Leverage to remain high despite fund raise
Key takeaways from Arvind Fashions’ (ARVINDFA) Q1FY21 result: 1) 77% network is operational in Aug’20 with overall sales at 46% of same month last year; 2) expects 8-10% improvement in sales recovery every month; 3) online channel consumer offtake increased by 30%; 4) targeting structural cost reduction of Rs1.2bn-1.5bn p.a.; 5) expects EBITDA and cash breakeven in Q3FY21 and Q4FY21 respectively on exit-month basis; and 6) net debt declined by Rs3.3bn in QTD to Rs9.7bn as of Aug’20-end post fund raise of Rs6.6bn. However, net debt to EBITDA is still likely to remain high at ~4x even in FY22E, in our view. Factoring slower demand recovery, we cut our FY21-22E revenue by 2-6%. Maintain REDUCE with DCF-based revised target price of Rs130/share (earlier: Rs150).
* Revenue declined 89% YoY to Rs1bn owing to Covid-19 lockdown, while post IndAS 116 EBITDA loss (including other income) stood at Rs533mn in Q1FY21. Currently, 77% of network is operational in Aug’20 with overall sales at 46% of same month last year with stores sales at 50% while department stores sales at 34% of same month last year in Aug’20. Management estimates 8-10% improvement in sales recovery MoM over the next few months. Overall, online channel consumer offtake has increased by 30% with nearly 3.5x growth in own website (NNNow.com). Store expansion would largely be restricted to power brands and Sephora during FY21 and company is unlikely to add any Unlimited store till the time it achieves reasonable margins.
* Management is targeting structural cost reduction of Rs1.2bn-1.5bn p.a. by optimising store operating cost and closing tail stores (10% reduction between occupancy and store operating cost), warehouse consolidation (35% reduction), 20% reduction in headcount and overall overheads control (15% reduction). In Q1FY21, cost reduced by 63% and 57% on YoY and QoQ basis respectively and targeting 35-40% reduction in fixed costs in FY21. Management expects EBITDA and cash breakeven in Q3FY21 and Q4FY21, respectively on exit month basis. Despite various cost initiatives, ARVINDFA is still likely to report EBITDA losses in FY21E and PAT loss even in FY22E, in our view.
* Focus on preserving cash by cutting down capex, reducing inventory levels, controlling immediate buys (AW’20 buys down 60%) and bringing strategic flexibility in the buying process. Gross working capital reduced by Rs1.3bn during Q1FY21 and the company targets to reduce the same by Rs2.5bn in FY21. However, with similar reduction in creditors, net working capital may not decline in our view.
* Net debt to EBITDA still likely to remain high at ~4x even in FY22E despite fund raise of Rs6.6bn, as the same would get utilised to fund FY21 operating losses and reduce creditors. Management expects net debt to remain at ~Rs10bn till FY21-end.
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