Recommendation From Textile Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

There are various macro-economic factors which have been facilitating growth in the country’s textile sector in recent times. Factors like rapidly growing e-commerce sector, raw material availability (cotton), manufacturing base expansion, positive policy framework for textile (TUFSI), manpower advantage (National Skills Development Programme), above average monsoon prediction, increased per capita income create a win-win environment for the textile industry. The industry realised export earnings worth USD 41.4 billion in 2014-15, a growth of 5.4 per cent, according to The Cotton Textiles Export Promotion Council (Texprocil). The stocks like Arvind will benefit from positive macro environment.

Arvind is a vertically integrated textile company. The company manufactures cotton shirting, denim, knits and bottom weights (Khakis) fabrics, and jeans and shirts garments. Its business segments include textiles, brands and retail, real estate and others.

Arvind aims to add 200 more retail stores with focus on opening large format stores. Gap, worldwide clothing and accessories retailer is set to enter into India partnering with Arvind in May, opening 40 to 45 franchise operated Gap stores by 2020 with India based pricing headed by Calvin Kays. It will drive Arvind’s profit margins. Strong distribution network enables it to reach a large number of customers and huge potential market to sell its products.

Arvind is turning into a brand power house from being a simple denim producer with best brand portfolio of 28 brands and adding Billabong, Nautica and Hanes to add more no to power brand. Brand wave is attracting 21st century generation and set to improve margin to 12 per cent in FY16 and also overall profitability. Brand pull focuses on scaling up brand business to 30 per cent CAGR over next 5 years.

Arvind forays into e-commerce portal Creyate. The omni channel brick and mortar platform offers walk in as well as home visit shopping experience. Amidst of growing customer acceptance, Arvind plans more Creyate stores in India (Bangalore, Chandigarh, Mumbai, Hyderabad, Kolkata, Surat) and Abroad (looking for US, UK, Germany and Japan). The company eyes for USD 5 billion revenue from e-commerce segment.

On financial front, Arvind’s revenue increased by 5.51 per cent to Rs 6131 crore in 9MFY16 as compared to same period in previous fiscal year. On segmental revenue front, the company earned 62.04 per cent from Textile segment, 31.76 per cent from Branding & Retailing segment and remaining 6.2 per cent from others segment during 9MFY16. Its EBITDA too rose by 2.01 per cent to Rs 768 crore in 9MFY16 on yearly basis. Arvind’s interest expense declined by 4.13 per cent to Rs 287 crore in 9MFY16 as compared to same period in previous financial year. The company’s net profit declined by 12.61 per cent to Rs 254 crore in 9MFY16 on yearly basis.

On valuation front, Arvind’s EV/EBITDA stood at 9.59 looks attractive compare to SRF at 11.32 and Indo Count Industry at 11.39. The company’s trailing twelve months (TTM) ROE is at 15.52 per cent. Its PB multiple is at 2.55x times which is attractive as compared to SRF 3.11x times, Indo Count at 8.52x times and Welspun India at 5.12x times. Hence, we recommend to BUY the stock.