Arvind Fashions' Profitability Growth Outlook Drives Equirus Securities' 'Long' Initiation

Arvind Fashions Ltd. has got a 'long' rating from Equirus Securities with the brokerage expecting company's profitability to improve as it starts reaping the benefits of corrective actions undertaken in the past three years.

The brokerage initiated coverage on the stock with a target price of Rs 753, implying an upside of 49%. "Additionally, supported by asset-light expansion and improved working capital efficiency, return on equity and return on capital employed are expected to reach 18.5% and 19.9%," it said.

The brokerage also finds the company's valuation attractive. "Given strong growth potential and improved profitability, we find Arvind Fashions to be attractively priced," Equirus said.

It said, "A focused premiumisation strategy, combined with the expansion of adjacent categories (now contributing ~15% of revenues) and the turnaround of Arrow and FM brands, is anticipated to drive decent revenue growth of 10% CAGR along with substantial increase in profitability, 33% PAT CAGR by FY27E."

According to the brokerage, margin expansion should drive multi-fold growth in profitability. Fiscal 2024 margins were impacted due to premiumisation, reduced discounting, and changes in channel mix, it noted, and said operating margins too did not increase due to brand-level losses and inventory write-offs.

"With most corrective actions completed, AFL is positioned for robust growth, expecting 178 bps increase in operating margins over the next three years," according to the brokerage. "While the topline growth remains decent at 10% CAGR, Pre-IND AS EBITDA/PAT growth should be much higher at 23%/33%, led by improved gross margins, positive operating leverage, and reduced interest costs."

Key risks for its call include a slowdown in the economy and reduced discretionary spending, which could negatively impact same-store sales and overall revenue growth and issues related to licencing or royalty payments.

Increasing competitive intensity and any issues with franchisee partners could also hurt its growth prospects as the company has 60% of its store count being operated by franchisees, it said.