Arvind Ltd: Multiple growth drivers in place

But benefits of growth in textiles & brands divisions and planned reality demerger factored in

Textiles major and retailer Arvind's scrip has gained over 40 per cent in less than a month and made a new 52-week high of Rs 334 last week. Strong prospects of its core business and positive news flow including, de-merger of real estate business, tie-up with Gap Inc. USA and foray into e-commerce, are reasons behind this rally. Likely monetisation of its land bank that will remain with the parent and could fetch up to Rs 500 crore over the next two-three years is another catalyst. Even as company's textile business, which accounted for two-third of revenues in FY14, continues to do well, analysts expect its brands and retail business (28 per cent of revenues) to be another key growth engine.

Among Arvind's key initiatives is its recent foray into e-commerce by way of providing customised clothing under the Creyate brand, which could add about Rs 100 crore to revenues in its first year (ending August 2015). But, what's important is that Arvind operates international brands such as Tommy Hilfiger, US Polo, Arrow, Calvin Klein and GAP in India and owns brands such as Flying Machine, Colt, Ruggers, amongst others. The company also plans to bring these 30 apparel brands (16 International, rest owned) online, providing a big boost to the business. Arvind expects e-commerce business to contribute Rs 1,000 crore to its revenues over the next three years, almost 15 per cent of FY14 sales of Rs 6,862 crore.

MegaMart, its apparel retail stores, though is currently making losses. The management is taking measures make it profitable in two years.

Analysts at Standard Chartered Securities expect Arvind's return on capital employed to improve 300 basis points over FY14-17 to 23 per cent. They also believe Arvind's brands business could list over FY17-FY18. Such a move could help unlock value.

Arvind has a host of fundamental growth catalysts in place, which could boost its financial performance going forward. Its earnings are expected to grow at a compounded annual rate of 20-21 per cent during FY14-17, with strong boost from FY16. Most analysts thus are positive on the company.

The flip side is the average target price of Rs 289 of analysts polled by Bloomberg since July, which indicates most of the good news is priced in. Arvind's scrip now trades at 18.6 times FY16 estimated earnings, more than double of historical average one-year forward price-earnings ratio of 7.2 times. Investors with long-term horizon can consider the stock on a meaningful correction.