Buy Arvind Ltd for Target Rs.471 by Elara Capitals
Sector tailwind intact
Arvind (ARVND IN) Q4 performance was in line with our estimates on revenue and EBITDA fronts while it was above our estimates on the PAT front on account of higher Other income and lower tax rate. Uncertainty due to US tariffs may lead to higher revenue while margin is likely to be under pressure as the company makes efforts to increase volume to offset tariff share and take margin reduction in the near term. We pare down our earnings by 36% for FY26E & 20.6% for FY27E and introduce FY28E. However, we increase our target multiple to 10x (from 8x) FY27E EV/EBITDA for textiles segment due to increased opportunity to cater to the US and potentially the UK market. We retain the target multiple for the advanced materials segment at 15x FY27E EV/EBITDA, arriving at an unchanged SOTP based TP of INR 471. We reiterate Buy.
Revenue up 7.0% YoY, led by 16.6% YoY growth in AMD business: Revenue grew 7.0% YoY to INR 22,207mn. Textiles business grew 7.3% YoY on account of volume growth of 13.2% YoY in denim, 4.7% in woven and 1.1% YoY in garments. The AMD segment grew by 16.6% YoY. Meanwhile, we expect higher volume from the US market and efforts to increase revenue share from the UK & India to drive revenue CAGR of 11.8% during FY25-28E.
Margin to compress while order remains sanguine: EBITDA margin contracted 65bp YoY to 11.1%, led by an increase in employee cost by 15.2% YoY and other expenses by 3.5% YoY. We expect margin compression of 87bp in FY26E to reach 9.4%, due to increased discounts and higher air freight for the US markets in the near term. Once the tariff scenario settles and the company gains market share in the US and the UK markets, we expect margin to improve to 11.7% in FY28E, led by improvement in garment profitability and operating leverage.
Capex to continue to grab opportunity: Management to invest in capex worth INR 4,500- 4,750mn across business segments, which are equally distributed across garments, AMD and fabric businesses while AMD is to set to get a slightly higher share. Garment capacity is likely to increase to 60mn pieces pa in the next 18 months from 48mn currently. Its fabric business is expected to deliver 4-5% volume growth and margin improvement, delivering robust internal rate of return (IRR) across capex investment.
Retain Buy with a TP of INR 471: We are positive on the long-term prospects with increased potential to cater to large global markets. Investment in garments and AMD businesses should drive growth and improve margin as the international market remains attractive. We expect an EBITDA CAGR of 16.9% and a PAT CAGR of 22.3% during FY25-28E. ARVND is set to generate cumulative free cashflow of INR 14.5bn during FY25-28E. We retain our SOTP-based TP of INR 471 based on 10x (from 8x) FY27E EV/EBITDA for the textiles segment, 15x (unchanged) FY27E EV/EBITDA for AMD based on our revised earnings estimates. Our revised TP implies 22.8x (from 18.5x) FY27E P/E. We reiterate Buy. Key risks to our estimates are demand slowdown and sharp volatility in input cost.
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SEBI Registration number is INH000000933
