Arvind Fashions Ltd Q3 FY23 Earnings Conference Call Insights

Key highlights from Arvind Fashions Ltd (ARVINDFASN) Q3 FY23 Earnings Concall

Management Update:

• [00:02:40] ARVINDFASN said GM increased due to lower discounting, leading to an improvement in EBITDA margin by 110 bp YonY.

• [00:03:00] ARVINDFASN’s supply chain transformation yielded positive results, with stock turns sustaining above 4 and improved gross working capital leading to cash flow generation and reduced debt.

• [00:11:38] ARVINDFASN remains confident of achieving double-digit pre-IndAS EBITDA in power brand next year, and is optimistic about the momentum going forward with Pongal festival in south and Eid festival coming up in mid-April.

Q&A Highlights:

• [00:13:07] Pritesh Chheda from Lucky Investments enquired about the operating cash flow generated for 9M FY23, and gross and net debt as of 9M. Shailesh Chaturvedi MD replied that operating cash flow is close to INR150 crores after working capital. Net debt was at INR372 crores and gross debt of about INR570 crores.

• [00:18:29] Pritesh Chheda from Lucky Investments asked if the discounting has increased due to which margins are not coming. Shailesh Chaturvedi MD answered that there are two factors contributing to an increase in EBITDA: a 4% increase in margins over nine months, and a 0.6% reduction in discounting.

• [00:22:25] Shreya of Swann Investments asked about the drivers of 8% increase in other expenses QonQ. Shailesh Chaturvedi MD said that other expenses are largely related to retail sales, such as commission to franchisees, royalty payments etc. As retail sales increase, these expenses will also increase. In Q2, other expenses were INR342 crores, while in Q3 they were INR370 crores, with the difference being attributed to higher retail sales of INR110 crores and an associated weighted average commission of 28%, or INR30 crores.

• [00:26:54] Shreya of Swann Investments asked about the drivers of the operating leverage in ARVINDFASN business. Shailesh Chaturvedi MD answered that the company is aiming for a 5% efficiency on other expenses of INR1,000 crores in three months, which would be INR330 crores. The company has already saved 0.5% of EBITDA from employee costs and 0.5% from marketing costs, while increasing spending in those areas. Moving forward, the company will try to gain as much leverage and efficiency in the remaining one-third of other expenses.

• [00:32:02] Shreya of Swann Investments asked what’s happening in the other subsidiaries as the company has made INR28 crores profit from its CK and Tommy subsidiaries, but there is a INR6 crore loss in the other businesses. Shailesh Chaturvedi MD said that the PAT number for the cumulative nine months is close to INR60 crores and it is split between the PVH business and all other brands of AFL. In 3Q, the winter was late, however, the Tommy and CK still did better than the other brands of Arvind and the industry. On a full year basis, the PAT number will be an equal split, not skewed like what was seen in 3Q.

• [00:34:01] Jatin Sangwan from Burman Capital queried about the reason for QonQ EBITDA remaining same, but there being big difference at PBT level. Shailesh Chaturvedi MD answered that the main reason for the increase in costs below EBITDA is a 0.85% increase in interest rates, as well as an increase in depreciation due to IndAS entries.

• [00:38:05] Mythili Balakrishnan at Alchemy Capital asked about the components of other income. Shailesh Chaturvedi MD said that the other income in 3Q was INR15.9 crores. Almost INR8 crores of this was from provision no longer required, INR3.3 crores was interest on bank deposits, INR2.5 crores was rent recovery, and INR2 crores was from re-assessment and fair value of security deposits.

• [00:42:25] Mythili Balakrishnan at Alchemy Capital asked about the quality of sales at Arrow and the steady state of the business. Shailesh Chaturvedi MD replied that ARVINDFASN is very pleased with the progress on Arrow, which has seen 3 quarters of positive EBITDA. The delta in EBITDA in FY23 will be significant, and we need to now focus on increasing the scale for Arrow and take it to double digit EBITDA in 2-3 years. The goal is to reach 5-6% EBITDA soon and then to double-digit EBITDA journey.

• [00:46:54] Mythili Balakrishnan at Alchemy Capital enquired what would be the steady state EBITDA margins for ARVINDFASN. Shailesh Chaturvedi MD said it has set a goal of achieving double-digit EBITDA pre-IndAS in its power brands within 12 months. This year, the EBITDA has already gone up by 4%, and the goal is to reach 14%-odd post-IndAS EBITDA in power brands next year. The plan going forward includes scaling up the brands like Arrow and Flying Machine to INR1,000 crores in revenue, as well as leveraging scale advantages such as reduced people costs.

• [00:49:02] Sagar Parekh from One Up Financial enquired when the company will reach the peak again in topline at Arrow and if double digit pre IndAS EBITDA margins can be achieved.  Shailesh Chaturvedi MD answered that the company should reach the highest ever revenue in FY24 and double-digit EBITDA in 2-2.5 half years from now.