Arvind Mills: Past and the future - Views on News from Equitymaster

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Arvind Mills: Past and the future

Apr 25, 2005


Arvind Mills Limited is the flagship company of Rs 20 bn (US$ 550 m) of the Lalbhai Group. It enjoys the distinction of being the world's largest exporter and Asia's largest producer of Denim. Various brands owned by Arvind include Flying Machine, Newport and Ruf & Tuf in Jeans and Excalibur in shirts. Apart from these, the company has licenses from reputed International brands like Arrow, Lee, Wrangler and Tommy Hilfiger for the Indian market.

Business profile
Denim continues to be the mainstay of the business (55.8% of revenues in FY04). However, realisations from denim being uncertain on account of volatility in cotton prices, the company has increased its focus on High Value Cotton Shirting (HVCS) which is a more stable product group and which contributed 21% to revenues in FY04.

Besides the above, the company also manufactures knit fabrics and yarns. Other peripheral businesses include EPBAX systems. Exports constitute a major chunk of the business; US being the key market accounting for over 30% of the volumes.

Financial performance: Over the years
In the past, the company faced financial difficulties due to a downslide in denim markets and heavy depreciation charges as new projects were commissioned at Santej. Also, these projects were largely financed by high cost debt, which resulted in a huge interest cost burden severely affecting its profitability. The same has been reflected in the FY00 and FY01 results (see table below). It underwent a restructuring exercise in FY02 which was approved by a majority of the lenders and which saw the interest costs reduce by nearly 50% in 1QFY02 itself.

The company bounced back in FY03. It reported its highest ever operating profit at Rs 4.3 bn, signifying a CAGR of 108% since FY00. Increased proportion of value added fabrics in Denim and resurgence of demand globally resulted in higher price realizations contributing 63% of the total revenue.

However, it could not sustain its stellar performance of FY03 in FY04 largely on account of rising raw material costs (cost of cotton having increased by 11%), high power and fuel costs (cost of naphtha by 5%). Operating margins clocked a negative 15% growth YoY and bottomline dipped by 25% YoY. Exports revenue, which contributed 49% of the total revenues, was adversely affected by exchange rate fluctuations, which saw a significant appreciation in the rupee. The company has recently switched over to natural gas from the relatively expensive naphtha for captive power consumption. The benefits of this are expected to accrue from 4QFY05 onwards.

How the numbers stack up...
(Rs m) FY00 FY01 (18m) FY02 (6m) FY03 FY04 CAGR since
FY00
9m FY05
Net Sales 11,838 18,541 6,969 14,792 14,353 3.9% 12,339
Expenditure 11,374 16,749 5,596 10,612 10,830 -1.0% 9,570
Operating Profit (EBIDT) 464 1,792 1,373 4,180 3,523 50.0% 2,795
Operating Profit Margin(%) 3.9% 9.7% 19.7% 28.3% 24.5% 22.7%
Other Income 288 209 145 123 126 -15.2% 26
Interest 2,643 4,798 594 1,528 1,133 -15.6% 862
Depreciation 1,652 2,219 740 1,481 1,503 -1.9% 1,109
Profit before Tax (3,543) (5,016) 184 1,294 1,013 824
Extraordinary item 442 - - - - 0
Tax - - 46 80
Profit after tax/(loss) (3,101) (5,016) 20 1,294 967 745
Net Profit Margin(%) -26.2% -27.1% 0.3% 8.7% 6.7% 6.0%

Looking ahead...
At the current price level of Rs 119, the stock trades at a P/E multiple 23.4 times annualised 9mFY05 earnings.

The abolition of the quota system from the start of this year promises to be very challenging for the Indian textiles and apparel industry. The industry is projected to achieve a size of US$ 85 bn by the year 2010 with exports of US$ 40 bn. However, this is easier said than done, as Indian textiles have to compete with lower costing products from China, Sri Lanka, Bangladesh and even Pakistan.

Going forward, Arvind Mills with its vertically integrated set-up is poised to capitalize on the immense opportunities available for export growth post the quota system and has already undertaken steps to increase its production capacity. However, an appreciating rupee albeit at a slower pace, volatile cotton prices and cyclical nature of denim which has assumed the nature of a commodity are the downside factors to be considered.


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