Multi Baggers

Arvind Limited

We initiate coverage on Arvind as a BUY with a Price Objective of Rs 81 over a period of 15-18 months. At CMP of Rs 44.1, the stock is trading at 9.2x and 5.6x its estimated earnings for FY2011E & FY2012E representing a potential upside of ~83.7%. Arvind is one of the largest fabric producers in India with 200 million metres of fabric producing capacity. With ~100 mn metres fabric capacity expansion getting operational in phases over FY2010-FY2013 and robust growth in Brands & Retail business, the earnings are expected to grow at CAGR of 74.3% during FY11-13. Monetization of its 500 acres land bank is expected to result cash flows of nearly Rs 1000 crore over a four year period which would be used to fund the capex and retire part of the debt.

Significant expansion of textile capacity to foster long term growth

With resurgent domestic demand and renewed interest for textiles from overseas markets( denim fabric in particular), Arvind is looking to expand its fabric manufacturing capacity by 50% to nearly 300 mn metres (Denim 50mn, Shirting 30mn & Voiles 20mn) from the current 200 mn metres over the next 3- 4 years. Part of the expansion ~30 mn metres is expected to come up in Bangladesh which will offer proximity to customers. With economies of scale and Garment business expected to break even in the current fiscal, we expect expansion of EBITDA margins of the textile business by 160 bps to 16.1%.

Brands and Retail business to witness accelerated growth

With 28% CAGR revenue growth in the past 5 years, Arvind has achieved the distinction of being the fastest growing Apparel Brands and Retail company in India. Driven by ~ 25% growth in retail demand, we expect this segment to grow at 21.3% CAGR to Rs 1383.5 crore by FY2013. The share of revenue from this division is to account for nearly 26.7% of total revenues in FY2013 from the current 22.8%. In anticipation of this demand Arvind is looking to grow its well diversified portfolio of brands and expand exclusive brand store space threefold to 0.6mn sqft (from the current 0.2 mn sqft) by FY2014. Megamart retail space is also expected to grow to 2 mn sqft by FY2015. Further, we expect margin expansion ~by 280 bps to 10.4% to boost profitability significantly.

Monetization of land bank to aid capex and debt reduction plans

Monetization of its 500 acre surplus land will yield ~Rs 1000 crore of cash flow over the next four years. These funds are to be deployed partly to fund the capex and retire debt. We expect the debt equity ratio to be lowered to 1.0 by FY2013 from the current 1.7.

Valuation

With strong revenue growth of 17% CAGR over FY2010-2013 and overall EBIDTA margin expansion of 170 bps to 14.2%, we expect earnings to grow at a CAGR of 74.3% over the same period and ROCE to expand to 15.7% from the present 7.4%. We value the stock at Rs 81 (using the DCF method) representing a potential upside of ~83.7% from the CMP of Rs 44.1.