Arvind Q1 Review: Textile Disappoints; Branded Apparel, Engineering Grow

Company Performance

Arvind Q1 Review: Textile Disappoints; Branded Apparel, Engineering Grow

Arvind Ltd's Q1FY19 consolidated top-line growth was tepid owing to the underperformance of the textile segment, which constitutes nearly 50-55% of the total turnover. This was largely on account of a high base in Q1 FY18 (buyers preponed purchases prior to GST implementation from Q2) and a weak offtake in denim fabrics. In contrast, robust year-on-year (YoY) revenue growth was observed in case of the other segments.

High raw material costs (cotton), prima facie, weighed in on Arvind's gross margins significantly during the quarter, which, in turn, took a toll on the operating margins. From a YoY perspective, higher depreciation and financing costs (primarily on account of investments in the textile and branded apparel segments), coupled with an increase in tax rate, compressed the company's profit margin.

The road ahead

Arvind is shifting its focus gradually from fabrics to garmenting. At present, garment manufacturing facilities are located in India and Ethiopia, with the latter catering exclusively to export markets in North America and Europe at zero rate of duty. To expand its manufacturing base, the management intends to increase its capacity by three times in the next three years, mainly in Jharkhand and Ethiopia. Foray into new sub-segments such as activewear, sportswear, and loungewear (using synthetic fibres or a blend of cotton and synthetic material) is also on the agenda. Currently, 10% of the fabric manufactured is used as an input for manufacturing garments. In the next 3-5 years, the management targets to take this number to 30-40%. Consequently, cost savings & reduced dependence on external suppliers should be margin accretive.

Branded apparel

On the back of a strong portfolio of international and in-house brands, this segment is well-poised to maintain its consistent run in terms of revenue growth. An uptrend in sale volumes and higher realisations (especially in case of foreign brands) should help offset the corresponding increase in promotional spends, thus leading to operating leverage in due course. Three international brands, that were loss-making in the past, are likely to turn profitable by the end of FY19 because of economies of scale. Since the contribution of this segment to Arvind's annual turnover is sizeable (30-40%), the company's overall margin profile will improve. Given the high growth potential and good brand recall in this space, investments by way of store additions across retail channels (large format stores, multi-brand outlets, exclusive brand outlets) and marketing will pick up the pace going forward.

The manufacturing operations, however, will be predominantly outsourced to keep the business model asset-light. Furthermore, after this segment is listed as a separate entity (Arvind Fashions), product offerings will be extended to cover categories such as footwear (3 brands already in the kitty) and customised premium clothing under the 'Creyate' brand.

Advanced material (Technical textiles)

This segment's revenue grew 10% YoY in Q1 FY19. Arvind's management anticipates sales to grow by at least 20% every year and also foresees margins improving through operational efficiencies. Through continued investments at periodic intervals, the intent is to achieve a top-line of Rs 100 crore by FY20 end.