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Arvind: Denim shows its colour on margins - Views on News from Equitymaster

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Arvind: Denim shows its colour on margins
Mar 8, 2011

Arvind Ltd. declared its 3QFY11 results. The company has reported 17% YoY growth in net sales while its profits have grown by 156% YoY. Here is our analysis of the results.

Performance summary
  • Topline grows by 7% YoY in 9mFY11 aided by higher volumes and price improvements in denim sales in the domestic markets.
  • EBIDTA margins improve from 12.9% in 9mFY10 to 13.0% in 9mFY11 despite higher cotton and power costs.
  • Other income for the nine month period includes gains from derivative transactions. Also the company derived gains of Rs 115 m from sale of land in 9mFY11.
  • Lower interest costs further eased pressure on profits which grew by 116% YoY in 9mFY11.

Standalone financial performance
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 5,428 6,339 16.8% 17,201 18,470 7.4%
Expenditure 4,881 5,601 14.8% 14,981 16,076 7.3%
Operating profit (EBIDTA)  547 738 34.9% 2,220 2,394 7.8%
Operating profit margin (%)       12.9% 13.0%  
Other income  236 264 11.9%  299  686 129.4%
Interest   370 415 12.2% 1,288 1,420 10.2%
Depreciation  291 275 -5.5% 866 873 0.8%
Profit before tax 122 312 155.7% 365 787 115.6%
Tax - -   - -  
Profit after tax/ (loss) 122 312 155.7% 365 787 115.6%
Net profit margin (%) 2.2% 4.9%   2.1% 4.3%  
No. of shares (m)       269.7 270.2  
Diluted earnings per share (Rs)*         4.1  
P/E ratio (x)         13.8  
* on a trailing 12 months basis

What has driven performance in 3QFY11?
  • Although the domestic business continued to remain lucrative for Arvind's denim segment in 3QFY11, exports continued to lag. The company, however, managed to grow its denim realizations by a sterling 28% YoY. This helped curtail the impact of rise in input costs to an extent. In fact the cost of raw materials as a percentage of sales went up significantly as the company resorted to buying semi-finished products to meet the surge in orders.

    The shirting business also showed encouraging signs of improvement in volume off-take overseas. The division which is a supplier to the company's garmenting arm, also did not disappoint on the domestic front (up 2% YoY). However, its realization growth remained muted at 11% YoY. The denim and shirting segments will have capacity expansions of 8% and 10% respectively by the end of FY11. Fabrics performance

    Fabrics performance
      3QFY10 3QFY11 Change
    Denim      
    Exports (mm) 8.5 8.8 3.5%
    Domestic (mm) 12.5 14.3 14.4%
    Avg price (Rs/mt) 109 139 27.5%
           
    Shirting      
    Exports (mm) 2.6 3.8 46.2%
    Domestic (mm)       13.1           13.4 2.3%
    Avg price (Rs/mt)     125.0         139.0 11.2%

  • Arvind's garmenting business seems to be doing well in the shirts category while the knits and jeans categories suffered with lower realizations. We have been conservative in our future growth estimations in this segment considering the pressure on input costs.

  • The interest costs were lower in 3QFY11 as the company had mark-to-market (MTM) gains on the forex borrowing. Going forward the pressure of interest costs is only set to rise in the medium term.

  • Arvind's nine-year gas supply agreement with GAIL has put to rest the concerns over supply of gas to its captive power plants. The cost of gas remained stable over that in 3QFY10. However, the cost of cotton went up by 52% from Rs 65 per kg in 3QFY10 to Rs 99 per kg in 3QFY11. Arvind expects the cost of cotton to remain firm in FY12.

  • Profits from sale of land in Ahmedabad came in as a windfall gain to the company this quarter. It booked profits of Rs 115 in 9mFY11. However, investors need to keep in mind that these are one-time gains that cannot support the company's profitability in the longer run.

What to expect?
At the current price of Rs 55, the stock is trading at a multiple of 8.5 times our estimated FY13 EV/EBIDTA ResearchPro subscribers can view latest updates here. While the management has projected higher growth in volumes for FY12 as well, the continued volatility in input costs reduces the visibility in the medium term. The higher denim and shirting capacities are expected to support volume growth. The dependence on forex rates and high leverage are also dampeners. Despite the relative attractiveness of the stock to its peers in terms of price to book value, we believe that most of the near term upsides are already priced in.

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