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Arvind: Land bank stimulus - Views on News from Equitymaster
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Arvind: Land bank stimulus
Aug 16, 2010

Performance summary
  • Topline falls by 2% YoY in 1QFY11 due to lower volumes in denim sales and flat realizations.
  • EBIDTA margins improve marginally from 14.7% in 1QFY10 to 15% in 1QFY11 due to higher cotton and power costs.
  • Other income for the quarter includes profit of Rs 91 m on sale of land in Ahmedabad at Rs 700 m.
  • Interest costs were higher due to forex losses in addition to upward movement in interest rates.


Standalone financials
(Rs m) 1QFY10 1QFY11 Change
Net sales 5,787 5,696 -1.6%
Expenditure 4,938 4,844 -1.9%
Operating profit (EBDITA) 849 852 0.4%
EBDITA margin (%) 14.7% 15.0%  
Other income (19) 174  
Interest 447 536 19.9%
Depreciation 292 300 2.7%
Profit before tax 92 190 108.1%
Tax - -  
Profit after tax/(loss) 92 190 108.1%
Net profit margin (%) 1.6% 3.3%  
No. of shares (m) 226.4 231.9  
Diluted earnings per share (Rs)*   2.5  
Price to earnings ratio (x)   16.6  
(*On a trailing 12-month basis)

What has driven performance in 1QFY11?
  • Although the domestic business continued to remain lucrative for Arvind in 1QFY11, exports continued to lag. Despite the signs of recovery in the export and domestic markets, Arvind's realisations remained flat 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.

    The shirting business in fact, showed encouraging signs of improvement in volume off-take. The division which is a supplier to the company's garmenting arm, also did not disappoint on the exports front (up 17% YoY). However, its realization growth remained muted. The operating margins for 1QFY11 showed a very marginal improvement.

    Fabrics
      1QFY10 1QFY11 Change
    Denim      
    Exports (mm) 11.7 11.5 -1.7%
    Domestic (mm) 10.1 10.1 0.0%
    Avg Price (Rs/mt) 121 122 0.8%
    Shirting      
    Exports (mm) 1.2 1.4 16.7%
    Domestic (mm) 8.0 8.8 10.0%
    Avg Price (Rs/mt) 133 133 0.0%
    mm-million metres; mt-metre

  • 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 higher in 1QFY11 as the company had mark-to-market (MTM) losses on the forex borrowing as against the MTM gains in 1QFY10. Going forward the pressure of input costs is only set to increase.

  • 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. The cost of gas came down by 18% in 1QFY11. However, the cost of cotton went up by 23% from Rs 61 per kg to Rs 74 per kg in 1QFY1. Arvind expects the cost of cotton to remain firm in FY11.

  • Profits from sale of land in Ahmedabad came in as a windfall gain to the company this quarter. It booked profits of Rs 91 on sale consideration of Rs 700 m. Further, it expects to derive Rs 300 m from the sale during the rest of the fiscal.

What to expect?
At the current price of Rs 41, the stock is trading at a multiple of 6.2 times our estimated FY13 EV/EBIDTA (ResearchPro subscribers can view latest updates here). While the management has projected higher growth in volume in FY11, the continued volatility in realisations reduces the visibility in the medium term. The denim and shirting capacities are expected to go up by 8% YoY and 10% YoY respectively by 3QFY11. 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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