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Arvind Ltd: Sale of VF brands boost bottomline - Views on News from Equitymaster

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Arvind Ltd: Sale of VF brands boost bottomline

Mar 20, 2012

Arvind Ltd. declared its results for the third quarter of financial year 2011-12 (3QFY12). The company has reported 42% YoY growth in net sales while its profits have grown by 370% YoY. Here is our analysis of the results.

Performance summary
  • Topline grows by 42% YoY in 9mFY12 aided by higher volumes and price improvements in denim sales in the domestic markets.
  • EBIDTA margins improve from 13% in 9mFY11 to 16.5% in 9mFY12 with drop in cotton prices and reduced power costs.
  • Extraordinary income for the third quarter nine month period of FY12 includes gains from from sale of land as well as sale of stake in JV VF Arvind Brands to VF Corp.
  • Despite higher interest costs, net profits grew by 369% YoY in 9mFY12. Excluding the extraordinary items, net profits grew by 118% YoY in 9mFY12.

(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 6,339 8,430 33.0% 18,470 26,291 42.3%
Expenditure 5,601 6,805 21.5% 16,076 21,948 36.5%
Operating profit (EBIDTA) 738 1,625 120.2% 2,394 4,343 81.4%
Operating profit margin (%)       13.0% 16.5%  
Other income 264 234 -11.4% 686 925 34.8%
Interest 414 1,010 144.0% 1,420 2,571 81.1%
Depreciation 275 328 19.3% 873 978 12.0%
Profit before tax 313 521 66.5% 787 1,719 118.4%
Tax - -   - -  
Extraordinary items - 1,979   - 1,979  
Profit after tax/ (loss) 313 2,500 698.7% 787 3,698 369.9%
Net profit margin (%) 4.9% 29.7%   4.3% 14.1%  
No. of shares (m)         254.6  
Diluted earnings per share (Rs)*         18.6  
P/E ratio (x)         4.5  
* on a trailing 12 months basis

What has driven performance in 3QFY12?
  • Arvind Ltd's textile business continue to draw strength from the demand for denim in the domestic market, accompanied by higher realizations. However, exports continued to lag. The company managed to grow its denim realizations by 14% YoY in 3QFY12. This also 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 showed encouraging signs of improvement in volume off-take overseas. The division which is a supplier to the company's garmenting arm, however, saw a dip in demand on domestic front (down 8% YoY). Its realization growth remained muted at 3.4% YoY.

    Fabrics performance
      3QFY11 3QFY12 Change
    Exports (mm) 9 9 0.0%
    Domestic (mm) 14 15 7.1%
    Avg price (Rs/mt) 139 159 14.4%
    Exports (mm) 4.0 6.0 50.0%
    Domestic (mm) 13.0 12.0 -7.7%
    Avg price (Rs/mt) 148.0 153.0 3.4%

  • 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. Cotton costs went up to Rs 120 per kg in 3QFY12 from Rs 99 per kg in 3QFY11.

  • The interest costs were significantly higher in 3QFY12 as the company had debt to equity ratio of 1.14 times in 9mFY12 against 1.3 times in 3QFY11. Going forward also the pressure of interest costs may rise, the company plans to pay off debt with the extraordinary gains from sale of land.

  • 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 went up by 19% from Rs 19 per unit in 3QFY11 to Rs 16 per unit in 3QFY12.

  • The retail business saw a like to like sales growth of 11%. The company had 548 stores with retailing space of over 10 lac square feet at the end of December 2012.

What to expect?
At the current price of Rs 84, the stock is trading at a multiple of 6.7 times our estimated FY14 EV/EBIDTA. While the management has projected higher growth in volumes for FY13 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. While some extraordinary gains from sale of land pockets in Ahmedabad will continue to come time to time, we believe that most of the near term upsides are already priced in.

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