Hold Arvind Fashions; target of Rs 860: ICICI Direct

ICICI Direct's research report on Arvind Fashions

Arvind Fashions (AFL) reported its first quarterly numbers post its demerger from Arvind Ltd. Revenues grew 1.5% YoY to Rs 1169.0 crore. The muted revenue growth was on account of exit from long credit cycle customers in power brands and subdued market conditions. On account of lower discounting days, gross margins improved significantly by 239 bps YoY to 53.2% while EBITDA margins expanded 75 bps YoY to 7.3%. Substantial increase in interest cost (up 71% YoY to Rs 35 crore) further impacted PAT growth. The ensuing PAT declined 9.2% YoY to Rs 21.3 crore.

Outlook

We reduce our revenue estimates downwards for FY20, FY21 by ~8% owing to deceleration of revenue growth. Increase in debt by Rs 200 crore to Rs 790 crore in FY19 with 38% YoY increase in interest cost to Rs 126 crore is a cause of concern. Though the management has indicated a revival in revenue growth from Q2FY20, we would closely monitor if the revenue growth is able to pick up with tighter credit norms for the various trade channels. We model in revenue and EBITDA CAGR of 13% and 23%, respectively, in FY19-21E. We have a HOLD recommendation on the stock with a revised target price of Rs 860 based on 13x FY21E EV/EBITDA (earlier 16x FY21E EV/EBITDA).

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