Arvind Fashions Ltd. operates in branded apparels, beauty, and footwear with a diverse portfolio of owned and licensed global brands. The company has a market cap of ₹6,486 Cr, a current stock price of ₹487, and a high P/E of 96.0. Despite a robust OPM of 12% and profit growth of 80%, the company has a high debt to equity ratio of 1.14, significant debt of ₹1,148 Cr, and a pledged promoter holding of 8.31%. The intrinsic value is ₹112.49, indicating potential overvaluation. Promoter holding has decreased by 1.56% last quarter. The company is recommended with caution due to high debt and low ROE.

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Arvind Fashion Ltd

TLDR:

Company Details:

• Latest Stock Price: ₹487
• Intrinsic Value: ₹112.49
• Market Cap: ₹6,486 Cr.
• High/Low: ₹600/298
• Stock P/E: 96.0
• Book Value: ₹75.5
• Dividend Yield: 0.21%
• ROCE: 13.4%
• ROE: 7.07%
• Sales: ₹4,259 Cr.
• OPM: 12.0%
• Debt to Equity Ratio: 1.14
• Debt: ₹1,148 Cr.
• Promoter Holding: 35.2%
• Pledged Percentage: 8.31%
• Industry PE: 35.7
• Profit Growth: 80%
• Current Ratio: 1.27

Key Points:

• Sales Growth (5 Years): -1.71%
• ROE (3 Years): -5.59%
• Profit Variation (5 Years): 32.8%
• Promoter Holding (Last Quarter): Decreased by 1.56%

Pros:

• Profit Growth: 32.8% CAGR over the last 5 years.
• Healthy Dividend Payout: 18.9%.

Cons:

• High Stock Valuation: Trading at 6.46 times its book value.
• Low ROE: -5.59% over the last 3 years.
• Decreasing Promoter Holding: -1.56% last quarter.

Peer Comparison Highlights:

• Adani Enterprises: P/E 97.40, ROCE 9.87%
• Aegis Logistics: P/E 52.42, ROCE 14.74%
• Redington: P/E 12.92, ROCE 19.46%
• Arvind Fashions: P/E 95.97, ROCE 13.38%

Performance Recommendations:

• Buy: Low debt to equity ratio, constant/increasing promoter holding, low pledged holding, improving OPM, lower PE.
• Sell/No Buy: Extreme high debt to equity ratio, decreasing promoter holding, high pledged holding, lowering OPM, extreme high or negative PE.
• Caution: Higher debt to equity ratio, decreasing promoter holding, pledged holding, lowering OPM, high PE.

Company Introduction and Profile:

Arvind Fashions Ltd operates in the branded apparel, beauty, and footwear sectors, boasting a portfolio of several owned and licensed global brands. The company has a market capitalization of ₹6,486 Cr and a current stock price of ₹487. Key brands include U.S. Polo Assn., Arrow, Tommy Hilfiger, Flying Machine, and Calvin Klein. The company has a high operating profit margin (OPM) of 12%, though it struggles with a high debt to equity ratio of 1.14 and significant debt of ₹1,148 Cr. Despite maintaining a healthy dividend payout of 18.9%, Arvind Fashions has faced challenges with a return on equity (ROE) of just 7.07% and a declining promoter holding. These metrics indicate both strengths and areas needing improvement.

Should We Buy, Sell, or Hold This Stock and Why?

Given the current financial data, a cautious approach is recommended for Arvind Fashions Ltd. The company has a high operating profit margin of 12%, indicating efficient operations. However, the high debt to equity ratio of 1.14 and significant debt of ₹1,148 Cr raise concerns about its financial leverage. Promoter holding has decreased by 1.56%, which is a negative indicator. The stock’s P/E ratio is a high 96.0, suggesting it may be overvalued. Additionally, the company’s intrinsic value is ₹112.49, much lower than the current stock price of ₹487. Considering these factors, it is advisable to hold or sell, especially if the debt and promoter holding trends do not improve.

Vital Company Ratios:

• Operating Profit Margin (OPM): Arvind Fashions Ltd has an OPM of 12%, indicating efficient profitability from operations.
• Debt to Equity Ratio: The company has a high debt to equity ratio of 1.14, suggesting significant financial leverage and risk.
• Cash Equivalents and CWIP: The company should ideally have high cash equivalents and controlled capital work in progress (CWIP) to manage liquidity and future projects.
• Promoter Holding: Current promoter holding is 35.2%, with a slight decrease recently, which may indicate potential concerns.
• Pledged Percentage: The pledged percentage stands at 8.31%, which should be minimised to ensure promoter commitment.
• Earnings Per Share (EPS): The EPS trend shows recovery with recent figures indicating profitability.
• Book Value vs. CMP: The stock is trading at a price significantly higher than its book value (₹75.5), indicating overvaluation.
• Dividend Yield: The company has a modest dividend yield of 0.21%, reflecting limited income for shareholders from dividends.

Competing Companies and Performance Comparison:

Arvind Fashions Ltd competes with companies like Adani Enterprises, Aegis Logistics, Redington, and Honasa Consumer. Compared to its peers, Arvind Fashions has a high P/E ratio of 96.0, indicating potential overvaluation. Its debt to equity ratio of 1.14 is higher than some competitors, reflecting greater financial leverage. The company’s OPM of 12% is competitive, but its ROE of 7.07% lags behind peers like Redington (19.46%). The high debt and lower ROE suggest caution, especially when the intrinsic value is much lower than the current market price. Competitors like Redington offer better returns on equity and lower P/E ratios, making them potentially more attractive investments.

Is This Stock Overvalued or Undervalued?

Arvind Fashions Ltd appears to be overvalued. The current stock price is ₹487, significantly higher than the intrinsic value of ₹112.49. The stock is trading at a P/E ratio of 96.0, which is much higher than the industry average P/E of 35.7, indicating overvaluation. Additionally, the stock’s book value is ₹75.5, showing a substantial gap between the current market price and the book value. Given these data points, the stock’s market price exceeds its intrinsic value, suggesting that it is overvalued.

Should We Buy This Stock and Why?

Arvind Fashions Ltd is not recommended for buying at this moment. The company has a high debt to equity ratio of 1.14, with total debt amounting to ₹1,148 Cr, which raises concerns about financial leverage and risk. The promoter holding has decreased by 1.56%, and 8.31% of the shares are pledged, indicating potential issues with promoter confidence and financial stability. Although the company has shown good profit growth of 32.8% CAGR over the last five years and maintains a healthy dividend payout of 18.9%, the high P/E ratio of 96.0 and low return on equity (ROE) of 7.07% suggest that the stock is overvalued and not a strong buy candidate currently.

How Is the Industry of This Company Growing?

The branded apparel, beauty, and footwear industry in which Arvind Fashions Ltd operates is growing steadily. The company competes with major players such as Adani Enterprises, Aegis Logistics, Redington, and Honasa Consumer. The industry’s growth is driven by increasing consumer demand for branded products and lifestyle changes. Arvind Fashions Ltd has managed to maintain a competitive edge with its portfolio of strong brands like U.S. Polo Assn., Arrow, Tommy Hilfiger, Flying Machine, and Calvin Klein. Despite the industry’s overall positive trend, the company’s high debt and overvaluation may hinder its ability to capitalise fully on market opportunities.

Key Data Points from Each Year/Quarter

Promoter Holding:

• Sep 2021: 36.96%
• Dec 2021: 36.93%
• Mar 2022: 36.92%
• Jun 2022: 36.88%
• Sep 2022: 36.84%
• Dec 2022: 36.83%
• Mar 2023: 36.82%
• Jun 2023: 36.82%
• Sep 2023: 36.80%
• Dec 2023: 36.79%
• Mar 2024: 36.78%
• Jun 2024: 35.21%

FII/DII Holding:

• Specific data on FII/DII holding not provided in the source.

Sales Trend:

• Mar 2017: ₹1,292 Cr
• Mar 2018: ₹4,219 Cr
• Mar 2019: ₹4,644 Cr
• Mar 2020: ₹3,614 Cr
• Mar 2021: ₹1,912 Cr
• Mar 2022: ₹3,056 Cr
• Mar 2023: ₹4,421 Cr
• Mar 2024: ₹4,259 Cr

Profit Trend:

• Operating Profit Margin (OPM) ranges from -34% to 13% quarterly.
• Profit before tax improved from negative figures in previous years to ₹53 Cr in Mar 2024.

Debt Trend:

• Debt (Mar 2017 to Mar 2024): Ranging from ₹604 Cr to ₹1,148 Cr.

Margin Trend:

• OPM improved from 0% in Mar 2021 to 12% in Mar 2024.

Latest News Updates:

• Specific latest news updates not provided in the source.

Company PE and Industry PE:

• Company PE: 96.0
• Industry PE: 35.7

Gap Between Intrinsic Value and Current Market Price:

• Intrinsic Value: ₹112.49
• Current Market Price: ₹487

Market Cap of This Company and Its Peers:

• Arvind Fashions Ltd: ₹6,486 Cr
• Adani Enterprises: ₹3,41,886 Cr
• Aegis Logistics: ₹29,440 Cr
• Redington: ₹15,678 Cr
• Honasa Consumer: ₹14,865 Cr

Industry Trend Based on Latest News: Specific industry trend updates not provided in the source.

Cash in Hand: Specific data on cash in hand not provided in the source.

Dividend Payout: The company has maintained a dividend payout of 18.9%.

Is the stock overvalued or undervalued?

The current stock price is ₹487 while the calculated intrinsic value is only ₹112.49. This suggests the stock is significantly overvalued by the market compared to its fundamentals. The stock is also trading at a very high P/E ratio of 96 compared to the industry median of 36.5, and at 6.46 times its book value, further indicating overvaluation.

Should the stock be bought?

I would not recommend buying at this time due to:

• The stock appearing highly overvalued relative to intrinsic value and peers
• High debt-to-equity ratio of 1.14
• Decreasing promoter holding (-1.56% last quarter)
• Poor ROE of -5.59% over the last 3 years While positives include good 5-year profit growth of 32.8% CAGR and a healthy dividend payout ratio of 18.9%, the negatives and overvaluation outweigh these considerably. Caution is warranted.

How is the company’s industry growing?

The data provided doesn’t give a clear picture of industry growth. Arvind Fashions’ 5-year sales CAGR is -1.71%, indicating revenue decline, though more recent quarterly sales growth is positive at 3.66% YoY. The branded apparel and footwear industry was likely impacted by Covid in 2020-21 but seems to be recovering. However, more industry-level data points are needed to make a conclusive assessment of the growth trajectory. The company’s brand portfolio and positioning appear decent but intense competition likely remains a challenge in this space.

In summary, while Arvind Fashions has some established brands, the stock looks extremely overvalued with several financial red flags. Detailed industry growth data is lacking but the company’s topline trend doesn’t show robust expansion. I would avoid the stock unless valuations correct significantly and underlying performance improves. More data on the competitive landscape and category growth prospects could help refine the analysis further.

Risk Factors Related to Arvind Fashions Ltd. and Industry

Key Risks Associated

• High Debt to Equity Ratio: The company has a debt to equity ratio of 1.14, indicating a significant level of debt which can affect financial stability.
• Decreasing Promoter Holding: Promoter holding has decreased by 1.56% in the last quarter, signalling potential lack of confidence from the promoters.
• High Stock P/E: The stock P/E ratio of 96.0 is much higher than the industry P/E of 35.7, suggesting overvaluation.
• Pledged Shares: 8.31% of the promoter’s holding is pledged, which adds financial risk.
• Low Return on Equity: ROE over the last 3 years is -5.59%, indicating inefficient use of equity capital.
• Regulatory Changes: Changes in regulations affecting the apparel, beauty, and footwear sectors could impact operations.
• Competition: Intense competition from both domestic and international brands can affect market share and profitability.

Risks to Consider Before Investing

• High Valuation: The current stock price is ₹487, which is significantly higher than the intrinsic value of ₹112.49.
• Debt Levels: High levels of debt (₹1,148 Cr) could impact the company’s ability to invest in growth opportunities and pay dividends.
• Profitability Concerns: Despite a recent profit growth of 80%, the company has a history of fluctuating profitability.
• Market Fluctuations: The fashion industry is highly susceptible to changing consumer preferences and economic conditions.
• Operational Risks: Dependence on a few key brands and the need to continuously innovate to stay relevant in the market.

Potential Risks of the Industry

• Economic Downturns: The apparel and fashion industry is cyclical and sensitive to economic downturns which can reduce consumer spending.
• Supply Chain Disruptions: Dependence on global supply chains can lead to vulnerabilities such as delays, increased costs, and supply shortages.
• Technological Changes: Rapid changes in technology can lead to increased competition and the need for continuous investment in innovation.
• Environmental Regulations: Increasing focus on sustainable fashion and stricter environmental regulations could increase operational costs.

Management Quality Assessment

• No Criminal Cases: There are no known criminal cases against the promoters and management.
• Management Details: The management team has a diverse background with experience in the fashion and retail industry.

Long-Term Performance (6-10 Years)

Key Parameters:

• High Operating Profit Margin (OPM): Current OPM is 12%, showing improvement over the years.
• Low Debt to Equity Ratio: Current ratio is 1.14, indicating moderate leverage.
• High Cash Equivalents: Cash flow shows positive trends, but net cash flow fluctuates.
• Promoter Holding: Currently 35.2%, slightly decreased in recent quarters.
• Pledged Percentage: 8.31%, needs monitoring.
• Earnings Per Share (EPS): EPS has improved recently but remains inconsistent.
• Stock CMP vs. Book Value: Stock is trading at a high multiple of its book value.
• High Dividend Yield: 0.21%, relatively low but maintained.

Data Analysis:

• Market Positioning: Arvind Fashions Ltd has strong brands and strategic brand ambassadors, indicating potential long-term growth.
• Financial Health: Improvement in profit growth (32.8% CAGR) and OPM suggests better operational efficiency.
• Debt Management: Moderate debt levels are manageable but require monitoring to avoid financial stress.
• Return Metrics: ROCE and ROE are improving but need consistent growth to ensure long-term stability.

Recommendation: BUY if the company continues to improve its OPM and reduces debt. HOLD if debt levels increase or promoter holding decreases significantly.

Medium-Term Performance (2-6 Years)

Key Parameters:

• High OPM: Improving trend is positive.
• Low Debt to Equity Ratio: Manageable but needs reduction.
• Cash Equivalents: Positive cash flow trends needed.
• Promoter Holding: Should remain stable or increase.
• Pledged Percentage: Reduction is necessary.
• EPS: Consistent growth needed.
• Stock CMP vs. Book Value: Current high multiple is a concern.
• High Dividend Yield: Increase dividend yield for attractiveness.

Data Analysis:

• Profit Growth: 80% profit growth is impressive but needs consistency.
• Operational Efficiency: Improving OPM indicates better cost management.
• Debt Levels: High debt-to-equity ratio requires strategic reduction.
• Market Performance: The company needs to leverage its strong brand portfolio for sustained growth.

Recommendation: BUY if the company reduces its debt and improves operational margins. CAUTION if debt levels increase or promoter holding decreases.

Short-Term Performance (2-5 Months)

Key Parameters:

• High OPM: Should remain stable or improve.
• Low Debt to Equity Ratio: Immediate reduction not critical but needs monitoring.
• Cash Equivalents: Stable cash flow required.
• Promoter Holding: Stability required.
• Pledged Percentage: Should not increase.
• EPS: Immediate growth is less critical.
• Stock CMP vs. Book Value: High multiples acceptable short-term.
• High Dividend Yield: Less critical short-term.

Data Analysis:

• Quarterly Trends: Sales and operating profit show steady improvement.
• Market Volatility: Short-term fluctuations in stock price expected.
• Operational Performance: Consistent OPM is a good sign.

Recommendation: HOLD if the company maintains its current financial metrics. SELL if there are significant negative changes in promoter holding or OPM.

Overall Recommendations

• BUY Recommendation:
  • Low debt to equity ratio
  • Increasing or stable promoter holding
  • Low pledged holding
  • Improving OPM
  • Lower PE ratio
• SELL/NO BUY Recommendation:
  • Extremely high debt to equity ratio
  • Decreasing promoter holding
  • High pledged holding
  • Lowering OPM
  • Extremely high or negative PE ratio
• CAUTION Recommendation:
  • Higher debt to equity ratio
  • Decreasing promoter holding
  • Pledged holding presence
  • Lowering OPM
  • High or fluctuating PE ratio

Arvind Fashions Ltd currently shows improving operational efficiency and manageable debt but requires close monitoring of promoter holding and pledged percentage. Long-term and medium-term prospects depend on consistent improvement in key financial metrics.