Arvind, one of India’s biggest textile conglomerates, recorded moderate consolidated top-line growth in Q1 FY19 mainly due to the underperformance of the textile segment. This was largely on account of buyers pre-poning purchases prior to GST implementation from Q2 and a weak off-take of denim fabric. In contrast, a robust year-on-year (YoY) revenue growth was observed for other segments.
The high costs of raw materials, especially cotton, took a significant toll on Arvind’s gross margins during the quarter, which, in turn, affected its operating margins. The company’s profit margin slowed owing to higher depreciation and financing costs primarily on account of investments in the textile and branded apparel segments, coupled with an increase in tax rate.
Arvind is gradually shifting focus from fabrics to garmenting to earn better margins. At present, the company’s 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. The company also intends to increase its manufacturing capacity three times in the next three years, mainly in Jharkhand and Ethiopia. Additionally, it will foray into new sub-segments such as activewear, sportswear, and loungewear using synthetic fibres and a blend of cotton and synthetic material.
Currently, Arvind uses only 10 per cent of the fabric manufactured in-house as an input for manufacturing garments. The company is looking to increase this to 30 to 40 per cent in the next 3-5 years.
High pace apparel growth
The branded apparel segment is well-poised to maintain consistent revenue growth due to a strong portfolio of international and in-house brands. The increase in promotional spends will be easily offset by an uptrend in sale volumes and higher realisations, thus leading to operating leverage in due course. The segment will witness high-paced growth owing to its potential, good brand recall, investments by way of store additions across retail channels (large format stores, multi-brand outlets, exclusive brand outlets, e-commerce portals) and marketing.
To keep the business model asset-light, the manufacturer will outsource its operations. Furthermore, after being listed as a separate entity, it will extend its products to categories such as footwear and customised premium clothing under the ‘Creyate’ brand.
Technical textiles on the rise
The company recorded a 10 per cent YoY revenue growth in technical textiles in Q1 FY19. The company anticipates sales to grow by at least 20 per cent every year. Margins are also likely to improve through operational efficiencies. The company, through continued investments at periodic intervals, intends to achieve a top-line of Rs 100 crore by FY20 end.
Meanwhile Arvind plans to demerge branded apparel and engineering divisions from its core textile business in H2 FY19. This is expected to create value for the company’s shareholders. It will also result in verticalisation of the textile segment, promising prospects of the branded apparel segment and a healthy order book in the engineering segment.
However, risks linked to rising input costs, unfavorable revisions in license clauses (pertaining to foreign brands) and stiff competition from other major garment retailers could impact financials materially. Moreover, Arvind’s omnichannel arm ‘Arvind Internet’ (where products are sold through the nnnow.com website), despite comprising a small portion of the top-line, has been a loss-making business. The textile segment of Arvind has been dormant for quite some time. It needs a performance turnaround to drive the next leg of profitability.