SHAREHOLDERS can hold the stock of Arvind Mills. The company's earnings stream continues to be vulnerable to commodity cycles of both denim and cotton. Profits have declined in each of the last four quarters compared to levels in the corresponding previous quarter.
The company does, however, appear to be changing tack by attempting to reduce its dependence on denim as a commodity, and increase apparel exports. The strategy could augur well for its profitability over the long term.
In the near term, the possibility of higher cotton prices ? key raw material ? is a cause for concern. The garments business is at a nascent stage and unlikely to make a notable difference to revenues and earnings in FY 05.
Over the long term, the company's ability to weather fluctuations in cotton prices and gain a sizeable market share in the garments segment would have an important bearing on its profitability.
Arvind Mills reported a 32 per cent decline in profits in the April-June quarter.
The highlights of its performance are:
? Increase in revenues on the back of higher volumes in the denim segment and improved realisation in the denim, shirting and knitwear segments, partly due to the weakening of the rupee;
? Pressure on operating profit margins, as expenditure has outpaced revenues by five percentage points;
? Increase in operating expenditure due to higher cotton prices, power and fuel costs.
Cotton accounts for about 40 per cent of its sales. Cotton prices have risen by 17 per cent over the past year; they have, however, been on a downward trend in the last few months, which should have eased the pressure on margins. But that has not been the case. A large inventory of cotton at relatively higher prices, perhaps, explains the negative ...