Initiating Coverage by MOSL February 2014

Initiating Coverage | 6 February 2014
Sector: Textiles
Arvind Ltd
Brand it up
Niket Shah (Niket.Shah@MotilalOswal.com); +91 22 3982 5426
Atul Mehra (Atul.Mehra@MotilalOswal.com); +91 22 3982 5417
Investors are advised to refer through disclosures made at the end of the Research Report.
Arvind
Arvind: Brand it up
Page No.
Summary ........................................................................................................ 3-4
Company background ....................................................................................... 5
Focus on brands to ensure greater overall profitability ........................... 6-13
Megamart metamorphoses, margins set to improve .............................. 14-15
Garments business out of the woods ..................................................... 16-17
Wovens to be largest revenue segment in FY16E .................................... 18-20
Focus on high value denim segment to drive profitability ..................... 21-23
Key risks ............................................................................................................ 24
Key management profile ................................................................................. 25
Financial outlook ....................................................................................... 26-29
Annexure: Segment description ............................................................... 30-43
Financials and valuation ........................................................................... 44-45
6 February 2014 2
Initiating Coverage | 6 February 2014
Sector: Textiles
Arvind Ltd
BSE SENSEX S&P CNX
20,311 6,036 CMP: INR147 TP: INR215 Buy
Arvind Ltd, flagship of the Lalbhai group, is Indias largest textile company. It is also the
largest cotton textile manufacturer, with an installed fabric capacity of over 200mmt per
annum. Company is the preferred supplier to internationally renowned brands like
Polo, Armani Exchange, Diesel, GAP among others. It makes a strong statement among
Bloomberg ARVND IN
international brands and retail business and has one of the robust brands portfolio in
Equity Shares (m) 258.0
India (28) along with Megamart, the fastest growing value retail chain.
M.Cap. (INR b)/(USD b) 34.5/0.6
52-Week Range (INR) 157/65
Brand it up
1,6,12 Rel. Perf. (%) 5/104/54
Brands, retail segment margins to increase 650bp by FY16E
Brands and retail segment margins to see structural improvement from 5.4% in FY13
Financials & Valuation (INR b)
to 12% by FY16E, driven by consolidation of portfolio, more power brands, turnaround
Y/E March 2014E 2015E 2016E
of loss-making new brands and improved margins in Megamart.
Sales 66.5 80.1 95.5
Restructuring in garments segment led to turnaround and improvement in margins
EBITDA 9.3 11.6 14.3
from -8% in FY10 to 11% in FY13. Plans to expand capacity from 10m pieces to 25m by
NP 3.4 4.3 5.8
FY15 to drive profitable growth.
EPS (INR) 13.1 16.6 22.3
Wovens to be the largest segment for Arvind Ltd (ARVND) in FY16 and overtake denims
EPS Gr. (%) 36.3 26.8 34.4
in sales and profitability.
BV/Sh. (INR) 98.0 111.7 131.0
Focus on higher value-added products in denim (70% of denim revenue) will ensure
RoE (%) 14.2 15.9 18.4
better realizations and margins in an over-supplied market scenario.
RoCE (%) 14.5 16.4 18.9
We value ARVND at 6x FY16E EV/EBITDA, in line with five-year historical average multiple
Valuations
of 6.4x one-year forward EV/EBITDA. Initiate coverage with a 'Buy'.
P/E (x) 11.4 9.0 6.7
P/BV (x) 1.5 1.3 1.1 Turning into brand power house
EV/EBITDA (x) 7.1 5.9 4.8 From a large denim producer, ARVND is turning into a brand power house, with
EV/Sales (x) 1.0 0.9 0.7 one of the best brand portfolios in the country of ~28 brands, of which 15 are
licensed and 13 owned and being sold at its own value retail format, Megamart.
It had ~684 retail stores spanning over 1.2msqft and 150 cities (including
Shareholding pattern (%)
As on Dec-13 Sep-13 Dec-12 Megamart) and domestic presence in 700 MBOs and 656 departmental store
Promoters 43.8 44.0 43.5 counters in FY13. It plans to add 0.3msqft of retail space every year (including
Dom. Inst. 18.2 19.4 18.3 Megamart), a key entry barrier for new entrant, and expects SSSG of 8-10% in
Foreign 19.2 15.7 17.4 brands and retail segment, thus driving growth.
Others 18.8 20.9 20.8
Megamart metamorphoses, margins set to improve
To improve profitability, ARVND repositioned Megamart as a value retail from
Stock performance (1 year) discount store in 2012 and decided to shut down non-profitable stores (from 216
in FY12 to 197 in FY13), to change customer perception and improve pricing power. Its
strategy is to attract customers by providing discount on brands like Arrow, Park
Avenue, VanHeusen etc (low margin) and then convert them to purchase private
brands like Excalibur, Newport (high margin). Private labels constitute ~40% of
total sales, which it expects to increase to 60%, thereby improving overall margins.
ARVND plans to scale up brands and retail business at 30% CAGR over FY13-18 from
INR15b to INR50b. It expects brands and retail segments margins to increase from
5.4% in FY13 to 12% by FY16, driven by consolidation of brand portfolio, increase
high margin power brands to six by FY15 (Nautica and Hanes being added), turning
around newly-acquired brands and improved margins in Megamart.
6 February 2014 3
Arvind
Garments business out of the woods, high growth on radar

Garments business is intensive both from labor and management parameters and
its success hinges on labor management. Also, it requires significant level of
industrial engineering. Supply side constraints (both quality and in-time delivery)
led to air freight and claim payouts, high wastages and leakages in the system (on
over-ordering of trims and fabrics), which resulted in losses in this segment.
However, strategic management measures ensured a successful turnaround in this
business (reported EBITDA margin loss of 8% in FY10 and +11% in FY13). Garments
business has a firm order book visibility of six months compared to a month for
textile business. With a combined capacity of 200mmt (denim plus wovens) in the
fabrics business, garments capacity at 10m pieces is miniscule. Hence, management
plans to increase it to 25m pieces by FY15, thereby driving growth.
Wovens to be largest revenue segment in FY16E

Wovens business opportunity is at least 5x that denim offers. It is less competitive
and more profitable due to the high and complex levels required at each stage of
manufacturing. Scope for value addition too is higher in wovens segment as it begins
at the yarn level, translating into superior realization and margins. ARVND has a
strong distribution network of more than 1,000 dealers and 500-700 wholesalers to
sell products. Indian brands buy ~50-60% of their woven requirements from ARVND,
which is a testimony of its quality and brand recall, thereby leading to higher pricing
power. With significant ramp-up in woven exports, revenue from this business has
substantially scaled up over the last five years from just 41% of denim revenue in
FY08 to 93% in FY13. We expect wovens to be largest revenue segment in FY16E, thus
overtaking denims in turnover and profitability.
Higher value-added denims to drive profitability

ARVNDs focus in the past five years was to move towards higher value-added
products in denim, thus ensuring better realizations and margins. Around 70% of its
denim products are value-added and 30% being lower-end commoditized ones. On
increased proportion of value-added products over the past five years, denim
realizations grew aggressively from INR102/mtr in FY08 to INR173/mtr in FY13, with
margins rising from 12% in FY08 to 19% in FY13. However, post the global demand
slowdown in FY08 and a currency rate of USD/INR40 which made exports unviable,
ARVNDs management decided to reduce the denim capacity from 120mmt to
108mmt. Company has been consolidating its current denim capacity, with no increase
during the last five years.
Valuation and view initiate coverage with a Buy

We expect ARVNDs revenue to post 20% CAGR over FY14-16E complimented by
100bp of margin expansion on improvement in brands and retail and garments
margins. We expect RoCE to improve from 14.5% in FY14E to 19% in FY16E and RoE
from 14.2% in FY14E to 18.5% in FY16E, driven by an improvement in margins and
reduction in capex intensity in the business. We believe that with RoCE and RoE at a
decade high and increased contribution from brands segment, capex intensity over
the long term will reduce, warranting a re-rating. We value ARVND at 6x FY16E EV/
EBITDA, in line with 5 year historical average multiple of 6.4x 1 year forward EV/
EBITDA and arrive at a target price of INR215. Initiate coverage with a 'Buy'.
6 February 2014 4
Arvind
Company background
Arvind (ARVND), established in 1931 as Arvind Mills Ltd, the flagship of the Lalbhai
group, is the largest textile company in India. It was the first to introduce the globally
accepted fabric, denim, to India in 1986. Currently, ARVND is the leading manufacturer
of denim, with a manufacturing capacity of 108mmt p.a. Company is also the largest
producer of textile fabrics in India making shirting, voiles, khakis and knits, with a
manufacturing capacity of 130mmt p.a. ARVND is the largest cotton textiles
manufacturer in the country, with an installed fabric capacity of over 200mmt per
annum. It is also one of the leading denim fabric manufacturers in the world.
Company is the preferred supplier to internationally renowned brands like Polo,

Armani Exchange, Diesel, GAP, Banana Republic, Calvin Klein, Hugo Boss, Espirit, Zara,
Levis, Miss Sixty, Ann Taylor, Brooks Brothers, Express and Eddie Bauer. ARVND also
has a strong presence in international brands and retail business, with one of the
strongest brands portfolio in the country along with Megamart, the fastest growing
value retail chain in India launched in 2008. Currently, Megamart has emerged as
Indias largest value retail operating with a retail space of 4.5 lakh sqft. ARVND has an
enviable brand portfolio comprising of in-house and licensed brands, with names
like Flying Machine, Arrow, Tommy Hilfiger, Lee, Wrangler, US Polo, Izod, Gant, New
Port, Excalibur etc.
Business segment
Arvind
Textiles Subsidiaries Joint Ventures
Fabrics Arvind Retail Arvind Murjani Brands

Garments (Arvind's stake 50%)
(Denim, woven, (100% subsidiary)
(100% exports)
voiles, knits) Arvind Lifestyle Brands
(100% subsidiary)
Arvind Products
(53.9% subsidiary)
Arvind Engineering
(98.8% subsidiary)
Arvind group's business structure (Sales)
Arvind Group
Textiles Brand & Retail Real Estate

(INR37.2b, 71%) (INR14b, 26%) (INR1.5b, 3%)
Denim Woven Garment Others

(INR15.4b, 29%) (INR14.3b, 27%) (INR5b, 10%) (INR2.4b, 5%)
Sources: Company, MOSL
6 February 2014 5
Arvind
Focus on brands to ensure greater overall profitability

To scale up brands business at 30% CAGR over FY13-18
ARVND has one of the best brand portfolios in the country, with brands present across
categories. Company has a portfolio of ~28 brands, with 13 owned and 15 licensed.
It has a strong distribution network comprising of ~684 retail stores spanning over 1.2m
sqft and 150 cities (including Megamart). ARVND has a domestic presence in 700 MBOs
and 656 departmental store counters.
It plans to add 0.2-0.3msqft of retail space every year and expects SSSG of 10% in brands
segment, thereby driving growth.
Company derives 57% of its revenue from EBOs, 16% from MBO (Vama etc), 15% from
departmental stores and balance from other institutional sales, including 4% from online.
Of the total stores, currently ~50% are franchisee models.
It classifies any brand with more than INR1b in turnover, double digit margins, free cash
flow positive and growth of 20%+ as power brands.
Company purchases 20m garments annually for its brands and retail business from 35
dedicated vendors.
ARVND is focused on scaling up the brands business at 30% CAGR over FY13-18 from
INR15b to INR50b.
Management expects brand and retail segments margins to increase from 5.4% in FY13
to 12-13% by FY16, driven by consolidation of portfolio (brand portfolio is near completion),
increase in total number of power brands to six by end-FY15 (by adding Nautica and
Hanes) and turning around newly-acquired brands.
In FY10, the B2C business contributed 29% of total revenue, which increased to 35% in
FY13. Management expects it to increase to 40% in next two years.
One of the best brand portfolios in country

Portfolio of ~28 brands, From a denim producer for its corporate clients, ARVND is turning into a brand power
of which 13 are owned house catering to consumers directly through various JVs, exclusive licences, own
and 15 licensed brands and sales through a wide network of exclusive brand outlets, shop-in-shop
outlets and aggressive expansion of its own Megamart stores. Company has one of
the best brand portfolios in the country, with presence across categories and a portfolio
of ~28 brands with 13 owned (Flying Machine, Excalibur and Ruggers etc), 15 licensed
brands (Arrow, US Polo, Gant and Hanes etc) and Tommy Hilfiger (JV).
This will span multiple channels and price points, with each brand appropriating sharp
and differentiated consumer proposition. Arrow is the lead brand in the premium
segment, with its positioning as the best-in-class style for premium consumers.
Excalibur brand addresses young executives need for dressing solutions. Flying
Machine brand is being positioned as the platform of Youth Expression with a view
to grow into an iconic youth brand. Newport is clearly positioned as a campus wear
brand for college students seeking affordable fashion. ARVND has strong brand-
building capabilities with five of the top 10 international brands in India built by it.
6 February 2014 6
Arvind
Brand portfolio and positioning
Source: Company, MOSL
ARVND had 684 stores, Brands in mass premium channels are sold across exclusive outlets, department stores,
with a total retail space cash-and-carry, multi-brand and factory outlets. Ruff and Tuff is the lead brand in the
of 1.2msqft across 150 mass segment and is largely merchandized through the emerging channel of
cities at end-FY13 hypermarkets. ARVND has a strong distribution network comprising of ~684 retail
stores spanning over 1.2msqft and 150 cities (including Megamart). Company has a
domestic presence in 700 MBOs and 656 departmental store counters. It has a decent
presence overseas, with seven retail stores in Dubai and South Africa along with 113
departmental store counters across Middle East and South Africa. ARVND derives 57%
of its revenue from EBOs, 16% from MBO (Vama etc), 15% from departmental stores
and balance from other institutional sales, including 4% from online. Of the total
stores, currently ~50% are on franchisee model thereby achieving faster growth.
EBOs contribution is largest to retail revenue (%)
6 February 2014 7
Arvind
ARVND - the preferred partner in India for aspiring foreign brands

Brand retailing earns maximum return in textile value chain, while manufacturing
can only be differentiating through scale. Most global players generated significant
returns through brand building and innovation in design. Among large Indian
traditional textile players, only few successfully diversified their revenue from
manufacturing to brand and retail. Within India, we believe ARVND is in a better
position to capture brand and retail boom due to its 1) integrated textile facility, 2)
supply chain management, 3) branding and 4) bargaining power for retail space and
strong distribution in MBO and departmental stores due to its size.
Focus to scale up brand and retail business significantly over next 5 years
Guidance to ARVND has defined criteria while acquiring new brand licences namely 1) brands
increase brand and should be well-known to consumers of India so as to minimize the ad spends required
retail sales from INR15b to create a brand, 2) should have significant scalability potential, 3) should be for the
to INR50b by FY18 middle class Indians and not luxury, 4) licence should be for at least 20 years and 5)
royalty should not exceed 4%. With these prerequisites, capturing long term business
potential of brands is ensured. Company is focused to scale up the brand and retail
business at 30% CAGR over FY13-18, from INR15b to INR50b.
Consolidation, higher contribution from power brands, break-even of newer

brands to improve margins
ARVND classifies any brand with more than INR1b in turnover, double digit margins,
free cash flow positive and growth of 20%+ as power brands. Its strategy is to create
certain power brands, which can generate large revenue and have potential for high
growth. Based on this classification, Arrow, Tommy, US Polo and Flying Machine account
as power brands. It took 15 years for the company to achieve INR1b in sales in Arrow.
Margins in brands However, post that, the journey from INR1b to INR5b was done is four years. Similarly,
segment is expected to in US Polo, in four years the brand notched sales of INR2.4b, indicating the popularity
improve from 5% in FY13 of power brands and scalability of the business, given ARVND has a plethora of strong
to 11% in FY16E brands which are capable of becoming power brands.
Companys power brands have posted 50% CAGR over the last four years, from INR2.2b
to INR7.3b in FY13. Similarly, profitability for power brands has improved significantly,
with margins expanding from 7.4% in FY10 to 11% in FY13. Power brands account for
86% of the brands business. 14% of the brands business is still operating on a sub-
optimal scale and are in investment mode, thus depressing overall brands margin to
8%, against power brands margins of 11%.
Plans to add Nautica and Management expects brands and retail segments margins to increase from 5.4% in
Hanes to list of power FY13 to 12% by FY16, driven by consolidation of brand portfolio, increase in number of
brands by FY15 high margin power brands to six by end-FY15 (Nautica and Hanes being added),
imrprovement in power brands margins (Arrow and US Polo enjoy 14% margins),
turnaround of newly-acquired brands like Nautica, Hanes, Elle, Next etc which are
still loss-making (it takes around two years for a new brand to breakeven and five
years to reach matured sales). Company plans to focus on investing in Nautica and
Hanes in FY14 to scale it up and invest in Ed Hardy and NEXT in FY15.
6 February 2014 8
Arvind
Power brands turnover Margins in power brands (%)
Percentage contribution to total power brands revenue
Strong retail space across country, set to expand further

Plans to add 0.3msqft Total stores in the brands segment increased 3.5x from 139 in FY10 to 487 in FY13,
every year, with 10% while sqft data rose 4x to 0.5msqft for the corresponding period. ARVND has big plans
SSSG growth for its brands business and aims to add more than 200 stores this year. Its recent
acquisition of operating licences for more international apparel brands Billabong,
Nautica and Hanes will expand offerings in the premium segments. Company plans
to end FY14 with 1.6m sqft (0.8m for brands and balance 0.75m for Megamart),
compared to 1.2msqft at end-FY13, with focus on opening large format stores. It plans
to add 0.3msqft of retail space every year and expects SSSG of 8-10% in brands and
retail segment, thereby driving growth.
For any store, it takes 1.5-2 years to break even and hence profitability would increase
as outlets margins improve. With more stores, the ratio of matured stores to newer
stores would favor ARVND, thus improving margins. Even after adjusting the negative
impact of new outlets, which would be operating at a lower margin initially, strong
improvement in existing outlets would reflect on B&R divisions consolidated margin.
Due to reduction in excise duty, stabilization of cotton prices at a lower level, retail
prices of garments are declining, which would support volume growth. Also, company
would get the benefit from bulk sourcing of goods and better utilization of existing
distribution network.
6 February 2014 9
Arvind
Total stores in brands segment (ALBL) Total sq ft and revenue per sq ft
As ALBL occupies 30% space in menswear section of department stores, it gets

favorable treatment in launching new brands compared to competitors. It recently
tied up with Shopper Stop for selling its brands. US Polo is the No. 1 selling brand
across all categories in Shopper Stop a testimony of strong brand recall.
Product extension within brands to help improve presence across categories

To strengthen its position in the premium menswear segment, ARVND launched US
Polo Associated brand in April 2010, which dominated the market from launch, and
Izod in March 2010. With the launch of these together with Arrow, company
substantially strengthened its premium menswear portfolio. Arrow accounted for
~50% revenue of its branded garment sales and company enhanced its target market
by introducing sportswear and womens wear categories. Gant, the bridge to luxury
brands, also posted a growth rate of more than 100% during the year.
ARVND plans to introduce newer products across categories (sportswear, casual wear
across mens, kids and womens segment) to improve its offerings, thereby driving
growth. Company derives 84% of its revenue from men, 6% from women, 7% from
kids segment and 3% from non apparel.
Category-wise revenue composition (%)
Plans to increase
focus on kids and
womens segment
through product
extension
6 February 2014 10
Arvind
Key brand performance and strategy

Arrow: Launched stitchless shirts, Arrow wovens, leather products, purses, shoes
etc. This accelerated growth for Arrow and is expected to grow at 25% over next
two to three years.
US Polo: Company launched US Polo Kids, inner garments, footwear and leather
goods to stimulate growth.
Tommy: Will launch Hilfiger denim range, watches, shoes shortly. Has launched
Tommy Kids which has received robust response.
Flying Machine: Present in the jeans segment, expects to enter womens casual
wear, going forward.
Nautica: Management highlighted that sales in Nautica have doubled in FY14 and
expects it to be positive EBITDA in FY14.
Debenhams: Company plans to double Debenhams sales in FY14. However, the
strategy will be to make the existing two stores profitable before expanding.
NEXT: ARVND has added two stores thus taking the total number to five and has
also tied up with Shoppers Stop for shop in shop.
Hanes: In case of Hanes, it had some issues with SCM, which have been resolved.
It is seeing 50% growth in last 2 quarters. Plans to double sales and expects it to
cross INR1b in FY15E.
ARVND decides the pricing for all brands apart from Tommy and Gant. We believe that
the company, over the last two decades, has built a strong portfolio of brands across
categories, price points and scaled them to a dominant position in Indias consumption
story.
Brand portfolio ensures strong leverage across value chain

ARVND purchases 20m Having a large portfolio of brands, against running a single brand, has numerous
garments annually from advantages. Advantages begin from sourcing to sharing common administration costs
35 dedicated vendors to better bargaining while scouting for brands retail space. ARVND purchases 20m
garments annually for its brands and retail business from 35 dedicated vendors. It is
one of the few players which can take space across floors in a mall, act as an anchor
tenant due to its presence across store formats and categories.
Earlier, the company monitored the performance of each brand. But now it changed
the strategy and clubbed all brands under various categories like youth, men formal,
sportswear etc. Based on this strategy, ARVND can focus on the growth of a particular
category and improve the performance of a weak brand in this category by introducing
fast moving designs of a brand into other brands of the same variety.
Also, each store/outlet used to maintain inventory details and was responsible for
re-stocking its inventory, which reduced inventory turnover. Currently, ARVND does
central monitoring of inventory at all stores and a central team would take decisions
to transfer slow-moving inventory in a store to other stores and also re-stock inventory
across stores. Other synergies between textiles and brands segment include training,
distribution, HR and IT costs.
6 February 2014 11
Arvind
Focus shifts from B2B to B2C

B2C contribution is likely Company is actively changing its business model from B2B to B2C. In FY10, B2C
to improve to 40% from contributed 29% of the total revenue, which increased to 35% in FY13. Management
25% currently expects it to increase to 40% in next two years. In a rising cost environment, B2C will
give ARVND better pricing power compared to a B2B. B2C model will be a faster driver
of growth compared to a B2B as it will increase penetration in untapped markets and
also increase brand recognition and presence. Gauging its portfolio of brands and
presence across all segments (value, premium and luxury), a thrust on B2C will benefit
ARVND from the rising disposable income and increased spending power across all
segments and demographics of the country, and also by being a direct beneficiary of
Indias consumption story.
B2C revenue to touch 40% in next two years
Capitalizing on brand JVs

Apart from exclusive strength of the six brands discussed above, ARVND formed two
joint ventures VF Arvind Brands Pvt Ltd (VFABPL) in September 2006 and Arvind
Tommy JV. VFABPL, with ARVND and VF Mauritius holding 40% and 60% stake
respectively, was engaged in the marketing of products under the brands Lee and
Wrangler. VFABPL reported revenue of INR2,840m (ARVNDs share INR1,136m) in FY11.
In line with the terms of JV formed in September 2006, ARVND exited from the venture
in November 2011 by selling its 40% stake to VF Mauritius for a cash consideration of
INR2,570m, valuing it at ~2x sales and ~17x EV/EBITDA on trailing basis. Company
utilized the cash proceeds to repay high cost debt. The Arvind Tommy JV, with 50%
holding by each partner, is engaged in the marketing of products under the brand
Tommy Hilfiger. The JV reported revenue of INR900m in FY13. We expect the JV to post
30% CAGR over next two years.
6 February 2014 12
Arvind
Stores segment
6 February 2014 13
Arvind
Megamart metamorphoses, margins set to improve

Stores operate on very low working capital with no debtors, unpaid inventory
Megamart stores range from 2,000sqft to 65,000sqft, with large presence in south India.
It derives 40% revenue in south, 20% in west, 30% in north and 10% in east.
Private labels constitute ~40% of total sales, which the company wants to increase to
60%, thereby improving overall margins.
ARVNDs strategy is to attract customers by providing discount on brands like Arrow,
Park Avenue, VanHeusen etc (low margin) and then try to convert them to purchase
private brands like Excalibur, Newport (high margin).
Megamart works on very low working capital, with no debtors and unpaid inventory.
Hence, any improvement in margins for Megamart will help improve RoCE going forward.
Company to improve profitability decided to shut down non-profitable stores from 216
in FY12 to 197 in FY13. It also repositioned the Megamart business model as value
retail from discount store earlier in 2012 to mitigate the impact of additional excise
duty and change the customer perception, which should help improve pricing power.
To roll out Megamarts nationwide, ARVND is following the Hub and Spoke model, whereby
it would set up large format Megamarts in Tier I towns by offering over 200 brands at a
discount under one roof. This would drive brand visibility and also manage the inventory
to support other small format stores.
Company plans to set up small neighborhood stores in Tier I towns and own stores in Tier
II and Tier III towns, while setting up franchisee stores in Tier IV towns.
Value retail chain Megamarts transformation complete

ARVND operates Indias largest value retail chain, Megamart, which offers its own
and other licensed international brands at amazingly low prices and provides a retail
experience of a high-end department store. The Megamart stores range in size from
2,000 sqft to 65,000 sqft, with large presence in south India. Currently, brands like
Ruggers, Skinn, Elitus, Donuts, Karigiri, Mea CASA, Aurburn Hill, Bay Island, Colt, Leisha,
Edge, Excalibur are sold exclusively through Megamart. Almost three brands in
Megamart namely Ruggers, Elitus and Cheeroke contribute INR1b each representing
~60% of total Megamart revenue. Companys strategy is to attract customers by
providing discount on brands like Arrow, Park Avenue, VanHeusen etc (low margin)
and then try to convert them to purchase private brands like Excalibur, Newport (high
margin). Private labels constitute ~40% of total sales, which the company wants to
increase to 60%, thereby improving overall margins. This also helps to liquidate
excessive inventory of brands which are unsold through its exclusive outlets and MBO.
Repositioned as a value ARVND saw a deterioration in SSG from 20% in FY11 to negative 4% in FY13 due to
retail play v/s discount sluggish growth in retail and hence impacted its profitability. Company to improve
stores profitability decided to shut down non-profitable stores from 216 in FY12 to 197 in
FY13. It has also repositioned the Megamart business model as value retail from
discount store earlier in 2012 to mitigate the impact of additional excise duty and
change the customer perception, which should help improve pricing power. The retail
business was run by Arvind Retail Ltd, which was amalgamated with ALBL in FY13.
Megamart works on very low working capital with no debtors and unpaid inventory.
Hence, any improvement in margins for Megamart will help improve RoCE going forward.
6 February 2014 14
Arvind
Total sqft area for Megamart Total Megamart stores
Megamart expansion through Hub and Spoke model

To roll out Megamarts nationwide, ARVND is following the Hub and Spoke model,
whereby it would set up large format Megamarts in Tier I towns by offering over 200
brands at a discount under one roof, thereby driving brand visibility and also managing
the inventory to support other small format stores. Company plans to set up small
neighborhood stores in Tier I towns and own stores in Tier II and Tier III towns, while
setting up franchisee stores in Tier IV towns. The larger stores are called Big Megamart
and there are six such stores across Bangalore, Chennai, Pune and Mumbai.
Around 200 brands ARVNDs strategy in its value retail business, Megamart, is entirely different from
sold through Megamart other players in the segment such as Brand Factory and The Loot. Compared to
on Hub and Spoke model competitors, ARVND does not have to solely rely on other companies for its
merchandise. Being the owner/licensee and manufacturer of many brands, it has the
flexibility to sell slow moving/older but popular stocks of its premium collection at a
discount and attract customers, who end up getting value-for-money through the
brands owned by ARVND. This serves as a key advantage as the company uses older
but popular designs from its own premium brands to attract customers.
Arvind Stores - tapping fabric retailing space

Company has also launched its own brand of Arvind Stores to target the attractive
domestic market for premium fabric retail and custom clothing. With 100 stores up
and running, it aims to grow them to 400 stores by FY17-18. The latest addition of
departmental and specialty stores of British fashion retailers Debenhams and NEXT
will expand ARVNDs positioning from value to bridge to premium segments.
Real estate
As part of the strategy to deleverage balance sheet, management has started to
monetize large chunks of land (~400 acres) in and around Ahmedabad. ARVND has a
JV for ~150 acres of land and balance owned by it, which it plans to either monetize by
outright sale or development. Few of the land parcels were already monetized
through sales or joint ventures. In June 2010, ARVND announced a 50:50 JV with B
Safal group to develop 1m sqft in East Ahmedabad. In May 2011, it entered into a 50-
50 JV with Tata Housing to develop 134 acres of land (9m sqft) for a township in the
outskirts of western Ahmedabad. ARVND expects cash flows of ~INR1b every year
over next five to six years.
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Arvind
Garments business out of the woods

High growth on radar
Garments business is intensive both from labor and management parameters and its
success hinges on labor management. Also, it requires significant level of industrial
engineering.
Lack of discipline in working hours, excessive absenteeism and low labor productivity are
reasons why India has lagged other countries in the garments business.
Supply side constraints (both quality and in-time delivery) led to air freight and claim
payouts, high wastages and leakages in the system (on over-ordering of trims and fabrics),
which resulted in losses in this segment.
However, strategic management measures ensured a successful turnaround in this
business (reported EBITDA margin loss of 8% in FY10 and +11% in FY13).
Garments business has a firm order book visibility of six months compared to a month for
textile business. With a combined capacity of 200mmt (denim plus wovens) in the fabrics
business, garments capacity at 10m pieces is miniscule. Hence, management plans to
increase it to 25m pieces by FY15, thereby driving growth.
Management changes ensure turnaround in garments business

Restructuring All fabrics are bought to convert into garments and globally China, Bangladesh, Africa,
led to an improvement Sri Lanka and Vietnam are among the leading countries where conversion from fabric
in margins from -8% in to garments work is undertaken. While India has always been among the largest
FY10 to 11% in FY13 fabric exporters globally, it lagged in garments business. The business is not only
labor intensive but management intensive and success is contingent on how well the
labor force is managed. Also, it requires very high level of industrial engineering.
Lack of discipline on working hours, excessive absenteeism and low labor productivity
are reasons why India lagged in the garments business.
Garment business was making losses for Arvind due to following reasons:-
a. Supply side constraints (both quality and in-time delivery), resulting in air freight
and claim payouts. This is a rare phenomena now.
b. High wastages and leakages in system due to over-ordering of trims and fabrics.
c. Lack of customer confidence due to inconsistent performance and hence struggle
for full order book. Now company has significant visibility on orders which helps
in good planning and execution.
d. Competition in price from neighbouring countries. With devaluation of Indian
currency, ARVND is quite competitive.
However, appropriate management changes have ensured successful turnaround

in this business. These measures aided the garments segment improve margins
from operating losses of 8% in FY10 to 11% margins in FY13.
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Arvind
Volume break-up category-wise Garment- EBITDA margins
Garments segment next step is to achieve high growth

Plans to increase capacity High degree of emphasis on verticals is possible in the textile business, which can be
from 10m pieces to 25m achieved by converting a larger proportion of fabric revenue into garment revenue.
Forward integration will ensure greater connect with the end consumer and provide
greater order book visibility and improved margins. Garments segment has a much
better return on capital profile than fabrics, with asset turnover standing at 3x, against
1x for fabrics. Garments business has firm order book visibility of six months, against
a month for the textile business. Further, as garment is the last link in the supply
chain, client loyalty to high quality suppliers like ARVND is higher. With a combined
capacity of 200mmt (denim plus wovens) in the fabrics business, garments capacity at
just 10m pieces is miniscule. Management plans to increase it to 25m by FY15, thereby
driving RoCE higher for overall textile segment.
Garment capacity (mmt) Garment capacity utilization
Garment realization (INR/piece)
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Wovens to be largest revenue segment in FY16E

High growth coupled with strong profitability to continue going forward
Wovens business opportunity is at least 5x that denim offers. It is less competitive and
more profitable due to the high complexity levels required at each stage of manufacturing.
Scope for value addition too is much higher in the wovens segment as it begins at the
yarn level, translating into superior realization and margins.
Domestically, company has more than 1,000 dealers and 500-700 wholesalers through
which it sells products.
Indian brands buy ~50-60% of their wovens requirement from ARVND, which is a testimony
of quality and brand recall its wovens possess, thereby leading to higher pricing power.
With change in focus towards wovens, revenue from this business has substantially scaled
up over the last five years from being just 41% of denim revenue in FY08 to 93% in
FY13.
Due to the strong growth, we expect wovens to be the largest revenue segment in FY15
and overtake denims in turnover and profitability.
Wovens business opportunity is at least 5x denim

Wovens market is 5x of ARVND has historically and largely focused on the denim business. However, over
denim market the past five years, focus has substantially shifted on other high potential textile sub-
markets. According to the management, the global wovens market opportunity is at
least 5x compared to denim. Logically, each person has at least 5x the number of
shirts compared to denim jeans. Also, the wovens market is less competitive and
more profitable than denims due to high complexity levels required at each stage of
manufacturing, apart from the requirement to produce extensive and differentiated
designs (ARVND has 15 designers globally to capture the trends). Further, scope for
value addition too is much higher in the wovens segment as it begins at the yarn
level. Greater value addition translates into superior realization and margins and the
management is focused on this objective.
Woven revenue as a proportion of denim revenue Woven installed capacity (mmt)
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Measured strategy for capacity expansion

45% of yarn is in-house, ARVND employs a measured strategy for capacity expansion in the wovens segment.
25% is outsourced and Typically, it creates a market for the products, outsources it completely in the initial
the balance is purchased phase of contract, ensures there is stability in the order book over the next three to
from open market six months and then backward integrates to create capacity. This ensures there is no
idle capacity and every rupee spent on capex goes in the right direction. As evident
from the chart below, even as production and sales have multiplied manifold over
the last five years, capacity utilization has averaged 90% and is on an upward trajectory.
Currently, 45% of yarn production is in-house, 25% is outsourced through tie-up with
large yarn manufacturers and balance 25-30% is kept open to be bought from the
market. Overall, this measured expansion strategy in our view is healthy for long
term capital efficiency of the company, thus helping to keep a lid on debt levels.
Exports contribute 25% of woven volumes (%) Woven quantity sold and capacity utilization trend
Strong domestic distribution, INR depreciation makes exports more

attractive
Exports contribute Domestically, ARVND has more than 1,000 dealers and 500-700 wholesalers through
35% of revenue which it sells products. Capacity is fungible among shirts and khakis and margins are
similar in both segments. Shirtings contribute 60% and khakis contribute 40% to wovens
revenue. ARVND is a leader in shirtings market on the domestic side. Majority of the
revenue in this segment are domestic at 65% (22% contribution from company store
and MBO), while exports contribute 35% to revenue. Indian brands buy ~50-60% of
their wovens requirements from ARVND, a testimony of quality and brand recall its
wovens possess, thereby leading to higher pricing power.
ARVND has 1,000 dealers Wovens business witnessed a strong growth over FY09-13, posting a CAGR of 37% in
and 500-700 wholesalers revenue terms, from INR2.98b in FY08 to INR14.3b in FY13, driven by 26% volume
CAGR over FY09-13. With increase in export contribution, revenue for the wovens
business has substantially scaled up over the last five years from being just 41% of
denim revenue in FY08 to 93% in FY13. We expect wovens volumes sold to increase
from 87mmt in FY13 to 122mmt in FY16E, with stable margins of 19%. Thus, we expect
wovens to be the largest revenue segment in FY15E, overtaking denims in terms of
turnover and profitability.
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Realization (INR m)
Realization
Woven margins (%)
6 February 2014 20
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Focus on high value denim segment to drive profitability

Business is better placed compared to past
ARVND's focus has been to move towards higher value-added products in denim, thereby
ensuring better realizations and margins. Around 70% of its denim products are value-
added and 30% being lower end commoditized ones.
With no increase in capacity in the last five years, growth has primarily come from an
increase in capacity utilization from 59% in FY08 to 83% in FY13.
In FY13, the Indian market saw massive capacity addition of 250mmt, with most additions
being in the lower end of denim market. Thus, impact on ARVND's existing business and
margins should be marginal.
As the company is operating at 100% capacity utilization, it plans to add a new batch (12m
mt) of denim capacity in FY15, to take the capacity from current levels of 108mmt to
120mmt in FY15.
Business is better placed, compared to the past, led by levers like INR depreciation, wage
arbitrage and thus would have a price advantage of 10-11% against Chinese products of
similar quality.
Post the slowdown in global demand in FY08 and a currency rate of USD/INR40 which
made exports unviable, ARVND's management reduced the denim capacity from 120mmt
to 108mmt.
Consolidating current capacity; no capex undertaken for past 5 years

ARVND's focus in the past five years was to move towards higher value-added products
in denim, thus ensuring better realizations and margins. Around 70% of its denim
products are value-added and 30% being lower-end commoditized ones. On increased
proportion of value-added products over the past five years, denim realizations grew
aggressively from INR102/mtr in FY08 to INR173/mtr in FY13, with margins rising from
12% in FY08 to 19% in FY13. Post the global demand slowdown in FY08 and a currency
rate of USD/INR40 which made exports unviable, ARVND's management decided to
reduce the denim capacity from 120mmt to 108mmt. Managements strategy has been
to consolidate capacities in the denim business, ramp up capacity utilization (increased
Plans to increase denim from 59% in FY08 to 83% in FY13), with focus on value-added products within denims
capacity from 108mmt to with different finishing, coating, colors, stretch etc. Globally, there are not more than
120mmt in FY15. RoCE at 15 mills that can supply quality value-added denims to brands, thus creating an edge
28% for FY13 for ARVND, compared to Indian competitors.
In FY13, the Indian market saw massive capacity additions of 250mmt, resulting in a
situation of over-supply. With most additions being in the lower end of denim market,
impact on ARVNDs existing business and margins should be marginal. As the company
is operating at 100% capacity utilization, it plans to add a new batch (12mmt) of denim
capacity in FY15, to take the capacity from current levels of 108mmt to 120mmt in
FY15. Denims marked 28% RoCE in FY13 due to higher margins in the segment and no
major capex in the last five years. We note managements focus to drive efficiencies
and profitability in the denim business and believe that capex intensity will reduce
(with lower aggression by management for this segment), thereby maintaining RoCE
at higher levels.
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Denim capacity (mmt) and capacity utilization (%) Denim sold (mmt)
Higher focus on value-added products in denim ensures better realizations,

margins
70% of denim is Denims range from INR100/mtr to INR500/mtr and depend on the fabrics quality.
value-added Value addition in denims happens at multiple levels from finishing to coloring,
excel fiber, design, wash downs etc. ARVND has been moving up the value chain by
focusing on higher value-added denims over the past few years. Now, 70% of its
denims are value-added products, with the rest 30% being lower end commoditized
products. Due to an increase in proportion of value-added products over last five
years, denim realizations have been growing aggressively from INR102/mtr in FY08 to
INR173/mtr in FY13, with margins rising from 12% in FY08 to 19% in FY13. Competing
nations like China and Bangladesh have traditionally been stronger on the lower end
of the denim market. Thus, ARVNDs strategy to focus on value-added denims aids in
better pricing power and maintain margins at 19-20% in this segment.
Denim is not completely a commodity business. Customers typically scout for players
who have demonstrated abilities to innovate with new designs and a consistent track
record on quality and time lines. We expect value-addition trends in denim to sustain,
thus driving realizations higher from INR169/mtr in FY13 to INR196/mtr in FY16E, with
stable margins of 18-19%.
Denim realization /mtr (INR) Denim margins (%)
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Exports continue to contribute 40% of denim volumes
Denim business has a diversified and stable client base

40% of Denim revenue ARVND has a diversified client base of export customers and local market for its
comes from exports denim business. While direct exports constitute 40% of the denim business, almost
65-70% of its denim sales land out of India. The balance 60% coming from domestic
segment includes sales to Indian brands and other large distributors. ARVNDs export
business has many marquee clients with limited client concentration. Its top three
customers include GAP, Levis, Lee which form less than 30% of the exports business.
Most orders commit firm quantity for a month and indicative quantity for three months.
Price changes are made on a quarterly basis, thus providing order book visibility and
margin cushion. Company changed its hedging policy from one year forward to three
months hedging to the extent of order inflow. Hence, we believe the impact of rupee
depreciation from USD/INR45 to USD/INR62 will start to reflect significantly in terms
of higher realization and better margins (100-150bp) in 4QFY14E and FY15E.
Top 3 clients on the exports side (% of denim revenues)
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Key risks
Slowdown in global economy
ARVND is one of the largest exporter of textiles from India. Textile demand is highly
dependent on the macro-economic environment in the developed countries and
supply-demand scenario as was seen in the last recession. Also, domestic slowdown,
lower job prospects and increase in interest rate will have a negative impact on brand
and retail business. A prolonged period of slow growth could impact discretionary
consumption, akin to branded apparel, in the near to medium term.
Sharp increase in cotton prices

Cotton is the largest raw material and accounts for almost 35% of revenue or 42% of
cost -- both directly and indirectly (as the company purchases cotton yarn also). Large
part of profitability last year was from increase in cotton prices, which ARVND and
other textile players were able to pass on due to strong
demand. A spike in cotton price could impact margins. However, given the improving
demand environment and ARVNDs move towards higher value-added fabrics,
especially denim, its ability to pass on a cost hike is higher than in the past.
Appreciation in INR
ARVND derives significant revenue from exports and has been one of the major
beneficiaries of INR depreciation. Hence, any significant appreciation in INR will impact
realizations and revenue growth for the company. However, with INR appreciation,
raw material cost is likely to decline, thereby benefiting in terms of margins.
Execution risk in brands, retail

ARVND plans to introduce new brands and expand its store network significantly
over the next two to three years. This involves high execution risk as new stores can
take some time to break even. Also, its earlier chain of stores, Megamart, has not
been very successful.
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Key management profile

Mr Sanjay S Lalbhai, Chairman & MD
Mr Sanjay S Lalbhai, 58 years, is the Chairman and Managing Director of the company.
He is a science graduate with a Masters degree in business management and has
been associated with ARVND for more than 33 years.
Mr Jayesh Shah, Executive Director & CFO

Mr Jayesh K Shah, 52 years, is the Wholetime Director with the designation of Director
and Chief Financial Officer of the company. He is a commerce graduate and a chartered
accountant and has been with the company since July 1, 1993. He has a distinguished
academic career and extensive administrative, financial, regulatory and managerial
expertise. He also holds directorships in many other companies.
Mr Punit Lalbhai, Executive Director

Mr Punit Lalbhai, 30 years, is an MBA from INSEAD (France) specializing in strategy
and general management, along with post graduate degree in masters of
environmental science from Yale University, and a bachelors degree in science
(conservation biology) from University of California, US.
Ms Renuka Ramnath, Non-Executive Independent Director

Ms Renuka Ramnath is the Founder and Managing Director of Multiples Alternate
Asset Management Pvt Ltd which seeks to manage circa USD450m of Indian and
international capital. In her career spanning nearly two-and-a-half decades in the
Indian financial sector, Ms Ramnath has been involved with building several businesses
from scratch in the ICICI Group, which include investment banking, structured finance
and e-commerce in the 1990s and private equity in 2000.
Mr J Suresh, MD & CEO, Arvind Brands & Retail

He is MD & CEO of the Arvind Groups Brands & Retail Companies Arvind Lifestyle
Brands Ltd and Arvind Retail Ltd. He strengthened the Lifestyle Brands portfolio of
ARVND and also aggressively grew Megamart as a leading value retail chain in
apparels. Prior to joining ARVND, Mr Suresh has held several senior positions during
his 18-year-old stint in Hindustan Unilever Ltd and served as a member of the
management committee of the foods and beverages business.
Mr Aamir Akhtar, CEO Denim (Fabrics)

He has 18 years of work experience in the textile industry. His current and previous
assignments were with two of the most respectable and large sized textile companies
of Asia Arvind Mills Ltd and Reliance Industries Ltd.
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Financial outlook
Revenue to post 20% CAGR over FY14-16E
We expect ARVNDs revenue to post 20% CAGR over FY14-16E from INR66,519m to
INR95,506m. This will be led by brands and retail business, which is expected to clock
32% CAGR over FY14-16E.
Brand and retail business to drive revenue growth
EBITDA to post 24.3% CAGR, margins improve by 100bp over FY14-16E

We expect EBITDA to clock 24.3% CAGR over FY14-16E from INR9,273m to INR14,335m,
on the back of strong revenue growth of 22% and 200bp improvement in EBITDA
margin from 14% in FY14 to 15% in FY16. We expect textile margins to be stable but
expect a sharp improvement in brands margin from 5.4% in FY13 to 11% in FY16E.
EBITDA margins to improve led by brand and retail segment
PAT expected to clock 31% CAGR

We expect PAT to clock 31% CAGR over FY14-16E from INR3,385m to INR5,765m, led by
strong operating performance. However, tax rates are expected to increase from 0%
in FY13 to 25% in FY16E, thereby leading to lower PAT growth, compared to EBITDA
growth.
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Strong PAT growth (INR m)
RoCE, RoE at decade high, warrant re-rating

ARVNDs return ratios, on the back of a change in business model in favor of brands,
have improved dramatically over the past few years. We expect return ratios to improve
further over FY14-16E, from the levels of 14.5% in FY13 to ~19% in FY16E, and RoE to
improve from 14.2% in FY14 to 18.4% in FY16E.
RoCE at a decade year high (%)
RoE at a decade year high (%)
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Debt-equity on a steady decline, see stability at current levels

Companys debt-equity has seen a continuous improvement over the last five years,
declining from 2.2x in FY09 to 1.1x in FY13 . We expect debt-equity to remain ~1x by
FY16E due to modest increase in working capital on high growth in brands segment in
the initial years. Brands have net working capital cycle of four months, with textiles at
around three months.
Debt-equity ratio (x)
Debt-EBITDA ratio (x)
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Valuation and view initiate coverage with a Buy

ROCE and ROE at a decade high warranting re rating
We expect ARVNDs revenue to post 20% CAGR over FY14-15E complimented by 100bp
of margin expansion due to improvement in brands and retail segment. Return ratios are
expected to improve further over FY14-16E with ROCE from levels of 14.5% in FY14 to
~19% in FY16E and RoE to improve from 14.2% in FY14 to 18.4% in FY16E driven by
improvement in margins and reduction in capex intensity in the business. We believe
that with RoCE and RoE at a decade high and increased contribution from brands segment,
capex intensity over the long term will reduce, warranting a re-rating. We value ARVND
at 6x FY16E EV/EBITDA, in line with 5 year historical average multiple of 6.4x 1 year
forward EV/EBITDA and arrive at a target price of INR215. Initiate coverage with a 'Buy'
EV/EBITDA valuation
EBITDA- FY16E 14,335
Target Multiple- 6x 6.0
Target Enterprise Value 86,013
Less:- Debt 33,108
Add:- Cash 2,624
Target Mcap 55,529
No of shares 258.0
Value per share 215
ARVND 1 year forward EV/EBITDA
Peer global comparison

International MCap Sales PAT RoE EBITDA P/E EV/EBITDA
(USD m) 5yr 5yr (%) margins (%) (x) (x)
CAGR % CAGR % CY14E CY15E CY14E CY15E CY14E CY15E CY14E CY15E
Arvind 616 14.6 57.0 15.9 18.4 14.5 15.0 9.0 6.7 5.9 4.8
Shenzhou International (China) 4,818 12.7 12.7 20.0 20.7 26.4 26.0 13.2 11.1 8.8 7.6
Texwinca Holdings (China) 1,317 -4.7 1.8 14.4 16.3 10.2 11.7 12.0 10.1 6.2 5.2
Pacific Textiles Holdings (China) 2,052 8.9 11.0 29.6 32.2 20.7 20.4 13.4 11.9 7.7 6.5
6 February 2014 29
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Annexure: Segment description

Textile business
ARVND is the largest textile fabric player in the country, with an overall fabric capacity
of over 200m mtrs. It enjoys such brand equity in the textile fabric business that its
products are considered as a benchmark of quality in the industry. ARVND has
continuously focused on research and development for innovating new products,
improving processes and cost reduction by which it has developed various methods
which make it possible to use types and quality of cotton to reduce cost without
compromising on quality. Company has two state-of-the-art fabric manufacturing
facilities in Naroda and Santej in Gujarat.
Denim
ARVND was the first company to introduce denim fabric in India in 1986 and it has
been the market leader for the product ever since. Currently, it is one of the largest
denim producers in India and the world, with a capacity of ~108m mtrs. Company is a
preferred supplier of denim fabric to one of the most reputed denim brands in the
world like Miss Sixty, Diesel, Replay, Armani Exchange, Ann Taylor, Hugo Boss, Calvin
Klein, Polo Ralph, A & F, Jack & Jones, Levis, Lee, Wrangler, Gap, Zara, Esprit, H & M and
Quick Silver. In FY13, ARVND sold over 89m mtrs of denim fabric of which 40% was
exported and 60% was sold in the domestic markets. Almost 70% of ARVNDs denim is
exported (50% directly and balance 20% indirectly). All products are designed and
modeled on the basis of expert design inputs coming from designers based in India,
Japan, Italy and the US.
Denim is a capital intensive business and company manufactures ~18,000 different

types of denim for leading international and national brands. Denim can only be
manufactured from cotton (cannot mix with yarn) and thus more vulnerable to
fluctuation in cotton prices. Over the years, revenue contribution from denim in
textile business declined from 65% in FY07 to 30% currently.
ARVND has a global market share of 2% in denim and domestic market share of 13%.
It supplies ~65% of its production to trade channels, while balance 35% is supplied to
the branded garment players. It has ~50% market share with leading domestic and
international brands in India. Company sells products starting from INR140-500 per
metre. It manufactures denim from its factory in Naroda, Ahmedabad and Satej in
Ahmedabad.
Woven fabric
ARVND with a capacity of over 90m mtrs is the largest player of woven fabric in the
country. Company sells shirting and bottom weight fabrics (khakis) within wovens
segment, contributing 60% and 40% of wovens revenue respectively. With constant
research, innovation and an extensive team of designers it has been able to maintain
a leading and a trend setting position in the industry. In addition to cotton, ARVND
works with a variety of fibres including modal, tencel, excel, viscose, bemberg, lycra,
silk, linen, polyester and nylon. It has one of the best customer base as it supplies to
brands like Banana Republic, Brooks Brothers, Ann Taylor, Hugo Boss, Calvin Klein,
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Polo Ralph, Eddie Bauer, Express, J Crew, Louis Phillip, Van Heusen, Arrow, Color Plus,
Esprit, Paul Smith and Park Avenue. Exports contribute 40% of wovens segment
revenue, with average order size of 20,000mtrs. Price range for wovens starts from
INR130-300. It has ~1,000 dealers, 500 wholesalers and 1,000 retailers.
Voiles
An uncontested market leader in the manufacture of voiles, company continues to
manufacture the traditional fabric for both domestic and international markets. With
a production capacity of 36m mtrs per annum and market share of 40%, its voiles are
primarily used as blouse material and are sold in the domestic market through a
network of ~150 dealers, reaching over 5,000 retail outlets throughout India. In this
business, shades and color palette is a vital driver and ARVND can boast of offering
one of the largest shade collections of the best quality in the industry. High quality
Swiss voiles are exported to Switzerland, Sri Lanka and countries in the Middle East.
Entire revenue is derived from BTC segment.
Knits
The knits vertical has a fabric dyeing capacity of 5,000 tons per annum and yarn dyeing
capacity of 1,800 tons per annum. It has the ability to process both tubular and open-
width fabrics and offers specialty finishes like mercerization, singeing and various
forms of brushing and peaching. Entire revenue is derived from BTC. This segment
was in EBITDA loss till FY11 and has turned profitable with 8-10% EBITDA margin, with
improved focus from management.
Garments
ARVND has successfully established as a one-stop shop for apparel solutions catering
to an array of national and international clients with capacity of 7.2m pieces of jeans
per annum in bootms, 6m pieces per annum in formal and casual tops and 3.6m pieces
per annum in knit tops. Some of its clients include Gap Inc, Patagonia, Tommy Hilfiger,
Quicksilver, Brooks Brothers, Silver Jeans, Calvin Klein, FCUK, Pull & Bear, Jack & Jones,
Energie, Esprit, S.Oliver, Mexx, Sisley, Benetton and Coin.
Company has two garment units in Bangalore where it manufactures jeans, shirts and
knitted garments, of which 90% is exported. This business is highly labor intensive
(labor component more than 20% of sales and employs ~40% of its total labor force)
and is prone to risks of inefficiencies and delay in order execution. In FY10, this division
sold 18.2m pieces of garments, achieving a turnover of INR5,060m. Due to order
execution delays, ARVND made an EBITDA loss of INR450m in FY10. With increased
management focus and improvement in demand, margins in garments business stand
at 11%. Company derives 70% of its export revenue from the US and balance from UK.
It has 8,000 employees in its plant, with a turnaround time of 45 days.
Arvind Lifestyle Brands and Arvind Retail

In FY10, ARVND demerged its brands and retail business into two wholly-owned
subsidiary companies, Arvind Lifestyle Brands Ltd (ALBL) and Arvind Retail Ltd (ARL).
Both are engaged in the business of retailing branded apparel. Currently, ARVND has
a portfolio of 29 brands, making it the pioneer in the branded retail business in India.
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It also owns Indias fastest growing value retail chain Megamart under Arvind Retail
Ltd. One of the major benefits that ARVND possesses is that its brands portfolio
straddles across all segments of the market value, premium and luxury. Thus, it is
able to cater to both the classes and masses.
Arvind Lifestyle Brands

ARVND is among a few organizations worldwide, with a portfolio of brands that are as
distinctive and relevant across diverse consumers.
Brands are divided into two parts - owned and licensed

ARVND entered the brand business very early through its JVs with VF Corp, USA
for selling Lee/Wrangler brands in India. It sells brands through exclusive brand
outlets (franchisee or own), multi branded outlets and key accounts. In brands
business, it has three categories: own/licensed/JVs.
Own brands: It owns brands like Flying Machine, Excalibur, Newport etc. It has
brands across various customer segments but only few have been able to create
significant brand awareness.
Licensed brands: ARVND has exclusive licence to sell global brands (Arrow, Izod,
US Polo) in India and few other countries. Licence period is generally for 15-20
years, with milestone attached to it. Going forward, companys strategy is to bring
more foreign brands in India than develop own brands to fill gaps in its portfolio.
On licensed brands, ARVND pays ~5% of revenue as licence fee.
The expanse of ARVNDs landscape is spread across the Indian market with ~273
standalone brand stores of which 80% were company operated in addition to 975
counters selling through key accounts and multi brand outlets across India. Company
currently has a retail space of ~303,363 sqft.
Arvind Retail
ARVND operates Indias largest value retail chain - Megamart. The format offers a
unique and differentiated proposition to consumers. Megamart, value retail business,
sells seconds and season-old inventory of major brands. The stores range in size from
2,000 sqft to 65,000 sqft. It has a wide offering of over 200 brands under a roof, which
are available at attractive discounts all round the year. ARVND currently has 219 stores
and is targeting to add 60 stores per year. Company has stores in two formats small
format stores and large format. ARVND uses a Hub and Spoke model for opening
stores, where it opens a couple of large format stores in Tier I cities. It operates self-
operated small format stores in Tier I and Tier II cities and franchisee operated stores
in Tier III and IV towns.
(i) Small format stores: These are stores with a size of 3,000-6,000 sq ft. Currently,
ARVND has ~213 small format stores, of which ~80% are company operated and
the rest 20% stores are franchisee operated. EBITDA margin in small format stores
is 8-9%.
(ii) Large format stores: These are stores with a size of 40,000-50,000 sqft and offer a
range of ~200 brands. The larger stores are called Big Megamart and there are six
6 February 2014 32
Arvind
such stores across Bangalore, Chennai, Pune and Mumbai. The ratio of sales of
ARVND brands (owned and licensed) to outside brands in these stores is 20:80.
ARVND currently has six large format stores. EBITDA margin hovers ~6-7% for
these stores. Company plans to add two to three large format stores every year.
The brands sold exclusively in Megamart include Ruggers, Skinn, Elitus, Donuts,
Karigari, Mea Casa, Auburn Hill, Bay Island, Colt, Leisha, Edge.
Arvind Store
Considering the huge opportunity in the fabric retailing business, ARVND introduced
The Arvind Store, a unique concept in fabrics and apparel retail in 2009. The store
brings together, under one roof, the best that ARVND has to offer. It is a convergence
of three of ARVNDs strongest capabilities, the best of fabrics from its textiles division,
leading apparel brands from brands and bespoke styling solutions based on the latest
garment styles from Arvind Studios. The store offers over 1,000 fabric styles across
shirting, suiting and denim, leading apparel brands such as Arrow, US Polo & Flying
Machine. In just two years, ARVND has opened over 850 shops in shops. It is also
planning to open over 100 exclusive Arvind Stores in the next three years on franchisee
basis. Currently, company has 23 stores (6 franchisee operated, rest company) across
South India, with revenue per sqft per day at ~INR40-50.
Joint ventures
VF Arvind Brands Pvt Ltd (VFABL): This is a 60:40 JV between VF Corp of the US and
Arvind Ltd. The JV has an exclusive licence to sell two brands, Lee and Wrangler, in
India. In FY11, the JV posted revenue of INR2,840m, with ARVNDs share at INR1,140m.
Arvind Murjani Brands Pvt Ltd (AMBPL): This is a 50:50 JV between Murjani group and
Arvind Ltd. The JV has an exclusive licence to sell the brand Tommy Hilfiger across
India. In FY11, the JV posted revenue of INR800m, with ARVNDs share at INR400m.
Anup Engineering - 90.8% subsidiary

Anup Engineering was a BIFR company bought by ARVND in 1997. Anup operates in
the heavy fabrication industry and is one of the very few companies in the country
which has integrated fabrication facilities under one roof. Range of products includes
process equipments, pressure vessels, heat exchangers, columns, centrifuges,
chlorine tonners and vessels, expansion bellows etc. In FY13, company posted a
turnover of INR735m and an EBITDA margin of ~20%.
6 February 2014 33
Arvind
Industry dynamics
Global textile industry - growth shifting to emerging countries

The global textile and apparel (T&A) trade is expected to grow to USD1t by 2020 from
USD602b in 2010, a CAGR of 5%. However, with growth slowing down in developed
markets, the dynamics of global fashion market are expected to change dramatically.
Emerging economies namely Brazil, Russia, India and China along with a few other
Southeast Asian countries are seen as the major growth drivers. Also, in the recent
past, global apparel markets saw a paradigm shift towards increased product
differentiation and catering to a diverse, aware and demanding customer base.
Global textile and apparel market (INR b)
Is China losing competitive advantage?

China is the leading source base for textile and apparel, with a majority share of ~35%
of global exports. Textile production has shifted from western countries to China and
India and these have become production hubs. China is a leader in textile production
with total industry size of USD351b, of which domestic segment stood at USD135b
and exports stood at USD216b. Chinas export of textile and clothing has increased
from USD28.3b (13.3% of world trade) in 1990 to USD216b (35.9% of world trade) in
2010. It garnered almost entire share that EU lost during this period.
6 February 2014 34
Arvind
Global textile trade dominated by China
Despite the strengths that China possesses in the apparel sector, inflation and labor
supply challenges have hampered the sectors global competitiveness. Some of the
key challenges are:
Increase in labor cost: Chinese average wage cost is about USD193 per month
compared to India which is ~USD135. Wage inflation in China is ~18%.
Currency appreciation: Appreciation in yuan and depreciation of INR by 20.7%
makes India more competitive
Ageing population: Increase in ageing population and one child policy will cause
wage inflation to rise at a faster pace in the future.
Hence, it may not be prudent for those sourcing apparel to put all their eggs in the
Chinese basket. There are many uncertainties involved in sourcing and importing
clothing, relating not only to economic factors as variations in cotton production which
affect the pricing of inputs but also political factors such as the imposition of safeguard
quotas on Chinese textiles and apparel exports by the US and EU in 2005. Thus, with a
long term risk management view, it would be prudent for even those who sourced
large amounts of apparel from China to cultivate alternative suppliers.
Wages and efficiency - advantage India

The textile and apparel industry in India benefits from a large pool of skilled workers
at less wage rates compared to rest of the world. Though wages across the globe are
consistently increasing, wage rate growth in India is still lower than several other
textile and apparel exporting nations.
Apparel factory workers monthly wage (USD)

Country 2009 2010 2011
China 173 184 193
India 121 129 135
Thailand 295 314 329
Philippines 379 403 423
Indonesia 148 157 165
6 February 2014 35
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Comparative costing for exports to US

Garment made by Country India Bangladesh China Pakistan Cambodia
Fabric Source India China China Pakistan China
Packaging per Garment
Plastic Polybag 0.02 0.02 0.02 0.02 0.02
Cardboard Box 0.01 0.01 0.01 0.01 0.01
Total Material Cost per Garment 1.84 1.89 1.83 1.80 1.88
Labour Hour USD Cost per Garment 0.60 0.30 0.90 0.50 0.47
SAM for Cut, Make and Finish 6.12 6.12 6.12 6.12 6.12
Efficiency (%) 60 55 65 60 55
Labor Cost per Garment 0.20 0.14 0.25 0.18 0.19
Rejections 0.06 0.08 0.04 0.06 0.06
Manufacturing Overheads per Garment 0.07 0.06 0.09 0.05 0.07
Inclusive of Electricity, Rent, Indirect Labor
Sales and Admin Cost (5% on Labor) 0.01 0.007 0.01 0.01 0.01
Total Cost per Garment - Fabric, Labor, Overheads (USD)
Sales and Administration 2.19 2.18 2.23 2.11 2.20
Factory Gate Cost per Garment 2.18 2.18 2.23 2.11 2.20
Source: USAID report, Technopak analysis
In the apparel industry, efficiency is considered to be the key indicator to measure

any manufacturing units performance. Technopak analysis suggests that countries
like China, India and Pakistan are producing goods at a higher rate of efficiency,
compared to Bangladesh or Vietnam, thus giving edge to a country like India.
Efficiency analysis (%)
Efficiency is a measure of output compared to a particular input (factor of production) or a

combination of all the factors of production. In the context of apparel industry, it is the ratio of
total work produced in minutes against the total minutes spent as a percentage.
Indian textile at an inflexion point

Indias textile and apparel trade witnessed a quantum leap in the post quota era.
Country is now the second largest producer of cotton, textiles and garments after
China and is the only textile manufacturer with a cotton surplus. The trade is also the
second largest employer in India after agriculture direct employment to 35m people
and indirect employment to 50m people and constitutes ~12% of Indias exports and
~4% to GDP. India is among the few countries in the world which has a presence across
the textile value chain and the countrys investment made in the textile sector post
quota regime is INR2,080b.
6 February 2014 36
Arvind
The market size of Indian textile and apparel industry is estimated at USD96b, which
includes domestic consumption of USD63b and an export value of ~USD33b in 2013.
Within domestic consumption, apparel retail contributes ~ USD45b, technical textiles
~USD14b and home textiles contributes ~USD4b. The domestic market has grown at a
yearly rate of 12% over last five years. In exports, the market growth has been 8% in
last five years and presently the share of textile and apparel in total export value
stands at 60% and 40% respectively. Apparel trade from India stood at USD13b in 2012
and has the potential of growing to ~USD50b by 2020.
Indian textile and apparel market snapshot
1%
R of 1
CAG
Indian textile and apparel sector market size (CY12)
Source: CII
Domestic apparel market

The present apparel market size of India is estimated to be USD45b and it has registered
a robust growth of 12% from 2007 to 2012 despite global uncertainties and slack
demand. The market segmentation of Indian apparel market shows a different trend,
with the fact that it is the only major apparel market where womens wear is not the
largest category in value terms. The reason behind this anomaly is the fact that
womens wear in India is largely dominated by traditional, unbranded dresses, which
in value terms are lower than mens wear market, despite having larger volumes
overall.
6 February 2014 37
Arvind
The apparel market in India is set to experience rapid growth going forward as
consumers are giving preference to recent trends and styles in fashion and are willing
to spend more on apparels, with disposable income increasing. Urban area dominated
apparel market in India and had a share of 60% in 2012. By 2016, rural area is expected
to grow rapidly as several companies are targeting rural population.
Growth of Indian apparel market (USD b) Apparel market in India 2012-16 (USD b)
Apparel market in India by product type segmentation 2012-16 Apparel market in India 2012-16 (%)
6 February 2014 38
Arvind
Readymade garments
Readymade garments were the largest segment in Indian textile sector for export
proceeds as in 9MFY13. The segment accounted for 39% of textile export earnings.
During 2008-12, export earnings from readymade garments posted a CAGR of 14%.
However, in FY13, the segment recorded YoY export growth of 8%. As in 9MFY13,
readymade garments (RMG) made from cotton accounted for 68% of total export
earnings, followed by garments made from man-made fibre, with a contribution of
20%.
Ready-made garment exports by segments (9MFY13, %)
Export market
India is the fifth largest exporter of textile and apparels in the world, with a share of
~5% of the global trade. It exported textile and apparel goods worth USD33b in 2012.
Exports posted a CAGR of more than 8% in the last five years.
Growth of India export markets (USD b)
Category-wise break-up of exports (USD b)

6 February 2014 39
Arvind
India evolving as export hub

Indian textile and apparel exports have been steadily growing over the years, from a
cumulative figure of USD11.5b in 2000 to more than USD33b in 2012. Indias domestic
demand has been growing at a fast pace. The size of domestic consumption in 2012
stood at USD63b, against an export basket of USD33b. This growth also accounts for
continuous shift from an unorganized to an organized industry. This in itself is a big
opportunity for the future and provides a cushion against global turbulences, thus
making a case to build up and leverage capacities.
Also, if the global textile and apparel trade is poised to reach ~USD800b by 2015 and
~USD1t by 2020 and manufacturing is expected to shift further from the West to the
East (read Asia), then the region is probably headed for a textile revolution. If China
has to reduce its exposure to the sector due to a multitude of factors, space for the
sector has to be created in countries like India, Pakistan, Bangladesh, Indonesia,
Vietnam and Cambodia. Other than China, only India and Pakistan have relative supply
chain integration from fiber to garment. All other countries are mostly dependent on
imports.
In global comparison, India has a stable position among the top textile exporters,
with its share rising from 3.3% in 2005 to 4.4% in 2011. The growth, however, is
substantially below the expansion of China. As world textile trade doubled in 2001-
11, Chinas share rose from 13.8% to 31.8%. Nevertheless, Chinas export is expected
to decelerate due to rising per capita income, huge domestic consumption and stronger
currency. Among the EU countries, only Germany and Italy performed better than
India, the latter losing share in recent years.
World textile export shares (%) India and China in world textile export (%)
6 February 2014 40
Arvind
Top exporters & importers of textiles and clothing

1990 1995 2000 2005 2010
Value % Value % Value % Value % Value %
Top Exporters
China 28.3 13.3 49.3 15.9 78.0 21.9 132.8 27.5 216.2 35.9
EU - 27 91.6 43.2 110.7 35.7 101.0 28.4 148.3 30.7 166.0 27.6
India 4.7 2.2 8.5 2.7 10.2 2.9 16.1 3.3 24.0 4.0
Turkey 4.8 2.3 8.7 2.8 10.2 2.9 18.9 3.9 22.0 3.7
USA 7.6 3.6 14.0 4.5 19.6 5.5 17.4 3.6 17.0 2.8
Others 75.0 35.4 118.9 38.3 137.0 38.5 149.5 31.0 157.0 26.1
Total 212.0 100.0 310.1 100.0 356.0 100.0 483.0 100.0 602.2 100.0
Top Importers
EU - 27 107.3 50.6 131.4 42.4 129.4 36.3 194.5 40.3 237.0 39.4
USA 33.7 15.9 51.8 16.7 82.4 23.1 102.8 21.3 105.0 17.4
Japan 12.8 6.0 24.7 8.0 24.7 6.9 28.4 5.9 34.0 5.6
China 5.3 2.5 11.9 3.8 16.2 4.6 17.5 3.6 20.0 3.3
Canada 4.7 2.2 5.9 1.9 7.8 2.2 10.3 2.1 12.0 2.0
Russia 0.0 0.0 1.4 0.5 3.9 1.1 10.5 2.2 11.0 1.8
Others 48.2 22.7 82.9 26.7 91.6 25.7 119.0 24.6 183.2 30.4
Total 212.0 100.0 310.0 100.0 356.0 100.0 483.0 100.0 602.2 100.0
Major competing countries - India has self-sufficiency in textiles
6 February 2014 41
Arvind
World cotton and fibre scenario

World cotton production is ~24,870mt and world consumption of cotton is ~24,460mt.
India is the only manufacturing country in textiles which is cotton surplus. The global
all fibre per capita consumption in 2011 is estimated at 11kg, of which cotton is ~3.5kg,
representing ~32% of the total consumption.
Per capita consumption in North America is ~31kg, West Europe is ~22 kg, China 17kg
and India is ~7.5 kg. The growth in per capita consumption of cotton fibre is more or
less stagnant. With growth in world population and increase in consumption of textiles
in the emerging economies, the growth in fibre is likely to accelerate, going forward.
Major Producer and consumption centre are as under

Country Production Consumption Exports Imports
China 6,400 9,600 30 2,610
India 5,770 4,550 110 85
USA 3,940 850 3,130 0
Pakistan 1,910 2,200 130 310
Brazil 1,960 990 435 150
Turkey 450 1,250 0 750
Sub-Total 20,430 19,440 4,895 3,905
World 24,870 24,460 7,600 7,600
% of Top 6 Countries 82.1 79.5 64.4 51.4
Annual Cotton Yarn Production in India (M Kg)
Annual Cotton Cloth Production in India (M Kg)
6 February 2014 42
Arvind
Key demand drivers for Indian textiles

The domestic Indian textile market is set to experience rapid growth going forward as
consumers are giving preference to recent trends and styles in fashion and are willing to
spend more on apparels, with disposable income increasing. Key drivers are as follows:
Increasing retail penetration: Textiles and clothing retail comprise 40% of organized
retailing in India. Share of organized retailing to increase from ~5% currently to
~24% by FY20.
Higher disposable income: Rising per capita income estimated at USD1,200 pa
leading to consumption of textiles at 11% CAGR.
Favorable demographic profile: The earning population (15-60 years) in the total
population is rising and is ~60%.
De-risking from China: Textile manufacturing continues to shift to low cost Asian
countries. Overseas buyers are looking at India as an alternative to de-risk their
sourcing requirements from China.
Impact of drivers and challenges 2012-16
The impact of the drivers and challenges is graded on the basis of the intensity and
duration of their impact on the current market landscape. The magnitude of the
impact has been categorized as described below:
Low: Negligible or no impact on the market landscape
Medium: Medium-level impact on the market
Moderately High: Significant impact on the growth of the market
High: Very high impact with radical influence on the growth of the market
6 February 2014 43
Arvind
Financials and Valuation

Income Statement (Consolidated) (INR Million)
Y/E March 2011 2012 2013 2014E 2015E 2016E
Net Sales 40,846 49,251 52,925 66,519 80,081 95,506
Change (%) 25.2 20.6 7.5 25.7 20.4 19.3
EBITDA 5,297 6,022 6,874 9,273 11,572 14,335
Margin (%) 13.0 12.2 13.0 13.9 14.5 15.0
Depreciation 1,725 1,614 2,043 2,418 2,720 2,977
EBIT 3,572 4,408 4,831 6,855 8,851 11,359
Int. and Finance Charges 2,360 3,091 3,153 3,660 4,200 4,436
Other Income - Rec. 547 1,185 806 562 709 760
PBT bef. EO Exp. 1,759 2,502 2,483 3,758 5,361 7,682
EO Expense/(Income) 0 -2,450 0 0 0 0
PBT after EO Exp. 1,759 4,953 2,483 3,758 5,361 7,682
Current Tax 16 622 58 376 1,072 1,921
Deferred Tax 89 -28 -56 0 0 0
Tax Rate (%) 6.0 12.0 0.1 10.0 20.0 25.0
Reported PAT 1,654 4,359 2,481 3,382 4,288 5,762
PAT Adj for EO items 1,654 2,202 2,481 3,382 4,288 5,762
Change (%) 211.6 33.2 12.6 36.3 26.8 34.4
Margin (%) 4.0 4.5 4.7 5.1 5.4 6.0
Less: Mionrity Interest 4.8 0.1 -3.4 -3.4 -3.4 -3.4
Net Profit 1,649 2,202 2,484 3,385 4,292 5,765
Consolidated - Balance Sheet (INR Million)

Y/E March 2011 2012 2013 2014E 2015E 2016E
Equity Share Capital 2,544 2,580 2,580 2,580 2,580 2,580
Total Reserves 14,404 17,738 19,959 22,711 26,233 31,228
Net Worth 16,948 20,318 22,540 25,291 28,813 33,808
Minority Interest 161 91 108 108 108 108
Deferred Liabilities 217 189 58 58 58 58
Total Loans 22,102 21,283 24,608 29,608 32,608 33,108
Capital Employed 39,428 41,881 47,313 55,064 61,586 67,082
Gross Block 40,517 39,668 42,875 48,375 52,375 55,875

Less: Accum. Deprn. 15,411 13,737 15,930 18,348 21,069 24,046
Net Fixed Assets 25,106 25,932 26,945 30,027 31,306 31,829
Capital WIP 898 1,918 2,076 2,129 2,402 2,388
Total Investments 610 417 678 678 678 678
Curr. Assets, Loans&Adv. 23,426 25,827 32,635 41,017 50,010 59,775

Inventory 12,363 11,261 14,129 18,574 23,106 27,813
Account Receivables 5,018 6,422 7,547 9,659 11,409 13,606
Cash and Bank Balance 585 709 1,856 1,859 2,386 2,624
Loans and Advances 5,460 7,435 9,104 10,924 13,109 15,731
Curr. Liability & Prov. 10,611 12,213 15,021 18,785 22,810 27,588
Account Payables 10,504 11,206 14,130 17,816 21,747 26,412
Provisions 108 1,006 891 969 1,063 1,176
Net Current Assets 12,815 13,614 17,614 22,231 27,200 32,187
Appl. of Funds 39,428 41,881 47,313 55,064 61,586 67,082
E: MOSL Estimates; * Adjusted for treasury stocks
6 February 2014 44
Arvind
Financials and Valuation

Ratios
Y/E March 2011 2012 2013 2014E 2015E 2016E
Basic (INR)*
EPS 6.5 8.5 9.6 13.1 16.6 22.3
Cash EPS 13.3 14.8 17.5 22.5 27.2 33.9
BV/Share 66.6 78.7 87.4 98.0 111.7 131.0
DPS 0.0 1.0 1.7 2.1 2.6 2.6
Payout (%) 0.0 6.9 20.1 18.7 18.0 13.4
Valuation (x) *
P/E 15.5 11.4 9.0 6.7
Cash P/E 8.5 6.6 5.5 4.4
P/BV 1.7 1.5 1.3 1.1
EV/Sales 1.1 1.0 0.9 0.7
EV/EBITDA 8.8 7.1 5.9 4.8
Dividend Yield (%) 1.1 1.4 1.7 1.7
Return Ratios (%)

RoE 11.1 11.8 11.6 14.2 15.9 18.4
RoCE 11.1 13.9 12.7 14.5 16.4 18.9
Working Capital Ratios

Asset Turnover (x) 1.0 1.2 1.1 1.2 1.3 1.4
Inventory (Days) 110.5 83.5 97.4 101.9 105.3 106.3
Debtor (Days) 44 47 51 52 51 51
Leverage Ratio (x)

Current Ratio 2.2 2.1 2.2 2.2 2.2 2.2
Debt/Equity 1.3 1.0 1.1 1.2 1.1 1.0
* Adjusted for treasury stocks
Consolidated - Cash Flow Statement (INR Million)

Y/E March 2011 2012 2013 2014E 2015E 2016E
Net P / L Bef. Tax & EO Items 1,759 4,953 2,483 3,758 5,361 7,682
Depreciation 1,725 1,614 2,043 2,418 2,720 2,977
Interest & Finance Charges 2,098 2,786 2,826 3,660 4,200 4,436
Direct Taxes Paid 311 839 620 376 1,072 1,921
(Inc)/Dec in WC -3,013 -1,874 -1,700 -4,614 -4,442 -4,749
CF from Operations 2,257 6,640 5,033 4,846 6,767 8,426
Others -290 -3,288 -461 0 0 0

CF from Operating incl EO 1,967 3,352 4,573 4,846 6,767 8,426
(inc)/dec in FA -1,126 -2,324 -2,815 -5,552 -4,274 -3,485

(Pur)/Sale of Investments 46 136 -281 0 0 0
Others 69 2,523 -213 0 0 0
CF from Investments -1,012 335 -3,308 -5,552 -4,274 -3,485
(Inc)/Dec in Debt 994 -620 3,195 5,003 3,003 503

Interest Paid -1,802 -2,944 -3,014 -3,660 -4,200 -4,436
Dividend Paid -1 0 -298 -634 -770 -770
CF from Fin. Activity -809 -3,563 -117 710 -1,966 -4,702
Inc/Dec of Cash 147 124 1,147 3 527 238

Add: Beginning Balance 438 585 709 1,856 1,859 2,386
Closing Balance 585 709 1,856 1,859 2,386 2,624
E: MOSL Estimates
6 February 2014 45
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Disclosure of Interest Statement Arvind Ltd

1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No
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Initiating Coverage by MOSL February 2014

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Initiating Coverage by MOSL February 2014

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Initiating Coverage | 6 February 2014

Summary ........................................................................................................ 3-4

Company background ....................................................................................... 5

Focus on brands to ensure greater overall profitability ........................... 6-13

Megamart metamorphoses, margins set to improve .............................. 14-15

Garments business out of the woods ..................................................... 16-17

Wovens to be largest revenue segment in FY16E .................................... 18-20

Focus on high value denim segment to drive profitability ..................... 21-23

Key risks ............................................................................................................ 24

Key management profile ................................................................................. 25

Financial outlook ....................................................................................... 26-29

Annexure: Segment description ............................................................... 30-43

Financials and valuation ........................................................................... 44-45

Garments business out of the woods, high growth on radar

Wovens to be largest revenue segment in FY16E

Higher value-added denims to drive profitability

Valuation and view initiate coverage with a Buy

Company is the preferred supplier to internationally renowned brands like Polo,

Textiles Subsidiaries Joint Ventures

Fabrics Arvind Retail Arvind Murjani Brands

Arvind group's business structure (Sales)

Textiles Brand & Retail Real Estate

Denim Woven Garment Others

Sources: Company, MOSL

Focus on brands to ensure greater overall profitability

One of the best brand portfolios in country

Brand portfolio and positioning

Source: Company, MOSL

EBOs contribution is largest to retail revenue (%)

Source: Company, MOSL

ARVND - the preferred partner in India for aspiring foreign brands

Consolidation, higher contribution from power brands, break-even of newer

Power brands turnover Margins in power brands (%)

Percentage contribution to total power brands revenue

Source: Company, MOSL

Strong retail space across country, set to expand further

Total stores in brands segment (ALBL) Total sq ft and revenue per sq ft

Source: Company, MOSL

As ALBL occupies 30% space in menswear section of department stores, it gets

Product extension within brands to help improve presence across categories

Source: Company, MOSL

Key brand performance and strategy

Brand portfolio ensures strong leverage across value chain

Focus shifts from B2B to B2C

B2C revenue to touch 40% in next two years

Source: Company, MOSL

Capitalizing on brand JVs

Source: Company, MOSL

Megamart metamorphoses, margins set to improve

Value retail chain Megamarts transformation complete

Total sqft area for Megamart Total Megamart stores

Source: Company, MOSL

Megamart expansion through Hub and Spoke model

Arvind Stores - tapping fabric retailing space

Garments business out of the woods

Management changes ensure turnaround in garments business

However, appropriate management changes have ensured successful turnaround

Volume break-up category-wise Garment- EBITDA margins

Garments segment next step is to achieve high growth

Garment realization (INR/piece)

Source: Company, MOSL

Wovens to be largest revenue segment in FY16E

Wovens business opportunity is at least 5x denim

Woven revenue as a proportion of denim revenue Woven installed capacity (mmt)