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Arvind Mills: Arvind Garments visit note - Views on News from Equitymaster
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Arvind Mills: Arvind Garments visit note
Mar 27, 2006

We met the management of Arvind Garments (Arvind Mills’ 100% subsidiary) to understand the dynamics of the garmenting industry, how the company will contribute to Arvind Mills’ revenues going forward and the growth drivers post the quota-free regime. We also visited the garment manufacturing facility in Bangalore (500 machines, 10,000 pieces per day of capacity). Here are the key takeaways.

Garment Industry
The textile industry today is facing the challenge of minimising the lead-time for buyers by offering a ‘package’. To reduce the lead-time, either the fabric players need to offer garments or vice versa. Also, the fabric players face the risk of cyclicality of the industry (e.g. cotton cycle and denim cycle). This is where the garmenting business gains significance. Players like Arvind Mills, which were conventionally in the fabric business, ventured into the garmenting business (since FY05) to hedge their revenue risks and partially de-risk their business. Also, the labour-intensive (employment generating) and specialised skill oriented nature of the business makes it beneficial for India.

Arvind Garments
The garmenting facility of Arvind Mills, established in FY05, works with 9 production lines currently. While 4 more production lines are being added (by 1HFY07), the company is also envisaging starting the second shift by May 2006. The current employee base of 1,150 people is expected to be scaled up to 1,350 in the next 1 to 2 years. Besides having an in-house designing team (critical for garmenting companies), it has subscribed to design portals and has 4 designers traveling to international fashion shows every year.

Although the company can currently produce 10,000 pieces per style, orders of not more than 3,000 to 4,000 pieces per style are received. This makes the change of styles and production lines not very cost effective. Nevertheless, to cater to the growing export demand, Arvind Garments is accessing laundries in the US, Italy and Japan for technical support. The company’s current order book is sourced 60% from the US, 40% from Europe and 10% from the domestic markets. Its working capital cycle ranges from 30 days to 75 days.

Cost structure
To get a perspective on the cost structure in the garmenting business, we asked the company to breakup the structure assuming the selling price of a single garment to be US$ 10. While the fabric and trimming-job are outsourced (the former from Arvind Mills), sewing, washing and dyeing jobs are done in-house. The total cost of the garment manufacturing process comes to 85% of the selling price (see chart) while the profit margins vary from 12% to 15% at the EBIDTA level. Also, depending on the quality of the garment, the sewing charges can range from US$ 1 to US$ 2 and the weaving cost can vary from US$ 0.5 to US$ 4 per garment. The payback period is around 4 years.

Going forward…
The capacity in Bangalore cannot be ramped up beyond 5 m pieces per annum (currently 3.6 m per annum) due to the lack of space. Arvind Garments will be looking at establishing facilities in low cost destinations like Bangladesh, where the power costs are lower and labour costs are 40% to 50% cheaper than that in India. The company also plans to take the benefits of establishing facilities in SEZs (special economic zones) where hire-and-fire policy is allowed. The company is targeting to reach a capacity of 1 m pieces a month (10,000 pieces currently).

Our view
At the current price of Rs 91, Arvind Mills’ stock is trading at a price to earnings multiple of 6.6 times our estimated FY08 earnings. While the downside in denim cycle and losses on the forex side were inadvertent, we believe that the de-risking strategies will prove to be benign to the company in the longer run. Also, the company will continue to enjoy its competitive advantage on account of lower cost of cotton and power.

We recently had a conference call with Arvind Mills to get an outlook on denim prices, volume pressures and the contribution from Arvind subsidiaries to the consolidated topline in the longer term. We shall soon update you on the same.

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