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All Dressed Up

Author: Administrator Account/Tuesday, February 23, 2010/Categories: Stocks

All Dressed Up

The Lalbhai family-promoted Arvind Mills is the largest cotton  textiles  manufacturer  in  India with an annual  capacity in excess  of  230  million  meters. The company faced some tough times in the early 2000s when the whole textile business became commoditised.

The company then chartered a new course and built strong apparel brands that helped Arvind stand out in a cluttered market. Today Arvind is a  leading  player  in  branded  garments  and  value  retail  in  the domestic  market.  The  company  is  the  third  largest  Denim  manufacturer in the world and largest producer of woven fabric in the country.

Its  major  business consists  of  textiles  (denims,  woven fabric, readymade garments,  and voiles ),  and  manufacturing  and  selling of licensed  and  its own branded apparel. Arvind’s retail presence is pretty strong. It’s present in virtually every multi-brand outlet in the country and also has a franchisee network of exclusive brand outlets, and its own Megamart chain of large format value retail outlets. Arvind seems well placed to meet its target of being a Rs 10,000 crore company by 2018 with a mix of organic and acquisitions led strategy.

Arvind underperformed the benchmark Sensex and BSE Mid-Cap Index over the  last  one  year  due  to  subdued consumer sentiment  in  FY13  coupled  with  pressure  on  margin  seen  in  its  brands  and  retail  division.  However, it looks likely that the consumer sentiment could improve along with its margins in Q4FY13.

Compared  to  its  peer-group,  Arvind  trades at lower valuations (6.6x FY15E EPS and 5.0x FY15E EBITDA).  Therefore, it could be a good time to enter the stock.

A Diversified Portfolio

Arvind  has  a  diversified  and  premium  portfolio  in  the denim  and woven  segments.  It is  ranked  amongst  the top-3 fully-integrated denim manufacturers globally, and is the largest  woven fabric manufacturer in India. Its denim and woven capacities are likely to grow by 7%  and 15% CAGR respectively by 2015. Arvind  has  a  portfolio  of  close to 30 brands. That includes 13 in-house brands (Flying Machine, Excalibur),  15  brand licenses (Arrow, Lee, Wrangler) and one  JV (Tommy Hilfiger) in the ultra premium category.

Its Megamart stores  range in size from 2000 sq ft to 65000 sq ft. There are six large format stores (average size of 40,000 sf. Ft) and 205 smaller stores across the country.

According to the company,  it  plans  to tie-up  brands in the fast growth segments without cannibalizing its own portfolio. The  complete  removal  of  excise  duty  from  branded  apparel  should  boost  profitability of its Megamart stores.

Strong Network

Arvind  has  strong  distribution  network  of about 750  retail stores  across  150  cities.  It  has  presence  in  700 multibrand outlets and 656 departmental store in India. In addition, its present in seven retail stores and 113 counters  at  departmental  stores  in  Middle  East and  South  Africa.  It  plans  to  increase  its retail space by 15-18% Y/Y over next 2-3 years to tap the growing retail potential.

Divestment of  Realty

Arvind is  expecting  Rs  7-8  billion in net  cash-flow over six  years  from  the sale  real estate.  Cash-flows  from  realty  divestment  would  act  as  a  cushion for expanding operations. Arvind’s  revenue  and  EBITDA  are  likely  to  grow  13.5%  and  15.1%  CAGR,  while  its  PAT  would  grow  by  11.8%  CAGR  in  FY13-15E  on  higher  tax  payments.  Its current market price is about Rs  80,  and could touch Rs 103 representing a 30% upside in the next year or so.

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