Entering next growth orbit
Brands business to be scaled up aggressively, e-commerce launch soon
We met Arvind’s management for a perspective on the demand scenario in the industry and growth prospects, going forward. Key takeaways are:
Brands and Retail business to be aggressively scaled up
Management is focused on scaling up the Brands and Retail business aggressively over the next three to five years. Among a trade-off between scale and margins, management will choose scale as this will increase ARVND’s overall profit pool. While brands will witness incremental store additions largely through the franchise route, retail will see store additions through the owned model route. This has been strategically planned as there will always be limited capital to deploy and growth has to be maximized within that pool of capital and finite time period.
Power Brands’ growth robust; growth brands to be future drivers
‘Power Brands’ like Arrow, Tommy, US POLO and Flying Machine will continue to witness more than 25% growth. Management will invest aggressively in what are internally identified ‘Growth brands’ – brands which are presently small but have high potential for growth and can be Power Brands over the next three years. These include Nautica, Hanes, Gant, Calvin Klein.
E-commerce foray to be next big event
ARVND is working on a unique e-commerce platform, which will be launched under a new brand and will offer differentiated products. For example, customization will be a major differentiator. Online consumers will be able to choose the color, fabric type, style and have messages written on a t-shirt or any other garment they buy. These differentiators will be first of the kind for Indian consumers. Also, company plans to have retail kiosks which will be a unique brand concept.
MegaMart restructuring to be completed by 1HFY15
ARVND is working on a massive restructuring strategy for MegaMart (MM) stores. The plan is to move from old format stores to newer ones. New format stores will be larger – typically 10,000sqft plus. Company has three 50,000sqft stores in MM. It has reduced the store count for MM from 216 to 166 over the past couple of years due to restructuring. However, retail space in MM has expanded during this period from 0.69msf to 0.75msf implying significant (40%) increase in sqft/store from 3,200sqft/store to 4,500sqft/store. MM’s restructuring will be completed by September 2014.
Significant room to expand RoCE in textile business
Management believes that contrary to popular perception there exists significant scope to improve capital efficiency and reduce capex intensity in the pure textile business. Initiatives that are consideration include 100% outsourcing of spinning units and entering into outsourcing arrangements with third party denim and wovens manufacturers. As there is surplus capacity available in the market, management believes it is better to outsource than to put up new capacities. In contrast to ARVND, third parties are ready to work on lower RoCE as they can use the numerous incentives available in the form of TUFF loans and state level incentives which make their model profitable. These initiatives, in our view, can structurally improve RoCE potential in the business and result in further balance sheet deleveraging.
Verticalization from fabrics to garments - a key strategy
Verticalization from fabrics to garments is a key strategy that will gain momentum over the next couple of years for ARVND. Garments segment, which was an underperformer, has been effectively brought back to track. Company is gaining business from new clients due to scale-up in garments. Earlier these new clients never came to ARVND as they procured ready garments and did not work on a model of procuring fabrics and giving to converters. With direct market access with these new clients, company is gaining more visibility and higher margins across the entire textile value chain.
Debt metrics will continue to improve
Management highlighted incremental capex will be largely done from internal cash generation and thus debt in absolute terms will increase only marginally. Capex guidance for FY15 stands at INR5b out of which INR2b will be invested in brands & retail, INR2b in textiles, and INR1b in technical textiles, e-commerce and corporate capex combined. Debt metrics improvement to continue as absolute debt remains steady.
Valuation and view
We remain optimistic with ARVND’s transformation from a pure textile player to a brands and retail powerhouse. We believe with its massive experience gained in the textile business over the last few decades, company is well placed to extend its experience to launch new initiatives - prime among these will be e-commerce foray that is scheduled for launch over the next couple of quarters. We believe that with RoCE and RoE at a decade high and increased contribution from brands segment, capex intensity over the long term will reduce, warranting a re-rating. We upgrade the target price from INR240 to INR270 (7x FY16E EV/EBITDA), maintain Buy.
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Brands business to be scaled up aggressively, e-commerce launch soon
We met Arvind’s management for a perspective on the demand scenario in the industry and growth prospects, going forward. Key takeaways are:
Brands and Retail business to be aggressively scaled up
Management is focused on scaling up the Brands and Retail business aggressively over the next three to five years. Among a trade-off between scale and margins, management will choose scale as this will increase ARVND’s overall profit pool. While brands will witness incremental store additions largely through the franchise route, retail will see store additions through the owned model route. This has been strategically planned as there will always be limited capital to deploy and growth has to be maximized within that pool of capital and finite time period.
Power Brands’ growth robust; growth brands to be future drivers
‘Power Brands’ like Arrow, Tommy, US POLO and Flying Machine will continue to witness more than 25% growth. Management will invest aggressively in what are internally identified ‘Growth brands’ – brands which are presently small but have high potential for growth and can be Power Brands over the next three years. These include Nautica, Hanes, Gant, Calvin Klein.
E-commerce foray to be next big event
ARVND is working on a unique e-commerce platform, which will be launched under a new brand and will offer differentiated products. For example, customization will be a major differentiator. Online consumers will be able to choose the color, fabric type, style and have messages written on a t-shirt or any other garment they buy. These differentiators will be first of the kind for Indian consumers. Also, company plans to have retail kiosks which will be a unique brand concept.
MegaMart restructuring to be completed by 1HFY15
ARVND is working on a massive restructuring strategy for MegaMart (MM) stores. The plan is to move from old format stores to newer ones. New format stores will be larger – typically 10,000sqft plus. Company has three 50,000sqft stores in MM. It has reduced the store count for MM from 216 to 166 over the past couple of years due to restructuring. However, retail space in MM has expanded during this period from 0.69msf to 0.75msf implying significant (40%) increase in sqft/store from 3,200sqft/store to 4,500sqft/store. MM’s restructuring will be completed by September 2014.
Significant room to expand RoCE in textile business
Management believes that contrary to popular perception there exists significant scope to improve capital efficiency and reduce capex intensity in the pure textile business. Initiatives that are consideration include 100% outsourcing of spinning units and entering into outsourcing arrangements with third party denim and wovens manufacturers. As there is surplus capacity available in the market, management believes it is better to outsource than to put up new capacities. In contrast to ARVND, third parties are ready to work on lower RoCE as they can use the numerous incentives available in the form of TUFF loans and state level incentives which make their model profitable. These initiatives, in our view, can structurally improve RoCE potential in the business and result in further balance sheet deleveraging.
Verticalization from fabrics to garments - a key strategy
Verticalization from fabrics to garments is a key strategy that will gain momentum over the next couple of years for ARVND. Garments segment, which was an underperformer, has been effectively brought back to track. Company is gaining business from new clients due to scale-up in garments. Earlier these new clients never came to ARVND as they procured ready garments and did not work on a model of procuring fabrics and giving to converters. With direct market access with these new clients, company is gaining more visibility and higher margins across the entire textile value chain.
Debt metrics will continue to improve
Management highlighted incremental capex will be largely done from internal cash generation and thus debt in absolute terms will increase only marginally. Capex guidance for FY15 stands at INR5b out of which INR2b will be invested in brands & retail, INR2b in textiles, and INR1b in technical textiles, e-commerce and corporate capex combined. Debt metrics improvement to continue as absolute debt remains steady.
Valuation and view
We remain optimistic with ARVND’s transformation from a pure textile player to a brands and retail powerhouse. We believe with its massive experience gained in the textile business over the last few decades, company is well placed to extend its experience to launch new initiatives - prime among these will be e-commerce foray that is scheduled for launch over the next couple of quarters. We believe that with RoCE and RoE at a decade high and increased contribution from brands segment, capex intensity over the long term will reduce, warranting a re-rating. We upgrade the target price from INR240 to INR270 (7x FY16E EV/EBITDA), maintain Buy.
To Read Complete Report Click Here
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