Arvind Fashions: Up 18% in last one year, Sytematix sees another 40% upside in the stock; here’s why

The brokerage has a target price of ₹515 for the stock, indicating an upside of over 40 percent.

The stock has risen over 18 percent in the last 1 year but only 5 percent in 2023 YTD, giving positive returns in 6 of the 10 months so far in this current calendar year. It rose the most in June 2023, up over 24 percent and shed the most in February 2023, down over 13 percent.

The stock is still almost 6 percent away from its 52-week high of ₹389.45, hit in November 2022. Meanwhile, it has advanced 41 percent from its 52-week low of ₹261, hit in March 2023.

Investment Rationale

Arvind Fashion is a leading player in the lifestyle space, with a strong portfolio of fashion brands across categories and price points like US Polo Association (USPA), Arrow, Tommy Hilfiger (Tommy), Calvin Klein (CK), Flying Machine and Sephora. A combination of capital raises, portfolio rationalisation, and margin improvement have helped the company recover from its painful past, noted the brokerage.

With USPA forecast to cross ₹2000 crore revenue in FY24E and Tommy + CK achieving the ₹1000 crore mark in FY23, with double-digit EBITDA margins, these three brands seem to be in autopilot mode currently. Currently, the company’s focus is on scaling up its Arrow and Flying Machine brands, as these hold significant potential for both growth and margin improvement, added the report.

“ARVINDFA’s steadfast focus on achieving only profitable revenue growth may cause it to grow a tad slower than peers in the near term, but we expect the company to retain its top position among peers in terms of cash generation and EBITDA/PAT growth. Continued product innovation and increased marketing spending have helped the company in re-energizing and premiumizing its key brands. Improved retail rigor with a focus on high-quality season launch that provides superior customer experience, better sell-through and lower discounting are other factors that should drive growth in the company. The company’s cash flows could improve on better inventory turns and render it debt-free by FY26, further enhancing the company’s return ratios that are already in the top tier in the apparel space,” explained Systematix.

Despite the near-term slowdown in consumption, the brokerage expects ARVINDFA to keep delivering on its stated objectives (100-150bps annual margin improvement, 12-15 percent growth, 20 percent RoCE) at least until FY25, before it ruminates over other growth initiatives.

Prolonged slowdown in demand, enhanced competition, failure to scale up the focus brands, deterioration in margin/working capital and attrition issues are key risks to its call.

Valuation and View

“We have built in 12 percent revenue, 24 percent EBITDA and 96 percent PAT CAGR over FY23-25E with a 21.6 percent RoCE. Growth will be led by a combination of strong footprint expansion while margins are expected to keep moving up, especially with the scale-up in Arrow and Flying Machine. Sephora and other smaller brands, which are being phased out, will likely have a limited impact on overall profitability,” it stated.

“We believe our target multiple of 10x still has room for further re-rating as we continue to see the company doing well on its deliverables for the next couple of years. The key monitorable would be the pace of scale-up in Arrow and Flying Machine and sustained improvement in margins, inventory turns and cash flows,” said Systematix.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 18 Oct 2023, 02:20 PM IST