Arvind Fashions shares tumble 11% today; Anand Rathi sees 92% potential upside on this stock

Domestic brokerage Anand Rathi has upped its target on Arvind Fashions to Rs 567 from Rs 516, as it sees it as a rerating candidate. Arvind Fashions, Anand Rathi noted, completed its business reset in FY20-FY21 and has seen an upswing in business over the last four quarters, the pace of which should accelerate, the domestic brokerage said in a note on Thursday. 

On Friday, the scrip was trading 11,76  per cent lower at Rs 295 level. The Rs 567 target suggests a 90 per cent potential upside on the stock over this price. 

While growing 12-15 per cent in the next 3-4 years, the company expects a double-digit Ebitda  margin in the next 18 months. Revenue growth would be driven equally by like-to-like growth and store expansion, margin expansion by efficiencies as brands gain scale and on the Arrow turnaround, Anand Rathi said quoting the company management.

The management, it said, will focus on scaling up existing brands profitably and is not looking at adding brands.

"We expect its Rs 380 crore net debt to shrink to Rs130 crore by end-FY25. We are positive on the stock and see a further re-rating, driven by a better sustainable performance. We retain our Buy rating at a higher target of Rs 567, based on 12x FY25e EV/ Ebitda (previously Rs516, at 11 times FY25e EV/Ebitda)," Anand Rathi said.

Arvind Fashions delivered 4 times inventory turns by end-FY22 and intends to move towards 5 times in 3-4 years. As its cash generation picks up from FY24, Anand Rathi said, the company will focus on scaling up brands and not by adding brands. The management says revenue growth would not come at the cost of margin dilution, the brokerage noted.

"With a significant swing in Arrow’s Ebitda (loss-making in FY22), we expect Power brands’ margins to be higher. With the Power brands’ margin rebound, and it exiting loss-making brands, we expect a significant turnaround over FY23-25," it said.

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