Cotton Down, Arvind Gains

Market sources say this is on account of fresh buying by foreign institutional investors.

One of the main reasons for the optimism is a bright outlook on the raw material side as cotton prices are down. Cotton prices have been falling, following a lower offtake by mills, apart from expectations of higher production in the next crop.

The industry estimates cotton production at 160 lakh bales in 1997 as compared with 156 lakh bales in 1996.

Analysts feel cotton cost will be lower by around four per cent in the next financial year.

With cotton accounting for as much as 60-70 per cent of the total raw material costs, it comes as no surprise then that Arvind's fortunes are closely linked to cotton prices.

In fact, analysts point out that every one per cent drop in the company's average cotton purchase price results in a three per cent increase in its profits.

Lower cotton prices have already shown its impact on the company's first half performance.

For the six-month period ended September 1996, margins at the operational level jumped from 13.18 per cent to 19.22 per cent.

Analysts expect exports (which incidentally account for almost 45 per cent of Arvind's turnover) to remain a key focus area for the company in future.

According to BZW Asia Research, its focus to produce higher value-added denim and the building up of strong brands in the domestic market, should reduce the sensitivity of its earnings to cotton prices.

A reduction in its investments in financial assets is also a good step. The commissioning of a major part of its capacity expansions in 1997 would also result in higher earnings growth.

The company is also setting up captive power generation facilities to meet its requirements. Its expansion plans also includes forays into areas like knitted fabrics.

Companies like Vardhaman Spinning, Bombay Dyeing and Ashima Syntex should also gain from lower cotton prices.