Moneycontrol Bureau
Arvind shares hit record high of Rs 368.50, up 5.5 percent intraday Tuesday. CLSA raised target price on the stock to Rs 418 from Rs 362 as it expects the shift in favour of garments business and the asset-light expansion model to drive further improvement in return on capital employed (RoCE) over the next three years.
While retaining a buy call on the stock, the brokerage house says Arvind's textiles business (contributed 62 percent to FY16 revenue) is structurally shifting in favour of the less capital-intensive garmenting division with a reduced focus on commodity denims. Meanwhile, expansions are being restricted only to critical units with a focus on outsourcing the rest.
This offers visibility of an improving RoCE even as cotton price volatility is a near-term headwind, it says, adding a more capital-efficient asset-light textiles business should continue to fund growth in the brands & retail (B&R) division.
Arvind expects its garment segment to contribute 25 percent of total textiles revenue in the next two years and has guided for an improvement in margin as capacity scales up. The company’s new garmenting facility in Ethiopia will give it duty-free access to European markets, which account for about 70 percent of its total export revenue.
Arvind has demonstrated that it can differentiate its offerings by focusing on innovation and design. Furthermore, technical textiles, a business with high entry barriers is gaining traction, the brokerage house says.
Arvind's legacy denim business remains the major cash generator. Although Arvind has taken steps to overcome its commodity nature, this business is relatively more cyclical and hence there is no plan to add capacity in denims. However, volatility in the cotton price will impact denim margins in FY18, CLSA says.
At 12:25 hours IST, the scrip of Arvind was quoting at Rs 363.35, up Rs 14.10, or 4.04 percent on the BSE.Posted by Sunil Shankar Matkar
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!