Buy Arvind; target of Rs 465: Sharekhan

Sharekhan's research report on Arvind

The Central Board of Excise and Customs (CBEC) modified duty drawback rates for exporters, which will be effective from 1st October 2017. The drawback rate announced for garments has been lowered to 2% as against 7.5-7.7% earlier. However, the decision on the 3.9% Rebate of State Levies (ROSL, effective from 23rd March 2017) is still pending. Under the new tax regime, the cut in duty drawback was expected by the industry, as exporters are entitled to get input tax credit (which is still not received due to the initial emerging issues under GST). However, this cut to 2% has been higher than expected, and it also coincides with macro headwinds such as rise in cotton prices, rupee appreciation and increasing oversees competition.

Outlook

Though recent events such as rupee appreciation and cut in duty drawback rate will impact Arvind’s profitability in the short term, the company’s faster shift from B2B to B2C will improve the growth prospects in the long  run. According to management, July was weak in terms of volume growth due to GST transition impact, but pickup in sales was visible from August 2017 (especially in the branded and retail business). Arvind is playing big on its lifestyle brands and specialty retail brands which will help it in achieving strong revenue growth in the coming years. Further, revamped retail business would improve margin prospects over the next two to three years. Thus, in view of the longer term growth story being intact, we maintain our Buy recommendation with a revised price target of Rs.465 (in line with reduction in earnings estimates).

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