J Suresh, MD & CEO, Arvind feels that their deal with PVH Corp is margin accretive as Calvin Klein margins are higher than brands and retail margins.
We are looking CK taking a leadership in the fashion retail and our target is to reach 5,000 crore by 2018.
MD & CEO
Arvind rallied over 5% on news that they will now be the Indian partner for US-based Phillips-Van Heusen Corporation (PVH) by buying 49 percent stake in Premium Garments Wholesale Trading, a joint venture that sells fashion brand Calvin Klein in India , for Rs 100 crore.
J Suresh, MD & CEO, Arvind feels that their deal with PVH Corp is margin accretive as Calvin Klein margins are higher than brands and retail margins. Suresh believes that Calvin Klein margins can improve by 300 bps in FY15 expecting their margins to be 15 percent by FY16.
Calvin Klein revenues can improve to Rs 1.5 billion in FY15 from Rs 1.25 billion, adds Suresh.
Motilal Oswal says post CK acquisition, Arvind will command a 90 percent market share in one of the fastest growing 'bridge to luxury' segment while Nirmal Bang remains concerned over aggressive capex and poor allocation of funds by Arvind.
Below is the verbatim transcript of the interview:
Q: Where are your margins are currently standing? What are the margins on this acquisition of yours and how will it affect it going forward? Will it reflect this quarter itself?
A: In terms of margins, this acquisition is accretive to the overall margin because the current margin of Calvin Klein is higher than the current margins of brands and retail business and going forward we are looking at Calvin Klein delivering higher in terms of 15 percent plus kind of an EBITDA. So, we will have a definite improvement in margins as a result of this acquisition. It will not get reflected in the current quarter because we will start operations from the month of April and it will take six months before we see improvement in the margins.
Q: Calvin Klein has EBITDA margins of 8-9 percent and you indicated that you are looking to grow them to 15 percent EBITDA margin for CK. How soon would it happen, the scale up in margins?
A: We hope to do it by end of the second year. So, the current year will go in selling right things and looking towards an improvement. We may bump it up to 3 percent in FY15. FY16 definitely has the potential to cross 15 percent plus.
Q: There were some concerns like some brokerages have about the aggressive capex by your company. In 2012, you had acquired Debenhams, Next and Nautica but these were incurring losses at the time of acquisition and they continue to do so even after 18 months. You have Calvin Klein which you indicated would be margin accretive. Are there any more plans now in terms of your expansion or is this it?
A: We are looking at taking a leadership in the fashion retail and our target is to reach 5,000 crore by 2018. So, we are looking at other opportunities but opportunities we look at only from the point of view of it gives us strategic position in the market and it is going to contribute positively to our EBITDA and rosy improvement. So, we are not looking at any of the acquisitions that will not positively contribute to our results.
Q: Could you tell us how has this deal with CK been funded; and what are the debts to equity or the total debt on the books now stand at?
A: This is funded primarily from Arvind’s fund and because of this acquisition; there is an infusion of funds. There is no change in the debt structure of Arvind.
Q: When you say it is been funded by Arvind’s funds, does it mean the cash on the books that Arvind has because Arvind has net debt. So could you explain that?
A: The better person to ask this question will be the CFO of Arvind but I can tell you that Arvind’s debt of around Rs 3,000 crore doesn’t change because of this acquisition.
Q: As of FY13, CK had revenue of Rs 1.25 billion. You told us how margins in CK can be ramped up. Could you give us some forecast of how revenues will look like in the next two years?
A: We are looking at brand delivering up to 500 crore by 2018. We are much clearer about revenues going forward because the current year may move from 125 crore to 150 crore but once we set things right, we are looking at certain category expansions and aggressive distribution expansion. The combination of these two can take the brand to Rs 500 crore.
Arvind stock price
On August 20, 2014, Arvind closed at Rs 251.80, up Rs 16.85, or 7.17 percent. The 52-week high of the share was Rs 256.10 and the 52-week low was Rs 67.85.
The company's trailing 12-month (TTM) EPS was at Rs 15.31 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 16.45. The latest book value of the company is Rs 102.09 per share. At current value, the price-to-book value of the company is 2.47.
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