14 December 2022

Company Update | Sector: Retail

Arvind Fashions
BSE SENSEX S&P CNX
62,678 18,660 CMP: INR333 Not Rated
Building blocks toward profitable growth
We recently hosted the management of Arvind Fashions Ltd. It was represented by
Mr. Kulin Lalbhai (Promoter) and Mr. Shailesh Chaturvedi (MD & CEO). The discussion
mainly revolved around the following:
Stock Info
Bloomberg ARVINDFASN IN  Business re-set undertaken in the last two to three years, including
Equity Shares (m) 132.3 discontinuation of un-profitable brands, deleveraging, improving working capital
M.Cap.(INRb)/(USDb) 44.2 /0.6 management and management changes.
 Initiatives by the new CEO, including new common sales vertical, supply chain 2.0,
Financials Snapshot (INR b) and improving retail productivity.
YE March FY20 FY21 FY22
 The company’s three-year plans with focus on 10-12% revenue growth and
Sales 38.7 22.0 30.6
achieving double-digit EBITDA margin (pre IND-AS 116) over the next 18 months.
EBITDA -1.2 -0.1 1.8
Adj. PAT -6.9 -4.4 -1.0
EBITDA Margin (%) -3.0 -0.3 5.9 Business re-set addresses pain points
Adj. EPS (INR) -127.5 -81.7 -19.1 As indicated by our earlier report following its philosophy of “chasing profitable
EPS Gr. (%) NM -36.0 -76.6 growth”, the company undertook a business re-set to address the various pain
BV/Sh. (INR) 126.5 108.8 156.5
points including the following:
Ratios
 Re-calibration of portfolio brands by dropping unprofitable brands
Net D:E 3.1 2.9 1.0
RoE (%) -72.7 -69.4 -14.4  Changes made in the top management - appointment of new MD & CEO;
RoCE (%) -18.1 -7.7 0.6 various brand heads.
Payout (%) 0.0 0.0 0.0  Improving leverage position by decreasing debt levels to INR4b from
Valuations
INR14b, aided by multiple rounds of fund raise.
P/E (x) -2.5 -3.9 -16.8
 Increase the inventory turns to 4x from 3x to release capital and to improve
EV/EBITDA (x) NM NM 22.9
EV/Sales (x) 1.0 2.3 1.7 inventory management.
Div. Yield (%) 0.0 0.0 0.0  Change in approach by profitably scaling up the existing portfolio, even if it
FCF Yield (%) 2.1 -2.3 6.2 implies slowing down on the growth rate with no additional new brands.

Change in management building capabilities to streamline operations

The newly appointed MD & CEO Shailesh Chaturvedi, along with the newly
hired brand heads, has built various capabilities to improve go-to-market,
supply chain, and retail sales productivity and support the growth plans. a.) In
addition to creating a common sales structure, the company brought in Chief
Revenue officer and opened branches across all the four regions to understand
and better respond to the local demand. b.) Further, with the implementation
of Supply chain 2.0, the company is now working on improved inventory
planning and is connecting the complete value chain from retail store to
warehouse to vendor, increasing stock turns of core products, which also aids in
lower discounting. c.) Focus on improving retail sales productivity by working on
improving store layout, visual merchandising, and store inventory planning
through data analytics.

Aliasgar Shakir - Research Analyst (Aliasgar.Shakir@MotilalOswal.com)

Research Analyst: Harsh Gokalgandhi (Harsh.Gokalgandhi@MotilalOswal.com) | Tanmay Gupta (Tanmay.Gupta@MotilalOswal.com
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Arvind Fashions

Improved retail productivity and scale up of leaner brand portfolio drive

profitability
Currently, the company is operating in the range of 7-8% margins (pre-Ind AS 116),
which is expected to reach double digits in the next 18 months. While established
brands such as USPA, CK, and Tommy Hilfiger are already operating at double-digit
margins, scaling up Flying machine and Arrow will help with economies of scale and
drive the profitability. The company has further guided the revenue growth to range
between 12% and 15%. The growth would mainly be driven by continued
momentum in LFL growth, expansion of adjacent categories (Footwear, Innerwear,
and women wear) and strong footprint expansion of ~200 stores annually through
the franchise model. The management endeavors to further improve inventory to 5x
from 4x over the next three years (after improving it from 3x), partly offset by
working capital investment in new stores, and targets to generate a positive FCF
from FY24 onwards.

Valuation and view

The stock is currently trading at just ~1.2x on EV/sales for FY23 v/s 2–3x for most
apparel retailers. This may largely be attributable to the concerns around profitable
growth for Arvind Fashion. However, owing to the recent measures taken by the
company, EBITDA has reached 7.5% (Pre INDAS 116) from its earlier loss. It took
some initiatives to pare loss-making businesses, deleverage, and improve working
capital management. Further, with the revenues expected to touch INR60b (10-12%
revenue growth guidance) and pre-Ind AS EBITDA margins guidance of ~10%, the
stock is trading at 0.8x EV/Sales and 7.7x EV/EBITDA.

Detailed Takeaways
Business Re-set: The company undertook a business re-set across four areas:
 Undertook re-calibration of portfolio brands by dropping un-profitable brands
that posed internal challenges. The impact of such discontinued business stood
at INR4b (combined impact of ~ INR7-8b for FY21-22 on top-line).
 The company decreased its debt levels to its current INR4b from INR14b,
thereby improving its leverage positioning. This was mainly aided by multiple
rounds of fund raise through rights issue and preference issue of ~INR14.4b.
 Improved the inventory turns to 4x from 3x in the recent period, thereby
improving the working capital management.
 The company recently appointed Mr. Shailesh Chaturvedi as its CEO effective
from Feb’21. He earlier used to manage the company’s JV business (Tommy
Hilfiger and CK). The company has also hired different brand heads with great
experience of managing large brands.

Capabilities built by the new CEO

 Created a common sales structure to avoid duplication and additional costs.
Further, the company has hired a new Chief Revenue Officer (ex. Nestle) and
opened branches in Delhi, Bangalore, Mumbai, and Calcutta for each region to
understand the local demand and meet them.
 The common Sales ensures all brands are optimized across different
channels in online, LFS, and franchisee verticals.

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 Arvind Fashions

 Supply chain: The company appointed a new Chief Supply Officer (ex. Pidilite)
two years back to push stock turn. The company has started working on the
“theory of constraints” to improve turns in association with “Vector
Consultancy” nine months back with Arrow on a pilot basis. This is expected to
be implemented across other brands within the next two years.
 The key focus of the company is to improve the inventory turns within the
core products and take the core product’s share in revenues to 15% from 6-
7%. This helps improve gross margin as the core category does not require
discounting.
 The complete value chain is well connected from the retail network to the
warehouse to the vendor through data analytics.
 Improving retail sales productivity: The company is working on improving its
sales (SSPD) through two major routes:
 Front end: Improving the layout of the stores with improved visual
merchandising, hiring and training competent staff to improve the sales and
changing of the CRM program.
 Back end: Improving inventory management with stock planning based on
each store’s location and regional preferences through data analytics.

Three-year Plans
 The company expects a revenue growth of 12-15% to INR60b by FY26, with
USPA continuing to be the largest brand.
 The focus would be on improving the profitability by scaling up the current
portfolio of brands, instead of adding new brands.
 It further aims double digit EBITDA margins from its current 6-7%, on the back of
operating leverage gained from scaling up the brands. It looks to improve
EBITDA margins by 100bps annually.
 It plans to open ~200 stores annually, mainly through the franchise route.
 The company expects to turn FCF positive by FY24 (CK and Tommy JV already
FCF positive), led by good control on working capital. This will further aid in
achieving its target to become debt free in the next three years.
 The company is further trying to increase the turns of core products (7-8x v/s 4x
for overall basis) and improve its share to 15% from its current 7-8%, thereby
driving up the gross margins.
 The company has currently attained an annualized ROCE of 15% (2QFY23) and is
expected to take it up to 20% in the near term.

Growth: The company expects the growth in business to be driven by:

 Digitalization: The segment stands at a quarterly run rate of ~INR3.2b (INR1b
monthly run rate), which includes market place and in-house website. The
segment continues to remain profitable with 800 omni-linked stores, forming a
revenue share of high single digits.
 Expansion in adjacent categories:
 Footwear: The recently started USPA footwear business has achieved
reasonable scale and is seeing good traction even in Tommy/CK brand. The
company expects to nearly double the revenue in this segment, thereby
contributing over ~10% of the total revenues. The company has

14 December 2022 3
 Arvind Fashions

incorporated a separate team for footwear. This segment further enjoys a

higher turnover as compared to the overall company turnover.
 It is undertaking Women wear on a pilot basis, under the USPA and Flying
Machine segment with focus only on the online segment.
 It is looking to expand into other accessories such as belts and wallets under
the Arrow brand.
 Geography expansion: Will look to expand within smaller tier towns and open
200 stores annually largely through franchise.
 Strong SSSG: The company witnessed a strong LFL growth of 25% in Q2FY23. It
will look to maintain the SSSG pace to drive revenue growth.

Brand-wise details
 USPA: The business currently has annualized sales of INR15-16b with a double
digit EBITDA margins. It expects this to grow to INR20b by FY24. Will look to
expand the denim segment under USPA.
 CK and Tommy Hilfiger: They provide a combined business of INR10b with a
double-digit EBITDA margin. While both have seen good performance in the
online segment, it will look to expand offline as well.
 Flying Machine and Arrow: These brands provide a business of INR5b
individually with single-digit margins. The company looks to grow this segment
to INR10b each to bring in the benefits of operating leverage.
 The FM brand saw a delay in scale up mainly due to shutting down of stores
during the Covid period. It is now looking to re-energize the brand and
improve the offline experience.
 The segment has further seen some advantages on online performance, led
by Flipkart ownership.
 Arrow has seen a strong recovery post covid, driven by fresh designs and it
has further witnessed 10% improved sell through, which contributed
majorly to the gross margin expansion. It will further see a swing of
~INR700m in profitability on a YoY basis in FY23, driving EBITDA margins
 Sephora: The brand is standing at INR3b revenue with EBITDA still at break-even
levels.

Store economics
 A majority (~90%) of stores are franchise, where capex and other costs are
incurred by the franchise partner. The company further receives some form of
deposits in lieu of the inventory supplied.
 Average store IRR ranges between 15% and 16%, implying a two-three years
break even period.
 Store operating margin is targeted at 20-25%.
 Going ahead, the company will look to open bigger store with optimum size to
accommodate adjacent categories, without diluting the sales throughput.

Other highlights
 The company has undertaken the retail sales directly through consignment,
which might marginally impact margins but bring down debtor days.
 Online segment:

14 December 2022 4
 Arvind Fashions

 The company will look to narrow down online discounts by 100-200bps on a

YoY basis
 Currently, the differential between online discounting and offline stands in
the range of ~20%
 Credit period for the “buy and sell” term in the online segment stands at 90
days, while under market place (inventory risk with company) stands at 15
days.
 Annual capex stands in the range of INR600-700m, consisting of INR250m
toward IT/Systems, INR250m toward SIS, and INR100-150m toward COCO.
 The company has 400 bps margin differential between pre and post Ind AS
EBITDA
 The company does not have any in-house manufacturing and is totally
outsourced with major sourcing from India and Bangladesh.

Exhibit 1: Details of funds raised / investments made recently

Amount Raised Price (Discount)/
Period Type of Issue Prevailing CMP Equity dilution
(INR b) (INR) Premium
Jul'20 Right Issue 4.0 100.0 119.7 -16% 68%
Jul'20 Investment by Flipkart* 2.6 NA NA NA
Feb'21 Right Issue 2.0 135.0 157.4 -14% 15%
Sep'21 Preferential allotment 4.0 218.5 273.3 -20% 15-16%
*Investment by Flipkart was in Arvind Youth Brands (Subsidiary) Source: MOFSL, Company

Exhibit 2: Details of brands discontinued / sold off

Period Brand Stores Revenue (INR b)
FY20 GANT 20-25
FY20 Nautica 30-35
FY20 Elle 05-10
Collective revenues of INR 2-3b
FY20 Izod 05-10
FY21 The Children’s Place 10-15
FY21 Hanes NA
FY21 GAP 15-20 ~2
FY22 Unlimited 74 5.3
Source: MOFSL, Company

Exhibit 3: Details of brand wise revenue and EBITDA margins

Broad channel split
Brand Revenue (INR b) EBITDA margins (%) EBO/Doors
(Retail: Online: LFS/MBO)
USPA 15-16 11-12% 391 33:33:34
Arrow 05-06 3-5% 212 33:22:45
CK 03-04 10-12% 76 67:15:17
Tommy 05-06 11-12% 98 55:20:25
Flying Machine 04-05 3-5% 270 33:45:22
Sephora 2.5-3.5 Break-even 25 90:10:00
FY23 Total 42-43 7-8% 1,072 45:25:30
Source: MOFSL, Company

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 Arvind Fashions

Exhibit 4: Improvement in Inventory days

INR m FY18 FY19 FY20 FY21 FY22
Turnover 42,189.0 46,438.6 38,662.5 22,011.8 30,560.4
Inventory 7,272.9 9,862.8 13,058.3 8,100.1 8,308.1
Inventory days (days) 62.9 77.5 123.3 134.3 99.2
Inventory turns (x) 5.8 4.7 3.0 2.7 3.7
Source: MOFSL, Company

Exhibit 5: Revenue growth trajectory (INR b) Exhibit 6: Pre Ind AS EBITDA recovers in FY22 (INR m)

Consol. revenues Growth YoY (%) EBITDA EBITDA margins (%)

226.5 6.2 6.0
5.4
38.7
(1.0)
22.0 38.8 2,294 2,881 2,311
10.1
(16.7)
(43.1) (2,583) (320)
42.2 46.4 30.6
(11.7)
FY18

FY19

FY20

FY21

FY22

FY18

FY19

FY20

FY21

FY22
P – Potential; Source: MOFSL, Company P – Potential; Source: MOFSL, Company

Exhibit 7: Segmental revenues recovers in FY22 (INR b) Exhibit 8: Segmental EBITDA (post Ind AS) trend (INR b)
Power Brands Emerging Brands Speciality Power Brands Emerging Brands Speciality
3.4
28.0 2.8
25.9 24.8 2.4
23.1 2.2
20.0 1.8
1.1
15.2
(0.9) (0.3) (0.4) 0.4 0.1 -
11.1 11.1 (0.1)
8.1 9.5
7.0 5.5 5.8
5.3 5.0 4.6
2.2 (0.2) (0.4) (0.3)
- (0.5)
(0.5)
FY17

FY18

FY19

FY20

FY21

FY22

FY17

FY18

FY19

FY20

FY21

FY22
*Specialty discontinued from FY22; Source: MOFSL, Company *Specialty discontinued from FY22; Source: MOFSL, Company

14 December 2022 6
 Arvind Fashions

Financials and valuations

Income Statement (INR m)
Y/E March FY17 FY18 FY19 FY20 FY21 FY22
Total Income from Operations 12,922 42,189 46,439 38,663 22,012 30,560
Change (%) -51.7 226.5 10.1 -17 -43 39
Raw Materials 6,959 19,789 22,887 21315 12870 17098
46 53 51 45 42 44
Employees Cost 1,116 3,669 4,078 3492 2291 2368
Rent 0 0 0 0 0 0
Other Expenses 4,097 16,437 16,593 11545 6921 9293
Total Expenditure 12,171 39,895 43,557 36,352 22,082 28,759
% of Sales 94.2 94.6 93.8 94.0 100.3 94.1
EBITDA 751 2,294 2,881 -1,170 -70 1,802
Margin (%) 5.8 5.4 6.2 -3.0 -0.3 5.9
Depreciation 430 1,390 1,532 4375 3027 2330
EBIT 322 905 1,350 -5,545 -3,097 -528
Int. and Finance Charges 326 913 1,262 2891 2249 1239
Other Income 24 125 41 598 1283 669
PBT bef. EO Exp. 19 116 129 -7,839 -4,063 -1,099
EO Items 0 0 0 -607 -452 0
PBT after EO Exp. 19 116 129 -8,446 -4,515 -1,099
Total Tax -162 -14 -86 -977 419 -58
Tax Rate (%) -837.0 -11.7 -66.7 11.6 -9.3 5.3
Reported PAT 182 129 215 -7,469 -4,933 -1,041
Adjusted PAT 182 129 215 -6,932 -4,439 -1,041
Change (%) -146.6 -28.9 66.3 -3,325.7 -36.0 -76.6
Margin (%) 1.4 0.3 0.5 -17.9 -20.2 -3.4

Balance Sheet (INR m)

Y/E March FY17 FY18 FY19 FY20 FY21 FY22
Equity Share Capital 217 232 232 235 424 530
Share Premium 6,363 11,571 11,571 - - -
Non-Controlling Interest - 873 912 889 694 1,002
Total Reserves (0) (1,205) (509) 5,750 4,796 6,973
Net Worth 6,580 11,471 12,206 6,874 5,914 8,504
Total Loans 5,767 6,709 7,908 21,287 17,153 9,579
Net Deferred Tax Liabilities (2,115) (2,362) (2,692) (4,401) (3,918) (4,105)
Capital Employed 10,233 15,817 17,422 23,760 19,149 13,978
Net Fixed Assets 3,405 5,326 5,489 12,356 10,453 6,613
Total Investments
Curr. Assets, Loans&Adv. 16,115 23,499 26,393 26,963 20,526 19,525
Inventory 9,436 7,273 9,863 13,058 8,100 8,308
Account Receivables 2,501 7,845 8,787 7,814 6,256 5,717
Cash and Bank Balance 231 284 121 116 189 1,050
Loans and Advances 3,948 8,097 7,623 5,975 5,981 4,450
Curr. Liability & Prov. 9,286 13,008 14,460 15,559 11,830 12,160
Account Payables 7,478 10,680 12,390 1,773 9,318 10,479
Other Current Liabilities 1,688 2,142 1,857 13,590 2,324 1,538
Provisions 121 186 214 197 188 144
Net Current Assets 6,829 10,491 11,933 11,404 8,696 7,365
Misc Expenditure
Appl. of Funds 10,233 15,817 17,422 23,760 19,149 13,978
E: MOFSL Estimates

14 December 2022 7
 Arvind Fashions

Financials and valuations

Ratios
Y/E March FY17 FY18 FY19 FY20 FY21 FY22
Basic (INR)
EPS 3.3 2.4 4.0 -127.5 -81.7 -19.1
Cash EPS 11.2 27.9 32.1 -47.0 -26.0 23.7
BV/Share 121.1 211.0 224.6 126.5 108.8 156.5
DPS 0.0 0.0 0.0 0.0 0.0 0.0
Payout (%) 0.0 0.0 0.0 0.0 0.0 0.0
Valuation (x)
P/E 95.9 135.0 81.1 -2.5 -3.9 -16.8
Cash P/E 28.5 11.5 10.0 -6.8 -12.3 13.5
P/BV 2.6 1.5 1.4 2.5 2.9 2.1
EV/Sales 1.8 0.6 0.6 1.0 2.3 1.7
EV/EBITDA 30.6 10.9 9.2 -46.0 -709.6 22.9
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0
FCF per share -16.7 -42.8 3.7 14.6 -11.1 23.9
Return Ratios (%)
RoE 3.6 1.4 1.8 -72.7 -69.4 -14.4
RoCE 26.7 7.5 12.1 -18.1 -7.7 0.6
RoIC 30.3 8.2 14.5 -25.1 -16.5 -3.3
Working Capital Ratios
Fixed Asset Turnover (x) NA NA NA NA NA NA
Asset Turnover (x) 1.3 2.7 2.7 1.6 1.1 2.2
Inventory (Days) 267 63 78 123 134 99
Debtor (Days) 71 68 69 74 104 68
Creditor (Days) 211 92 97 17 155 125
Leverage Ratio (x)
Current Ratio 1.7 1.8 1.8 1.7 1.7 1.6
Interest Cover Ratio 1.0 1.0 1.1 -1.9 -1.4 -0.4
Net Debt/Equity 0.8 0.6 0.6 3.1 2.9 1.0

Cash Flow Statement (INR m)

Y/E March FY17 FY18 FY19 FY20 FY21 FY22
OP/(Loss) before Tax 19 116 129 -4,964 -5,541 -2,367
Depreciation 430 1,390 1,532 4,375 3,341 2,609
Interest & Finance Charges 320 880 1,240 2,865 2,333 1,299
Direct Taxes Paid -40 -254 -369 -112 112 -118
(Inc)/Dec in WC -2,195 -3,064 -857 329 1,003 2,782
CF from Operations -1,465 -933 1,675 2,493 1,247 4,205
Others 9 155 76 -436 -2,019 -1,204
CF from Operating incl EO -1,456 -778 1,751 2,057 -772 3,001
(Inc)/Dec in FA -548 -1,701 -1,534 -1,201 -409 166
Free Cash Flow -908 -2,479 217 857 -1,181 3,167
Others -6,549 211 35 24 14 -251
CF from Investments -7,098 -1,490 -1,499 -1,177 -395 -85
Issue of Shares
Inc/(Dec) in Debt -61 138 619 4,197 -3,008 -4,413
Interest Paid -194 -876 -1,198 -5,144 -2,492 -876
Others 8,803 3,000 119 93 6,610 3,197
CF from Fin. Activity 8,548 2,262 -459 -854 1,110 -2,092
Inc/Dec of Cash -6 -6 -208 27 -57 824
Opening Balance 0 64 99 72 99 43
Closing Balance 64 99 72 99 43 867
Other balances 168 185 48 17 146 183

14 December 2022 8
 Arvind Fashions

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >=15%
SELL < - 10%
NEUTRAL < - 10 % to 15%
UNDER REVIEW Rating may undergo a change
NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within
following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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Specific Disclosures
1 MOFSL, Research Analyst and/or his relatives does not have financial interest in the subject company, as they do not have equity holdings in the subject company.
2 MOFSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company
3 MOFSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months
4 MOFSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report
5 Research Analyst has not served as director/officer/employee in the subject company
6 MOFSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
7 MOFSL has not received compensation for investment banking/ merchant banking/brokerage services from the subject company in the past 12 months
8 MOFSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months
9 MOFSL has not received any compensation or other benefits from third party in connection with the research report
10 MOFSL has not engaged in market making activity for the subject company

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 Arvind Fashions

The associates of MOFSL may have:

- financial interest in the subject company
- actual/beneficial ownership of 1% or more securities in the subject company at the end of the month immediately preceding the date of publication of the Research Report or date
of the public appearance.
- received compensation/other benefits from the subject company in the past 12 months
- any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however, the same shall have no bearing whatsoever on
the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even
though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.
- acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
- be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies)
discussed herein or act as an advisor or lender/borrower to such company(ies)
- received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.
- Served subject company as its clients during twelve months preceding the date of distribution of the research report.

The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report
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