Hold Arvind Fashions; target of Rs 270: ICICI Direct

ICICI Direct recommended hold rating on Arvind Fashions with a target price of Rs 270 in its research report dated August 23, 2021.

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ICICI Direct’s research report on Arvind Fashions

Arvind Fashion’s (AFL) strategy of focusing on its core profitable brands and strengthening the balance sheet is expected to aid profitable growth while maintaining leverage at reasonable levels. According to the management, the latest capital raising (Rs 439 crore) from 17 marquee investors and promoters is the final leg of its restructuring phase. The management has indicated that this preferential allotment would enable it to significantly deleverage its b/s and adequately fund its future growth aspirations. We believe that restructuring of brand portfolio and b/s are steps in the right direction. We expect profitable growth with prudent capital allocation to result in debt/EBITDA ratio (pre-Ind-AS) declining to 2.5x by FY23E.

Outlook

We expect gross debt to reduce from Rs 903 crore in FY21 to Rs 500 crore by FY23E. The management’s focus on prudent capital allocation, stringent working capital policy is expected to translate to positive FCF by FY23E, with pre Ind-AS 116 EBITDA margin of ~7%. We change our stance from REDUCE to HOLD owing to strengthened b/s. Better capital allocation towards profitable brands with improvement in margin profile, debt reduction would be key monitorables. We value AFL at Rs 270, i.e. 8.5x FY23E EV/EBITDA (~20x FY23E EV/EBITDA pre Ind-AS 116).

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