Buy Arvind; target of Rs 130: Kotak Securities
Kotak Securities’ research report on Arvind
Arvind has demerged its branded apparel & retail business and engineering business into separate companies Arvind Fashions Ltd (AFL) and Anup Engineering Ltd (AEL), respectively. This would create three separately listed companies focusing on different businesses which will increase focus on individual businesses. The company management is positive on the long term fundamental of all the entities. As per company PPT, AFL and AEL are expected to be listed on exchanges tentatively in early February 2019. Post demerger, Arvind will be present in two main businesses; textiles ~87% of FY18 revenue and advance materials ~7% of FY18 revenue, while balance ~6% of FY18 revenue was contributed by other smaller businesses. The textiles business involves manufacturing of wide variety of fabrics including, woven, knitted, denim, garments, etc. Under advance materials, it caters to high growth sectors such as infrastructure, healthcare, energy, aviation, industrial, etc. Arvind has adopted verticalization strategy in textiles business in order to move up in the value chain by increasing focus on garmenting business. It intends to invest ~Rs 15 bn in order to expand capacity in textiles and advance material businesses in the next three years. The company has reported strong performance in advance material in H1FY19 and is targeting a revenue growth rate of 24% yoy in FY19E with 9% operating margins. Arvind has maintained revenue guidance of ~10% on broader basis with slower growth rate of 5-6% in textiles business and 24% growth rate in advance materials in FY19E. The company has guided for 100bps improvement in EBITDA margin in the year.
In the recent times, textiles sector witnessed challenges related to currency volatility, increased raw material cost due to elevated cotton prices and reduced government incentives. We have factored these challenges in our estimates and valuations. Based on this, we have assigned EV/EBITDA multiple of 6.5x (vs 8x earlier) which is marginally premium to industry average and arrive at a target price of Rs 130 for Arvind (Vs Rs 452 pre-demerger). At CMP, Arvind is trading at FY19E and FY20E EV/EBITDA (post demerger basis) of 6.6x and 5.7x respectively. We maintain buy rating on Arvind post demerger.
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