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Profitable revenue growth; maintaining a Buy

Driven by strong, 70% y/y, retail channel growth and its MBO channel doubling its revenue, Arvind Fashions’ Q2 FY23 revenue grew ~46% y/y. With higher productivity, lower discounts and operating leverage, the EBITDA margin expanded ~290bps y/y to 9.8%. The company is on track to its profitable-growth target, working-capital optimisation, delevered B/S and rising cash-flows. Ahead, management expects revenue to grow 12-15% (Rs40bn revenue in FY23), driven by network expansion and healthy comparable growth. With better full-price sales and operating leverage, it expects margins to rise. It will continue to focus on reducing debt further and better inventory turns, leading to more cash-flows. We lower our FY23e/FY24e EBITDA ~6%/7% from earlier. Consistent performance with profitable revenue growth and rising return ratios are key monitorables. We introduce FY25e, retaining our Buy rating at a higher TP of Rs516, based on 11x FY25e EV/EBITDA.

Better demand and strong retail sales. Q2 FY23 revenue grew ~46% y/y, led by ~48%/33% y/y growth in Power/emerging brands. The gross margin expanded ~280bps y/y to 44.3% led by festival-season higher full-price sellthru’s, lower discounting, a better channel mix and brand refreshment. Despite more advertising spends (up 70bps y/y), EBITDA grew ~2x y/y to Rs1.2bn and the EBITDA margin expanded ~290bps y/y to 9.8%. Other income was Rs200m (impact of Rs140m toward the IND AS 116 adjustment). Minority interest was Rs99m (Rs34m last year). PAT was Rs182m (vs. a Rs976m loss a year earlier).

Healthy growth in brands, categories. The Arrow brand grew 50% y/y with a positive EBITDA. Tommy Hilfiger and Calvin Klein grew ~50% y/y, USPA crossed Rs10bn NSV in Oct’22. Working capital days reduced by six to 36 in H1 FY23 (vs. end-FY22) led by 6/8 days shorter inventory/receivables. Inventory turns were 4.2x. Cash generation rose as OCF/FCF were Rs1.4bn/1.2bn. Net debt was Rs3.8bn (vs. Rs4.3bn in Q1 FY23).

Valuation. We retain our Buy rating with a TP of Rs516 based on 11x FY25e EV/EBITDA. Risks: Keen competition; lower revenue growth.

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