Arvind Mills: A review

Arvind Mills is the flagship company of the Lalbhai Group. It is world’s third largest and India’s largest denim producer and commands 70% domestic market share with 120 m meters of denim rolling out every year. The company is also into knitting and shirting. Apart from textiles, Arvind Mills has presence in ready-to-wear, agrochemical and telecom industry through its subsidiaries.

Denim segment remains the lead performer for Arvind Mils (63% of FY03 revenues). The domestic denim business is expected to grow at a faster rate of around 6% as compared to 4% in the global market. Internationally, this segment faces competition from China, Indonesia and Hong Kong. In India, Arvind rules the market as small denim manufacturers suffer from financial and capacity limitations.

Shirting contributed to around 22% to FY03 revenues. Domestically, the division faces competition from the lower end of the market. The company expects shirting business volumes to increase, as the global shirting business is growing at around 6% whereas domestically, this segment is growing at around 25%. Arvind Mills is focusing on HVCS (High Value Cotton Shirting) because it commands premium in both domestic and international markets. The major consumers of HVCS are countries like Europe, Japan and US. But due to quota restrictions applied by European and US markets, the company is not able to cash the opportunity. However, prospects for this segment looks better post 2005. Arvind Mills is also targeting key brands that are expected to improve its orderbook position and margins.

The company has presence in the garments segment through its subsidiary. Garment is a growth area and has low capital requirement but high value addition. The industry is labour intensive, so the company has the opportunity to take advantage as it has access to cheap labour.

Knitting is another key growth area for the company, as demand in the domestic and international markets are expected to grow by 15% and 5% respectively in medium term. The company is already supplying to domestic majors Wills and Madura Garments. Domestically, this segment faces competition largely from unorganised and regional players.

Raw material cost as percentage of net sales is expected to go down from the current level of 25% because of good cotton crop this year. Debt restructuring is expected to improve net profit margin (8.7% in FY03). To put things in perspective, interest cost was lower by 22% YoY, in 1QFY04. However, rupee appreciation as against US dollar can affect the margins, because company earns more than 50% revenues from exports. Out of the total export earnings, around 70% is US dollars denominated.

At the current price level of Rs 52, the stock trades at P/E multiple of 7.1x FY03 earnings. The phasing out of the MFA (multi fiber arrangement) in 2005 would provide Indian majors like Arvind Mills an opportunity to improve access to major textile-consuming markets based in the Europe and US. However, concerns regarding the sustainability of strength in denim prices and the past track record remain intact.