Arvind: Eroding hopes… - Views on News from Equitymaster

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Arvind: Eroding hopes…

Jan 5, 2001

This company, once, was one of the top traded scrips on the bourses. It has a strong presence in the branded apparel and in the formal segment apart from fixed contract fixtures with some of the top fashion groups in the world. But changes in fashion trends, fluctuating cotton prices and excessive capacity of denim, both in domestic as well as in the international markets, suppressed margins and realisations. The scrip is currently trading at Rs 13 compared to its all time high of Rs 320 in 1994, a 96% erosion in market capitalisation! Where did Arvind Mills go wrong?

The company has strong brands, which include Arrow, Wrangler, Lee, Flying Machine, Newport, Excalibur and Ruggers! However, branded apparel sales as a percentage of total turnover accounted for just 10% in FY00. But the main problem lies somewhere else. Cloth sales that include denim accounted for 80% of FY00 sales. Though volumes grew CAGR of 21%, realisations per unit have been on the decline (10% in the last three years). The reason could be attributed to the fact that denim is suffering from excess capacity.

The company increased its denim capacity during early 1990s in anticipation of rise in demand and so did denim manufacturers worldwide. This led to excess supply in the market. Moreover, fashion started to drift as cotton ready-mades and casuals became the hot favorite as opposed to denim. This led to the consistent fall in realisations. Though demand for denim was growing faster in the domestic markets, there were too many unorganised players.

Down and red…
(Rs m) FY97 FY98 FY99 FY00
Gross sales 8,415 9,328 9,411 12,160
Gross profit 1,799 1,628 817 786
Depreciation 578 727 822 1,652
Interest 1,029 743 915 3,143
PAT 1,368 1,010 144 (2,714)
GPM (%) 21.4% 17.5% 8.7% 6.5%
NPM (%) 16.3% 10.8% 1.5% -22.3%
EPS 13.6 10.0 1.4 (26.9)

The resultant effect is apparent from the company financials. Operating margins has declined from Rs 21% in FY97 to 7% in FY00, which was also led by fluctuating cotton prices (the main raw material). Besides, higher interest cost (interest costs grew at a CAGR of 45% in the last four years) absorbed a significant part of the net margins. This is because the company borrowed more than Rs 8 bn in FY97 to fund its capacity expansion plans for its Sutlej unit. Apart from this the company raised money in the international market to supplement its additional capacity expansion plans. All this primarily led to the downfall of the company.

Even for the first quarter ended 30th June 2000, the company has posted a net loss of Rs 949 m compared to Rs 481 m in the corresponding quarter of the previous year. Operating margins have declined from 14% in 1QFY00 to 11% in 1QFY01. Interest costs have gone up by more than 68%. This led the sharp fall in net profits.

So, where to from here? The only way out is to sell of some of its assets or brands to come out of this severe debt burden. Recently, the scrip flared upwards on the bourses in anticipation of the restructuring initiative, which somehow do not seem to take off. The management is quite about the issue. But, what about the shareholders of the company? They are keeping their fingers crossed!


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