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A step in the right direction

Arvind Fashions (ARVINDFA) announced that Arvind Lifestyle Brands Limited (ALBL), a wholly owned subsidiary of ARVINDFA, has signed a definitive agreement for the strategic sale of assets of its Unlimited retail business to V-Mart Retail Ltd. for an all cash consideration of Rs1.5bn. Unlimited operates a chain of 74 value fashion retail stores across South and West India and as a part of the transaction, it will sell the assets of these 74 retail stores along with ‘Unlimited’ brand to V-Mart at its book value and will thus, recover the entire capital employed in the business. We believe the loss making Unlimited was a key drag on the company’s operational performance.

This divestment will enable the company to focus on its six high conviction brands, strengthen its balance sheet by repaying debt and improve company-wide profitability and return ratios. Factoring in the divestment of assets of Unlimited, we increase our FY22E-FY23E pre-Ind AS 116 EBITDA by 5-10% and upgrade the stock to ADD with DCF-based target price of Rs230/sh (earlier: Rs132/sh). Key risks: Slower recovery in discretionary spends and increasing competition.

* Unlimited operates a chain of 74 value fashion stores. The stores are present across South and West India. It retails fashion apparel and accessories for men, women and children at affordable prices. ALBL will sell the assets of the 74 retail stores including warehouses, inventory etc, along with ‘Unlimited’ brand to V-Mart at its book value. This transaction, subject to the necessary approvals, is likely to get executed in Q2FY22. For FY21, turnover from these 74 stores stood at Rs2.9bn, which accounted for 13% of consolidated revenue of the company.

* ALBL is likely to receive a cash consideration of Rs1.5bn which is based on the book value of the assets being sold. This will enable it to fully recover the capital employed in the Unlimited business. In addition, contingent payments will be received by ALBL based on certain milestones achieved by V-Mart over the next few years post the acquisition. ALBL intends to use the cash proceeds for repayment of debt and for working capital purposes.

* Focusing on its six high conviction brands: Sale of assets of Unlimited is in-line with the company’s strategy of focusing on 6 high conviction brands which include US Polo Assn., Tommy Hilfiger, Arrow, Flying Machine, Calvin Klein and Sephora. Divestment of the loss making Unlimited and sharpening of its portfolio of offerings will result in higher profitability for the company.

* Net debt to EBITDA will come down below 3x by FY23E with this sale. Net debt may decline to Rs8bn in FY22-23E with the sale of Unlimited. The company had earlier passed on an enabling resolution to raise further up to Rs4bn (to fund working capital needs), although it has no immediate plan to raise funds.

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