Arvind Fashions - Exit From Non-Core Sephora Business Makes It A Pure-Play Branded Apparel Play: Systematix

Systematix Research Report

Arvind Fashions Ltd. announced its exit from the Sephora India business. The company signed a definitive agreement with Reliance Beauty and Personal Care Ltd. to sell its wholly owned subsidiary Arvind Beauty Brand Retail Ltd. which runs its Sephora India business, in an allcash transaction.

Sephora operated in 26 company owned company operated outlets stores across the country offering prestige beauty products across categories such as makeup, skincare, fragrance, haircare. The total cash consideration received by the company post this transaction is Rs 2.16 billion. The purchase consideration towards sale of entire equity stake was Rs 990.2 million out of total enterprise value of Rs 2.16 billion.

The business had generated a revenue of Rs 3.37 billion with a post-Indian Accounting Standard Ebitda margin of 9% with a profit before tax loss of Rs 199 million in FY23. It was just about breaking even at pre-Ind AS Ebitda level.

Arvind Fashion intends to utilise the proceeds to invest in growth of its apparel brands and repayment of debt. With this sale, the company will emerge as a pure-play branded fashion company and will further sharpen its focus on profitably growing its five marquee fashion brands - U.S. Polo Assn., Tommy Hilfiger, Arrow, Flying Machine and Calvin Klein.

We would view this as a positive development given the company was not able to move forward in its talks with the brand owner LVMH (agreement was up for renewal in 2026) to secure the online rights for the business, and hence was not able to realise the full potential of the business.

The business has been growing at a 11% compound annual growth rate since its launch in India but has been loss-making given the high operational costs and volatile margins.

This exit will reduce FY25 revenue/Ebitda by 6%/5% for Arvind Fashion, but will see a 5% boost to profit before tax given the savings on interest and depreciation, as the proceeds should help in bringing down debt.

Return ratios would also look better given the better cash flows post release of working capital. While this could lead to some re-rating, we retain our target FY25 EV/Ebitda multiple of 10 times for now and revise our target price to Rs 505 from Rs 515 and would review this post the Q2 earnings scheduled on November 07.

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