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Arvind: Lower interest costs offer relief

Jun 15, 2010

Arvind declared its FY10 results. The company has reported 2% YoY drop in net sales while it has declared profits at the net level as against losses last year. Here is our analysis of the results.

Performance summary
  • Topline falls by 2% YoY and 8% YoY in in FY10 and 4QFY10 respectively. This is due to pressure on realizations despite a good takeoff in volume.
  • EBIDTA margins improve from 10% in FY09 to 12% in FY10 due to higher volumes and lower power costs. Cotton costs continue to remain under pressure.
  • Lower interest costs bring in positive bottomline for the fourth quarter and full year periods.
  • Fall in other income in FY10 is primarily due to the receipt from sale of land in FY09.

Standalone financials
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 6,036 5,568 -7.8% 23,272 22,769 -2.2%
Expenditure 5,483 5,094 -7.1% 20,882 20,074 -3.9%
Operating profit (EBDITA) 553 474 -14.3% 2,390 2,695 12.8%
EBDITA margin (%) 9.2% 8.5%   10.3% 11.8%  
Other income 67 216   780 517 -33.7%
Interest 434 266 -38.7% 2,294 1,555 -32.2%
Depreciation 330 271 -17.9% 1,220 1,138 -6.7%
Profit before tax (144) 153   (344) 519  
Extraordinary items (55) -   (115) -  
Tax 5 -   19 -  
Profit after tax/(loss) (204) 153   (478) 519  
Net profit margin (%) -3.4% 2.7%   -2.1% 2.3%  
No. of shares (m)       218.9 226.4  
Diluted earnings per share (Rs)**         2.1  
Price to earnings ratio (x)         15.4  
(*On a trailing 12-month basis)

What has driven performance in FY10?
  • Although it was business as usual for Arvind in FY10, the improvement in volume takeoffs for denim and shirting were noteworthy. Not that these aided significantly in improving the companyís fundamentals. Despite the signs of recovery in the export and domestic markets, Arvind failed to retain improved realisations for its denim and shirting businesses. Infact 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.

    Denim fabric, which continues to be the mainstay in Arvindís business, showed encouraging signs of improvement in volume off-take. The shirting division which is a supplier to the companyís garmenting arm, also did not disappoint on the volumes front (up 44% YoY). However, its realisations got impacted due to the slowdown in the garmenting business itself. As per the company, the average realisations are lower as volume growth has come in largely from domestic market where the product mix sold has lower price points. The operating margins for FY10 are well within our estimates.

      FY09 FY10 Change
    Volume (mm) 67.0 88.0 31.3%
    Avg Price (Rs/mt) 115 116 0.9%
    Volume (mm) 27.0 39.0 44.4%
    Avg Price (Rs/mt) 135 127 -5.9%
    mm-million metres; mt-metre

  • Arvindís 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 lower in FY10 as the mark-to-market (MTM) gains on the forex borrowing were Rs 220 in FY10 as against the MTM loss of Rs 630 m in FY09.

  • In FY10, Arvind had signed a nine-year gas supply agreement with GAIL, thus putting to rest the concern over supply of gas to its captive power plants. Going forward, lower power costs are expected to aid the margins of the company. While the cost of cotton went up significantly from Rs 61 per kg to Rs 68 per kg in 4QFY10, that of gas went down from Rs 17 per kg to Rs 13 per kg. Arvind expects the cost of cotton to be even higher in FY11.

  • While the lower interest and depreciation costs along with negligible tax incidence buoyed the companyís bottomline performance during FY10, the same may be unsustainable going forward as interest costs start rising.

What to expect?
At the current price of Rs 36, the stock is trading at a multiple of 6.2 times our estimated FY12 EV/EBIDTA. While the management has projected higher growth in volume in FY11, the continued volatility in realisations reduces the visibility in the medium term. The dependence on forex rates and high leverage are also dampeners. Despite the relative attractiveness of the stock to its peers in terms of price to book value, we maintain a cautious stance on the earnings potential of the company

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