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Arvind Ltd: Well rounded performance - Views on News from Equitymaster

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Arvind Ltd: Well rounded performance
Aug 14, 2013

Arvind Ltd. declared its results for the first quarter of financial year 2013-14 (1QFY14). The company has reported 26% YoY growth in net sales while its profits have grown by 75% YoY. Here is our analysis of the results.

Performance summary
  • Topline grows by 26% YoY in 1QFY14 aided by volume growth and price improvements in denim and garment sales in the domestic market.
  • EBIDTA margins improve from 16.3% in 1QFY13 to 17.9% in 1QFY14 with drop in cotton prices and reduced fuel (gas) costs for power.
  • Most of the other income was from sale of surplus land and fixed assets.
  • Due to better operating performance, net profits grew by 74.7% YoY in 1QFY14. The exceptional write-off was a one-time retrenchment compensation to workers opting for VRS.

Standalone financial performance
(Rs m) 1QFY13 1QFY14 Change
Net sales 8,737 11,042 26.4%
Expenditure 7,312 9,067 24.0%
Operating profit (EBIDTA) 1,425 1,975 38.6%
Operating profit margin (%) 16.3% 17.9%  
Other income 26 135 419.2%
Interest 629 710 12.9%
Depreciation 361 376 4.2%
Profit before tax 461 1,024 122.1%
Tax 7 114  
Extraordinary items # - (117)  
Profit after tax/ (loss) 454 793 74.7%
Net profit margin (%) 5.2% 7.2%  
No. of shares (m)   258.04  
Diluted earnings per share (Rs)*   11.4  
P/E ratio (x)   6.3  
* on a trailing 12 months basis

What has driven performance in 1QFY14?
  • Arvind Ltd seems to have started to reap the benefits of investments in branding and retail presence over the years. This was seen in the enthusing growth in volumes and improved pricing power for the company, despite the economic slowdown. Thanks to improved pricing power, and volume growth in both denim and shirting, Arvind's textile business registered health sales growth and operating margins. The company managed to grow its denim sales by 30.5% YoY in 1QFY14. This also helped curtail the impact of rise in input costs to an extent. The shirting and khakhi business, too, showed better performance both on volume and realization front.

    Segmental performance
      1QFY13 1QFY14 Change
    Denim
    Volume (mm) 25 26.6 6.4%
    Sales (Rs m)  3,540 4,620 30.5%
    % share 28% 35%  
    Shirting & Khakhi
    Volume (mm) 19.7 24.8 25.9%
    Sales (Rs m) 3,120 4,150 33.0%
    % share 25% 31%  
    Brands and retail
    Sales (Rs m) 1,270 1,260 -0.8%
    % share 10% 10%  

  • 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 marginally higher than in 1QFY13 due to rise in interest costs. The debt to equity ratio stood at 1.2 times at the end of June 2013. Going forward, we expect the pressure of interest costs to fall further 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 9% YoY. Sales from Megamart retail grew by 19% YoY. The company had 892 stores with retailing space of over 1.3 million square feet at the end of June 2013.
What to expect?
At the current price of Rs 72, the stock is trading at a multiple of 3.5 times our estimated FY15 EV/EBIDTA. In the past the company has misjudged its growth prospects and had to undergo corporate debt restructuring. With expanded capacities, focus on pricing power, better working capital management and plans to deleverage the company certainly looks better placed to enhance shareholder returns. 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. We maintain our Hold view on the stock.

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