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Arvind Ltd.: Maneuvering change - Views on News from Equitymaster
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Arvind Ltd.: Maneuvering change
May 12, 2008

Performance summary
  • Topline grows 23% YoY on the back of appreciable performance of the garmenting and retail business.

  • EBIDTA margins contract from 16.7% in FY07 to 12.7% in FY08 due to cost pressure; higher cotton and power costs to exert pressure on profitability in the coming quarters.

  • Net margins (excluding the extraordinary items) improve from 1.4% in FY07 to 1.5% in FY08. VRS offered to some categories of employees amortised over 30 months.

  • Has provided for mark-to-market (MTM) loss of Rs 126 m on forex derivatives entered into this year.

  • 5 lac pieces of garments destroyed in a major fire in one of the godowns. Insurance claim filed on the basis of realisable value.

  • Has changed its name from ‘The Arvind Mills’ to ‘Arvind Ltd’.

Standalone financials
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 4,862 6,583 35.4% 18,479 22,712 22.9%
Expenditure 4,158 5,876 41.3% 15,399 19,838 28.8%
Operating profit (EBDITA) 704 707 0.4% 3,080 2,874 -6.7%
EBDITA margin (%) 14.5% 10.7%   16.7% 12.7%  
Other income 49 67 36.7% 131 164 25.2%
Interest 324 353 9.0% 1,502 1,314 -12.5%
Depreciation 302 308 2.0% 1,433 1,366 -4.7%
Profit before tax 127 113 -11.0% 276 358 29.7%
Extraordinary items (68) 55   942 63  
Tax 4 5 14.3% 24 23 -7.8%
Profit after tax/(loss) 55 53 -2.9% 1,194 273 -77.2%
Net profit margin (%) 1.1% 0.8%   6.5% 1.2%  
No. of shares (m)       209.4 219.0  
Diluted earnings per share (Rs)**         1.2  
Price to earnings ratio (x)         38.6  
(*On a trailing 12-month basis)

What has driven performance in FY08?
  • Realisations offer relief: Arvind Ltd. (Arvind) managed to retain the momentum made in the denim realisations in the first half of this fiscal, as the same improved sequentially from Rs 96 per metre in 3QFY08 to Rs 105 per metre in 4QFY08. Also, for the full year, it improved from Rs 94 per metre in FY07 to Rs 102 per metre in FY08. On the volumes front, however, off-takes were lower by 12.5% YoY for the fiscal. The shirting division, that is a supplier to the company’s garmenting arm, however, did not disappoint in volume terms.

    Arvind, 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.

    Fabrics
      FY07 FY08 Change
    Denim      
    Sales (Rs m) 7,634 7,248 -5.1%
    % total turnover 41.3% 31.9%  
    Volume (mm) 81.6 71.4 -12.5%
    Avg Price (Rs/mt) 94 102 8.5%
    Shirting      
    Sales (Rs m) 2,674 2,972 11.1%
    % total turnover 14.5% 13.1%  
    Volume (mm) 22.1 23.4 5.9%
    Avg Price (Rs/mt) 121 127 5.0%
    mm-million metres; mt-metre

  • Volumes stack up well: Arvind’s garmenting business seems to be doing well across categories, largely due to higher volumes with the commissioning of new capacities. 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 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 is targeting a capacity of 12 m pieces in the garment business by 9mFY09 and would follow that up with an addition of 50% of the capacity over the next 3 fiscals. However, around 0.5 m pieces of garments were destroyed in a major fire that broke out in one of the godowns of the company in 4QFY08. We have been conservative in our future growth estimations in this segment considering the pressure on input costs.

    Garments
      FY07 FY08 Change
    Shirts      
    Sales (Rs m) 1,084 1,250 15.3%
    % total turnover 5.9% 5.5%  
    Volume (m Pcs) 2.8 3.5 25.0%
    Avg Price (Rs/pc) 387 357 -7.8%
    Knits      
    Sales (Rs m) 742 980 32.1%
    % total turnover 4.0% 4.3%  
    Volume (m Pcs) 4.1 5.8 41.5%
    Avg Price (Rs/pc) 181 169 -6.6%
    Jeans      
    Sales (Rs m) 703 1,351 92.3%
    % total turnover 3.8% 5.9%  
    Volume (m Pcs) 1.8 3.5 92.3%
    Avg Price (Rs/pc) 386 386 0.0%
    Domestic garment packages      
    Sales (Rs m) 237 260 9.7%
    % total turnover 1.3% 1.1%  
    Branded garments      
    Sales (Rs m) 3,235 4,340 34.1%
    % total turnover 17.5% 19.1%  
    Volume (m Pcs) 6.8 7.8 14.3%
    Avg Price (Rs/pc) 473 555 17.3%
    m Pcs-million pieces; pc-piece

  • Costs and extraordinary items hurt margins: Problem of sourcing of natural gas for its power plant persists. The impact of purchasing natural gas at spot rates (cost of power up 25% YoY in FY08) is likely to be higher in the current quarter. VRS offered to some categories of employees will continue to be amortised over 30 months. Further, the company has provided for MTM loss of Rs 126 m on forex derivatives entered into this year.

What to expect?
At the current price of Rs 51, the stock is trading at a multiple of 3.3 times and 0.7 times our estimated FY10 earnings and book value respectively. 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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