Cotton accounts for about 40 per cent of its sales. Cotton prices have risen by 17 per cent over the past year; they have, however, been on a downward trend in the last few months, which should have eased the pressure on margins. But that has not been the case. A large inventory of cotton at relatively higher prices, perhaps, explains the negative impact on profitability. Margins are likely to remain under pressure until the cotton prices slip further.

The use of naptha as a fuel for its captive power plant has resulted in a surge in power and fuel costs by about 21 per cent. It plans to substitute naptha with natural gas from August; this would help lower the power and fuel costs.

Driven by denim, still

Arvind Mills is the market leader in denim fabric and has a dominant presence at the global level. The cyclical nature of denim demand and prices determines the revenues, to a large extent. Revenues between October 2003 and March 2004 fell due to lower offtake of denim fabric.

Though there has been a revival in demand in recent months, revenues remain susceptible to changes in the cycle.

To reduce the impact of cyclical changes, Arvind Mills has diverted a part of its denim capacity towards shirting fabric. That the contribution of shirting fabric to revenue has increased by two percentage points, at the expense of the denim fabric segment is an outcome of this strategy. At 55 per cent of the turnover, denim, however, remains a major driver of revenues.

Garment export thrust

Arvind Mills has been increasing its focus on shirting and garments. This will help de-link its revenues from commodity cycles to an extent. It will also enable the company capitalise on the opportunity in the garments market; the removal of quotas in 2005 would provide an avenue for scaling up revenues, as outsourcing from India would increase in a phased manner

There is an increasing trend in the export revenues of the shirting segment. Export as a per cent of revenues of this segment production has increased by 15 percentage points to 42 per cent over the past year. Arvind Mill's ability to emerge as a major player in the competitive garments market would, however, determine the success of its shift in strategy.

Arvind Mills is not new to the garments business. Arvind Brands, an erstwhile subsidiary company, is a leading player with brands such as Lee, Arrow, Wrangler and Flying Machine. Arvind Brands ceased to be a subsidiary of Arvind Mills earlier this year when ICICI Venture picked up a 54 per cent stake in its equity, This was part of a debt restructuring exercise.

The promoter group of Sanjay Lalbhai has, however, retained management control and has the option to acquire an additional 5 per cent stake over the next eight years, which may be exercised if the performance improves in the next few years.

Arvind Brands would have to retain its leadership position in flagship brand Lee, and also reposition brands such as Flying Machine, Newport and Ruf `n Tuf, which have shown signs of stagnation, if its performance is to perk up. The marketing expertise of Arvind Brands would stand the group in good stead in its plans to enhance revenues from the garments business.

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