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
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.
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)