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Arvind: Volumes bring in hopes
Aug 4, 2009

Performance summary
  • Topline grows by 26% YoY in 1QFY10 on the back of improved volumes.
  • EBIDTA margins improve by nearly 4.5% for the quarter on the back of lower input costs.
  • Net margins improve from 0.7% in 1QFY09 to 1.3% in 1QFY10 despite lower other income.
  • Gas prices were lower by 43% YoY on account of new contract with GAIL.
  • Fall in other income in 1QFY10 over that in 1QFY09 primarily due to one time sale of land in 1QFY09.


Standalone financial performance
(Rs m) 1QFY09 1QFY10 Change
Net sales 5,369 6,768 26.1%
Expenditure 4,905 5,888 20.0%
Operating profit (EBDITA) 464 880 89.7%
EBDITA margin (%) 8.6% 13.0%  
Other income 219 5 -97.7%
Depreciation 294 326 10.9%
Interest 332 473 42.5%
Profit before tax 57 86 50.9%
Extraordinary income/(expense) (16) -  
Tax 3 -  
Profit after tax/(loss) 38 86 124.0%
Net profit margin (%) 0.7% 1.3%  
No. of shares (m)   226.5  
Diluted earnings per share (Rs)*   (1.7)  
Price to earnings ratio (x)   N.A  
*On a trailing 12-month basis

What has driven performance in 1QFY10?
  • Although the economic slump continued to ail the textile industry, higher volume takeoffs thanks to competitive pricing and the change in product mix bore well for Arvind Ltd this quarter. The denim fabric, which continues to be the mainstay in Arvindís business, showed very appreciable momentum in volumes (grew by 27% YoY) while the realisations picked up as well due to rupee depreciation. Raw material consumption as percentage of sales went up from 37% in 1QFY09 to 45% in 1QFY10 due to significant increase in purchase of semi-finished products to meet surge in orders.

  • The shirting division, which is a supplier to the companyís garmenting arm, also did not disappoint in volumes, while the realizations remained flat.

    Fabrics
    (Rs m) 1QFY09 1QFY10 Change
    Denim
    Volume (mm) 17.2 21.8 26.7%
    Avg price (Rs mt) 109 121 11.0%
    Shirting
    Volume (mm) 5.9 9.2 55.9%
    Avg price (Rs mt) 134 133 -0.7%

  • Arvindís garmenting business seems to be gaining leverage in the knits category while the jeans and shirts business have managed to do reasonably well. With strong order book and improved productivity, the exports of apparels are expected to further improve in coming quarters

  • While volumes in the branded garment space are not very enthusing, the company has not compromised on the realisations for the same, seeking its positioning in the premium category. Revenues were up 2% YoY despite closure of two brands - Newport and Excalibur, thanks to strong performance of Arrow and Megamart stores. The company opened its fifth Megamart store in Bangalore this quarter. We have been conservative in our future growth estimates for this segment considering the pressure on retailing costs.

    Garments
    (Rs m) 1QFY09 1QFY10 Change
    Shirts
    Volume (m pcs) 0.96 0.94 -2.1%
    Avg price (Rs pc) 387 396 2.3%
    Knits
    Volume (m pcs) 1.5 2.9 93.3%
    Avg price (Rs pc) 187 148 -20.9%
    Jeans
    Volume (m pcs) 1.3 1.4 7.7%
    Avg price (Rs pc) 378 398 5.3%
    Branded garments
    Sales (Rs m) 1,000 1,020 2.0%

  • Arvind has hedged most of its future exports receivables and it expects to realise between Rs 47 to Rs 48 per dollar for the same.

  • During the quarter, Arvind signed a nine year contract for supply of gas with GAIL. As 100% of energy required was generated with gas, the average cost of power for the company reduced to Rs 4.15 per unit in 1QFY10 from Rs 7.23 per unit last year (down 43% YoY).

  • Both international and domestic prices of cotton went up in the last three months and Arvind expects the same to remain firm in the next buying season as well. Although the acreage of cotton has increased this year, the prices of cotton are expected to move according to government and CCIís decision to hold inventory and fixation of minimum support prices. Arvind expects higher cotton prices to yield pressure on its operating margins.

      What to expect?
      At the current price of Rs 28, the stock is trading at a multiple of 9 times our estimated FY11 EV/EBIDTA. The company expects its revenue to grow by 15% YoY and margins to improve by 3% to 4% in FY10 on account of robust product demand, improved productivity in garments plants and reduced energy cost. Also, 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, we maintain a cautious stance on the earnings potential of the company.

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