MOSL: ARVIND (Neutral)-GST to have a transitional impact-Continued pressure on margins
​arvind: GST to have a transitional impact; Continued pressure on margins
(ARVND IN, Mkt Cap USD1.5b, CMP INR367, TP INR362, 1% Downside, Neutral)
Brands & Retail: Higher tax under GST to drive price hikes
- Price hikes on the cards: Arvind’s (ARVND) Brand & Retail segment currently attracts a tax rate of ~11% (5.5% VAT, 3.5% service tax, ~2% excise) of transaction value (company billing and not MRP), which will be increased to 12% under GST for all apparels with transaction value greater than INR1,000. The tax rate would be lowered to 5% for apparels with transaction value less than INR1,000, which forms 20% of the company’s total portfolio. The additional tax of ~2% for apparels with transaction value higher than INR1,000 will have to be passed on to customers in the form of price hikes of 2-2.5%, which is expected to be effective 30 June onward. Considering possible hiccups during GST transition, the company has brought ahead its end of season sale (EOSS) to clear excess inventory. In our view, the inventory that might still remain after EOSS should impact EBITDA to an extent of INR250-300m in FY18, largely in 1QFY18 and 2QFY18.
- Long-term growth to remain healthy: Post the GST transitional phase, the company is confident that growth would pick up from 3QFY18, and thus, has guided of margin expansion of 120-150bp. ARVND currently pays 7.5% CVD on all imported goods, which will not impact margins under GST. Considering that imports constitute 15% of the total portfolio, the pressure on margins is expected to ease post 3QFY18. Megamart (a division of ARVND) attracts a tax rate of 7.5%, which would remain the same under GST. EBITDA for Brand & Retail stood at INR1.45b in FY17, with power brands contributing INR2b and specialty retail (Gap, Sephora and Unlimited) posting EBITDA loss of INR600m. However, management expects specialty retail to turn profitable, driven by Gap and Unlimited.
Arvind Mills is primarily engaged in manufacturing and marketing of textiles, mainly denim, khakis, shirting, knits, shirts, jeans, trousers and knitting garments, in India.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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