New CEO Gurpreet Bhatia And Expanding Garment Capacity Will Drive Future Performance

Key Takeaways

• Strategic expansion and capacity increase in garmenting and woven fabric aim to drive revenue growth and enhance profitability long-term.
  
• New leadership and focus on AMD's growth trajectory are expected to boost operational efficiency and future earnings significantly.
  
• Challenges in product mix, market competition, and external factors may hinder Arvind's growth and profitability, necessitating prompt resolution of inventory and strategic expansions.

Catalysts

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

• The increasing garmenting volume with a growth of 21% year-on-year and focus on capacity addition and long-term investment are expected to drive strong future growth in revenue and profitability.
  
• The introduction of new management, such as the hiring of Gurpreet Bhatia as the CEO of the AMD business, aims to enhance efficiency and growth potential, likely leading to improved earnings and valuation.
  
• The AMD division, despite temporary setbacks, is expected to maintain a long-term growth trajectory of 20%, potentially driving significant revenue growth as both new and existing customer accounts ramp up.
  
• The expansion in Woven Fabric to support AMD suggests operational efficiencies and increased product offerings will enhance revenue growth and potentially improve net margins due to economies of scale.
  
• Planned increase in garment capacity, targeting 48 million to 49 million garment volumes next year, is aligned with future revenue growth and improved economies, boosting earnings over the medium term.

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 ₹31.96) by about February 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 28.2x today. This future PE is lower than the current PE for the IN Luxury industry at 23.4x.
• 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 15.33%, as per the Simply Wall St company report.

Arvind Future Earnings Per Share Growth

Risks

• The AMD division faced slower growth due to changes in the product mix and order deferment, suggesting potential risks to revenue and earnings if these issues persist.
  
• The management's cautious approach to inorganic growth and capital allocation in garmenting may result in slower expansion, which could impact revenue and long-term growth objectives.
  
• The competitive landscape, particularly in textile and garmenting, could pressure net margins as more players enter these markets, making it challenging to maintain Arvind’s pricing power and profitability.
  
• External macroeconomic factors, such as fluctuations in foreign exchange rates and geopolitical tensions, could negatively impact export revenues and overall financial performance.
  
• Inventory buildup and slowness in certain segments of the AMD business indicate potential risks to profitability if these issues are not resolved promptly, as they could lead to temporary revenue shortfalls.

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 ₹327.65, the analyst price target of ₹451.2 is 27.4% 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.