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Arvind Mills: Garments hold centrestage - Views on News from Equitymaster

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Arvind Mills: Garments hold centrestage
Feb 4, 2008

Performance summary
  • Topline grows 20% YoY on the back of appreciable performance of the garmenting and retail business.
  • EBIDTA margins contract from 15.8% in 3QFY07 to 11.2% in 3QFY08 due to cost pressures; higher cotton and power costs to exert pressure on profitability in the coming quarters.
  • Net margins (excluding the extraordinary items) improve from 0.8% in 3QFY07 to 0.9% in 3QFY08. VRS offered to some categories of employees amortised over 30 months.
  • Plans to open 5 Megamart outlets (which will be 50,000 to 60,000 square feet each) during the current year.

Standalone financials
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 4,478 5,368 19.9% 13,617 16,129 18.4%
Expenditure 3,769 4,766 26.5% 11,240 13,981 24.4%
Operating profit (EBDITA) 709 602 -15.1% 2,377 2,148 -9.6%
EBDITA margin (%) 15.8% 11.2%   17.5% 13.3%  
Other income 26 73 180.8% 82 97 18.3%
Interest 341 268 -21.4% 1,177 960 -18.4%
Depreciation 347 352 1.4% 1,131 1,057 -6.5%
Profit before tax 47 55 17.0% 151 228 51.0%
Extraordinay items 1,011 8 -99.2% 1,011 8 -99.2%
Tax 10 6 -39.8% 20 18 -11.5%
Profit after tax/(loss) 1,048 57 -94.6% 1,142 219 -80.9%
Net profit margin (%) 23.4% 1.1%   8.4% 1.4%  
No. of shares (m)         209.4  
Diluted earnings per share (Rs)**         5.8  
Price to earnings ratio (x)         8.6  
(*On a trailing 12-month basis)

What has driven performance in 3QFY08?
  • Thumbs down to denim: Arvind Mills failed to retain the momentum made in the denim realisations in the first half of this fiscal, as the same dipped from Rs 102 per metre to Rs 96 per metre in the past quarter. On the volumes front as well, offtakes were lower by 11.7% YoY. The shirting division, that is a supplier to the companies garmenting arm, however, did not disappoint on the volume terms.

    Arvind Mills, as part of its long term strategy, is reducing capacity of its denim operations in the country and plans to shut down the 20 mm per annum denim unit at Khatrej (100 mm denim capacity will be operational until the relocation of the 20 mm capacity). The company intends to focus only on the premium and mid premium product segments and for regular market is exploring possibilities of moving manufacturing capacities to logical locations. The company has also completed the process of voluntary separation of workers at its Khatrej unit and is currently exploring alternative uses for the location.

    Fabric
      9mFY07 9mFY08 Change
    Denim      
    Sales (Rs m) 5,697 5,519 -3.1%
    % total turnover 41.8% 34.2%  
    Volume (mm) 62.2 54.9 -11.7%
    Avg Price (Rs/mt) 92 100 8.7%
    Shirting      
    Sales (Rs m) 1,991 2,260 13.5%
    % total turnover 14.6% 14.0%  
    Volume (mm) 16.1 18.0 11.8%
    Avg Price (Rs/mt) 123 125 1.6%

  • Thumbs up to jeans: The garmenting business of the company seems to be doing well across categories, especially in the jeans and knit wear segments. This has also been fuelled by the domestic demand through the company’s presence in the retail space. What is also noticeable is that while the 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 Mills is targeting a capacity of 12 m pieces in the garment business by 9mFY08 and would follow that up with an addition of 50% of the capacity over the next 3 fiscals. While we believe that the former is achievable and would come on stream by FY08 – FY09, we have been conservative in our future growth estimations considering the pressure on input costs.

    Garment
      9mFY07 9mFY08 Change
    Shirts      
    Sales (Rs m) 799 947 18.5%
    % total turnover 5.9% 5.9%  
    Volume (m Pcs) 2.1 2.6 23.8%
    Avg Price (Rs/pc) 384 359 -6.5%
    Knits      
    Sales (Rs m) 522 740 41.8%
    % total turnover 3.8% 4.6%  
    Volume (m Pcs) 2.9 4.5 55.2%
    Avg Price (Rs/pc) 178 162 -9.0%
    Jeans      
    Sales (Rs m) 464 1,015 118.8%
    % total turnover 3.4% 6.3%  
    Volume (m Pcs) 1.2 2.5 108.3%
    Avg Price (Rs/pc) 388 402 3.6%
    Domestic garment packages      
    Sales (Rs m) 176 218 23.9%
    % total turnover 1.3% 1.4%  
    Branded garments      
    Sales (Rs m) 2,424 2,930 20.9%
    % total turnover 17.8% 18.2%  
    Volume (m Pcs) 6.8 5.8 -14.7%
    Avg Price (Rs/pc) 354 505 42.7%

  • Problem of sourcing of natural gas for its power plant persists. The impact of purchasing natural gas at spot rates was about Rs 75 m in 3QFY08 and the amount is likely to be higher in the current quarter.

What to expect?
At the current price of Rs 50, the stock is trading at a multiple of 3.3 times and 0.7 times our estimated FY10 earnings and book value respectively. Arvind Mills, predominantly being a ‘dollar revenue-rupee cost’ company, its forward cover on net dollar exposure is based on the average exchange of Rs 42.5 to a dollar. The near and medium term outlook on rupee being strong, the company expects the real impact of rupee on its FY08 margins to be about 4% compared to previous financial year on comparable basis.

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. Despite the relative attractiveness of the stock to its peers in terms of price to book value, especially in the light of the issue of warrants to promoters, we maintain a cautious stance on the earnings potential of the company.

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