Buoyancy in Arvind Ltd likely to continue; investors should hold stock for one year

MUMBAI: In the last six months, the stock of Arvind Ltd has given 22% returns against a meagre 2% gain in ET Textile Index—a composition of textiles companies in the entire value chain in the industry. This buoyancy in the company’s stock is expected to continue given the lucrative proposal in the recent Budget to do away with excise duty.

Prior to the Budget, Arvind and other retail textiles companies had to pay a net excise duty of 3.6% on maximum retail price of its products. With the proposal to do away with the excise duty, the company would pass on the zero excise duty in terms of discount to customers. This augurs well for the company at a time when the demand in the textiles industry is subdued. The company’s margins in the brand and retail division are expected to increase in the coming quarters. A Nirmal Bang Report on Arvind suggests “ Even if the company doesn’t pass on this benefit to customers and retains the entire benefit for itself, then its FY14E consolidated net profit would increase by 12%.” It is estimated that the company’s operating profit margins from the branding and retail division in the last three quarters have risen to 6% from 1.1%. In the coming quarters, due to enhance demand, if the company slashes prices, its operating profit margins are expected to grow further.

Beside this, the company is expected to benefit from expanding its woven capacity. The company increased its woven capacity in the first half of FY13. This should provide volume growth in the March 2013 quarter and the first half of FY14. The Nirmal Bang foresees its textile division to post revenue growth of 8.3% in FY14E on account of 19% growth in the woven division. Investors should hold onto the company’s stock for at least one year.