The Hindu Business Line : Arvind Mills: Buy

INVESTMENT can be considered in the Arvind Mills stock. After a line of disappointing quarterly results, the company's performance during the October-December quarter rebounded on the back of a reduction in interest costs and improved realisations across segments.

While robust demand for denim should continue to spur volumes, lower raw material and fuel costs are likely to have a beneficial impact on margins.

The company's expansion plans are also on track and would enable the company give a push to fabric and garment exports, which are no longer restricted by quotas.

Financials

Revenues grew 19 per cent on the back of strong demand for denim. Operating profits also recorded similar growth.

A 40 per cent reduction in interest costs saw profit-before-tax soar over a hundred per cent.

The appreciation of the rupee vis-a-vis the dollar during the quarter could partly explain the significant reduction in interest costs, as dollar-denominated debt accounts for about 40 per cent of its total debt.

We are now more confident about the company's prospects, as margins, which have been under pressure in the preceding quarters, have stabilised and show signs of improving.

On a sequential basis, the operating margins improved by more than 150 basis points and now stand at 23 per cent.

Although prices of cotton, the main raw material, have declined 25-30 per cent over the year, the company has for the greater part of the year not been able to enjoy the benefit of lower prices, owing to high-cost inventory.

On the back of higher output of cotton, the prices are likely to remain at these levels, if not lower, in the near term.

Margins are also likely to improve on the back of cost savings on fuel, which now account for about 10 per cent of sales. Arvind has switched from high-cost naphtha to natural gas as feedstock for its captive power plants.

The full benefits of this measure will accrue in the coming quarters.

Buoyed by denim

Strong volumes and improved in realisations in denim, which account for more than 50 per cent of Arvind's turnover, have pepped up the revenues.

The company has tried to reduce its dependence on denim, the demand for which is known to fluctuate, by diversifying into non-denim products such as shirting fabric and knits, which now contribute more positively to revenues.

But with denim back in demand once again, the segment continues to contribute the bulk of its revenues.

This exposes the company to volatility in both cotton prices and the demand for denim.

In the near term, however, the robust demand for denim is likely to be favourable for the largest denim-maker in the country. More than 50 per cent of revenues from this segment are from exports. Arvind is likely to be a preferred vendor to importers, who are no longer restricted by quotas.

With 70 per cent of its product portfolio now focussed on fashion products as against staple items, it is set to enjoy better realisations in a competitive market.

Foray into garments

Arvind has forayed into garments as well in a step towards complete integration. Garments now contribute less than 10 per cent of its revenues.

Arvind is, however, stepping up its thrust on garments, as demand for finished products, as against fabric, rises.

The demand for jeans, in particular, is expected to rise, as manufacturing companies in the US have shut operations.

Its jeans manufacturing unit is reaching completion and the first phase is set to commence production in February.

As Arvind already enjoys a strong market share for its fabric, it should be able to leverage its relationship with importers and gain customers for its garments as well.

While the garments business will pose its own set of challenges in terms of providing flexibility in operations and dealing with labour productivity issues, an increasing contribution to revenues from the garments business, which is less capital-intensive and margins-accretive, would augur well for earnings growth.

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