Stock Pick From The Textiles Sector

Here Is Why:

• In the five-year period ending FY13, the company has witnessed a consistent rise in its topline, at a CAGR of 18 per cent.
• The management has revised the FY14 revenue growth target from 20 per cent earlier to about 24 per cent.
• A strong financial performance has helped the company improve its Return on Equity from 11.1 per cent at the end of FY13 to 15.8 per cent by Q2FY14.

After a long lull, the textile sector has once again caught the fancy of investors in recent times. What has acted as a catalyst for demand is the relative depreciation of the INR (down 14.5 per cent in the last one year) against the USD, which is helping the companies increase their exports. Also helping the sector is the bumper crop of cotton, one of the key raw materials it uses. Needless to say, higher production of cotton will help to check the prices too.

One of the companies that will be benefited by these factors is Arvind Ltd., the largest cotton textiles manufacturer in India with an annual installed textile capacity of over 230 million metres. Arvind Ltd. is also a leading player in branded garments and value retail in the domestic market. Its major business consists of textiles, and manufacturing and selling licensed and owned branded garments through exclusive brand outlets, multi-brand outlets and its value retail chain, i.e. Megamart. Moreover, the company earns one-third of its revenue from exports.

In fact, there are many other compelling reasons as to why we see this company doing well going forward. In the five-year period ending FY13, Arvind Ltd. has witnessed a consistent rise in its topline, at a CAGR of 18 per cent. While there has been some volatility seen in the bottomline, we feel that this is likely to stabilise going forward, with the business sentiment improving across all its segments, be it the textiles vertical or brand & retail. This is clear from the fact that the company has revised its revenue estimates for FY14.

The revenue growth expectations have been revised from 20 per cent to about 24 per cent for the fiscal. In this, the textiles segment is likely to witness 17-18 per cent growth and brands & retail could see 33-35 per cent growth. We believe that the company will not have major difficulty in achieving this target. It has already registered growth of 29.3 per cent in H1FY14 and needs to achieve only 20 per cent in the second half of the year to meet the forecast.

Another highlight is that the EBITDA margins in its textiles business have gone up by 290 basis points on a YoY basis to stand at 19.1 per cent for the September 2013 quarter in spite of some hike in cotton prices.

Arvind Ltd. has reported revenue growth of 27.54 per cent on a YoY basis to stand at Rs 1718 crore for Q2FY14 as against Rs 1347 crore reported during the same quarter last fiscal. The EBITDA margins also improved significantly by 133 basis points YoY. The higher margins were mainly due to the improvement seen across all the segments, including textiles and brand & retail. The net profit for Q2FY14 stood at Rs 89.62 crore as against Rs 64.91 crore reported in Q2FY13.

The improvement in its financials has helped the company increase its Return on Equity from 11.1 per cent during FY13 to 15.8 per cent for Q2FY14. At the current market price, the stock trades at a PE of 10.54x, which is cheaper than that of its listed peers like Aarvee Denims & Exports and Nandan Exim. We feel that the company is poised to witness further upward movement in its prices going forward to catch up with the valuations. We recommend a ‘buy’ on this stock with a price target of Rs 125, for a one-year time horizon.