The stock of Arvind fell 1.55% on Tuesday despite marginally positive Sensex as the company’s December 2011 quarter performance was lower than the seen in September 2011 quarter. Further, the company’s expectations for FY12 also stands slightly lower and margins in March 2012 quarter is expected to drop a bit due to high cost inventory amid softening cotton prices.
Nevertheless, Arvind's long-term prospects continue to be robust thanks to improving performance of its branded apparel and retail (BA&R) business and resilience witnessed amid the slowdown. Given the growth potential, the stock’s valuation, even after significantly outperforming the Sensex in last one year, at 7 times, looks reasonable.
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Performance slipped in Q3…
Excluding the impact of the stake sale in joint venture company VF Arvind Brands, the company’s sales grew at a lower rate of 20% year-on-year compared to 23% recorded in September 2011 quarter. This is because growth of BA&R business (27% of total revenues) at 32% year-on-year was lower as compared 46% in September quarter. Positively, textile business grew faster (by 21%) compared to 18% helped by higher realisation and volumes in denim (15%) and shirting (7%) segments.
Lower raw material cost (read cotton prices), which declined 807 basis points to 46% as a percentage of sales, helped operating profit margin grow at a higher rate of 239 basis points compared to an improvement of 176 basis points witnessed in previous quarter.
After adjusting the extraordinary income of Rs 191 crore (net of tax) on account of the stake sale, net profit margin declined marginally by 23 basis points to 4.2%, which is still commendable given more than doubling of interest cost at Rs 114 crore (10% of revenues) due to Rs 38 crore exchange loss on foreign liabilities.
...but is likely to pick up
The company has tweaked its FY12 sales growth target marginally to 18% from 20% guided in the previous quarter; margins are also expected to be impacted in the March 2012 quarter.
Says Jayesh Shah, director and chief financial officer of the company, “The selling prices have adjusted downwards ahead of full benefit of lower cotton prices while inventories continue to reflect higher cotton prices of previous season. This may marginally impact the operating margin in the fourth quarter.” Thus, the outlook is a little dull in the near-term but investors with a horizon of more than one year can buy the stock.
BA&R, which comprises of Arvind Lifestyle Brands and Arvind Retail (that operates MegaMart stores) is doing well with sales per day per square feet improving since past three consecutive years. The same has jumped 68% and 38%, respectively during FY09 and FY12 (9 months ended December 2011).
Further, like to like growth in Arvind Lifestyle Brands and Arvind Retail at 16.2% and 4.7% was better than 15.2% and 3.6% in the previous quarter respectively despite the slowing economy. Capacity expansion in shirting/khaki fabrics (which will increase volumes by 10% in fourth quarter) will also boost financials. Besides, focus on advance materials, technical textiles are long-term growth drivers.