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Focusing on execution; maintaining a Buy

On completing its business reset in FY20-FY21, Arvind Fashions saw an upswing in the last four quarters; we expect the pace to accelerate. While growing 12-15% in the next 3-4 years it expects a double-digit EBITDA margin (pre-Ind AS) in 18 months. Revenue growth would be driven equally by like-to-like growth and store expansion, margin expansion by efficiencies as brands gain scale and on the Arrow turnaround. Management says it will focus on scaling up existing brands profitably and is not looking at adding brands. We expect its ~Rs3.8bn net debt to shrink to ~Rs1.3bn by end-FY25. We are positive on the stock and see a further re-rating, driven by a better sustainable performance. We retain our Buy rating at a higher TP of Rs567, based on 12x FY25e EV/ EBITDA (previously Rs516, at 11x FY25e EV/EBITDA).

Growing profitably. The company expects 12-15% revenue growth in 3-4 years driven equally by LTL growth and store expansion. New retail identity, brand extensions (footwear, innerwear, kids’ wear, women’s wear) are expected to boost LTL growth. It plans to add ~200 EBOs yearly, chiefly through franchisees; ~80-90% of store additions would be of Power brands; 70-80% in tier-2 and -3 cities as its network penetration deepens. It expects double-digit pre-IND AS EBITDA margins in 18 months (vs. EBITDA breakeven in FY22), driven by operating leverage and the Arrow turnaround. With a significant swing in Arrow’s EBITDA (loss-making in FY22), we expect Power brands’ margins to be higher. With the Power brands’ margin rebound, and it exiting loss-making brands, we expect a significant turnaround over FY23-25.

Better cash flows, optimised working capital, profitable revenue growth would reduce net debt/equity from 0.5x in FY22 to 0.1x in FY25. The company delivered 4x inventory turns by end-FY22 and intends to move toward 5x in 3-4 years. As its cash generation picks up (from FY24) it will focus on scaling up brands to reach Rs1bn sales and not by adding brands. Management says revenue growth would not come at the cost of margin dilution, working capital expansion

Valuation. We retain our Buy rating with a TP of Rs567 based on 12x FY25e EV/EBITDA as we are gaining confidence on its execution. Risks: Keen competition; lower revenue growth.

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