Buy Arvind Ltd for the Target Rs 700 by Emkay Global Financial Services Ltd
Arvind reported consol EBITDA of Rs2.4bn (up 36% yoy, but down 21% qoq), in line with consensus’ estimate. Macro-led events caused yarn prices and packaging costs to rise, resulting in margin drag in both textile and Advanced Material Business (AMB) segments. The Textile division, per se, reported EBITDA margin of 8% vs 8.5% in 1QFY26, due to 1) higher share of low ASP knit-wear products and 2) increase in variable cost to Rs190mn on account of increase in RM prices and supply-chain disruption. The AMB segment (ex Dalco GFT) offset the underperformance of the textile division, reporting robust growth of 40% yoy (albeit on a low base) with composites sub-section growing 76% yoy and EBITDA margin of 15% vs ~13% yoy. Overall, EBITDA margin on consolidated basis stood at 9.6% vs 8.8% yoy and 12% qoq. Our View: Arvind’s 1QFY27 was disrupted by uncontrollable factors; hence, we see the 1Q margin drag to normalize in 2HFY27E. Further, we like the ~13% yoy garment growth in 1Q, reposing faith in a likely better product mix in normal circumstances. We broadly maintain our estimates and continue to value Arvind on SoTP basis, ascribing EV/EBITDA of 11x/20x to textiles/AMB on 1QFY29E. We maintain BUY and see any near-term softness in the stock price as an entry opportunity
Strong AMB offsets the sub-par textile performance
Arvind reported consol revenue of Rs25bn, up 25% yoy and broadly flat qoq. Of the total revenue, the textile division reported ~Rs17bn (up 13% yoy and down 6% qoq) and AMB Rs6.5bn (up 85%/19% yoy/qoq), while fabric retail, telecom biz, etc comprised Rs1.8bn. In textiles, garmenting volume grew 13% yoy, but was largely led by higher knit (low ASP) products due to low dispatches (disruption in shipping lines) of denim fabric products. This resulted in garmenting ASP declining sharply by 10%/6% yoy/qoq. In addition, higher RM costs resulted in textile margin at 8% vs 8.5% yoy and 11% qoq. Meanwhile, the AMB segment grew 40%, excluding Dalco-GFT revenue, led by a strong show in the composites (up 76% yoy) and human protection (up 39% yoy) subsegments, with 15% margin. Arvind’s consolidated Dalco business for <2months of 1Q reported Rs1.57bn revenue, with EBITDA margin of ~15%, viz lower than its usual ~17%, due to higher input costs (volatile crude). Overall, EBITDA margin on consolidated basis stood at 9.6% vs 8.8% yoy/12% qoq. Adj PAT stood at Rs760mn, up ~43% yoy.
QIP funds lighten balance sheet; set for another inorganic growth opportunity
Arvind successfully raised Rs5bn in 1QFY27 QIP. Proceeds from the issue are being primarily utilized for debt reduction and balance sheet (BS) strengthening. Consequently, we see net debt-to-EBITDA remaining healthy at ~1.5x/1x/0.5x in FY27E/28E/29E vs 1.3x in FY26. We believe this gives Arvind the financial flexibility to plan future growth initiatives (organic or inorganic). We see revenue/EBITDA/adj PAT CAGR at ~14%/19%/23% over FY26-29E.
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