Arvind Fashions’ USPA-led growth and direct-channel mix strengthen earnings quality

Investment View and Core Thesis

Motilal Oswal Financial Services (MOFSL) reviewed Arvind Fashions’ FY26 annual report on August 19, 2026 and reiterated its Buy view. The broker sees the company evolving from an operational turnaround into a higher-quality, portfolio-led consumer platform.

The core thesis is that USPA has become the principal growth and profitability engine, reducing the earlier dependence on the PVH joint venture. Direct-to-consumer channels, adjacent categories and operating leverage are expected to support a more durable earnings profile.

MOFSL’s target price is Rs 680, compared with the report CMP of Rs 430, implying 58% upside.

FY26 Financial Performance

Arvind Fashions reported revenue growth of 14% year on year to Rs 52.7 billion in FY26. Gross margin expanded by 91 basis points to 54.4%, while pre-Ind AS EBITDA grew 23% to Rs 4.5 billion. PAT after minority interest nearly doubled to about Rs 1.5 billion, and RoIC improved to 24.1%.

The reported performance reflected premiumisation, lower discounting, a richer channel mix and improved cost absorption. Direct channels contributed 56% of revenue, up 300 basis points year on year, while adjacent categories accounted for about 24% of sales and grew 18%. More than 85% of inventory was less than one year old, which MOFSL considers supportive of full-price sell-through and structural gross-margin improvement.

USPA-Led Brand Performance

USPA, within the Lifestyle business, delivered 20% revenue growth to Rs 28.8 billion in FY26, with net sales value exceeding Rs 25 billion. Its gross margin reached 50.3%, while pre-Ind AS EBITDA doubled to Rs 2.6 billion, demonstrating scalability.

The PVH portfolio grew 7% to Rs 15.0 billion despite GST-related disruption. Tommy Hilfiger grew 8% and Calvin Klein grew 6%; Calvin Klein’s gross margin was 68.4%, up 240 basis points year on year.

Arrow grew 7% but recorded a Rs 54 million operating loss as its repositioning continued. Flying Machine remained in investment mode following Arvind Fashions’ acquisition of Flipkart’s remaining stake, which is expected to improve long-term strategic flexibility.

Investment, Cash Flow and Balance Sheet Monitorables

Management accelerated investment in D2C, technology-led merchandising, demand forecasting, domestic sourcing, retail infrastructure and adjacent categories. These investments, together with the Rs 1.35 billion Flying Machine acquisition, constrained near-term cash generation.

Core working capital rose 18% to Rs 7.5 billion. Pre-Ind AS CFO declined to Rs 1.4 billion from Rs 2.9 billion in FY25, while FCFF fell to Rs 0.3 billion from Rs 1.9 billion. Net debt increased to Rs 4.7 billion from Rs 2.3 billion.

MOFSL identifies cash conversion, inventory productivity and the maturation of newer stores and investments as important monitorables.

Growth Outlook and MOFSL Estimates

MOFSL forecasts FY26–29E revenue, pre-Ind AS EBITDA and PAT CAGR of 12%, 16% and 27%, respectively. Its estimates imply revenue of Rs 73.6 billion, pre-Ind AS EBITDA of Rs 7.1 billion, PAT of Rs 3.0 billion and RoIC of 27.5% by FY29E.

The broker expects gross margin to expand by about 100 basis points over FY26–28E. The anticipated improvement is supported by premiumisation, direct-channel growth, lower discounting, a richer channel mix and operating leverage.

Valuation and Target Price

At the report CMP, MOFSL notes that Arvind Fashions trades at about 11 times EV/EBITDA and 26 times FY28E EPS, representing a 20–30% discount to ABLBL.

The Rs 680 target price is based on a sum-of-the-parts valuation using FY28E estimates:

• 20 times USPA pre-Ind AS EBITDA.
• 15 times the 50% PVH pre-Ind AS EBITDA stake.
• 1 times sales for Arrow and Flying Machine.

The target implies 58% upside from the Rs 430 CMP.