Stock To Buy: Retail Clothing Company With Power Brands, Low Debt, Good Growth

Brokerage firm Anand Rathi is bullish on the stock of Arvind Fashions and has retained a buy on the stock for a price target of Rs 450 on the stock.

Arvind Fashions: Power brands

The company sells under some of the finest brands in the retail clothing business including the likes of Arrow, Calvin Klein, Flying Machine, Tommy Hilfiger, US Polo Assn etc.

According to Anand Rathi, Arvind Fashions' Q3 Power brands revenue recovered 23% vs. pre-Covid times.

"Pre-IND AS 116 EBITDA margin stood at 5.6-6.6% as per our estimates which is encouraging for the quarter. Greater employee cost, ad-spend and consultant fee kept expenses more than we expected. FY22 revenue is slightly lower as we bake in a weaker Q4 due to Omicron-related restrictions," the brokerage has said.

Management expectations

The management expects normal business by Mar'22, and a double-digit RoCE over the next 1-2 years because of working-capital controls, and better stock turns and margins. Our FY22e 6% EBITDA margin is 370 basis points lower due to greater investments than earlier expected. We retain our Buy rating, at a Rs 450 target price based on 11x FY24e EV/EBITDA," the brokerage has said.

Better inventory turns; lower debt

According to Anand Rathi, debt was Rs 3.7 billion lower q/q to Rs 4.65 billion. The company reached its target of 4x inventory turns and also added 60 stores, and is on track to open 150+ by end-FY22.

"It expects mid-40s gross margins in the medium term, and higher ahead. It aims at a double-digit Returns on Capital Employed in the next 1-2 years. Piyush Gupta was appointed CFO w.e.f. 12th Feb'22," the brokerage has said.

"We retain our Buy rating with a target price of Rs 450 based on 11x FY24e EV/EBITDA," the brokerage has said. According to the firm, the key risks include keen competition and lower revenue growth.

The stock of Arvind Fashions was last seen trading at Rs 291 on the BSE.