Aggressive expansion to drive Arvind’s earnings growth

Textiles player Arvind Ltd. reported a solid set of numbers in the fourth quarter of fiscal year 2013-14, beating analysts' estimates. With both the textiles and brands & retail (B&R) divisions reporting healthy growth, the company's net sales rose 33.6% in the quarter.

The B&R division's sales grew 38% on account of 10.5% same-store sales growth and increase in total store area. The textiles division's sales grew 27% owing to healthy volume growth in denims, wovens and garments. The company's net profit surged 11.5% in the quarter.

Most of Arvind's brands like Nautica, Tommy Hilfiger and Hanes are likely to clock healthy growth in the current year. The company maintained its guidance for revenue growth of 20-24% in 2014-15.
While sales growth and net profit were healthy, operating margins of both the verticals came under pressure in the last quarter. The company's overall operating margin declined by 121 basis points compared to the corresponding quarter last year.

This was primarily due to the -2.6% operating losses at Megamart. The brands segment's margin was muted at 6.9%. The company expects the B&R division's margins to improve this year.

Arvind's expansion plans are on track and are likely to provide a fillip to earnings in the coming years. The company incurred capex of Rs. 570 crore in 2013-14. Of this amount Rs. 250 crore was spent on the B&R division.

It plans to expand its wovens capacity from 120 million metres to 132 million metres. It also plans to add 3 lakh sq. ft. of space to its Megamart retail stores. It intends to increase garment capacity from 15 million pieces to 25 million pieces in 2014-15. However, all these expansion plans will require funding to the tune of Rs. 300 crore in 2014-15, which will add to the company's debt burden.

A significant positive for Arvind Ltd. is its acquisition of a 49% stake in the India business of global fashion brand Calvin Klein last quarter. This acquisition is expected to provide a fillip to Arvind's portfolio of brands.

The Calvin Klein brand has universal appeal and is expected to record high sales. More product extensions are on the cards. Arvind plans to introduce CK accessories, followed by formal wear and suits in the near future. The company now commands a 90% market share in one of the fastest growing segments- Bridge to luxury.
The B&R segment's margins could also improve in the wake of the Calvin Klein acquisition. High debt due to aggressive expansion is the key concern for the stock at present.


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