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Arvind Ltd: Extraordinary incomes save the day - Views on News from Equitymaster

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Arvind Ltd: Extraordinary incomes save the day
May 14, 2012

Arvind Ltd. declared its results for the fourth quarter of financial year 2011-12 (4QFY12). The company has reported 32% YoY growth in net sales while its profits have grown by 222% YoY. Here is our analysis of the results.

Performance Summary
  • Topline grows by 32% YoY in FY12 aided by price improvements in denim and garment sales in the domestic market.
  • EBIDTA margins improve from 12.9% in FY11 to 13.8% in FY12 with drop in cotton prices and reduced power costs.
  • Extraordinary income for the fourth quarter and FY12 includes gains 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 222% YoY in FY12. Excluding the extraordinary items, net profits grew by 74% YoY in FY12.

Standalone financial performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 7,912 8,501 7.4% 26,325 34,725 31.9%
Expenditure 6,714 7,428 10.6% 22,919 29,928 30.6%
Operating profit (EBIDTA) 1,198 1,073 -10.4% 3,406 4,797 40.8%
Operating profit margin (%)       12.9% 13.8%  
Other income 210 453 115.7% 975 1,556 59.6%
Interest 560 575 2.7% 1,872 2,702 44.3%
Depreciation 288 326 13.2% 1,161 1,305 12.4%
Profit before tax 560 625 11.6% 1,348 2,346 74.0%
Tax - -   - -  
Extraordinary items - -   - 1,997  
Profit after tax/ (loss) 560 625 11.6% 1,348 4,343 222.2%
Net profit margin (%) 7.1% 7.4%   5.1% 12.5%  
No. of shares (m)         254.6  
Diluted earnings per share (Rs)*         16.8  
P/E ratio (x)         4.4  
* on a trailing 12 months basis

What has driven performance in FY12?
  • Despite some pressure on volumes, Arvind Ltd's textile business continued 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 sales by 18% YoY in FY12. 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 and khakhi business, however, showed a lackluster performance both on volume and realization front. While the sales remained flat, volumes saw a marginal dip.

    Segmental performance
      FY11 FY12 Change
    Denim      
    Volume (mm) 96.4 95.9 -0.5%
    Sales (Rs m) 13,590 16,020 17.9%
    % share 46% 47%  
    Shirting & Khakhi      
    Volume (mm) 68.0 67.7 -0.4%
    Sales (Rs m) 4,580 4,600 0.4%
    % share 16% 14%  
    Brands and retail      
    Sales (Rs m) 8,130 11,720 44.2%
    % share 28% 35%  

  • 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 significantly higher in FY12 although the company had debt to equity ratio of 1.0 time in FY12 against 1.3 times in FY11. Going forward, however, the pressure of interest costs may fall as the company plans to pay off debt with the extraordinary gains from sale of land.

  • The retail business saw a like to like sales growth of 18%. The company had 327 stores with retailing space of over 10 lac square feet at the end of March 2012.

What to expect?
At the current price of Rs 74, the stock is trading at a multiple of 5.9 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 dampeners. However, if the company is able to pay off its debt with the extraordinary gains from sale of land pockets in Ahmedabad, we believe that there are some long term upsides in the offing.

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