Aug 11, 2004|
Arvind Mills: On the run
Despite a poor show in 1QFY05 and expected pressure on margins, on account of higher raw material costs, likely to continue in the near term, textile stocks have been in the reckoning in the recent past. The buying interest, however, is owing to the big export opportunity that lies ahead of Indian companies post 2005 when global markets would be thrown open with the quota regime coming to end. In this backdrop of the potential for Indian textile majors and the recent run up in stock prices of these companies, we look at Arvind Mills, India's largest denim producer.
Rs 100 invested at the end of April 2004...
Arvind's denim (a commodity) business contributes a significant 55% of the company's topline. The company's denim fabric has a presence in both, the domestic as well as export markets. However, if we consider the performance of this segment over the last few quarters, a sustained decline in denim volume offtake (largely affected by the demand from African countries) combined with subdued realisations has affected the topline growth and margins (see chart below). However, with the company now consistently emphasizing on apparel exports, the dependence of the company on the denim business is likely to decrease. This strategy could augur well for its overall profitability in the long term.
Unlike the denim segment, the shirting business (not a commodity like denims) of the company has remained stable with volumes holding ground and realisations improving marginally due to better product mix. Stable shirting revenues have provided a cushion to overall revenues. The company is carrying out a de-bottlenecking exercise on certain key production functions in order to achieve the rated capacity of 34 mm (million meters), which will enable it to meet the enhanced internal requirements for the additional 2.4 m pieces ready-to-wear shirt production capacity.
At the current price level of Rs 79, the stock trades at a price to earnings multiple of 21.4x annualised 1QFY05 earnings. With international markets opening up post 2005, the growth opportunity for a fully backward integrated company like Arvind Mills is promising because of its cost competitiveness. Though the company has reduced some of its debts by converting them into equity, it has led to earnings dilution. Undoubtedly, the company has benefited from the restructuring exercise in the last two years but we believe it will take time for the company's earnings to support the stock price fundamentally. To that extent, one should exercise caution.
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