Arvind Fashions Ltd. (AFL), the demerged retail arm of the Arvind Limited, is the new entry on the block. The stock was listed at Rs 591 on March 8 and climbed to trade at Rs 621, gaining 5 percent.

The stock continues to rise owing to the new listing norms. Currently, it is trading at Rs 1,050 levels. The circuit filter has been changed to 10 percent from 5 percent.

AFL’s portfolio includes brands like Calvin Klein, Tommy, GAP, US polo. It has three business segment categorised as per its brands - 'power brands', 'speciality retail' and 'emerging brands'. Power brands contribute around 60 percent to topline.

The stock is trading at a discount compared to its peers by at least 20-25 percent. The closest peer among the listed companies is Aditya Birla Fashion Limited (ABFRL). The street is expecting revenue CAGR (compound annual growth rate) of 15-16 percent over FY18-21 for Arvind Fashions, higher than ABFRL’s CAGR of 14-15 percent.

Both the companies had seen growth in their profitability but going ahead Arvind Fashions is expected to grow faster than ABFRL.

The current debt of Arvind fashion is around Rs 745 crore. In terms of return on capital employed (ROCE) and return on equity (ROE), ABFRL and Trent are leading the race. However, going forward, power brands are likely to generate higher ROCE, above 35 percent. Also, emerging brands will likely turn positive in the next year.

The management believes Sephora has the potential to grow to Rs 700-800 crore by FY22 with 50 stores and 15 percent contribution is expected from online. The company is aiming to achieve 6-7 percent EBITDA margin.

Growth Driver

Power Brands:

AFL’s 'power brands' segment is growing at 15 percent CAGR and the management targets to achieve sales over Rs 4000 crore by FY22, while EBITDA is expected at 14.5 percent by FY22.

Specialty retail & emerging brands:

The management's focus is on scaling up Unlimited, Sephora and emerging brands including Calvin Klein and Aeropostale. Nautica, Place, Izod are also expected to do well. Unlimited is expected to achieve break-even by FY20E with revenues growing at a CAGR of 18 percent in FY18-21E. The management expects to double the revenues by FY22E for Sephora.

Exploring new categories

The company is aiming to ventures into new categories such as premium innerwear, premium kids wear and prestige beauty.

Retail Expansion

The management is aiming to open 200 exclusive brand outlet (EBO) in the next 2-3 years. Most of the EBO expansion is expected in Unlimited and Sephora. Currently, the company has 1300 stores covering 180 cities.

Risk

Competition:

Competition continues to remain as a big risk. Key competitors include brands like Levi’s, UCB, Allen Solly, Indian Terrain, LP, Jack & Jones, Jockey, Van Heusen.

Higher advertisement expenses & inventory churn:

Due to competition, it is difficult to pare down ad expenses. Being in the fashion industry, it is important to manage inventory as a large part of the sale is based on sale on a return basis. Although, inventory days have come down from 112 in FY16 to 63 days in FY18.

ABFRL and Page industries are trading at a premium as they enjoy higher ROCE and ROE when compared to Arvind Fashion. However, going ahead ROCE and ROE for Arvind Fashions are expected to improve.

The company's margins are expected to improve to 7 percent while Future Lifestyle's margins are expected to remain flat at 9.4 percent.

However, only the market and time can tell if the valuations are justified.

First Published:Mar 26, 2019 12:31 PM IST