Buy the stock of Arvind Fashions with a price target of Rs 470
Anand Rathi expects a revival in growth and better margins in its key Power brands. “These account for 80%+ of its revenue and almost all its EBITDA. Hence, brighter prospects make us upbeat on the company. Ahead, it will concentrate on its six focus brands, optimise working capital via better inventory turns, and expand its network through franchisees.
We expect more cash generation and better return ratios, and debt to shrink. Revenue would be 3.5% more each year (FY22-24) due to good revenue recovery. FY22e/FY23e/FY24e EBITDA are 7/18/ 7% higher, driven by sales growth and the higher Power-brand margins. We retain our Buy, with a revised target price of Rs 470, on 11x FY24e EV/EBITDA,” the brokerage has said.
Power brands to bounce back
Internal strategies (one-time MBO channel correction) and external factors (Covid-19) led to their performance declining in FY19-21.
“On its strategic steps-expansions (network [175+ stores] and category [kidswear, innerwear]), continued investments in omni-channel capabilities (25%+ growth in online channel) and benefits of the post-Covid’19 casualisation trend-we expect a 13% revenue CAGR over FY20-24. We expect their adj. EBITDA margin to return to high single digit by FY24, driven by more full-price sales, operating leverage and a leaner cost structure. Arrow’s EBITDA margin will take longer than others due to the greater reliance on MBOs. With the Power brands margin rebound, and exiting the loss-suffering brands, we expect overall profit to turn around significantly over FY23-24,” Anand Rathi has said.
Stronger balance sheet, better working capital
“With fund raising and strategic investment in FY21, debt was reduced by Rs4bn y/y to Rs9.4bn. In H1 FY22 it further shrank to Rs8.4bn, and we expect it to come down to Rs6bn by end-FY22. The company expects to reach 4x inventory turns by end-FY22 and to move toward 5x in the next 2-3 years.
We expect net debt/equity of 0.1x by FY24 aided by better cashflows, optimised working capital and profitable revenue growth,” the brokerage has said.
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