scorecardresearchArvind Fashions: Why Anand Rathi sees a massive 76% upside in this retail stock in next 12 months

Arvind Fashions: Why Anand Rathi sees a massive 76% upside in this retail stock in next 12 months

Updated: 28 Dec 2022, 04:35 PM IST
TL;DR.
The brokerage has maintained its ‘buy’ call on the stock but raised its target price to 567 from 516 earlier. The new target price implies an upside of over 76 percent in 12 months.
According to the brokerage, Arvind Fashions has completed its business reset in FY20-FY21 and has seen an upswing in business over the last four quarters, the pace of which should accelerate.

According to the brokerage, Arvind Fashions has completed its business reset in FY20-FY21 and has seen an upswing in business over the last four quarters, the pace of which should accelerate.

Arvind Fashions can rise as much as 76 percent in the next one year, said domestic brokerage house Anand Rathi. The brokerage has maintained its ‘buy’ call on the stock but raised its target price to 567 from 516 earlier.

According to the brokerage, Arvind Fashions has completed its business reset in FY20-FY21 and has seen an upswing in business over the last four quarters, the pace of which should accelerate.

"While growing 12-15 percent in the next 3-4 years, it expects a double-digit EBITDA margin (pre-Ind AS) in 18 months. Revenue growth would be driven equally by like-to-like growth and store expansion, margin expansion by efficiencies as brands gain scale and on the Arrow turnaround. Management says it will focus on scaling up existing brands profitably and is not looking at adding brands," noted the brokerage.

Anand Rathi expects the firm's 380 crore net debt to shrink to 130 crore by FY25 end. It is positive on the stock and sees a further re-rating, driven by a better sustainable performance.

Stock price trend

The retail stock has advanced nearly 25 percent in 2022 and 20 percent in the last 1 year. The stock is flat in December after a 9.5 percent decline in November. The stock has given positive returns in seven of the 12 months this year and negative in five.

The stock gave double-digit returns to its investors in four months - October (14 percent), September (18 percent), July (14.6 percent) and February (13 percent). Meanwhile, it shed the most in February, down 13 percent followed by November.

In the last 3 years, the stock has gained only 9.5 percent. From its all-time high of 807, hit in March 2019, the stock has shed over 60 percent, however, from its all-time low of 107.95, hit in May 2020, it has advanced nearly 200 percent.

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Arvind Fashions stock price trend

The firm is engaged in retailing garments, cosmetics, and accessories in India and has a portfolio of owned and licensed brands, such as US Polo, Arrow, Flying Machine, Tommy Hilfiger, Calvin Klein, Unlimited, Sephora, and others. The company sells its menswear, womenswear, and kidswear products through retail and departmental stores, as well as online and also exports its products to Nepal, Sri Lanka, Bangladesh, the Middle East, and Maldives. The company was formerly known as Arvind J&M.

Rationale

Growing profitably: The company's management expects a 12-15 percent revenue growth in 3-4 years driven equally by like-to-like (LTL) growth and store expansion. New retail identity, brand extensions (footwear, innerwear, kids’ wear, women’s wear) are expected to boost LTL growth, noted the brokerage.

"The firm plans to add 200 exclusive brand outlets (EBOs) yearly, chiefly through franchisees; 80-90 percent of store additions would be of Power brands; 70-80 percent in tier-2 and -3 cities as its network penetration deepens. It expects double-digit pre-IND AS EBITDA margins in 18 months (vs EBITDA breakeven in FY22), driven by operating leverage and the Arrow turnaround," highlighted the brokerage.

With a significant swing in Arrow’s EBITDA (loss-making in FY22), Anand Rathi expects margins of ‘Power brands’ to be higher.

Better cash flows, optimised working capital, and profitable revenue growth would reduce net debt/equity from 0.5x in FY22 to 0.1x in FY25, noted the brokerage. The company delivered 4x inventory turns by FY22 end and intends to move towards 5x in 3-4 years. As its cash generation picks up (from FY24), it will focus on scaling up brands to reach 100 crore in sales and not by adding brands, it added. Management says revenue growth would not come at the cost of margin dilution or working capital expansion.

Risks: Keen competition; lower revenue growth.

Q2 earnings

In the September quarter of FY23 (Q2FY23), the firm posted a 79.07 percent YoY jump in its consolidated net profit at 125.02 crore helped by gains from exceptional items. It had posted a net profit of 69.58 crore in the year-ago period. Profit After Tax from continuing business and before the exceptional item was 85 crore, said the firm. Arvind had a gain of 40.52 crore from exceptional items, which includes profit on the sale of a subsidiary and provision from the value of land in Gujarat.

Meanwhile, its revenue from operations was up just 2.93 percent at 2,169.81 crore compared to 2,107.97 crore in the corresponding period of the previous fiscal.

JM Financial also gave Buy rating on the stock with a target of 400 per share, implying 24 percent upside as it expects margins to rise with better full-price sales and operating leverage. The company will continue to focus on reducing debt and better inventory turns, leading to more cash flow.

Two analysts polled by MintGenie have a ‘buy’ call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 28 Dec 2022, 04:35 PM IST