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Arvind Mills: Improved realisations - Views on News from Equitymaster
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  • Sep 11, 2003

    Arvind Mills: Improved realisations

    With the phasing out of the MFA (Multi-Fiber Arrangement) in 2005, Indian textile majors like Arvind Mills will have an opportunity to improve their access to the textile markets based in Europe and the US. In this article, we look at the 1QFY04 results of company and analyse the performance of its various divisions. The company managed to post a 4% growth in topline due to higher realisations in the denim segment, while the bottomline improved by 10%. The reduction in interest costs (down by 22%) had an important role to play in the June quarter. However, a 9% rise in operating expenditure led to fall in the company’s operating margins (down 280 basis points). Exports accounted for around 51% of the total revenues of the company.

    (Rs m) 1QFY03 1QFY04 Change FY03
    Net Sales 3,538 3,696 4.5% 14,792
    Other Income 15 23 61.4% 123
    Expenditure 2,520 2,750 9.1% 10,612
    Operating Profit (EBDIT) 1,018 946 -7.1% 4,179
    Operating Profit Margin (%) 28.8% 25.6%   28%
    Interest 407 318 -22.0% 1,528
    Depreciation 370 371 0.4% 1,481
    Profit before Tax 256 281 9.7% 1,293
    Tax - -   -
    Profit after Tax/(Loss) 256 281 9.7% 1,293
    Net profit margin (%) 7.2% 7.6%   9%
    No. of Shares (eoy) (m) 139.6 185.9   176
    Diluted Earnings per share* 7.3 6.0   7.4
    P/E (x)   6.8    

    Cotton forms a major chunk of raw material for the company. The cotton prices moved up by around 20%, which is one of the major reasons for a rise in expenditure and a consequent dip in operating margins. Power costs also increased by around 10%, primarily due to an increase in the prices of naphtha (raw material for its captive power plant). However, due to good monsoons this year, we expect cotton prices to remain stable.

    Since 51% of the total revenues come from exports, appreciation in the value of the rupee had a negative effect on the company’s earnings. Taking advantage of the lower interest regime, the company has been carrying a debt restructuring exercise, which helped it reduce its interest outgo significantly. It intends to further reduce interest costs by paying off some of its high interest bearing debts.

    Segmental revenue break-up
      1QFY03 1QFY04 Change
    Denim 22,269 23,011 3.3%
    Shirting 7,186 7,319 1.9%
    Knits  768 1,328 72.9%
    Yarn & Grey 2,826 3,169 12.1%
    Others 2,331 2,136 -8.4%

    Denim contributed around 62% of the revenues for the company. Though the volumes for this segment dipped by around 6%, a 10% improvement in realisations helped the segment improve revenues (up 3%). The shirting fabric segment also showed a marginal increase in revenues. Again, though the volumes were lower, realisations compensated for it.

    Recently, the company launched a new range of fabric for Knits segment called Bottom-Weight, which will cater to the needs of its existing clients like Nike. The company has also added new customers like Reebok and Outerbank (a division of Sara Lee) in 1QFY04. The revenues for the knits segment have improved significantly. Due to quota constraints, company couldn’t operate at its full capacity, but post-2004, we expect this division to double the revenues.

    At the current price of Rs 50, the stock trades at P/E multiple of 6.8x its annualised 1QFY04 earnings. The company is actively pursuing a strategy to vertically integrate itself to take advantage of the quota dismantling in 2005. It has already started investing in garment manufacturing capacities in all the product segments it operates like shirts & knits in India and jeans in Mauritius.



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