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Arvind Ltd: Gaining pricing power

Dec 8, 2012

Arvind Ltd. declared its results for the second quarter of financial year 2012-13 (2QFY13). The company has reported 31% YoY growth in net sales while its profits have grown by 23% YoY. Here is our analysis of the results.

Performance summary
  • Topline grows by 20% YoY in 1HFY13 aided by price improvements in denim and garment sales in the domestic market.
  • EBIDTA margins improve from 14.5% in 1HFY12 to 16.5% in 1HFY13 with drop in cotton prices and reduced power costs.
  • The drastic fall in other income is because the company had booked extraordinary gains from sale of land as well as sale of stake in JV VF Arvind Brands to VF Corp in FY12.
  • Despite lower interest costs and better operating performance, net profits fell by 6% YoY in 1HFY13. The same grew by 23% for 2QFY13.

Standalone financial performance
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 7,491 9,825 31.2% 15,472 18,563 20.0%
Expenditure 6,389 8,180 28.0% 13,226 15,491 17.1%
Operating profit (EBIDTA) 1,102 1,645 49.3% 2,246 3,072 36.8%
Operating profit margin (%) 14.7% 16.7%   14.5% 16.5%  
Other income 397 49 -87.7% 809 75 -90.7%
Interest 691 674 -2.5% 1,318 1,303 -1.1%
Depreciation 283 373 31.8% 568 735 29.4%
Profit before tax 525 647 23.2% 1,169 1,109 -5.1%
Tax - -   - 1  
Extraordinary items - -   18 -  
Profit after tax/ (loss) 525 647 23.2% 1,187 1,109 -6.6%
Net profit margin (%) 7.0% 6.6%   7.7% 6.0%  
No. of shares (m)         258.0  
Diluted earnings per share (Rs)*         16.4  
P/E ratio (x)         5.6  
* on a trailing 12 months basis

What has driven performance in 1HFY13?
  • Thanks to improved pricing power, despite some pressure on denim volumes, Arvind Ltd's textile business continued to draw strength from higher realizations. However, exports continued to lag. The company managed to grow its denim sales by 7.9% YoY in 1HFY13. 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
      2QFY12 2QFY13 Change
    Denim
    Volume (mm) 23.4 24.4 4.3%
     Sales (Rs m)  3,930 4,240 7.9%
    % share 31% 32%  
    Shirting & Khakhi
    Volume (mm) 16.4 20.5 25.0%
     Sales (Rs m)  4,780 5,270 10.3%
    % share 38% 40%  
    Brands and retail
     Sales (Rs m)  3,180 3,380 6.3%
    % share 25% 26%  

  • 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 lower than in 1HFY12 due to repayment of debt. 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 6%. The company had 627 stores with retailing space of over 1 million square feet at the end of September 2012.

What to expect?
At the current price of Rs 92, the stock is trading at a multiple of 4.5 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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