Arvind Mills: A turnaround on the anvil? - Views on News from Equitymaster

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Arvind Mills: A turnaround on the anvil?

Aug 3, 2001

Arvind Mills, one of the world's largest manufacturers of denim, seems to be turning around. The company has reported a sharp rise in sales as well as in operating profit for the first quarter of the current financial year.

(Rs m) 1QFY01 1QFY02* Change 1QFY02**
Sales & other income 2,823 3,328 17.9% 3,328
Expenditure 2,493 2,827 13.4% 2,827
Operating Profit (EBDIT) 331 501 51.5% 501
Operating Profit Margin (%) 11.7% 15.1% 15.1%
Interest 832 809 -2.8% 481
Depreciation 448 371 -17.1% 371.1
Profit before Tax (949) (679) -28.5% (351)
Extraordinary item - - - -
Tax - - - -
Profit after Tax/(Loss) (949) (679) -28.5% (351)
Net profit margin (%) -33.6% -20.4% -10.6%
(* pre-restructuring)
(** post-restructuring)

Sales and other income have gone up by 17.9% to Rs 3,328 m in 1QFY02. However, the other income component is not clear, so it is difficult to ascertain the quantum of sales growth in the first quarter. However, exports grew by an impressive 22.5% and exports contributed to around 55% of total sales in the aforesaid quarter. The sharp rise in operating margins is primarily on account of a 18% growth in denim price realisations in 1QFY01. This along with a 9% growth in denim volumes has resulted in a overall growth of 29% for the denim division. The denim prices, which have been on the decline for the last four years due to excess capacity, had recovered by around 5% in FY01.

The interest and depreciation costs, which were a drag on the company's profitability in the last four years, have come down by 2.8% and 17.1% respectively in the first quarter. Meanwhile, the debt restructuring plan has been approved by an overwhelming majority of lenders. Once the plan is implemented, it is expected that the total debt of the company will stand reduced by Rs 7 bn and the net worth is expected to be augmented by Rs 5 bn. The financial institutions which have lent more than Rs 7 bn to the company have agreed for a 48% settlement of the original amount.

If one were to account for the restructuring exercise, interest costs have almost halved from Rs 832 m in 1QFY01 to Rs 481 m in 1QFY02. As a result, net loss has come down from Rs 949 m in 1QFY01 to Rs 351 m, a significant fall of 73.6%.

With denim prices set to increase by around 6% in the current financial year coupled with the restructuring exercise, Arvind Mills could be back in black by the end of FY02. Also, the company has secured new supply orders from international fashion houses recently, which will also enable it in posting better volume growth in coming quarters. One must also remember that Arvind is one of the key suppliers of fabrics to some of the major Indian garment manufacturers like Indian Rayon and Raymond.

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