MOSL: ANNUAL REPORT THREADBARE (ART) | ARVIND FY18-Rising capital intensity dents return ratios
ANNUAL REPORT THREADBARE (ART) | ARVIND FY18: Rising capital intensity dents return ratios
Arvind Limited’s (ARVND) FY18 annual report indicated a weak operating performance with EBITDA remaining muted at INR9.6b (FY17: INR9.4b) and margin declining by 124bp to 9%, primarily on account of declining margins in the textiles business (13% v/s 16% in FY17) and rising revenue share of lower margin branded apparels business (36% v/s 32% in FY17). Increasing capex over the years has led to rising capital intensity while earnings growth has remained muted, leading to RoCE declining to 7.7%. (FY14: 12.7%). Our segmental analysis reveals asset turns for textiles marginally improved to ~1.5x (FY14: 1.2x) and declined to ~1x (FY14: 1.2x) for branded apparels. Cash flow generation remained weak with earnings to cash flow conversion declining to 58% (FY17: 70%) due to rise in balance with government authorities for input tax credit. Free cash flow has been negative for the last five years with the cumulative five-year FCF at –INR13.9b. Borrowings rose by INR3.9b to INR33.2b with D/E at 0.8x, although finance cost has been declining and stood at 8% (FY14: 12%).
- Revenue grows, but EBITDA margin continues to shrink: Revenue grew 17% to INR108.2b (FY17: INR92.2b), led by a high growth of 31% in branded apparels. A change in ownership structure led to three JVs being consolidated as subsidiaries. After adjusting for this, the revenue growth stood at 11% to INR102.7b. However, EBITDA margin continued to shrink to 9% from 13% in FY14, primarily due to a rise in the share of lower margin branded apparels (36% v/s 28% in FY14) and softening margins in textiles over the last two years (margins at 13% v/s 18% in FY16).
- Rising capital intensity pulls down return ratios: Increasing capex over the past few years has led to rising capital intensity, resulting in a decline in return ratios. While capital employed has been increasing (CAGR of 7% over FY14-18 to INR74.5b), earnings have remained muted (EBIT stood at INR6.1b v/s INR6.9b in FY14), thereby pulling down the return ratios (RoCE down from 13% in FY14 to 8% in FY18). Also, declining profitability (NP margin at 3% v/s 6% in FY14) has led to a decline in RoE to 8% (FY14: 15%).
Arvind Mills is primarily engaged in manufacturing and marketing of textiles, mainly denim, khakis, shirting, knits, shirts, jeans, trousers and knitting garments, in India.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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