BackConsumer spending revival key for Arvind
Consolidated net sales grew 8% to `2,041 crore in the March quarter, the lowest in around two years
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Fears of a dissipating revival in consumer discretionary demand have hit the shares of Arvind Ltd. They have plunged 21% since March, under-performing the broader markets. It is true that Arvind has forecast revenue growth of 15-17% for the current fiscal, compared with 14% in FY15. But that, too, is a comedown of sorts.
In the brands and retail segment, the company has scaled down its growth forecast to 24-26% from 30% earlier.
The company’s executive director and chief financial officer, Jayesh Shah, said that urban demand will pick up in the second half of this fiscal, but that optimism isn’t being shared by analysts yet.
The fact that consumer sentiments are yet to recover is amply evident from Arvind resorting to discounts to boost sales, points out a note from Edelweiss Securities Ltd.
The brokerage anticipates lower growth in the brand and retail segment versus the management forecast.
The brand and retail segment contributes to around one-third of overall revenue.
What is adding to analysts’ skepticism is that the performance in the March quarter is also not much to go by.
Consolidated net sales grew 8% to ₹ 2,041 crore in the March quarter, the lowest in around two years.
Sales in the value segment (mid- and lower-priced segments) remained subdued, while the premium brands continued to grow.
Net profit growth halved to ₹ 49 crore due to a one-time retrenchment for workers and the settlement of a legal dispute with Ralph Lauren.
Another disappointment was the operating profit margin, which narrowed 120 basis points (bps) sequentially to 12.7% because of higher discounts to liquidate inventory. One basis point is one-hundredth of a percentage point.
The margins for the textile business declined as denim volume shrank 8% from a year ago. Losses at two garment manufacturing plants which just started operations also dragged margin. The management has forecast a 150 bps expansion in margins for the brands and retail segment. The closure of money-losing stores and power brands such as Gap, known for trademark jeans, will also help buoy margins.
With Arvind investing aggressively in brands such as Nautica and Gant, it hopes that the premium brand sales will pick up, especially through the online channel, and help margins. But the key to a stock rally remains a pickup in consumption spending, although the shares aren’t exactly expensive, trading at 13 times their one-year earnings per share estimate.
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