24 March 2014
Update | Sector: Textiles
Arvind Ltd
BSE Sensex
22,055
S&P CNX
6,584
CMP: INR148
TP: INR215
Buy
Acquires 49% stake in Calvin Klein India for INR0.9b
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Re-iterates Arvind’s transformation into a brand power house
ARVND IN
258.2
160/65
-7/70/78
38.1
0.6
Arvind buys 49% in CK India JV; parent PVH to own balance 51%
Arvind Brands and Retail Ltd (100% subsidiary of Arvind Ltd) has entered into an
agreement to purchase 49% stake in Calvin Klein India from erstwhile JV
partners (Murjani Group and Matrix Partners) for a consideration of INR0.9b.
While Arvind will own 49%, the balance 51% will continue to be owned by
Calvin Klein’s global parent Phillips Van Heusen Corp (PVH). The deal values CK
India at an Enterprise Value of INR1.8b, at 8-10x FY15 EV / EBITDA multiple.
Financial Snapshot (INR Million)
Y/E March
2014E 2015E 2016E
Net Sales
66,519 80,908 96,622
EBITDA
Adj PAT
EPS (INR)
Growth (%)
BV/Share
( )
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
9,273 11,691 14,503
3,324 4,279 5,790
12.9
33.9
13.9
14.4
11.5
1.5
16.6
28.8
15.9
16.4
8.9
1.3
22.4
35.3
18.5
18.9
6.6
1.1
Calvin Klein is well known and a highly scalable brand
Calvin Klein brand is one of the top three most coveted brands globally. CK India
revenues stand at ~INR1.25b and have grown at a 30% CAGR over the last 3
years with an EBITDA margin of ~8%-9%. CK runs 41 stores in India with an
average store size of 1,000 sq. ft each, all of which are franchise based apart
from having 34 shops in shops. It derives 90% of revenues come from Jeans
(80% men’s and 20% from women’s), while balance 10% come from Innerwear.
Around 70% of revenues come from EBOs while balance 30% comes from MBOs
and departmental stores. Management plans to add around 15 EBOs p.a. over
next 2 years and also leverage its existing departmental stores and MBOs
network to attain 30-35% CAGR. With most store additions being added in
franchise model complimented with aggressive scale up across MBOs, margins
are set to improve to 14% in FY15 with capex intensity remaining low. Arvind
and PVH will have equal managerial involvement in growing the CK brand in
India.
97.8 111.4 130.8
Shareholding pattern (%)
As on
Promoters
Dom. Inst.
Foreign
Others
Dec-13 Sep-13 Dec-12
43.8
18.2
19.2
18.8
44.0
19.4
15.7
20.9
43.5
18.3
17.4
20.8
CK acquisition to further drive product extensions
Post CK acquisition, Arvind will command a 90% market share in one of the
fastest growing ‘Bridge To Luxury’ segment (with a strong portfolio of
Tommy
Hilfiger, Gant, Nautica
and
CK).
With brands like
Calvin Klein, Tommy Hilfiger,
US Polo, Ed Hardy and Flying Machine,
Arvind has a complete portfolio of denim
brands with price points from INR750 to INR10,000. CK as a brand has universal
appeal and hence Arvind plans to introduce CK accessories immediately;
followed by formal wear and suits in the medium term. Meanwhile Arvind now
has a very strong innerwear portfolio spanning brands like
Hanes, CK, US Polo
and
Tommy
which it plans to scale up to INR1.5b sales / INR5.0b by FY15 / FY18.
Stock Performance (1-year)
Valuation and view: maintain Buy
While we upgrade our EBITDA assumptions marginally, we believe that the
acquisition of CK provides huge scalability potential with improvement in
brands and retail margins going forward. Given decade high return rations and
increased contribution from brands and retail segment, we value ARVND at 6x
FY16E EV/EBITDA and arrive at a target price of INR215. Maintain
Buy.
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 39825426
Atul Mehra
(Atul.Mehra@motilaloswal.com); +91 22 3982 5417
Investors are advised to refer through disclosures made at the end of the Research Report.