Textile manufacturer Arvind today announced that it will sell 10 percent of stake in its subsidiary Arvind Fashions to Multiples Equity to raise Rs 740 crore.
Renuka Ramnath of Multiples Equity said that the deal with Arvind is a very interesting mix of brick to luxury and the company has a unique combination of owned, licensed and specialty brands.
In an interview with CNBC-TV18, Ramnath said that she will be happy if promoter group decides to list the branded business and feels that the market is not fully valuing Arvind's business.
She further said that the growth and intrinsic brand of Arvind portfolio is strong.
Below is the verbatim transcript of Renuka Ramnath’s interview to Reema Tendulkar and Varinder Bansal on CNBC-TV18.
Reema: First, if you could tell us the rationale, how were you projecting the growth at the brands and the retail business and any IRR that you are internally expecting from this investment?
A: Yes, the IRR expectation in this deal is no different from any other consumer deals that we do. What we liked about the Arvind brand story is that A: It is a very interesting mix of bridge to luxury brand and brands for the mass market. It also has an interesting proportion of speciality retail. So, it is a very unique combination of old brands, licensed brands and speciality retail and this is a business Arvind has been nurturing for many years. So, they have a very experienced management team and a very robust strategy on how you address the consumerism opportunity of the Indian market. And the fact that it is a very large bouquet gives them lot of unique advantages when it comes to retailing out spaces or identifying an appropriate merchandise or even on the brand spend.
So, we therefore found this opportunity absolutely unique and combined with the fact that this is a group that we know and we are extremely comfortable we have done businesses with them over several decades makes it very unique opportunity for us.
Varinder: I just want to understand, is there any clause in this investment regarding listing of this business because even the management of Arvind was alluding to the fact that they will be listing this business very soon?
A: As a private equity player, exit is very important for us. So, whatever conditions we have on this are very similar to what we do in other deals; nothing is different. If the promoter group that is Arvind Mills, board decides to list this company, we would be very happy with that.
Varinder: When you are expecting the listing to happen, could we assume that it could happen within six months?
A: Not at all; I don’t think so. I will be surprised if it happens within six months. There is no time pressure. It is a much more longer term plan.
Varinder: Branded business as a sector has seen good growth in some of the companies, other listed companies which are there, what kind of projections in terms of growth are your anticipating? Currently this business throws EBITDA margins of nearly 8-9 percent, are you playing on the volume growth or are you playing on the EBITDA margin growth?
A: We are playing in multiple directions. That is what is unique about this transaction. One is that there are many new businesses like GAP, The Children’s Place, Sephora, they are all very young businesses. So, there is a huge potential there, there is a huge potential in Aeropostale, there is a huge potential in the growth of Unlimited.
Besides very strong brands like US Polo and Tommy Hilfiger and Arrow which are registering growth anywhere between 25-50 percent, so, it is an interesting combination of growth in the current portfolio of brands, growth in the new specialty retailing opportunity and opportunity for addition of other compelling brands as the company goes forward.
Reema: Do you have a provision to raise your stake from the current 10 percent?
A: All the provisions which are normal in any other transaction, so, in any company we invest in, any private equity player would say that we would like to if there is a further dilution that happens in the company that we would have a right to re-invest in the company.
Nigel: The valuations that we have got is at around Rs 740 crore for 10 percent. How did you come about these valuations because this going to really re-rate the industry on the whole? What kind of multiples were you working with, could you help us out with that?
A: I am not confirming my percentage but as far as valuations are concerned, the methodology that we have used is other comparable company, ground up valuation based on counter cash flow which is what we do in every other kind of situation as well. So, there are some listed comparables that are readily available for us to compare and we believe that the growth and the intrinsic strength of the brands in the Arvind portfolio is even stronger than some of the listed comparables. So, to that extent, even if we pay the same as the listed comparables, we would have paid it for a slightly superior portfolio of that.
Varinder: If I remember correctly, in January 2014 you also invested in Arvind Limited which is the parent company. A word on the textile business because that is also an old business from Arvind Group; what are your thoughts because you are also shareholder in the parent company?
A: I really think that the market is not fully absorbing all the good change that the leadership in Arvind Mills has brought about. So, the textile business is becoming more and more a business where the play is on improving the return on capital employed (ROCE) by not further investing in the core textile business but by outsourcing and giving technology to outsource providers who are investing in the assets and the company itself is trying how do they convert more and more of denim into garmented fabric so that your margins from a ROCE perspective go up.
Their woven business has always been extraordinary so I think that the entire focus of Arvind has been how do we minimise further deployment of capital and increase the ROCE by doing more value added products and by doing more outsourcing and playing on the technology area rather than in the traditional textile sector.
Varinder: Till now we analysts with the kind of limited knowledge we have, we thought some of these branded companies should have an EV/EBITDA multiple of nearly 20 times. However, this deal surpasses all these assumptions and if we are correct in assuming, the FY18 numbers, the EV/EBITDA for this deal works around 28-30 times. Are you seeing the industry landscape changing because this deal will actually set the benchmark for the branded and retail sector as a whole? We have limited number of companies in that space but these are kind of numbers which are never heard of.
A: One is that, when you look at near-term EBITDAs, you will only look at what is already happened. If you look at brands like Aeropostale or even if you look at brands like GAP, The Children’s Place (TCP), Sephora, it is a very recent kind of an investment and we are going to build out new stores and the growth in this will be extraordinary. The other is the turnaround of our traditional mega mart under the new banner of Unlimited. It is altogether a new opportunity for Arvind.
Some of the existing stores which have been rebranded and re-positioned, both in terms of the merchandise, in terms of making it more a family shopping destination rather than just a men’s kind of outlet, is already showing very good promise. So, these are factored in terms of the potential upside. The fact that some of our current brands like US Polo, Tommy Hilfiger, Arrow and Flying Machine are very aggressively growing brands and we see that with the introduction of omni channel, with the introduction of online opportunity, they have a potential to penetrate even further from where they are today.
Varinder: We have seen that Biyani follows a different strategy, he cultivates brands and later on he sells stakes or wants to monetise those individual brands. I think for the first time we are watching out that this kind of deal is happening at a total brand and retail segment. Earlier people were having brands, cultivating it and then selling stake in individual brands, do you think it is a better idea to invest in a single brand or in multiple brands the way you did in Arvind?
A: What the multiple brand does is to address different kind of needs in the marketplace both in terms of age profile, in terms of affordability and so on. So, what we were excited about the Arvind portfolio was that it operates in a wide range of segments of population and therefore the growth opportunity, both by way of those segments growing and by way of penetration is much higher.
So, it is not to say that a single brand is not good; I would only say that I can only talk about what attracted us to this opportunity. So, it de-risks us, it allows for growth rates to continue over long periods of time because the opportunity of the market that the Arvind portfolio is addressing is a very wide opportunity.
Varinder: Do you need any clarity from the government side in terms of FDI rules in multiple brands because that news of FDI in the branded and retail segment has been going for long without any clarity?
A: In this transaction, we have had the advantage that we are investing in an operating company because Flying Machine is an operating company for Arvind, so it is not a multi brand retail. The regulations are pretty clear in terms of what should be the size of the operating business if one were to bring foreign capital into a multi brand retailing. We have been advised by AZB on this transaction and we have reasons to believe that we are well within the rules of foreign direct investment in this sector in this deal.