Garments Expansion And Woven Fabric Success Will Boost Future Prospects

Key Takeaways

• Strategic growth in Garments and Woven Fabric segments is enhancing operational efficiency, volume, and market traction, boosting revenue and net margins.
  
• Innovation, sustainability, and leadership shifts highlight a strategic push for enhanced growth, operational efficiency, and investor confidence, bolstering future earnings.
  
• Macroeconomic uncertainties and inventory issues could strain Arvind's financial performance, while reliance on traditional growth strategies may limit earnings potential.

Catalysts

Manufactures, markets, retails, supplies, and exports textiles in India and internationally.

• Arvind Limited is capitalizing on a scale-up in its Garments segment, resulting in significant volume growth and enhanced operational efficiency. This growth is expected to continue in the forthcoming quarters, positively impacting its revenue and net margins.
  
• The Woven Fabric division achieved its best performance historically, signaling strong market traction and expected future revenue growth, which should bolster earnings given the division's full utilization of capacity.
  
• The AMD division's commitment to maintaining a 20% growth trajectory, bolstered by customer confidence, interest from new market segments, and parallel development of high-value accounts, is poised to increase both revenue and profitability.
  
• The company's focus on innovation, customer centricity, and sustainability, reinforced by strategic investments such as vertical integration and expansion of product lines in human protection and outerwear, is likely to drive future revenue and earnings.
  
• Leadership changes, including the appointment of a new CEO with international experience, underscore a strategic push towards growth and value creation, which should enhance operating efficiencies and investor confidence, ultimately affecting earnings.

Arvind Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arvind's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 7.3% in 3 years time.
• Analysts expect earnings to reach ₹8.4 billion (and earnings per share of ₹31.97) by about March 2028, up from ₹3.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.5x on those 2028 earnings, down from 27.6x today. This future PE is lower than the current PE for the IN Luxury industry at 22.0x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.29%, as per the Simply Wall St company report.

Arvind Future Earnings Per Share Growth

Risks

• The AMD segment experienced slower growth due to changes in product mix and order deferments, which could affect overall revenue targets and financial performance.
  
• Continuous inventory buildup in certain AMD accounts, notably within human protection, may delay revenue recognition and strain cash flows if destocking takes longer than anticipated.
  
• Despite the garmenting division's expansion plans, some realization pressure exists due to product mix changes, potentially affecting revenue growth and net margins.
  
• There is macroeconomic uncertainty, including potential rupee depreciation and geopolitical factors, impacting export markets, which could harm revenue and profitability.
  
• The reliance on traditional growth strategies, like incremental capacity expansions in garments, might not capture the full potential market shift from Bangladesh, thereby limiting anticipated earnings growth.

Valuation

• The analysts have a consensus price target of ₹451.2 for Arvind based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹115.2 billion, earnings will come to ₹8.4 billion, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹320.45, the analyst price target of ₹451.2 is 29.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.