Buy Arvind Fashions Ltd For Target Rs.620 Motilal Oswal Financial services Ltd
Strong start to FY27; execution remains robust
* AFL's growth engine continues to strengthen, supported by improving execution, rising D2C penetration and broad-based brand momentum.
* Retail LTL growth accelerated to 11.6% in 1QFY27, driving 18% retail growth, while and online B2C grew 39%, increasing the direct channel’s contribution to 62% (+380bp YoY).
* Gross margin expanded ~90bp YoY to 56.7%, driving EBITDA growth of ~20% despite a ~50bp increase in brand investments. Margin improvement was led by lower discounting, sourcing efficiencies and a richer D2C mix, reflecting improving operating leverage.
* Execution continues to strengthen across the portfolio, with USPA extending its leadership, PVH brands returning to growth, and FM’s repositioning gaining traction. Continued investments in consumer analytics, retail execution and organizational restructuring are supporting market share gains and improving brand productivity.
* Growth outlook remains healthy, driven by D2C scale-up, premiumization, category expansion and improving execution. Near-term risks from raw material inflation, wage hikes and forex volatility are being mitigated through advance sourcing, while pricing actions remain calibrated and contingent on cost inflation.
* We expect AFL to deliver ~13% revenue CAGR and ~18% pre-Ind AS EBITDA CAGR over FY26-28E, with EBITDA margins expanding ~80bp to ~9.0%. PAT is estimated to clock ~30% CAGR, supported by operating leverage, margin expansion and continued deleveraging.
* AFL continues to trade at a ~20% EV/EBITDA and ~35% P/E discount to ABLBL on FY28E, despite superior earnings growth, margin expansion and comparable profitability.
* We reiterate our BUY rating with an unchanged SoTP-based TP of INR620.
Margin expansion driven by gross margin
* Gross margins expanded 87bp YoY to 56.7%, ahead of our estimate by 37bp, driven by higher full-price sell-through, lower discounting, and an improving channel mix.
* Employee costs increased 15% YoY, broadly in line with revenue growth, while other operating expenses rose 17% YoY, reflecting higher brand investments and continued expansion of direct channels.
* EBITDA increased 19.6% YoY to INR1.6b, ahead of our estimate by 2.5%, while EBITDA margin expanded 43bp YoY to 12.5% despite elevated marketing spends.
* EBIT grew 24.5% YoY, with EBIT margin improving 46bp YoY to 6.3%, supported by healthy operating leverage.
* Finance costs rose 18% YoY, while other income fell 52% YoY to INR70m.
* Adjusted PAT increased 11.5% YoY to INR280m, substantially ahead of our estimate (+32%). However, attributable PAT declined 26% YoY to INR96m, reflecting lower other income and a higher effective tax rate.
Valuation and view
* AFL continues to strengthen its competitive positioning through sharper brand architecture, D2C scale-up, category expansion and disciplined retail execution, reinforcing confidence in its medium-term growth trajectory.
* We expect AFL to deliver ~13% revenue CAGR and ~18% pre-Ind AS EBITDA CAGR over FY26-28E, with EBITDA margins expanding ~80bp to ~9.0% and PAT growing at ~30% CAGR.
* We view AFL's ~20% EV/EBITDA and ~35% P/E discount to ABLBL as unwarranted, given its comparable profitability and superior earnings growth, margin expansion and capital efficiency.
* We reiterate our BUY rating with an unchanged SoTP-based TP of INR620.
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