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Fashioning a new cycle of profitable growth

• Arvind Fashions (AFL), part of the Lalbhai Group, is a leading branded apparel company with a portfolio of marquee brands such as U.S. Polo Assn. (USPA), Arrow, Tommy Hilfiger, Calvin Klein, and Flying Machine, commanding leadership in lifestyle and casualwear. After the Covid period, AFL executed a remarkable turnaround by exiting non-core businesses like Unlimited and Sephora to focus on profitability and capital efficiency. Despite exiting the businesses that generated ~32% of its FY19 revenue, AFL surpassed its pre-Covid revenue by FY25, driven by its power brands. A sharp portfolio, consignment-led model, and asset-light structure have improved margins and returns, with RoIC rising from 5% in FY19 to 12% in FY25.
• AFL has now evolved into a lifestyle category, with ~15% of its revenue coming from adjacent categories. Its shift to a consignment-led model improved pricing control and margins, with an asset-light structure driving faster scale-up, strong cash generation (FCFF of INR6.6b over FY26-28E) and RoE/RoIC expansion to 25%/28% by FY28E. We believe AFL is well placed to deliver a CAGR of 13%/25%/32% in revenue/Pre-IND AS EBITDA/PAT over FY26-28E. We initiate coverage on AFL with a BUY rating and an SoTP-based TP of INR725, implying 38x Dec’27E EPS.

Where lifestyle meets leadership

• AFL operates a streamlined portfolio of five marquee brands that anchor its growth, offering a well-balanced mix of scale, profitability, and premium positioning across segments.
• USPA is the cornerstone of AFL’s portfolio and India’s largest apparel brand with a net sales value (NSV) of more than INR20b in FY25. Operated through a wholly-owned subsidiary, Arvind Lifestyle Brands (ALBL), USPA has evolved into a mid-premium lifestyle label, with adjacencies contributing ~25-30% of revenue.
• Tommy Hilfiger and Calvin Klein (CK) are managed through a 50:50 JV, PVH Arvind Fashions. Tommy leads in India’s premium casualwear space, scaling up to ~INR8.4b in revenue with a five-year CAGR of ~14%, supported by strong aspirational connect and omni-channel reach. CK ranks among India’s top two super-premium casualwear and innerwear brands, posting a five-year CAGR of 19% in revenue to INR5.7b in FY25, driven by EBO expansion and robust department store traction.
• Arrow, a legacy premium menswear brand, has undergone a successful turnaround through sharper product segmentation, supported by refreshed brand communication. Retail operations now reside under Lifestyle Brands, while wholesale remains with the standalone entity.
• Flying Machine, AFL’s fully owned in-house label under Arvind Youth Brands (with Flipkart as minority investor), is among the top three denim brands in India. The ongoing Gen Z-focused refresh is repositioning it as a youthful, digital-first brand to accelerate growth.
• Led by the marquee nature of its brands, AFL has evolved into a lifestyledriven portfolio with adjacencies contributing ~INR7b (15% of FY25 revenue). Category extensions have become structural growth engines, with footwear targeting INR5b in revenue in three years and the other segments sustaining double-digit growth.

D2C pivot driving capital efficiency

• AFL has transitioned from MBO/LFS and marketplace-led B2B exposure toward a D2C ecosystem, strengthening pricing discipline, improving full-price sellthrough, and enhancing consumer ownership through EBOs and own websites.
• ? Consignment-led FOFO retail has replaced SoR, enabling faster inventory turns, lower working-capital intensity, and stronger gross margins. Better demand visibility and reduced liquidation dependence support sustainable brand equity and profitability.
• As of 1HFY26, the revenue share of EBOs increased to ~43% from ~39% in FY23, while online B2C contributed ~13% of revenue and ~40% of online sales.
• With a continued scale-up of asset-light FOFO EBOs, AFL targets retail contribution to cross 50% of revenue in the medium term, supporting profitable growth with minimal balance-sheet intensity.

Arrow and USPA to anchor next phase of margin expansion

• Gross margins have expanded by ~450bp (ex-commissions) since FY23 as AFL’s move to a consignment-led model has strengthened its pricing discipline and increased full-price sell-through, partly on premiumization.
• PVH brands (Tommy/CK) have the strongest margin profile of ~53% (adj. for commissions). Meanwhile, Standalone (Arrow wholesale) and ALBL (USPA/Arrow retail) have expanded their margins by ~650bp over two years and yet they remain in the range of 36-42%, trailing peers’ margin range of ~45-50%.
• Pre-Ind AS EBITDA margins reached 9.2% in FY25 (adj. for commissions; 7.9% on reported basis), supported by higher gross margins and operating leverage.
• Further margin expansion would be driven by Arrow and USPA through scale benefits and disciplined pricing.
• Our estimates factor in gross margin expansion of ~100bp and pre-Ind AS EBITDA margin improvement of ~190bp over FY26-28E to 10.3%, resulting in a ~25%/32% CAGR in Pre-IND AS EBITDA/PAT CAGR.

Capital efficiency and profitability gains to double RoIC by FY27E

• AFL has significantly improved its leverage, reducing the net debt-to-Pre-IND AS EBITDA ratio from ~3x before Covid to ~1x in FY25, aided by capital infusion and monetization of non-core businesses. Gross borrowings have declined from INR13b to INR5b. With improving profitability and controlled capex, AFL is on track to turn net cash by FY28E.
• Inventory days have improved to ~80-85 from ~90-95 before Covid through shorter lead times, auto-replenishment, and a consignment-led model that improved visibility and cash collection. With efficiency now optimized, working capital should be stable at the current levels.
• Disciplined cost control, tighter working capital, and the FOFO-led rollout helped AFL generate pre-Ind AS operating cash flow of ~INR6b and free cash flow (FCFF) of ~INR4b over FY23-25. With moderate capex requirements, we expect FCFF to increase to INR6.6b over FY26-28E.
• Return metrics have strengthened substantially, with RoIC rising from ~5% before Covid to ~12% and RoCE reaching ~18% in FY25. With further improvement in profitability, we expect RoCE/RoIC to surpass 27% by FY28E.

Valuation and view

• AFL stands at an inflection point, transitioning from consolidation into profitable scale-up with a sharper focus on five power brands. This phase of growth will be driven by scaling up core brands, expanding adjacencies profitably, and driving operating leverage. USPA is evolving into a full lifestyle brand, with a third of its revenue coming from non-apparel, while Tommy and CK are strengthening their premium positioning with mid-teen EBITDA margins. Arrow and Flying Machine are entering a scale-up phase through sharper brand positioning and modern retail formats. Collectively, these initiatives are expected to drive ~13% revenue CAGR and ~190bp margin expansion over FY26-28E, taking pre-Ind AS EBITDA margin to 10.3% by FY28E.
• AFL enters this phase with a strong balance sheet and disciplined working capital. Capex will remain limited to high-visibility flagship stores, with the majority of retail expansion pursued through an asset-light FOFO model, enhancing capital efficiency and return ratios. This strategy should drive cumulative FCFF generation of INR6.6b over FY26-28E and lift RoCE to 32% by FY28E.
• With improving earnings visibility, steady margin expansion, and rising return ratios, AFL is well positioned as a high-quality compounding story in India’s branded fashion space. Its balanced portfolio, scalable model, and strengthening financial metrics offer a compelling risk-reward profile. ? We value AFL on an SOTP basis, with Lifestyle (USPA) at 11x EV/EBITDA and PVH at 20x contributing the majority of value, reflecting improving margins and superior profitability, while Standalone (Arrow) at 8x and Flying Machine at 5x are assigned conservative multiples amid ongoing restructuring. ? We initiate coverage on AFL with a BUY rating and an SoTP-based Dec’27 TP of INR725, implying 38x Dec’27E EPS.

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