenced by a majority of western brands. The growth stories of McDonald’s and i-phone in Indian markets explain the tremendous opportunities available in the country. The rapid adoption of Facebook and Twitter networking sites and spurt in their user base has created a digital marketing platform for these brands. As on 2014, there are approximately over 200 international brands in the Indian fashion segment. The growth of international brands entering the Indian market has been slow but steady in the last three years amid the global economic conservatism and a slowing Indian economy. However, with the increase in adoption of western fashion this seems to be just the tip of the iceberg. International brands are currently available via three options: either through franchise or distribution agreements, through a license partner, through a fully committed wholly-owned subsidiary or in a joint venture with an Indian partner. Majority of the brands prefer franchise or distribution agreements that remain a practical mode of entry providing international brands control in terms of product, price and partly the retail experience. Approximately 75% of the international fashion brands have a presence through a franchisee or a distribution set-up in the country. Only 15% of the brands prefer a license partner while the remaining 15% have some extent of ownership in the Indian business. The ownership structure is either through a fully committed wholly-owned subsidiary or in a joint venture with an Indian partner. This shows a greater willingness to engage directly and invest in the Indian market.

Exhibit 16: Gamut of brands currently available in India....


Over a period of time, Arvind has strategically built up its brand portfolio, which includes a blended combination of mass brands, entry level brands, premium brands and super premium brands. With this combination, the company manages to capture the customers present across the income pyramid.

Exhibit 15: India Calling!!!

15%

15%

75%

Subsidiary/JV Licensed Franchisee or distribution



Arvind: Moving Indian retail from unbranded to branded!

Arvind is the pioneer in the branded apparel space and has several firsts to its name in India. The company entered the branded apparel segment as early as 1980 with the launch of the ‘Flying Machine’ brand. From 1993 onwards, Arvind has been regularly adding brands to its portfolio and has created a strong bouquet of brands (owned & licensed) across different apparel categories with a presence at all price points varying from value to bridge to luxury. Exhibit 17: Arvind’s brand launch calendar

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020


Arvind, with an array of brands, is will equipped to capture the increase in brand consciousness in Indian society. Offering everything for everyone and at every price point category, it is well equipped to capture the increase in per capita consumption of clothing. With brands (both owned and licensed) and exhaustive coverage across categories and pan-India reach covering most metros, it is well poised to capture the apparel value proposition. Arvind’s brand portfolio consists of a balanced mix, with power brands (brands that have crossed | 200 crore in revenues) and growth brands. The power brands of the company are Arrow, Tommy Hilfiger, US Polo Association and Flying Machine. With the list of probable power brands, Arvind expects brands & retail revenues to touch $1 billion turnover by 2020.

Exhibit 19: Arvind’s successful brands

Power BrandsNext League of Power

Brands Other Brands


Exhibit 18: Arvind’s firsts in India First Denim Brand Flying MachineFirst International Brand ArrowFirst Exclusive Brand Outlet Arrow StoreFirst Mass Market Brand Ruf n TufFirst Factory Outlet MegamartFirst Designer Premium Brand Tommy Hilfiger



Social quotient of Arvind brands!!! With increasing adoption of social networking, brands would like to take over a large portion of social platforms and reap benefits of digital marketing. Transition from Orkut to Facebook was extremely rapid. Brands also do not want to be left behind and have started using different modes to market by creating their own Facebook page and Twitter accounts. These efforts help brands create an emotional connect with customers. These customers, in turn, stay loyal to their respective brands as they understand the brand and their ideology better. Some brands like Harley Davidson, Apple have been able to create a fanatical cult following and are reaping advantages of the same. It has been observed that western brands tend to create this social quotient much better compared to Indian brands. However, of late, Indian brands like Royal Enfield, Fastrack have also been able to successfully connect with customers.

Exhibit 20: Trending brands on social networking sites... Facebook Facebook

No. of Likes No. of Followers No. of Tweets No. of Likes No. of Followers No. of Tweets

Tommy Hilfiger 98,13,977 1,090,000 5,781 Allen Solly 17,09,040 14,600 11,900

GAP 70,52,528 632,000 23,200 Peter England 16,38,460 6,400 3,689

Nautica 57,49,817 321,000 5,687 Van Heusen 11,03,707 22,100 2,373

US Polo 26,27,432 8,750 2,186 Louis Phippe 673,090 5,949 7,841

Calvin Klien 1,05,20,560 270,000 3,523 Spykar 342,735 1,902 3,051

Arrow 88,114 538 1,531 LeeCooper 303,518 2,458 712

Flying Machine 10,27,811 1,204 2,140 Zodiac 227,305 1,264 1,726

Diesel 4,285,636 120,000 6,527 Killer 105,146 2,225 3,559

Being Human Clth. 22,900 18,600 5,566 Lawman Page3 101,180 5,247 4,886

Raymond 1,378,905 4,488 1,986 Levis 21,799,825 735,000 12,500

Wrangler 702,935 17,300 1,728 Pepe 2,285,835 19,200 4,185

Twitter TwitterBrands Brands

Source: Facebook, Twitter, ICICIdirect.com Research, Arvind Brands

Arvind’s portfolio of brands has also been successfully able to create this cult and manage to garner more followers and likes on social networking platforms. Brands like Calvin Klein and Tommy Hilfiger have been able to attract majority of the likes. However, they have also been able to get a loyal set of followers on Twitter. Brands acquired – Now keen on monetisation Over the decade, Arvind has built up a portfolio of a large number of brands. Further, the company has tried and tested a number of speciality retail formats like Next, Club America, Debenhams and the recent GAP and TCP. As per the management, as soon as a brand attains a turnover of | 100-150 crore, it stops bleeding at the EBITDA level. Further, as it attains a turnover of | 250 crore, the RoCE becomes attractive. By the time, it reaches | 350 crore it becomes a cash cow. Currently, the four power brands contribute ~50% of the brand & retail revenues with | 1350 crore with an EBTIDA of ~11.5%. The management focus is to increase this conversion rate of a brand to a power brand. Hence, now the focus would be on scaling up existing brands to the level of power brands, which would be at a faster pace. Further, the company has revisited its criteria for addition of brand. It will only enter something that would complement the existing portfolio or the company altogether gets a new category. Further, earlier the company used to associate with a brand that has a scalable opportunity of | 100 crore, which has now been revised to | 500 crore. The management was candid to show their disinterest in brands that cannot be scaled up to | 700-1000 crore over five to seven years. In addition, having now established a strong portfolio of brands across multiple categories, the company is now focused on increasing the monetisation of these brands.


Arvind – Pied piper in modern retail! The apparel market, which is currently harnessed by small retail formats, is experiencing a high degree of receptivity towards corporatised retail, which has resulted in an increased share of organised apparel market. Modern retail includes large format store (LFS), exclusive brands outlets (EBO), speciality stores and multi-brand outlets (MBO). The theory here is to provide an array of options to the customer entering the store, increasing the average billing amount as well. Though at present modern retail contributes only 20% of the total apparel market, its share is poised to grow sharply over the next five years to contribute 28% by 2018. The increased presence of multiple retail formats across specialty retail formats, hypermarkets and cash & carry is expected to drive this growth. The emergence of non-store formats e-tailing, m-commerce, direct selling, etc. are acting as enabling factors for scalability and extending reach to smaller relevant Indian cities.

The fashion distribution channel in India is dominated by wholesale channel followed by exclusive brand outlets (EBO), large format stores (LFS) and multi-brand outlet (MBO). The larger wholesale market is on the back of a huge rural apparel market, catered to by highly unorganised and local players. The four channels together contribute 96.7% to total apparel sales in the country. Besides these four channels, hyper markets, discount stores and e-tailing channels also have their presence in the market. Arvind has big plans on international brands offered over the big retail formats. The company has strategically shifted focus from the business to business (B2B) model to business to consumer (B2C). Arvind has an enviable brand portfolio and a presence in the menswear, womenswear and kids segment. With such a collection of brands, Arvind can attract higher footfalls. This enables it to garner prime retail space at attractive rates in most malls aiding in rapid expansion of the retail space.

Exhibit 21: Apparel market & modern retail growth

50000

98000

250000

350000

CY14 CY18

Total Market Modern Retail


Exhibit 22: Composition of distribution network in India

10.9 4.2

78.6

3.9 2.4

100.0

0

20

40

60

80

100

120

Wholesale EBO LFS MBO Others Total

% s

hare


Exhibit 23: Arvind’ bet on Large format retail



Extensive distribution network – Complimenting brands

Arvind has a strong distribution network of ~810 stores across 150 cities with a total retail space of ~1.42 million square feet (sq ft) in India, which enables it to reach a large number of consumers and a huge potential market to sell its products. The company has been aggressive in retail space expansion in its brands business. Over FY11-14, brand retail space has grown at a CAGR of 50% to 0.8 million sq ft.

Arvind has big plans on large retail formats, which enable it to offer multiple products. Among its extensive reach, ~35% consists of exclusive brand outlets (EBOs) in the name of respective brands. Further, the company also distributes through key channel partners like Lifestyle, Shoppers Stop, etc, forming another 30-35% of the distribution channel. Moreover, multi-brand outlets (MBOs) form 25-27% and e-commerce ~5% of the distribution channel. With an enviable brand portfolio and a presence in menswear, womenswear and kids segment, it envisages higher footfalls though large retail format stores at some prime locations.

Additionally, the company has also taken steps to contain losses in some speciality formats like Debenhams and Next. In FY15, the management initiated the process to withdraw from these unsuccessful ventures. The inventory from the Debenhams stores has been liquidated. Furthermore, the management is working on a strategy for the Next stores.

The company plans to open an additional seven GAP stores over the next year, with a store size of ~8000-10000 sq ft. Furthermore, for Aeropostale, the company plans to open 40-45 stores by 2020. These stores would have an average size of 2000-3000 sq ft due to which we believe the average space per store will increase.

Exhibit 24: Pan-India presence for brands & retail

No. of Stores

Sq Ft (mn)

No. of Stores

Sq Ft (mn)

No. of Stores

Sq Ft (mn)

No. of Stores

Sq Ft (mn)

No. of Stores

Sq Ft (mn)

No. of Stores

Sq Ft (mn)

Brands 228 0.21 352 0.33 487 0.50 611 0.61 671 0.59 816 0.74MM 200 0.62 216 0.69 197 0.71 166 0.75 140 0.83 126 0.78Total 428 0.83 568 1.02 684 1.21 777 1.36 811 1.42 942 1.52Exclusive KA counters

2014-15

532 692 989

2011-12 Q1 2015-16

810327

2012-13 2013-142010-11

248


Exhibit 25: Revenue growth trend for brands business

669836

1288

1674

2184

2796

0

500

1000

1500

2000

2500

3000

2012 2013 2014 2015 2016E 2017E

| cr

ore

Revenue


Exhibit 26: Store details for brands business

0.33 0.50 0.61 0.59 0.75 0.96

352

487

611671

721771

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2012 2013 2014 2015 2016E 2017E

mill

ion

sq.ft

0

100

200

300

400

500

600

700

800

900

Total sq. ft No. of stores



Tie-up with GAP & Children’s Place to enhance Arvind’s brand power

The addition of GAP and The Children’s Place to Arvind’s brand portfolio places it in an enviable position in the Indian branded apparel market. GAP is a leading global speciality retailer offering clothing, accessories and personal care products for men, women, children and babies. It has 3200 company operated stores and ~ 400 franchised stores. As per the tie-up with Arvind, 40-50 stores are planned to be opened over next four years. Arvind plans to set up GAP stores in 15-20 Indian cities and then gradually take the presence to Tier I towns. The GAP stores are expected to be ~8000-10000 sq ft in size and a single store would require investment to the tune of | 10 crore on fixtures per store. An added incentive for Arvind is that it has secured the rights to sell GAP products through e-commerce platforms, which can be a huge opportunity over the long term. Children’s Place, on the other hand is the largest retail player in North America for children’s apparel in North. Arvind plans to open ~50 stores by FY18. The average store size is expected be around 2000-3000 sq feet. Arvind expects to launch the first store by mid-2015 and is targeting to open the stores in 15-20 cities. The tie-up with these iconic brands makes Arvind a preferred partner for other potential global brands looking to enter Indian market.

We believe that majority of the growth will be driven by an increase in the number of stores and its distribution footprint. The existing stores would take some time to mature due to which same-store sales would remain lumpy.

“Creayte”, “Arvind Internet” to capture surging E-tailing

Online sales of apparel industry account for 2% of total apparel sales and currently stands at ~| 3200 crore in CY14. Arvind's management expects Indian apparel e-tailing to be a US$5 billion opportunity by 2017, about 20-25% of total e-tailing and ~7.5% of the total apparel retail market in India. E-commerce is rapidly growing compared in sharp contrast to traditional brick & mortar stores, though on a lower base. With growing online population on the back of affordable internet plans and mobile penetration, the growth rate is going to get added momentum. Huge discounts, abundant options and convenience are major triggers for diversion of traditional buyers to the online platform. The online presence, apart from a large customer base, gives the company an instant nationwide reach. A study on Google play store reveals that a large part of the user base with these e-tailers are potential customers and could be converted to sales by offering them the right quality/price mix. Applying data analytics would help understand the buying pattern of consumers. In developed markets, online and brick & mortar co-exist and complement each other. On the one hand, brick & mortar stores will remain a powerful platform for consumers to experience the full dimension of a brand through ambience, display and the personal touch of store staff. On the other hand, online channels would offer the widest possible variety of fashions, give instant accessibility to every corner of the country and direct highly customised recommendations and suggestions to the consumer. Though both these channels are expected to grow at a different pace, they need to co-exist in the retail ecosystem. Arvind intends to capture these e-tailing opportunities with omni-channel strategy. With “Creayte” the company tries to capture the digital custom clothing market. Additionally, the company has formulated a strategy to have a significant online presence through its investments in “Arvind Internet”. Currently, e-tailing contributes ~5% of the brands & retail revenues. The management has assured that these online efforts would not compete with the Flipkarts of e-commerce. Hence, they do not intend to burn money on discount for the same.

Exhibit 27: Online user base...!!! App

DownLoadsUser

ReviewsAverage ratings

10-50 mn 294,000 4.1

10-50 mn 1.25 mn 4.2

10-50 mn 282,000 4

10-50 mn 731,479 4.3

10-50 mn 738,000 4.2

Source: Google play store, ICICIdirect.com Research


Success stories of brands!

Zara has been successfully able to capture the growth momentum in India. With just | 406 crore revenue in FY13, the company has been consistently able to grow its revenues to | 580 crore (43% YoY) in FY14 and | 721 crore (24% YoY) in FY15. Currently, it operates from 16 stores with average revenue of | 45 crore per store and further has aggressive store opening plans in the next three to four years. A vertically integrated company like Page Industries has also been successfully able to market its brand “Jockey”. The revenue of the company has been growing at a CAGR of 34% over 2010-15. “Jockey” has been able to position itself as the most desirable brand in the innerwear space. The apt comparable for the company would be Madura Garments, which is a division of Aditya Birla Nuvo. It markets and owns some of the brands like Louis Philippe, Van Heusen, Allen Solly and Peter England. The distribution network comprises 1759 stores spread through 2.5 mn sq ft of retail space. It is also available at a number of multi-brand stores and departmental stores.

We observe that initially Madura was aggressive in opening new stores, growing at 48% CAGR over 2009-12. However, post 2012, the growth in new stores moderated at a CAGR of 18% over 2012-15.

Exhibit 28: Store dynamics for Madura

342 396

895

11291272

16481869

0.71 0.82

1.31.6

1.92.2

2.5

0200400600800

100012001400160018002000

FY09 FY10 FY11 FY12 FY13 FY14 FY15

mill

ion

sq.ft

0

0.5

1

1.5

2

2.5

3

No of EBO/stores Area (crore Sq feet)


Exhibit 29: Revenue & profitability for Madura

1116 1251

18112239

2523

32263735

1.7 136 196 245 388 463

0

800

1600

2400

3200

4000

FY09 FY10 FY11 FY12 FY13 FY14 FY15

% g

row

th

Revenue EBITDA



Megamart restructuring to aid margins

Arvind’s value retail business, which is housed under Megamart, has been struggling with sluggish revenue growth and low margins over the last two years. Megamart’s strategy is to attract customers by offering discounts on reputed brands like Arrow, Park Avenue, Van Heusen and try and convert them into buying its own private labels. The brands that are sold exclusively at Megamart include Ruggers Skinn, Elitus, Donuts, Karigari, Mea Casa, Auburn Hill, Bay Island, Colt, Leisha and Edge. Megamart stores range in size from 2000 sq ft to 6500 sq ft. The past few years have been challenging for Megamart as it registered negative LTL growth of 3.8% and experienced pressure on operating margins owing to incidence of higher excise duty and higher cost of finished goods due to an increase in cotton prices.

Exhibit 30: Megamart store dynamics…

200216

197

166140

126

3100 31943604

4518

5929 6190

0

1000

2000

3000

4000

5000

6000

7000

FY11 FY12 FY13 FY14 FY15 Q1FY16

Sq F

t

0

50

100

150

200

250

Number od Stores Avg Area Per Megamart Store


To counter the decline in margins, the management has repositioned Megamart from a ‘discount store’ to ‘value retail’ with a higher proportion of private labels. To improve its margins, Megamart is looking to increase the share of private labels from 40% to 60%. Also, several small stores have been closed while some large format stores have been opened resulting in a reduction in the number of Megamart stores from 216 in FY12 to 126 stores in Q1FY16. The large format Megamart stores have been positioned as ‘Power Megamart’ with a size of 1000 sq ft per store. Arvind currently has ~20% area under the power Megamart format and is planning to scale up the area under power Megamart format to 50% over the next two years. The shift in favour of large format stores has led the area per store for Megamart to increase from 3100 sq ft in FY12 to 6190 sq ft in Q1FY16. The repositioning of Megamart as ‘value retail’ is expected to boost revenue growth and enhance margins, going ahead.

Exhibit 31: Revenue growth trend for Megamart and brands business

523 533 576 588669836

1288

1674

0200400600800

10001200140016001800

2012 2013 2014 2015

% g

row

th

Retail (Megamart) Brands



Manufacturing capability positions Arvind across textile value chain Over a period of time, there has been a change in the business strategies of a majority of Indian textile players. Traditional textile players used to focus on single business activity like manufacturing or distribution. This led the majority of monetary benefits to be passed on to wholesalers or retailers, as the mark up in MRP was enjoyed by the latter. With the evolution of modern trade and increasing awareness, manufacturers felt the need to compress and eliminate intermediaries. Following this, wholesalers were felt to be unnecessary. By creating their own marketing team, some manufacturers started directly approaching retailers. Some brands outsourced their manufacturing activities and focussed only on brand building by opening large format stores, which helped them to capture the value in the entire manufacturing chain.

Arvind’s presence across garment value chain The company has successfully shifted from a pure B2B textile player to a combination of B2B and B2C player. Earlier, it used to be a major supplier of fabrics and denim. With the introduction of home grown brands like Ruff & Tuff, the company successfully shifted from a fabric supplier to a garment manufacturer. Following the same, Arvind introduced retail chains like Megamart and ventured into in-licensing/franchisee of international brands, which positioned it as a major retail player. We believe the company has transitioned from a low margin textile business, having subdued return ratios. Going ahead, the performance in its brands and retail business would affirm higher margins and better return ratios.

Exhibit 32: Change in business model for textile companies!!!


Exhibit 33: Revenue share of B2C to increase for Arvind!!!

70.7 68.6 65.0 62.3 59.1

25.4 26.6 28.5 32.7 35.8

3.9 4.7 6.5 5.1

0

10

20

30

40

50

60

70

80

90

100

FY13 FY14 FY15 FY16E FY17EB2B B2C Others


3.9


Most preferred “Make & Market in India” partner!!!

Arvind is strategically trying to balance its textiles business by reducing dependence on denim and enhancing capacity in the more lucrative wovens and garmenting businesses. The company has a denim capacity of 108 million metre while wovens have a capacity of 132 million metre. The garmenting capacity is currently 22 million pieces as on Q1FY16, which the company plans to double to 28 million pieces in FY16. The expansion of the garmenting capacity would be in line with its stated strategy of transforming itself into a powerhouse among brand with an asset light business model. The asset turnover of the garmenting business is typically 2-3x of the fabrics business yielding higher return on assets employed. Also, the garmenting business tends to have higher visibility and connect with the consumer aiding in brand building in the longer term.

The company strategically has a vertically integrated alignment. On the back of this, higher emphasis on garmenting would create multiple levers for improvement. The current internal consumption for fabric was at 4% of total production. The company intends to increase this captive consumption to 25%. By converting a larger proportion of fabric revenue into garment revenue, Arvind would improve its average realisation rates and would keep utilisation levels elevated. The current realisation for woven and fabric was |182/metre and |174/metre, respectively. Realization for garments stood at | 481/piece.

Exhibit 34: Denim volumes & realisation trend

9689

105 106 108 110

167

174

180182

183185

0

20

40

60

80

100

120

2012 2013 2014 2015 2016E 2017E

Mn

MT

155

160

165

170

175

180

185

190

Denim Average Realization


Exhibit 35: Woven volumes & realisation trend

87103

112 115 118 120

162

174 174176

178

162

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016E 2017E

Mn

MT

150

155

160

165

170

175

180

Wovens Average Realization


Exhibit 36: Garments volume & realisation trend

10 12 14 22 25 28

397465 481 491 500

456

0

5

10

15

20

25

30

2012 2013 2014 2015 2016E 2017E

Mn

pcs

0

100

200

300

400

500

600

Garments Average Realization


Exhibit 37: Product configuration in manufacturing business

48.3 42.0 40.8 38.8 36.0 35.1

33.1 38.1 38.8 39.1 36.8 36.0

11.4 11.1 11.5 12.812.2 12.0

-6.7 -5.5 -6.1 -5.2 -4.7 -4.4

13.9 14.3 15.0 14.4 19.7 21.3

-20

0

20

40

60

80

100

FY12 FY13 FY14 FY15 FY16E FY17EDenims Wovens Voiles & Knits Garments Intersegment & Other



Ramping up of its garmenting capacity Arvind is planning to increase its garment capacity to 40 million pieces over the next three years from 22 million pieces as on Q1FY16. On the back of this, the company plans to increase its current contribution from garments from 14% in FY15 to 20% by FY17. The increase in garmenting capacity would mainly be on account of replication of the Chinese dormitory model. The company provides residential accommodation and other livelihood facilities to migrant workers. It implemented this model at two of its manufacturing units in Chhatral and Dehgam in Gujarat. With the increase in garmenting capabilities, Arvind is positioning itself as the most preferred distribution partner in India. With majority of the brands targeting the Indian growth story, the company would help them formulate their manufacturing as well as distribution strategies. The current manufacturing capability includes production of denims and shirts. Arvind manufactures garments for associated international brands like Tommy Hilfiger, Calvin Klein and GAP for which it also has distributing licenses. For power brands like Arrow and Polo, the company manufactures 100% of its domestic requirements. Arvind also manufactures for non-associated brands like H&M, M&S, FCUK and Jack & Jones. In garments, majority of the revenues is from exports. However, approximately 10% of garments produced is marketed within India. The company expect this made and marketed in India proportion to increase to 25-30% by 2020.


Financials Strong revenue growth to be driven by brands & retail

We expect total standalone revenues to increase at 8% CAGR in 2015-17. Majority of the growth would be driven by its garment business, which would be on account of an increase its manufacturing capacity. In denim, the company expects a lull in its outlook. Hence, it is going slow in its expansion plans. We expect denim revenues to increase at a CAGR of 3% in 2015-17, which would be mainly on the back of better realisation and improved utilisation. Further, the capacity enhancement of garmenting would contribute substantially to standalone revenues.

Exhibit 38: Standalone textile revenue trend

3,3163,690

4,6304,966

5,4865,814

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2012 2013 2014 2015 2016E 2017E

| cr

ore

Revenue


Exhibit 39: Standalone revenue composition

1602

1927 1973 2038

377 409533460 529

693

10821236

1549

1890

10991407

1797 1944 20202093

635 667 700717

0

500

1000

1500

2000

2500

FY12 FY13 FY14 FY15 FY16E FY17E

| cr

Denim Woven Knits & Voiles Garment


Arvind is mainly focusing on increasing its revenues from brands & retail. The company has been successfully in garnering an overwhelming response for its first GAP store in Delhi. For FY16, it intends to open additional six to seven stores. Currently, the company has four “power brands” viz. Arrow, US Polo Association, Tommy Hilfiger and Flying Machine, which are growing rapidly. These sets of brands contribute 80% of brands revenues. Other brands like Nautica, Calvin Klein & Gants and the recently ventured GAP and The Children’s Place (TCP) contribute the remaining 20% of brands. Some of these brands are expected to join the list of “power brands” over the estimated period. We believe that in FY17 one of the other brands would qualify to become a power brand following which we expect power brands revenues to grow at a CAGR of 33% in 2015-17. Simultaneously, other brands are expected to grow at a CAGR of 11% over the same period.

Exhibit 41: Brands & retail revenue trend

1192.01369.7

1864.12261.7

2782.6

3409.2

0

500

1000

1500

2000

2500

3000

3500

4000


| cr

ore

Brands & Retail


Exhibit 40: ALBL revenue composition

1068

2376

1334

1638

220 340546 419

576 588 598 614

0

500

1000

1500

2000

2500

FY14 FY15 FY16E FY17E

| cr

Power Brands Other Brands Megamart


FY15 -17E CAGR: 8%

FY15 -17E CAGR: 23%


With major contribution from brands & retail, we expect total consolidated revenues to increase at a CAGR of 13% in 2015-17. Exhibit 42: Consolidated revenue trend

4925.1 5292.5

6862.17851.4

9022.310045.6

0

2000

4000

6000

8000

10000

12000


| cr

ore

Consolidated revenues


EBITDA margins to remain sticky with positive bias An increase in garmenting and higher captive usage would lead to better utilisation levels and higher realisation for the company. This would trigger an improvement in standalone margins, which are expected to increase 90 bps over the estimated period. However, as the newly acquired brands would take some time to normalise, they would drag the performance at ALBL. Still, this negative performance would be offset by restructuring activities at Megamart and older brands getting stabilised. Following this, we expect ALBL’s EBITDA margins to remain at ~6% level over 2015-17.

Exhibit 43: Consolidated EBITDA trend & margins

687.4602.2

934.01012.8

1180.11338.3

12.2

13.0

13.6

12.913.1

13.3

0

200

400

600

800

1000

1200

1400

1600


| cr

ore

11.5

12.0

12.5

13.0

13.5

14.0

Consolidated EBITDA EBITDA Margins



PAT to grow at higher pace than revenues With an improvement in standalone margins and ALBL’s margins condensed at current levels, PAT is expected to grow at a CAGR of 17% over the estimated period. Exhibit 44: Consolidated PAT trend & PAT margins

435.8

248.4

353.9 341.1398.5

500.88.8

4.7 4.3 4.45.0

5.2

0

100

200

300

400

500

600


| cr

ore

0.01.02.03.04.05.06.07.08.09.010.0

Consolidated PAT PAT Margins


Debt equity to remain moderate; return ratios to improve We expect Arvind’s debt to remain at ~| 3500 crore over FY15E-17E and debt-equity ratio to marginally decline from 1.2x in FY15 to 1x in FY17E. We also expect return ratios to improve modestly. Exhibit 45: Debt equity trend

2210.2 2128.32460.8

3396.7 3496.7

2992.11.0 1.1 1.2

1.2

1.1

1.0

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

4000.0


| cr

ore

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Debt Debt/Equity


Exhibit 46: Return Ratios trend

21.5

14.313.4

11.0

13.7 12.5 13.011.9

13.8 14.4 15.1 16.0

0.0

5.0

10.0

15.0

20.0

25.0


%

ROE (%) ROCE (%)



Risks & Concerns Standalone margins to get impacted by cotton prices Cotton prices have been volatile over the past few years. The textile business of the company is exposed to the risks of this volatility. Though the company procures cotton during September-December, the procurement is on the back of existing orders. The inventory managed by the company on its textile business is to the extent 72 days. The increase in cotton prices would impact standalone prices and result in lower EBITDA.

Increase in royalty payments Currently, the company operates in a combination of arrangements with international brands. This includes setting up of subsidiary/JV, franchisee or licensing. The current royalty payment is 2.87% of net sales. Any increase in royalty payments or any hike in taxation on royalty payment would impact EBITDA margins for Arvind Brands & Retail (ARBL).

Failure of new brands/investment overshadows core performance The company currently has 31 brands in its portfolio. If there is sluggishness in the uptake of apparels, new brands/investments of the company would drag down the overall consolidated performance. Furthermore, till new brands stabilise they would keep denting the company's profitability for an extended period. This would also result in new brands not choosing Arvind and preferring other companies for their strategic partnership.

Exhibit 47: Cotton prices sensitivity to standalone margins

-20% -10% 0% 10% 20%

FY16E 20.8 19.2 17.6 16.0 14.4 FY17E 21.0 19.5 18.1 16.6 15.1

EBITDA margins

Change in Cotton Prices


Exhibit 48: Royalty payment sensitivity to ALBL margins

-1% -0.5% 0% 0.5% 1%

FY16E 7.5 7.0 6.5 5.9 5.4 FY17E 7.2 6.7 6.2 5.6 5.1

EBITDA margins

Change in Royalty payments



Valuation Standalone business valued at 4x EV/EBITDA Given the company’s expertise in manufacturing garments, coupled with its positioning as the most preferred franchisee/distribution partner in India, it is poised to benefit from an increase in apparel demand. Arvind’s standalone revenue, which includes textiles and garments, grew at a CAGR of 19% in FY11-15. Majority of this growth was driven by growth in its fabric division, which grew at 13.4% CAGR in FY11-15. The increase in fabrics revenues was mainly supported by 21% CAGR in woven, followed by denim revenues, which grew at a modest CAGR of 6%. Apart from fabrics, the company manufactures garments for brands like Tommy Hilfiger, Calvin Klein, H&M, M&S, FCUK and Jack & Jones. Revenues from the same grew at a CAGR of 16% over 2012-15. Over the past few years, the company’s investments in augmenting its garmenting capacities were insignificant. The company now intends to double its garmenting capacity and has targeted 40 million capacity by 2020. Further, currently only 5% of the fabrics produced are used for production of garments that the company intends to increase to 25%. With the enhancement of capacities, the standalone revenues would be mainly driven by garments. Garment revenues have increased at a CAGR of 16% in 2012-15, which is further expected to grow at a CAGR of 30% over two years. Majority of the revenues would be driven by volumes on the back of capacity enhancement with realisation at current levels. We believe the standalone business has different dynamics and has very different working capital cycle. Thus, we value the standalone business on the basis of EV/EBITDA in comparison to the industry. Exhibit 49: Peer comparison for standalone business….

Figures (Rs crs)Company Price Sales EBIDTA OPM PAT PAT % FY16E FY17E

Nandan Denim 110.0 1,096.5 165.4 15.1 51.4 4.7 2.5 2.2 KPR Mills 715.0 2,565.8 437.3 17.0 173.8 6.8 6.7 5.5 Vardhman Textiles 916.0 6,952.2 1,284.0 18.5 450.4 6.5 5.3 4.8

Average EV/EBIDTA 4.8 4.2

FY15 EV/EBIDTA

Source: ICICIdirect.com Research

We value the company at an EV/EBITDA of 4x, which is lower than the industry average, arriving at an SOTP value of the standalone business at | 69 per share. Exhibit 50: Valuing standalone business….

SOTP

Arvind Standalone

Target EV/EBITDA (x) 4.0

EBITDA (FY17E) 1,043.0

Net Debt 2,399.5

Enterprise Value (| Crore) 4,171.8

Target Market cap Core business (| crore) 1,772.3

Value/Share 69



Brands & retail business valued at 2x Market capitalization to sales The theme around brands and positioning apparel as a ‘bridge to luxury’ segment has seen only a handful of players like Madura and Page getting it right and being successful. The growth from branded apparel has been lumpy with close to 200 international brands currently present in the India fashion segment. Currently, Arvind has four power brands with each having a turnover of ~| 2000 crore. The company estimates that each of these brands would be scaled up to | 5000 crore. Over a decade, the company believes it has added sufficient number of brands and now wants to focus on its monetisation. The recent restructuring of Megamart and closure of unsuccessful ventures like Debenhams and Next affirm the management efforts to focus on profitable growth. In addition to this, the garmenting capabilities of the company position it as the most preferred partner in India. Majority of the brands in India, though not profitable, are targeting revenue growth. However, profitability will creep in once significant scale is achieved. To quote the management, “When a brand attains a turnover of | 100-150 crore it gets out of negative EBITDA. By the time it touches | 250 crore, RoCE becomes attractive. By the time it gets to | 350 crore, a brand makes tonnes of money”. With the currently successful launch of GAP store and target audience for Aeropostale, it is well poised to create a number of powerbrands by 2020. We believe that one of the brands would be converted into a powerbrand in 2017. On account of this, powerbrand revenues are expected to grow at 33% CAGR while due to the shift the growth of other brands would be lower at a CAGR of 11% in 2015-17. We believe this business would be valued on the basis of the sales that the company is able to achieve and following this the estimated market capitalisation it would demand. We value its brands & retail business using the market capitalisation to sales method, valuing the company at an average multiple of 2x and arrive at a value of | 261 per share.

Exhibit 51: Peer comparison brands & retail business….

Figures (Rs crs)

Company

Market Capitalization FY14 FY15 FY16E FY17E FY16E FY17E

Kewal Kiran 2,601.5 363.9 405.1 469.3 564.5 5.5 4.6 Mandhana Industries 4,501.6 1,517.9 1,685.0 1,836.6 1,983.6 2.5 2.3 Raymond 11,880.9 4,548.0 5,332.6 5,960.3 6,668.5 2.0 1.8

Average P/E 3.3 2.9

Sales Market Cap/Sales


Exhibit 52: Valuing brands & retail business….

SOTP

Arvind Lifestyle & Brands

Target Market Cap/Sales (x) 2.0

Sales (FY17E) 3,370

Market Capitalization (FY17E) 6,739.4

No. of Shares 25.8

Price target (|) 261


Consolidated valuation Applying the EV/EBITDA multiple of 4x to its standalone business and market capitalisation to sales multiple of 2x to its brands & retail business, we arrive at a consolidated target price of | 330/share. We have a BUY recommendation on the stock.


Peer Comparison (Consolidated) Exhibit 53: Peer Comparison (Textiles)

FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 Arvind Standalone 7102 2503 3494 3780 4777 5225 501 587 796 828 14.3 15.5 16.7 15.8 434 261 362 378Nandan 506 470 574 703 894 1097 87 108 137 169 15.2 15.4 15.3 15.4 16 31 38 51KPR Mills 2694 658 1268 1665 2371 2565 187 393 454 462 14.7 23.6 19.1 18.0 33 103 142 174Vardhman Tex 5814 1892 4648 4972 6167 6786 624 976 1463 1171 13.4 19.6 23.7 17.3 141 356 718 454

PAT (| crore)Company Market Cap

(| crore) DebtSales (| crore) EBITDA (| crore) EBITDA Margin (%)

Source: Capitaline, ICICIdirect.com Research

Exhibit 54: Peer Comparison (Brands & Retail)

FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 Arvind Lifestyle 7102 696 676 1,285 1,742 2,104 56 68 87 121 8.3 5.3 5.0 5.8 13 (13) (21) (32) KKCL 2608 11 300 301 364 405 73 74 93 97 24.5 24.5 25.7 23.8 52 53 67 67Mandhana Ind 892 765 980 1363 1518 1685 187 197 244 278 19.1 14.5 16.1 16.5 72 66 60 83Raymond Ind 2375 1881 3666 4093 4560 5341 535 416 517 522 14.6 10.2 11.3 9.8 145 30 98 103

Company Market Cap (| crore) Debt

Sales (| crore) EBITDA (| crore) EBITDA Margin (%) PAT (| crore)

Source: Capitaline, ICICIdirect.com Research

Exhibit 55: Peer Comparison – Valuation metrics

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

Arvind Ltd 7102 21.0 18.0 14.3 10.3 8.9 7.9 2.6 2.3 2.0 12.5 13.0 14.3Vardhman Tex 5814 10.5 7.7 6.1 5.9 5.1 4.4 1.7 1.4 1.2 13.4 16.4 17.4KKCL Ltd 2608 39.8 31.7 25.2 27.0 22.5 17.9 8.4 8.3 7.3 20.7 25.7 28.4Nandan 506 9.4 7.3 5.8 5.1 4.1 3.4 1.9 1.5 1.2 21.7 22.2 22.8KPR Mills 2694 15.3 11.5 8.6 7.4 6.6 5.4 2.9 2.3 1.9 19.9 21.6 23.9Mandhana Ind 892 10.1 9.4 8.6 5.9 5.3 4.9 1.4 1.3 1.1 14.8 13.4 12.8Raymond Ind 2375 21.4 14.9 11.2 9.2 7.1 6.1 1.6 1.4 1.3 7.5 9.6 11.2

ROE (%)

CompanyMarket Cap

(| crore)

P/E (x) EV/EBITDA (x) P/B (x)

Source: Bloomberg, ICICIdirect.com Research


Financial Summary (Consolidated) Exhibit 56: Profit & Loss (| Crore)(Year-end March) FY14 FY15 FY16E FY17ETotal operating Income 6,862.1 7,851.4 9,022.3 10,045.6 Growth (%) 29.7 14.4 14.9 11.3 Raw Material Expenses 3,124.1 3,494.0 3,992.4 4,445.2 Employee Expenses 679.3 802.3 922.6 1,065.6 Manufacturing Expenses 1,181.4 1,449.2 1,708.7 1,892.4 Selling & Distribution Expenses 398.8 497.2 541.3 552.5 Admin & Other Expenses 442.6 525.3 595.9 661.2 Project Expenses 102.0 70.6 81.2 90.4 Total Operating Expenditure 5,928.1 6,838.6 7,842.2 8,707.3 EBITDA 934.0 1,012.8 1,180.1 1,338.3 Growth (%) 35.9 8.4 16.5 13.4 Depreciation 225.2 212.4 274.6 299.2 Interest 354.5 394.6 422.9 429.2 Other Income 69.4 93.2 97.9 102.8 PBT 423.7 499.0 580.5 712.7 Growth (%) 70.6 17.8 16.3 22.8 Total Tax 54.8 107.1 131.6 165.7 PAT (adj. exceptional gains/loss) 353.9 341.1 398.5 500.8 Growth (%) 42.5 (3.6) 16.8 25.7 EPS (|) 13.7 13.2 15.4 19.4


Exhibit 57: Balance Sheet (| Crore) (Year-end March) FY14 FY15 FY16E FY17ELiabilitiesEquity Capital 258.2 258.2 258.2 258.2 Reserve and Surplus 2,323.0 2,463.8 2,798.7 3,235.8 Total Shareholders funds 2,581.2 2,722.1 3,056.9 3,494.1 Total Debt 2,992.1 3,396.7 3,496.7 3,576.7 Deferred Tax Liability 43.5 47.1 47.1 47.1 Minority Interest / Others 24.2 34.8 34.8 34.8 Total Liabilities 5,640.4 6,200.4 6,635.4 7,152.6 AssetsGross Block 4,670.5 5,287.5 5,822.7 6,340.6 Less: Acc Depreciation 1,778.2 2,079.6 2,367.4 2,679.5 Net Block 2,892.3 3,207.9 3,455.3 3,661.1 Capital WIP 131.6 95.6 30.3 60.7 Intangible WIP 3.0 4.4 4.4 4.4 Total Fixed Assets 3,024.0 3,303.5 3,485.6 3,721.8 Investments 128.1 57.1 62.8 69.1 Inventory 1,627.9 1,845.0 1,755.0 1,844.0 Debtors 1,009.3 1,165.8 1,260.6 1,376.1 Loans and Advances 1,062.1 1,244.4 1,468.4 1,688.7 Other Current Assets 339.8 269.3 309.7 340.7 Cash 166.3 83.3 81.7 111.0 Total Current Assets 4,205.4 4,607.9 4,875.5 5,360.4 Trade Payables 1,248.8 1,349.4 1,321.0 1,476.6 Provisions 108.5 129.0 148.3 170.6 Other Current Liabilities 362.9 294.2 323.6 356.0 Total Current Liabilities 1,720.1 1,772.6 1,792.9 2,003.2 Net Current Assets 2,485.3 2,835.3 3,082.5 3,357.2 Application of Funds 5,640.3 6,200.4 6,635.4 7,152.6



Exhibit 58: Cashflow (| Crore) (Year-end March) FY14 FY15 FY16E FY17EProfit before Tax 407.3 444.7 526.5 662.7 Add: Depreciation 225.2 212.4 274.6 299.2 (Inc)/dec in Current Assets (961.3) (485.5) (269.2) (455.7) Inc/(dec) in CL and Provisions 218.8 52.4 20.4 210.2 Taxes Paid (54.8) (107.1) (131.6) (165.7) Interest on borrowings 354.5 394.6 422.9 429.2 CF from operating activities 189.7 511.5 843.5 979.9 (Inc)/dec in Investments (71.2) 70.9 (5.7) (6.3) (Inc)/dec in Fixed Assets (377.3) (509.8) (505.1) (491.5) (Inc)/dec in Intangible Assets (5.8) (107.2) (30.1) (26.5) Others 76.0 36.1 65.3 (30.4) CF from investing activities (378.3) (510.0) (475.6) (554.7) Issue/(Buy back) of Equity 0.1 0.1 - - Inc/(dec) in loan funds 531.3 404.6 100.0 80.0 Dividend paid & dividend tax 71.0 79.0 94.8 94.8 Interest paid & Others (433.1) (568.2) (564.4) (570.9) CF from financing activities 169.3 (84.5) (369.5) (396.0) Net Cash flow (19.3) (83.0) (1.6) 29.3 Opening Cash 185.6 166.3 83.3 81.7 Closing Cash 166.3 83.3 81.7 111.0


Exhibit 59: Ratios (Year-end March) FY14 FY15 FY16E FY17EPer share data (|)EPS 13.7 13.2 15.4 19.4Cash EPS 22.4 21.4 26.1 31.0BV 100.0 105.4 118.4 135.3DPS 2.8 3.1 3.1 3.1Cash Per Share 6.4 3.2 3.2 4.3Operating RatiosEBITDA Margin (%) 13.6 12.9 13.1 13.3PBT Margin (%) 5.9 5.7 5.8 6.6PAT Margin (%) 5.1 4.3 4.4 4.9Inventory days 86.6 85.8 71.0 67.0Debtor days 53.7 54.2 51.0 50.0Creditor days 66.4 62.7 53.4 53.7Return Ratios (%)RoE 13.7 12.5 13.0 14.3RoCE 13.8 14.4 15.1 16.0RoIC 13.4 13.4 14.1 15.1Valuation Ratios (x)P/E 20.1 21.0 18.0 14.3EV / EBITDA 10.6 10.3 8.9 7.9EV / Net Sales 1.4 1.3 1.2 1.1Market Cap / Sales 1.0 0.9 0.8 0.7Price to Book Value 2.7 2.6 2.3 2.0Solvency RatiosDebt/EBITDA 3.2 3.4 3.0 2.7Debt / Equity 1.2 1.2 1.1 1.0Current Ratio 2.3 2.6 2.7 2.6Quick Ratio 1.4 1.5 1.7 1.7



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Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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Initiating Coverage September 18, 2015 Arvind Ltd...

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