Arvind back in vogue: Nirmal Bang

Arvind Ltd is one of the largest producers of denim in the world, with an annual capacity of 108 million metres. It is the largest manufacturer, marketer and exporter of textile fabrics and garments in India. It also has a strong presence in the Brands & Retail (B&R) business with one of the strongest portfolio of brands in the country, and Mega Mart, the fastest growing value retail chain.

The company, established in the year 1931 as Arvind Mills, is the flagship of the Lalbhai Group. It was the first company to have introduced denim to India in 1986. It is also the largest producer, marketer and exporter of textile fabrics in India with a fabric manufacturing capacity of 84 million metres.

Arvind is a preferred supplier to internationally renowned brands. Arvind was one of the first companies to get internationally renowned brands to the Indian markets, beginning with the Arrow brand in 1993. Since then its brand portfolio has only got stronger. Arvind has an unmatchable brand portfolio comprising in-house and licensed brands in the country. In 2008, the company launched its value retail chain Mega Mart.

Valuations

Currently, Arvind trades at 5.3x/4.2x its FY13/14 EV/EBITDA, below its 10-year median of 6.5x. We expect the company to improve its EBITDA by 15.2% CAGR over FY11-14E as against 5.6% CAGR over FY06-11.

Its stock is trading attractively on other valuation parameters too; P/E at 6.7x/5.0x its FY13/14E EPS of `12.8/17.3, respectively, below its two-year median of 8.1x. We expect the company to report RoE of 13.0%/14.1%/16.2% in FY12/13/14E against 3.7%/9.5% in FY10/11, respectively. Adjusted D/E ratio, which was as high as 2.2x in FY09, should reduce to 1.1x in FY12E and to 0.6x in FY14E.

A strong revenue CAGR of 12.4%, supported by operating margin improvement of 104 bps, working capital efficiency and debt reduction by 26.5% should drive profitability CAGR by 45.6% over FY11-14E, generate free cash flow of Rs 5,244 million over FY12-14E, improve adjusted RoCE by 303 bps over FY11-14E and calls for expansion of the valuation multiple.

We expect Arvind’s textile division to command a premium to competitors like Vardhman Industries, Aarvee Denim, etc and we have valued it at 5.5x EV/EBITDA. On account of the evolving nature of its business, we have valued Arvind’s B&R business at 8x, near the lower end of Shoppers Stop’s valuation band of 9-15.4x.

Arvind has a large land bank of approximately 500 acres and it is planning to monetize these assets, either by developing land parcels or selling land parcels in bits and pieces. According to the management, the current value of its land assets after development would be around Rs 10 billion i.e. Rs 39 per share. We have valued the land parcel at 33% of its net asset value of `39 in our target price. We assign a Buy rating to the stock with a SOTP-based target price of Rs 117, valuing it at 9.1x/6.4x/1.2x PE, EV/EBITDA, P/B respectively, for FY13E.

Source: Nirmal Bang's Beyond Market

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