Arvind Fashions Ltd. share price target

Scaling new heights in Value Fashion

Despite muted demand, Arvind Fashions posted 11% retail LTL growth y/y, with double-digit LTL growth for all its five brands. The retail channel outshone (15% growth y/y), driven by higher ad-spend, store expansion and celebrity collaborations.

Retail channel leads the show; margin expands

Operating margin expands; retail LTL positive despite a slowdown

Aspirational Growth Playing Out for Arvind Fashions

Its FY24 annual report highlighted Arvind Fashions’ steps for growth with premiumisation being a core theme across brands. It is focusing on launching high-quality seasonal collections.

Margin expansion on track; revenue sails ahead

Strategy execution well on track; margins expand

Perfectly positioned for a valuation re-rating

ARVIND continues to outperform on all key parameters; (1) strong 9% SSSG in retail channel (~50% revenue share) which is one of the best in the apparel sector (after Trent’s at 10%), (2) healthy trajectory of EBITDA margin improvement in emerging brands (to 6% vs 3% in 2QFY23) with revenue growth outperformance at 19% YoY (vs 5% growth in Power Brands – 80% revenue share).

ARVIND’s continues to outperform on all key parameters; (1) strong 4% SSSG (vs -3% in ABFRL’s Lifestyle Brands) in retail channel (51% revenue share) which is 2nd best in apparel sector (after Trent’s at 12%), (2) healthy trajectory of EBITDA margin improvement in emerging brands (to 11% vs 6% in FY23) with strong revenue growth 15% YoY (vs 4% growth in Power Brands – 80% revenue share).

Arvind Fashions (ARVINDFA) reported decent set of headline numbers. Revenue from power brands (~80% of revenue) grew at 5% 4Y CAGR, led by (1) continued strong growth in USPA brand (~60% of power brand revenue; NSV of ~Rs18bn in FY23) due to outperformance in departmental stores and lower discounting.

Arvind Fashion has recorded a robust quarter with superior revenue growth and margin expansion led by strong growth in power brands coupled with operating leverage and lower discounts. Sharp growth in revenue from power brands (13% YoY) accounts ~80% of the total revenue on the back of 1) USPA shows encouraging growth in retail LTL and high growth in departmental stores leading to reduced discounts.

Arvind Fashions (ARVINDFA) reported strong set of headline numbers. Revenue from power brands (~80% of revenue) grew 13% 3Y CAGR (similar to Madura brands of ABFRL) led by (1) continued strong growth in USPA brand (~60% of power brand revenue) due to outperformance in departmental stores and lower discounting.

Q1 FY23, was amongst the best quarters where AFL reported a revenue jump of 171% YoY to ?920 Cr in Q1 FY23 from ?340.4 Cr in Q1 FY22

We expect gross debt to reduce from | 903 crore in FY21 to | 500 crore by FY23E. The management's focus on prudent capital allocation, stringent working capital policy is expected to translate to positive FCF by FY23E, with pre Ind-AS 116 EBITDA margin of ~7%. We change our stance from REDUCE to HOLD owing to strengthened b/s. Better capital allocation towards profitable brands with improvement in margin profile, debt reduction would be key monitorables. We value...

Given the brand equity of AFL's power brands (60% of sales), a recovery in this segment is a foregone conclusion. This coupled with multiple margin levers and an increasingly lighter expansion strategy should ensure AFL's return profile has a U-shaped recovery. (6.3% by FY22 vs -3.7% in FY20E). We remain circumspect on the value fashion play though, given AFL's lack of execution history. Valuations at <1x FY20E Power brand sales seem undemanding. While we maintain our estimates, a DCF-roll-over to FY22 leads to a marginal revision in TP to Rs. 460/sh (earlier Rs. 450), implying 11x F22 EV/EBITDA). Reiterate BUY. Near double-digit (-9.8%) top-line de-growth was par for the course for Arvind Fashion (AFL) as FY20 is all about 1. fixing working capital woes in brands biz via reducing reliance on long-credit cycle accounts (MBOs), 2. Reining in losses of the value fashion play Unlimited. 3). Non-core brand exits.