Krishna Karwa Moneycontrol Research
Arvind's consolidated numbers for the quarter and fiscal year ended March 2018 were quite decent and the company saw its branded apparel business improving further over the period.
But now that it has declared its earnings, the company's proposed demerger, which would involve listing the engineering and branded apparel businesses separately, should bring the focus back to its textiles business.
Arvind’s textiles business has been steadily evolving into a less capital-intensive and higher-ROCE (return on capital employed) garment division, with a reduced focus on commodity denim. Advanced materials (technical textile) is a business with high entry barriers and high margins, and is likely to be the next driver of growth for the company. While the stock has had a good run so far, its future looks promising too. So any weakness in the scrip should be used to accumulate it.
In the quarter gone by, the company’s overall sales grew on the back of improved offtake in all its segments. However, prima facie, a rise in cotton prices impacted the textile segment’s margins.
Arvind’s branded apparel segment, besides being on a consistent uptrend in recent times, is still well-poised to deliver healthy returns. As a result, the company is aggressively scaling up operations and marketing expenses in this space, aiming to maximise operating leverage. The engineering segment too has put on a steady show.
The strategy
Branded apparels segment
Arvind’s power, speciality and emerging brands have been growing steadily. Since the momentum is expected to continue, the company will continue to invest in the expansion of its distribution network, with an aim to grow sales by 20-24 percent in the ongoing fiscal year. The company will incur capital expenditure of around Rs 150 crore this year for the purpose.
In case of power brands, retail channels bring in only a third of the total sales. The rest comes from departmental stores, multi-brand outlets and online portals. With the latter three being more margin-accretive than exclusive brand outlets, they should continue growing at a fair click. Also, three of the company’s brands that are loss-making at the moment, may turn EBITDA positive by March 2019.
Textile segment
Vertical integration, which is currently underway, is underscored by Arvind’s Rs 500-crore capital expenditure plan being directed towards its garment manufacturing units in FY19, particularly those in Ethiopia and Jharkhand. Additionally, the company aims at increasing the allocation of manufactured fabric to such facilities from 18 percent at present to 25-30 percent over the next 2 years.
The objective is to achieve a sales growth of 10 percent from the textiles business, around a third of which it expects from the garments division. Arvind recently forayed into the fast-growing athleisure category to cater to leading sportswear brands such as Nike, Adidas and Asics.
By virtue of these initiatives, the company intends to earn a revenue of Rs 1,000 crore by FY20 from the textiles business.
Engineering segment
Arvind aims to grow its engineering business by 10-12 percent on the back of a strong order book and maintaining its margins at 20-30 percent. Anup Engineering is a debt-free company.
Valuation
Arvind’s proposed demerger of its branded apparel and engineering businesses is likely to be concluded in the second half of FY19, as stated in our earlier article. This will unlock value for investors in Arvind Fashions (the branded apparel arm) and Anup Engineering, and free up cash for growing the textile segment.
While the potential for re-rating is limited, the company’s future appears to be in fine fettle. We would, therefore, recommend buying the stock on corrections
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