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Arvind Ltd: Margins add fillip - Views on News from Equitymaster

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Arvind Ltd: Margins add fillip
Nov 4, 2009

Performance summary
  • Topline grows by 5% YoY in 1HFY10 despite significantly higher volume growth across all businesses.
  • EBIDTA margins improve from 8% in 1HFY09 to 14% in 1HFY10 due to lower input costs; lower cotton and power costs to ease pressure on profitability in the coming quarters.
  • Net margins (excluding the extraordinary forex loss) improve from 0.8% in 1HFY09 to 2.1% in 1HFY10.
  • Fall in other income is primarily due to the receipt from sale of land in 2QFY09.
  • Arvind has hived off the branded apparel and retail (Megamart) businesses to 100% subsidiaries Arvind Lifestyle Brands and Arvind Retail respectively w.e.f. Aril 2009.


Standalone financials
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 5,809 5,977 2.9% 11,178 11,783 5.4%
Expenditure 5,344 5,171 -3.2% 10,250 10,100 -1.5%
Operating profit (EBDITA) 465 806 73.3% 928 1,683 81.4%
EBDITA margin (%) 8.0% 13.5%   8.3% 14.3%  
Other income 534 82 -84.6% 754 64 -91.5%
Interest 663 463 -30.2% 995 928 -6.7%
Depreciation 293 283 -3.4% 587 575 -2.0%
Profit before tax 43 142 230.2% 100 244 144.0%
Extraordinary items (21) -††   (37) -††  
Tax 6 (10)   8 -††  
Profit after tax/(loss) 16 152 836.4% 55 244 346.9%
Net profit margin (%) 0.3% 2.5%   0.5% 2.1%  
No. of shares (m)       218.9 226.4  
Diluted earnings per share (Rs)**         (1.1)  
Price to earnings ratio (x)         N.A  
(*On a trailing 12-month basis)

What has driven performance in 2QFY10?
  • With some signs of economic recovery in the export markets and better consumption demand in the domestic markets, higher volumes and marginally better realisations helped Arvind improve its performance across all businesses in 1HFY10. 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.

  • Denim fabric, which continues to be the mainstay in Arvindís business, showed encouraging signs of improvement in volume off-take although the company managed to barely sustain the realisations (improved from Rs 114 per metre in 2QFY09 to Rs 117 per metre in 2QFY10). On the volumes front, off-take was higher by 25% YoY for the quarter. The shirting division, which is a supplier to the companyís garmenting arm, also did not disappoint on the volumes front although realisations got impacted due to the slowdown in the garmenting business itself.

    Fabrics
      2QFY09 2QFY10 Change
    Denim      
    Volume (mm) 17.5 21.8 24.6%
    Avg Price (Rs/mt) 114 117 2.6%
    Shirting      
    Volume (mm) 5.6 12.9 130.4%
    Avg Price (Rs/mt) 133 129 -3.0%
    mm-million metres; mt-metre

  • Arvindís garmenting business seems to be doing well in the shirts category while the knits and jeans categories suffered with lower realizations.

  • While volumes in the branded garment business are not very enthusing, the company has not compromised on the realisations on the same, seeking its positioning in the premium category. We have been conservative in our future growth estimations in this segment considering the pressure on input costs.

    Garments
      2QFY09 2QFY10 Change
    Shirts      
    Volume (m Pcs) 0.7 1.0 42.9%
    Avg Price (Rs/pc) 406 435 7.1%
    Knits      
    Volume (m Pcs) 1.9 2.1 10.5%
    Avg Price (Rs/pc) 175 147 -16.0%
    Jeans      
    Volume (m Pcs) 1.2 2.0 66.7%
    Avg Price (Rs/pc) 432 401 -7.2%
    Branded garments      
    Sales (Rs m) 1,250 1,550 24.0%
    m Pcs-million pieces; pc-piece

  • In 1HFY10, Arvind signed a nine-year gas supply agreement with GAIL, thus putting to rest the concern over supply of gas to its captive power plants. Going forward, lower power costs are expected to aid the margins of the company. Cost of power at the companyís Naroda plant was Rs 3.8 per unit and at Santej Rs 4.7 per unit in 2QFY10 as against previous year averages of Rs 5.3 and Rs 8.4 respectively. The cost of cotton however continues to remain high due to lower production of the same in China. Arvind expects the cost of cotton to be higher in 2HFY10 than in 1HFY10.

  • While the lower interest and depreciation costs along with negligible tax incidence buoyed the companyís bottomline performance during the second quarter and half year, the same may be unsustainable going forward as interest costs start rising.

What to expect?
At the current price of Rs 34, the stock is trading at a multiple of 12 times our estimated FY11 EV/EBIDTA. While the management has projected 15% growth in revenues and 3% to 4% growth in margins in FY10, the continued volatility in rupee-dollar rate reduces the visibility in the medium term. However, the policy of servicing the key markets with value added products and focused marketing of brands seems to be yielding positive results. 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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