Buy Arvind; target of Rs 450: Kotak Securities

Kotak Securities' research report on Arvind

The process of demerger of branded apparel business and engineering business is at final stage. The NCLT hearing process is completed and the final decision is reserved by the NCLT court. The company expects announcement of decision by NCLT court in the next hearing expected in the near future. Its verticalization strategy through expansion of garment manufacturing business is moving as per plan. It targets to achieve ~50% of garmenting from ~10% in FY18 in the next four to five years. In order to achieve this target, the company is increasing garment manufacturing capacity to 120 mn pcs per annum (~4x of current) in the next 4-5 years. The company is expecting strong growth in H2FY19 backed by all major festivals in the month of October and November 2019. The apparel business may grow at moderate rate of mid to low teen in Q2FY19 on weak Onam demand in southern India and major festival demand shifted to Q3FY19. The company is positive on improving margins of its branded apparel business based on improvement in operating leverage and all of its brands turning profitable on increased scale. The company has maintained guidance for 10% growth in textiles business with flattish margin, 20- 24% yoy growth in brand and retail business with 100 bps improvement in margins and 10-12% growth in engineering business with flattish margin.

Outlook

We have revised our growth estimates for branded apparel and textiles business based on our assumption of relatively slower growth rate in H1FY19. We have assumed revenue CAGR of 17% in branded apparel business, 8.9% in textiles business and 17.5% in engineering business with EBITDA margin improvement of 200 bps in branded apparel business, 160 bps in textiles and 90 bps in engineering business in FY18-20E. Based on this, we cut our consolidated EPS estimates for FY19E and FY20E by 10.4% and 11.8% respectively. We maintain BUY on the stock with revised SOTP based target price of Rs 450 (earlier Rs.500).