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Arvind Ltd: Forex drain bottomline - Views on News from Equitymaster

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Arvind Ltd: Forex drain bottomline
Jan 29, 2009

Performance summary
  • Topline grows by a tepid 11% YoY in 9mFY09 despite improved realisations.
  • EBIDTA margins improve by nearly 6% for the quarter and remain stable for the nine month period on the back of lower input costs.
  • Net margins (excluding the extraordinary forex loss) slips from 1.5% in 9mFY08 to 0.9% in 9mFY09.
  • The company had 23% of its borrowings in foreign currency at the end of December 2008 on which it incurred foreign exchange losses to the tune of Rs 356.4 m.
  • Derivative losses to the tune of Rs 220 m for 3QFY09 netted off against other income.


Standalone financials
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 5,092 5,994 17.7% 15,514 17,142 10.5%
Expenditure 4,726 5,178 9.6% 13,961 15,394 10.3%
Operating profit (EBDITA) 366 816 123.0% 1,553 1,748 12.6%
EBDITA margin (%) 7.2% 13.6% 10.0% 10.2%
Other income 324 (40) 712 713 0.1%
Interest 268 416 55.1% 960 1,410 46.8%
Depreciation 352 308 1,058 891 -15.8%
Profit before tax 70 52 247 160
Extraordinary items** (8) (380) (8) (417)
Tax 6 5 -17.5% 18 14 -23.2%
Profit after tax/(loss) 56 (333) 221 (270)
Net profit margin (%) 1.1% -5.6% 1.4% -1.6%
No. of shares (m) 209.4 218.9
Diluted earnings per share (Rs)** (0.9)
Price to earnings ratio (x) N.A
(*On a trailing 12-month basis) **Extraordinary items include foreign exchange loss of Rs 356.4 m for 3QFY09

What has driven performance in 3QFY09?
  • Although the economic slump continued to take a heavy toll on the incremental volume takeoffs for Arvind, the change in product mix bore well for the company in terms of higher realisations. The denim fabric, which continues to be the mainstay in Arvindís business, showed very appreciable momentum in realisations (grew by 20% YoY). On the volumes front, off-take was lower by 4% YoY for the quarter. The companyís contract with a European agency for marketing, which cost it Rs 80 m annually, was terminated in January 2009.

  • The shirting division, which is a supplier to the companyís garmenting arm, also did not disappoint in realisations, while the volumes were higher by nearly 10% YoY.

    Fabrics
      3QFY08 3QFY09 Change
    Denim      
    Volume (mm) 16.2 15.5 -4.3%
    Avg Price (Rs/mt) 102 122 19.6%
    Shirting      
    Volume (mm) 6.3 7.2 14.3%
    Avg Price (Rs/mt) 121 133 9.9%
    mm-million metres; mt-metre

  • Arvindís garmenting business seems to be doing well in the knits category while the jeans category had a record performance in volume terms. The profitability of the business was, however, impacted by shortage of staff.

  • While volumes in the branded garment space are not very enthusing, the company has not compromised on the realisations on the same, seeking its positioning in the premium category. Arvind is targeting a capacity of 12 m pieces in the garment business by FY09 and would follow that up with an addition of 50% of the capacity over the next 3 fiscals. We have been conservative in our future growth estimations in this segment considering the pressure on retailing costs.

    Garments
      3QFY08 3QFY09 Change
    Shirts      
    Volume (m Pcs) 0.9 0.6 -33.3%
    Avg Price (Rs/pc) 357 410 14.8%
    Knits      
    Volume (m Pcs) 1.4 1.9 33.6%
    Avg Price (Rs/pc) 155 205 32.3%
    Jeans      
    Volume (m Pcs) 0.8 1.3 62.5%
    Avg Price (Rs/pc) 401 457 14.0%
    Branded garments      
    Sales (Rs m) 1,120.0 1,315.0 17.4%
    m Pcs-million pieces; pc-piece

  • Arvind has been able to get some relief on its power costs this quarter, although the same were higher than the corresponding quarter of FY08. The cost of power at the Naroda plant was Rs 4.8 per Kwh and at Santej was Rs 6.5 per Kwh as against the previous year average of Rs 4.1 and 4.8 per Kwh respectively. In 2QFY09, the costs at the two plants were Rs 5.3 and Rs. 8.4 per Kwh respectively. The company has started getting 60% of its gas requirements from GAIL since December 2008 as a result of which the loss on account of energy cost has stopped. Arvind expects to get the full requirement of gas by end of March 2009.

  • Despite, drop in demand (10 to 15%) and possibility of having significantly higher surplus cotton inventory for the country, the prices of cotton, though lower than last year, are still ruling at higher levels. The company expects the prices of cotton to move according to government and CCIís decision to hold inventory. Arvind expects further savings from lower input costs going forward.

  • The management continues to remain bullish on the revenue prospects of the retailing venture ĎMegamartí. However, a substantial drop in footfalls (upto 20% and large inventory pile up with retailers across the country has toned the prospects of higher revenue growth from this segment in the near term.

What to expect?
At the current price of Rs 15, the stock is trading at a multiple of 4.8 times our estimated FY11 EV/EBIDTA. Given the fact that the company maintains a cautious outlook on its near term revenue and earnings, and the continued volatility in rupee-dollar rate there is little visibility in the medium term. However, the policy of servicing the key markets with value added products and focused marketing of brands seems to be yielding positive results. The company is targeting to improve its net margins by 1% till the end of FY09. Despite the relative attractiveness of the stock to its peers in terms of price to book value, we maintain a cautious stance on the earnings potential of the company.

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