Arvind limited - a triple play of RM tailwinds & brand growth


(Varadharajan Ragunathan) #1

I have been wanting to post a note on arvind for a long time and bought some at around Rs. 220. What attracted me most to arvind was that it is a mis understood situation with 40 % of its revenues coming from franchisees of global brands (arrow, tommy hilfiger, nautica, US polo and more recently GAP/aeropstale). Think of it as a page industries and you will see what I am talking about.

Arvind, cleverly has been buying up franchisees of famous global brands that saves them from the entire head ache of brand building and given their large distribution and a good understanding of the indian market, they have the reach, distribution and marketing muscle. The royalties for these brands range from 5-10% and the agreements are valid for 10-20 years. The brands business which did about Rs. 2361 Cr. in FY 15 with a growth of 23 %. While the company does not give SG & A, I expect it to be about 700-800 bps given the usual trends in building a brand. The brands and retail biz has an EBITDA biz of 5.2 %, which can move up to 8-9 % in another two years - the management has guided for a 150 bps expansion this year on the consolidated ebitda much of which will come from brands and retail.

Consolidated, FY 17 revenues should be about Rs. 10,500 Cr. or so with an EBITDA of Rs. 140–1500 cr. with about Rs. 350 Cr. coming in from brands (out of a total brands revenues of Rs. 4000 Cr.). This brands biz alone is worth 20 x EBITDA easily - looking at comparables like AB nuvo, pantaloons and indian terrain, this alone should be equivalent of today’s Mcap !

So you get the brands biz for free if you value arvind as a textiles biz today - it’s trading at the same PE as ambika with the following advantages:

  • far superior managemetn
  • far more diversified revenue stream
  • upside from brands which have some pricing power
  • embedded value - like real estate baked in

I do a lot of primary research and my research indicates that their power brands :smile:
GAP - has huge pent up demand in indian market given that its very popular youth brand in the USA and it’s being targeted at 25-35 ones at the same pricing as levis - levis is now a half dead brand because of its’ fuddy duddy image and GAP is the new apple of clothing. You are free to verify these facts online

arrow - a 20 year old brand in India - still does not do a lot of discounting and is quite known for its premium formals and casuals.

US polo - joker in the pack - has very little competition i the Rs. 2000-4000 range a notch above what indian terrain, louis philippe compete in. Doing very well and has very little discounts.

ROCE and RoE 's are steadily climbing and are at 15 % odd - these should go to 20 % once the brands business takes its foot off the accelerator on promotions and heavy duty brand spends.

At 2 x FY 16 PB, its not expensive either.

risks
arvind management has been known to be poor capital allocators. there have been several blunders in the past on over expansion in denim, building too many brands (ruf & tuf, newport) etc.

  • megamart is quite a drain - it’s ebitda, roe are below cost of capital and it only serves the purpose of dumping excess goods.

  • heavy duty dependence on retail formats - the management has indicated that they will eventually move into EBO franchisees but this is going to take time. Till then,capital allocation to retail stores is IMHO, quite a drag and does not do wonders to ROCE. I prefer brands that remain just brands - eg., page, madura garments rather than go into retail space - ala indian terrain and pantaloons. Look at the ROCE comparison and you will know what I am talking about.

  • another risk is that the management keep gettiing in way too many brands - I prefer a focusssed approach and these kinds of fixed costs makes me worried.

  • debt is huge - DE is 1.1 and given the spate of launches, FCF is sometime away.

Another positive is multiples PE is invested and renuka ramnath is on their board - they can’t get out with 4 % unless a demerger happens which I expect will unlock a lot of value.

discl: invested and will keep adding below 250. I expect Q1 results to be tepid - as urban pick-up is sometime away. attaching their latest IRP and an initiating coverage prezo by motilal.arvind - presentation.pdf (859.4 KB) 20150529_Arvind-Limited_55_InitiatingCoverage.pdf (1.2 MB) 20150529_Arvind-Limited_55_InitiatingCoverage.pdf (1.2 MB)


(GreyFool) #2

You state at the beginning that Arvind’s mgmt is far better than Ambika’s & then go on to illustrate why they are not under risks :wink:

Disclosure: No holdings in any textile stock. Arvind was a multibagger in the past :slight_smile:


(Akshay) #3

Hi - I am glad you introduced Arvind. I had bought into it between 120 - 140 and continue to hold it.

The positives have been very clearly laid out by you - and were the reasons why I first got attracted to the stock. However as you mention their capital allocation skills are what make me nervous coupled with high levels of debt. Capital turns are low and inventory turnover is also lower than industry average, though improving.

Aside from spreading themselves too thin on the brand front (I feel they need to spend more effort in cementing their existing brand portfolio rather than introducing new brands) their foray into infrastructure/ housing seemed unnecessary. They have however hived this business off and are in the process of getting it listed under Arvind Infrastructure if I am not mistaken.

Their foray into the e-commerce space http://www.creyate.com/en/about - can add to their growth in the coming years. And Creyate is just one of the many avenues they are looking to explore in the E-Commerce space.

As you mention GAP has received a great response in Delhi - averaging 23 lakhs a day in sales from 1 store in the first month… http://economictimes.indiatimes.com/industry/services/retail/gap-closes-in-on-zara-clocks-sales-worth-rs-23-lakh-daily-on-average-in-june/articleshow/47932811.cms - though personally I think its way too expensive!

Reading this article can bring those interested up to speed on the business - http://www.outlookbusiness.com/the-big-story/lead-story/a-brand-new-spin-540 .


(saurabh shankar) #4

Management of Arvind cause enough nervousness to me to be vary of them. The keep taking Debt and then keep getting into trouble. Its not a one-off case but if u speak to some bankers about this group they will tell that. ( other question why banks keep lending to them ;)).

let me try and speak to some people if management has changed its way of thinking.


(Varadharajan Ragunathan) #5

@GreyFool

Unlike most people, i see shades of grey - the same arvind guys are good at execution but poor at capital allocation. both are needed to deliver shareholder value.


(Nikhil Jain) #6

@Varadharajanr

Firstly, I must say that you left me confused.

In the beginning, you mention that Arvind’s management is superior to Ambika. Later, you point out that Arvind’s management has done misallocation of capital. When you compare that to Ambika, one can clearly observe that they have cleared their debts before going for further expansion. Does it not make Ambika’s management superior?

Secondly, I can sense a frenzy, in general, about stocks related to textiles industry. Myself being invested in a few stocks from the sector. What I feel in your post is a little bias, which is something I mostly have, once I like a company. So can’t really fault you there.

What I want to understand is, how do you compare it to Page Industries? As is generally seen, a company can build a single brand more efficiently when compared to building multiple brands simultaneously.

I have used arrow,gap and US Polo products and I have liked them. But, I’m a little skeptical about how they can push multiple brands simultaneously.


(Karan Maroo) #7

The problem remains - the mindset about taking debt. Its for the same reason that you’d find that in an overbanked market like Gujarat, no foreign bank has taken any meaningful limits in Arvind Limited. Having said that, they are banked by conservative corporate lenders like HDFC. However, their term loans are primarily from nationalized banks.


(Varadharajan Ragunathan) #8

@NikhilJain

I think you are looking at management quality through a lens of black or white. Its actually a continuous shade of grey - one could argue that by choosing to not expand before repaying debt, ambika chose to let go of growth that could have come their way. Similarly so with Arvind, they could have chosen not to expand into too many brands.

What about professionalization at ambika, what about new ideas, what about innovation, what about building a second line (ambika is still heavily dependent on one individual - chandran). I am surprised that you judge a management solely based on financial risk-reward.

The more consolidated a market is and fewer the number of players, the better it is for ROCE of the players.

I do agree with the debt issues and spreading oneself thin - these are real, live issues and I can only hope that the entry of a PE changes their mindset for the better.


(Nikhil Jain) #9

You misunderstand me. I just pointed out something that I found biased in your post. I too make such mistakes quite regularly.

I agree that Ambika is solely dependent on Chandran, but then one shall also remember that there was one Bill Gates, one Steve Jobs or one Ajim Premji. This phenomenon is quite common in great companies. These great men are often supported by efficient people that we usually do not know about.

Also I must mention that I do not base management quality solely on presence/absence of debt. But I believe that, if I have to be a good allocator of capital to be a good investor, the same principal shall apply to the company which I’m invested in.

My post was not meant to criticize your idea. Just posting as I see it.


(saurabh shankar) #10

slightly deviating…that is why in banks u love HDFC. They will be the banker, but never a term lender to such groups.
trying to get some dope from banking circle on this one


(Dhiraj Dave) #11

While management has done faced problem in past, they integrity of same is very well accepted among the bankers. In 2000-01, Arvind was the first restructuring completed without support of court led by ICICI Group which finally ended in Corporate Debt Restructuring under aegis of RBI.

The main problem I see frequent restructuring of divisions/ subsidiary.

For instance in 2000, Arvind Brands was seperated from Textile business with some bankers taking equity in that.
Subsequently, I understand that it became subsidiary of Arvind Ltd.
Again, if they face problem, they might hive of division into a seperate company and raise equity from same.

I might be wrong with facts, but that is what I remember vaguely based on my understanding of the group.

In textile business, the profitability is direct function of cotton price. It was among the largest denim players globally and that market is very volatile margins. Being a commodity players, profitability undergoes cycle and in downturn the company face problem. However, among Arvind and Vardhaman (not strictly comparable due to fabric and spinning presence), I find Vardhman management better disciplined at capital allocation, but Arvind gets advantage of brand.

Ambika is an entrepreneur driven company which is very small in size and history as compared with Arvind.

Promoter of Arvind Mills (Kastur Lalbhai) was one of the legend of Indian Business community leader which was main person behind promotion of IIM Ahmedabad and ICICI Limited, to name few. Personally, respect Arvind more for legacy then current management.


(ajith nayak) #12

Yes Arvind has done its job technically 209 -200 is base and must look for the tgt of 480 from current levels

must not worry till 200
CMP as on 7-7-2015 293

disclosure :- It is just a technical view and have accumulated some share for clients.


#13

Disclosure: Invested around 250

@Vardharajanr

Great analysis. This is going to be a great urban consumption story.
They have some great brands under their belt. Urban youth is looking for premium brands. If things are executed well we should have a multi-bagger in making.


(Varadharajan Ragunathan) #14

@NikhilJain

I have no emotions attached to my investing. Your views are very valid and highly useful. Everyone suffers from endowment, confirmation and availability bias and worst of all, chauffer knowledge.

These counter views make this forum richer and well rounded.


(vikramag) #15

Arvind is mostly into fabric manufacturing, Pantallon fashion and retail most likely to benefit from multi brands.


(Nikhil Jain) #16

@varadharajanr

Can you please elaborate, how the company is planning to build multiple brands simultaneously? As far as I understand, customers recognize Arrow, GAP and US Polo as different brands. Each of them have good competitors already. Many new brands get introduced each year. So more competition perhaps?

Is the company going to run ad campaign individually for each brand(like Jockey)?


(Varadharajan Ragunathan) #17

Yes - each brand has a separate COO and is managed as a separate profit centre. There is no overlap - only the excess inventory across all brands is disposed off through megamart.

Sans that, it’s an agglomeration of several mini-page’s into one single legal entity - which is my problem.

Each of these brands - arrow, tommy hilfiger and US polo is about Rs. 600-800 Cr. in sales and do ebita’s of 11-12 % - which is on par with the best. My worry is on the long tail of also ran brands which drag down profitability and most importantly draw out capital that otherwise could be repatriated into shareholders.

@vikramag

Arvind the parent entity is into fabric manufacturing. Arvind leisure brands owns the franchisees for all of these brands.


(Raj Panda) #18

Any insight’s on why these super brands like Tommy etc. are generating only 11-12% EBITDA where as a Jockey is generating 20% with much more headroom to grow.

Is it because of the fashion cycle ? and the need to dispose off a big proportion of products once it’s out of fashion ? What’s the disposal %tage/seconds sale in proportion to revenue Vs a Page ?

Regards
Raja


(Varadharajan Ragunathan) #19

@rajpanda

Great question - I asked myself this question and found out the answer a month back. It’s because of ;

  • fewer fashion trends in underwear - fewer colours, fewer SKUs
  • no fashion fads/cycles and returns - in underwear, bundling is done to dispose off slow moving stock - that’s why you have 2 briefs/3 vests combo. That’s because people buy 2-3 underwear at one go but are perfectly comfortable buying one shirt/trouser
  • less labour intensive process for underwear - the shape, type of clothes, materials, texture, printing are the same. Whereas, preparing a garment is a labour intensive affair that involves cutting, stitching, sewing, buttons, pressing, packing etc.
  • KKCL which deals with fewere SKU’s for eg. has similar margins to page - as it deals with only denim primarily and only two brands - lawman and killer and jeans have just 4-5 colours and 5-6 sizes and 2-3 fits. So, that’s about 50-60 sku’s whereas a fashion guy like indian terrain deals with 300-400 SKU’s - that’s a magnitude diffference and that tells in inventory, margins and returns.

(Sreeselva Veene) #20

@varadharajanr

Did you miss Hanes inadvertently?