Arvind Ltd’s shares have surged more than 50% in the past three months, outperforming other textile manufacturers and broader markets on expectations of buoyant revenue growth and strong margins. The management revised its revenue growth forecast for the current fiscal year to 24% from 20% earlier, following upbeat earnings in the September quarter.
Margins are expected to climb to 14%, up from 13.6% during the September quarter, buoyed by declining cotton prices and a weak rupee. An increased focus on selling private brands through its Megamart stores compared to selling discounted branded merchandise also helped, said Kulin Lalbhai, executive director of new initiatives at Arvind. Arvind is planning to end this fiscal year with around 200-230 Megamart stores.
The company’s brands and retail segment revenue grew 45% from a year ago in the September quarter. The garment business, which makes up around 16% of total revenues, recorded a sales growth of 47% to ₹ 190 crore in the September quarter.
The rupee’s depreciation of 7.4% in the first half of this year helped exports, which make up around 30% of revenues. Lalbhai also said the company was planning to double its garment exports to ₹ 400-500 crore.
While the prospects for increasing exports are good, the stabilizing rupee casts a slight shadow on the margin guidance and the estimates from brokerages. Also, Arvind has debt of ₹ 2,386 crore as of 30 September with the debt-to-equity ratio rising marginally to 1.29. Interest costs chipped away at nearly 40% of operating profits in the September quarter and are set to increase.
“There is huge requirement for working capital as we are adding around ₹ 1,000-1,500 crore to our topline. We will try and improve our debt-to-equity ratio to close to 1,” said Lalbhai, without specifying how the company proposes to do that.
In any case, the stock’s rally may well have run out of steam with the strong revenue growth expectations already discounted. Karvy Stock Broking Ltd said in a 9 December note, “We marginally upgrade our sales, operating margins and net income estimates factoring in better traction from garmenting business.” In the absence of an immediate impetus that would trigger further appreciation of stock price, there is little scope for re-rating the stock.
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