Credit Suisse expects brands and retail to improve Arvind financials

Credit Suisse has initiated coverage on Arvind with an outperform rating and a target price of Rs 360. It believes improving margins in brands and retail, faster growth in relatively low capital-intensive businesses, and improvement in working capital should gradually help free cash flows. The brokerage expects revenue CAGR of 15 percent and EPS of 27 percent by FY16-18.

After June quarter earnings, Arvind had said for the full year, revenue growth was likely to be 14 to 15 percent with improvements in margin in brands and retail segment. Brands and retail business, which contributes 28 percent to total revenue, reported a 13.8 percent growth in the first quarter at Rs 527 crores while textiles business, which contributes 67 percent to revenue, grew by only 1.3 percent to Rs 1,255.2 crores on low cotton prices and limited volumes. Brands and retail segment posted loss of Rs seven crore against loss Rs two crore year-on-year at EBIT level.

According to Credit Suisse, the scope for growth for large brands in India, improving margins driven by the 'power brands', better working capital, and asset turns should all fuel its financials. The brokerage says there is a shift away from capital-intensive denims to higher-ROCE (return on capital employed) garmenting and within denims. The company has de-risked its revenue somewhat and added some complexity to its offerings, it adds.

Uncertainty regarding the impact of GST and any currency-led relative competitiveness with China are key risks, it feels.