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A Study Of Finacial Preformance Of a Company

Arvind mills

Presented by Manish Kumar Manish Rajpurohit

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Type Public (NSE, BSE) Founded 1931 Headquarters Ahmadabad Key people Sanjay Lalbhai (CEO &MD) Arvind N. Lalbhai

Industry Textiles Products Denim, Knits, Khakhis Revenue Rs 20 billion

Website

http://www.arvindmills.com/

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Concept
The Textile industry (also known in the United Kingdom and Australia as the Rag Trade) is a term used for industries primarily concerned with the design or manufacture of clothing as well as the distribution and use of textiles Before the manufacturing processes were mechanized, textiles were produced in the home, and excess sold for extra money. Most cloth was made from either wool, cotton, or flax, depending on the era and location. For example, during the late mediaeval period, cotton became known as an imported fibre in northern EuropeThe key British industry at the beginning of the 18th century was the production of textiles made with wool from the large sheep-farming areas in the Midlands and across the country (created as a result of land-clearance and inclosure). Handlooms and spinning wheels were the tools of the trade of the weavers in their cottages, and this was a labor-intensive activity providing employment throughout Britain, with major centres being the West Country; Norwich and environs; and the West Riding of Yorkshire.

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Sector Synopsis
With a total market size (2004-05) of US$ 38 billion, the textiles domestic market comprises US$ 25 billion and exports US$ 13 billion. The Indian textiles sector has a strong contribution to the Economy

14 per cent contribution to industrial production 4 per cent contribution to GDP 16 per cent contribution to export earnings Direct employment to more than 35 million people

The textile industry functions in the form of clusters (roughly 70 in number) across India, producing 80 per cent of the countrys total textile It is diverse, with the hand-spun and hand woven sector at one end of the spectrum, and the capital intensive, sophisticated mill sector at the other.

Major Industrial contribution


Textiles The Indian textile industry covers a wide gamut of activities. Its production ranges from raw materials such as cotton, jute, silk and wool to a high value-added products like fabrics and garments to consumers. The industry make use of different varieties of fibres, be it natural fibres, man made fibres or blends of such fibres. In Indian economy, the textile industry plays a significant role. It provides direct employment to approximately 35 million people and contributes 4 per cent of GDP. It fetches 35 per cent of gross export earnings and contributes 14 per cent of the value-addition in the manufacturing sector.In textile sector,there are various industries which contributes in the Indian economy in which main industries are:
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Large industry conglomerate, with turnover of USD 279 million and presence in textiles, retail, engineering goods, personal care and prophylactics Textile products - worsted fabrics, wool and blended fabrics, specialty ring colour and stretch denim fabric, cotton and linen shirting fabric, readymade garments, woolen blankets and home furnishings

One of the oldest textile companies in the country, having turnover of USD 231 million Produces suitings, shirtings, sarees, towels, bed linen and mens apparel; significant exporter of polycotton blended fabrics and made ups

One of the largest textile business houses in India, having turnover of USD 400 million Significant presence in acrylic fibre, cotton, synthetic and blended spun yarns, grey and processed fabrics, cotton and synthetic sewing threads

Indias largest exporter of readymade garments, having turnover of USD 180 million
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Supplies to more than 100 retailers and fashion brands across 39 countries

Belongs to one of the most diversified business groups in India (Aditya Birla Group) and has turnover of USD 577 million) Key products in textiles include viscose filament yarn and branded apparel; other interests include insurance, telecom, IT, carbon black

Leading producer of silk yarns and fabric (mainly for decorative and bridal use), with annual turnover of USD 32 million Other businesses include retailing of home furnishings in India and manufacture of bed linen products for domestic and export market

Amongst the top 3 terry towel producers in the world, with annual turnover of USD 132 million

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Other products include cotton yarns, polyester filament yarn, bathrobes, buttons and saw pipes

Has the largest composite textile mill in India for producing cotton fabric Having a turnover of USD 95 million, its products include viscose filament yarn, viscose tyre/ industrial yarn, denim, cement and pulp and paper

Having turnover of USD 303 million, company is a major producer of polyester yarns, fabrics, garments and textiles

Outlets in the country


Arvind also owns and operates Indias largest 70 outlet strong value retail chain Megamart. The branded apparel and retail business of the company has returned yet another quarter of solid performance. Sales grew by 40% and the EBIDTA has grown by 187% during the current quarter. The company added another 50 doors during the current quarter. The first MegaMart Outlet Centre, the companys value apparel retail store measuring about 40,000 square feet was opened to public in Chennai on the 23rd January 2008.

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Present and future


Indian Textile Industry The Indian Textile Industry is growing at 20% and accounts for 4% of Indias GDP. It contributes 14% to the Industrial Production and employs about 35 million people. It accounts for 21% of India Gross Export Earning. Foreign Direct Investments inflows worth 681.59 million have been received by the industry between Aug 91 and May 06, accounting for 1.29% of total FDI inflows in the country. Position of the Indian Textile Industry in the World Textile Economy India contributes 20% to world spindleage capacity, the second highest spindleage in the world after China. It contributes 6% to the world rotorage and 62% to the world loomage. However in High-tech Shuttless Looms this industrys contribution is only 4.1% to the world Shuttless loomage. 12% to the world production of textile fibres and yarns is from India and is the largest producer of Jute, second largest producer of silk and cellulose fibre / yarn, third largest producer of cotton and fifth largest producer of synthetic fibres / yarns. Indias key assets include a large and low-cost labour force, sizable supply of fabric, sufficiency in raw material and spinning capacities. On the basis of these strengths, India will become a major outsourcing hub for foreign manufacturers and retailers, with
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composite mills and large integrated firms being their preferred partners. It will thus be essential for SMEs to align with these firms, that can ensure a market for their products and new orders. India's textile sector is the second largest industry after agriculture. It provides employment to about 35 million people. The country's current share in the world textile trade is only 4%, according to the study done by the World Trade Organisation. The Indian government says that it can reach to 8% share by 2010. India is one of the leading producer of cotton, goatskin and cashmere wool. It ranks top in goatskin and third in cotton after China and United States. The fabric industry in India accounts for about 20% of total exports of the country and represent the largest net foreign exchange earner

Company Profile

History 1930 was a year the world suffered a traumatic depression. Companies across the globe began closing down. In UK and in India the textile industry in particular was in trouble. At about this time, Mahatma Gandhi championed the Swadeshi Movement and at his call, people from all India began boycotting fine and superfine fabrics, which had so far been imported from England. In the midst of this depression one family saw opportunity. The Lalbhais reasoned that the demand for fine and superfine fabrics still existed. And any Indian company that met this demand would surely prosper. The three brothers, Kasturbhai, Narottambhai and Chimanbhai decided to put up a mill to produce this superfine fabric. Next they looked around for state-of-the-art machinery that could produce such high quality fabric. Their search ended in England. The best technology of that time was acquired at a most attractive price. And a company called Arvind mils was born
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Arvind Mills started with a share capital of Rs 2,525,000 ($55,000) in the year 1931. With the aim of manufacturing the high-end superfine fabrics Arvind invested in very sophisticated technology. With 52,560 ring spindles, 2552 doubling spindles and 1122 looms it was one of the few companies in those days to start along with spinning and weaving facilities in addition to full-fledged facilities for dyeing, bleaching, finishing and mercerizing. The sales in the year 1934, three years after establishment were Rs 45.76 lakhs and profits were Rs 2.82 lakhs. Steadily producing high quality fabrics, year after year, Arvind took its place amongst the foremost textile units in the country. In the mid 1980s the textile industry faced another major crisis. With the power loom churning out vast quantities of inexpensive fabric, many large composite mills lost their markets, and were on the verge of closure. Yet that period saw Arvind at its highest level of profitability. There could be no better time, concluded the Management, for a rethink on strategy. The Arvind management coined a new word for it new strategy Renovation. It simply meant a new way of looking at issues, of seeing more than the obvious and that became the corporate philosophy. The national focus paved way for international focus and Arvinds markets shifted from domestic to global, a market that expected and accepted only quality goods. An indepth analysis of the world textile market proved an eye opener. People the world over were shifting from synthetic to natural fabrics. Cottons were the largest growing segments. But where conventional wisdom pointed to popular priced segments, Renovation pointed to high quality premium niches. Thus in 1987-88 Arvind entered the export market for two sections. Denim for leisure and fashion wear. And high quality fabric for cotton shirtings and trousers. By 1991 Arvind reached 1600 million meters of Denim per year and it was the third largest producer of denim in the world. In 1997 Arvind set up a state-of-the-art shirting, gabardine and knits
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facility, the largest of its kind in India, at Santej. With Arvinds concern for environment a most modern affluent treatment facility with zero affluent discharge capability was also established. Year 2005 is a watershed year for textiles. With the mulitifiber agreement getting phased out and the disbanding of quotas, international textile trade is poised for a quantum leap. In the domestic market too, the rationalizing of the cenvat chain and the growth of the organized retail industry is likely to make textiles and apparel see an explosive growth. Arvind has carved out an aggressive strategy to verticalize its current operations by setting up world-scale garmenting facilities and offering a one-stop shop service, of offering garment packages, to its international and domestic customers. With the Indian economy poised for rapid growth, Arvind brands with its international licenses of Lee, Wrangler, Arrow and Tommy Hilfiger and its own domestic brands of Flying Machine, Newport, Excalibur and Ruf & Tuf, is setting its vision on becoming the largest apparel brands company in India.

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Board of Directors
CHAIRMAN AND MANAGING DIRECTOR Mr. Sanjay S. Lalbhai He is a Chairman and Managing Director of the Company. He is a Science Graduate with a Masters degree in Business Management. He has been associated with the Company for more than 28 years. He also holds directorships in Arvind Spinning Ltd., Mauritius, Amol Decalite Limited, Mahindra Gujarat Tractor Limited, Torrent Pharmaceuticals Limited, Arvind Worldwide Inc.,USA, Arvind Worldwide (M) Inc. and Arvind Overseas (M) Ltd. DIRECTOR AND CHIEF FINANCIAL OFFICER Mr. Jayesh K. Shah He is a Wholetime Director with designation of Director and Chief Financial Officer of the Company. He is a Commerce Graduate and Chartered Accountant and has been with the company for more than 22 years. He has a distinguished academic career and extensive administrative, financial, regulatory and managerial expertise. He also holds directorships in various companies.

OTHER DIRECTORS Mr. S. R. Rao (Nominee of EXIM Bank) He is a Nominee Director of EXIM Bank. He is a graduate from The Indian Institute Of Technology, Bombay. He is the Chief General Manager of EXIM Bank of India. He is also on the Board of Global Procurement Consultants Ltd., Global Trade Finance Ltd., and Nagarjuna Oil Corporation Ltd.

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Mr.

K.M.

Jayarao

(Nominee

of

ICICI

Bank)

He is a Nominee Director of ICICI Bank Ltd. He is a B.E. (Mechanical) and a Senior General Manager of ICICI Bank Ltd. He is also on the Board of Ispat Industries Ltd., Nagarjuna Fertilizers and Chemicals Ltd., Share Microfin Ltd., and Aban Loyd Chiles offshore Ltd. Mr. Sudhir Mehta He is a Non-executive and Independent Director of the Company. He is a Science Graduate from Gujarat University He was instrumental in the growth and progress of Torrent Pharmaceuticals Ltd. the flagship Company of the Torrent Group. He systematically expanded the power business of Torrent Group by acquiring significant stakes in the Torrent Power AEC Ltd. and Torrent Power SEC Ltd. and Torrent Power Generation Limited now merged with Torrent Power Limited and one among the few successful independent power projects in India. He has managed strategic alliance with leading international giants from U.K., Germany, France and USA. He is an Executive Chairman of Torrent Power Limited, Chairman of Torrent Pharmaceuticals Limited and Torrent Private Limited and a Director of The Torrent Power Transmission Private Ltd.

Mr. Tarun Seth He is a Non-executive and Independent Director of the Company. He has a masters degree in Arts (Sociology) from M.S University and ITP Harvard Business School, USA. He is a Management Consultant. He was a President of Bombay Management Association and a member of professional bodies like Indian Society for Applied Behavioral Science, Indian Society for Training and Development and Bombay Management Association. He is on Board of various Companies. He is a former faculty member of Motorola University and has trained Motoral managers in the US, Europe, Australia, China, Taiwan, Singapore and India. He is an independent and a non-executive Director of the Company.

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Mr. Munesh Khanna He is a Non-executive and Independent Director of the Company. He is a Chartered Accountant from Institute of Chartered Accountants of India. He has 21 years of experience in Investment Banking from across the Industrial spectrum in India in the areas of M&A, Financial Restructuring and Resource Raising. In addition, he has also an extensive experience in the Energy, Utilities and Telecom sectors. Prior to joining Halcyon Resources & Management Consulting Private Limited, he was the Managing Director and Head of Investment Banking in DSP Merrill Lynch. Prior to this he was the Country Head and Managing Director of Rothschild India and Partner- Country Head of Arthur Andersen Corporate Finance. He has advised Indian Lenders on the Restructuring of the Dabhol Power Project and LNG facility for a total value of US$ 1.9 billion. AXA on its joint venture with Bharati Group, Air Deccan on raising funds US$ 40m through Private Equity and IPO and many other significant transactions. He is a member of the Young President Organisation (YPO). He was also a Member of CII and a member of the Executive Committee of Federation of Indian Chambers of Commerce and Industry ('FICCI') and Co - Chairman of the Finance & Capital Market committee of FICCI. Mr. G.M.Yadwadkar (Nominee of IDBI) He is a Nominee Director of IDBI. He is a General Manager of IDBI, Ahmadabad. He is also on the board of Ecoboard Inds. Ltd. Pune, SJK Steel Plant Ltd., Hyderabad, Gujarat Alkalies & Chemicals Ltd., Vadodara and Gujarat Industrial and Technical Consultancy Organization Ltd.

Product Offering

Fabric Denim Shirting Khakis


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Knitwear Voiles Garment Shirts Jeans Arvind Brands (owned) Flying Machine Newport Ruf & Tuf Excalibur Arvind Brands (licensed) Arrow Lee Wrangler Tommy Hilfiger

Financial performance: Over the years In the past, the company faced financial difficulties due to a downslide in denim markets and heavy depreciation charges as new projects were commissioned at Santej. Also, these projects were largely financed by high cost debt, which resulted in a huge interest cost burden severely affecting its profitability. The same has been reflected in the FY00 and FY01 results (see table below). It underwent a restructuring exercise in FY02 which was approved by a majority of the lenders and which saw the interest costs reduce by nearly 50% in 1QFY02 itself. The company bounced back in FY03. It reported its highest ever operating profit at Rs 4.3 bn, signifying a CAGR of 108% since FY00. Increased proportion of value added fabrics in Denim and resurgence of demand globally resulted in higher price realizations contributing 63% of the total revenue. However, it could not sustain its stellar performance of FY03 in FY04 largely on account of rising raw material costs (cost of cotton having increased by 11%), high power and fuel costs (cost of naphtha by 5%). Operating margins clocked a negative 15% growth YoY and bottom-line
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dipped by 25% YoY. Exports revenue, which contributed 49% of the total revenues, was adversely affected by exchange rate fluctuations, which saw a significant appreciation in the rupee. The company has recently switched over to natural gas from the relatively expensive naphtha for captive power consumption. The benefits of this are expected to accrue from 4QFY05 onwards. How the numbers stack up FY01 FY02 FY03 FY04 (18m) (6m) 18,541 16,749 1,792 6,969 5,596 1,373 14,792 10,612 4,180 14,353 10,830 3,523

(Rs m)

FY00

CAGR since FY00 3.9% -1.0% 50.0%

9m FY05

Net Sales Expenditure Operating Profit (EBIDT) Operating Profit Margin(%) Other Income Interest Depreciation Profit before Tax Extraordinary item Tax Profit after tax/(loss) Net Profit Margin(%)

11,838 11,374 464

12,339 9,570 2,795

3.9%

9.7% 19.7%

28.3%

24.5%

22.7%

288 2,643 1,652 (3,543) 442 (3,101) -26.2%

209 4,798 2,219 (5,016) (5,016) -27.1%

145 594 740 184 -

123 1,528 1,481 1,294 -

126 1,133 1,503 1,013 46

15.2% 15.6% -1.9%

26 862 1,109 824 0 80 745 6.0%

20 0.3%

1,294 8.7%

967 6.7%

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Looking ahead At the current price level of Rs 119, the stock trades at a P/E multiple 23.4 times annualized 9mFY05 earnings. The abolition of the quota system from the start of this year promises to be very challenging for the Indian textiles and apparel industry. The industry is projected to achieve a size of US$ 85 bn by the year 2010 with exports of US$ 40 bn. However, this is easier said than done, as Indian textiles have to compete with lower costing products from China, Sri Lanka, Bangladesh and even Pakistan. Going forward, Arvind Mills with its vertically integrated set-up is poised to capitalize on the immense opportunities available for export growth post the quota system and has already undertaken steps to increase its production capacity. However, an appreciating rupee albeit at a slower pace, volatile cotton prices and cyclical nature of denim which has assumed the nature of a commodity are the downside factors to be considered.

Company Strategies
The company's poor financial health in the late 1990s. In the mid 1990s, Arvind Mills' undertook a massive expansion of its denim capacity in spite of the fact that other cotton fabrics were slowly replacing the demand for denim. The expansion plan was funded by loans from both Indian and overseas financial institutions. With the demand for denim slowing down, Arvind Mills found it difficult to repay the loans, and thus the interest burden on the loans shot up. In the late 1990s, Arvind Mills ran into deep financial problems because of its debt burden. As a result, it incurred huge losses in the late 1990s. The case also discusses in detail the Arvind Mills debt-restructuring plan for the long-term debts being taken up in February 2001.

Arvind Mills strategy and Programmes for its Corporate Social Responsibility
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Mr Sanjay Lalbhai, Arvind Mills Managing Director has laid the foundation of the companys approach for its Corporate Social Responsibility. The organisations that the company has created for carrying out the programmes for its Corporate Social Responsibility, build their programmes on this foundation. The SHARDA Trust, and the Narottam Lalbhai Rural Development Fund (NLRDF) are the companys two arms for carrying out the Programmes for its Corporate Social Responsibility. Therefore, to appreciate the Programmes of these two organisations, it is essential to grasp the foundation of these Programmes.

Arvind Mills Responsibility

Foundation

for

its

approach

to

Corporate

Social

Corporate Social Responsibility (CSR) is the latest buzzword in India today. Almost everyone is charging the Indian corporations to be alive to their Social Responsibility. But more the noise, less the clarity might be the reality.

We in the Lalbhai Group make a sharp distinction between a corporation being Socially Responsible and a corporation undertaking Social Responsibility. By a corporation being socially responsible, we mean that the corporation must conduct its operations in a socially acceptable wayin ways that honour ethical values and stakeholders concerns, and not merely stockholders interests. Its financial statements should be truthful and it must operate within the law and accepted norms of the society. In other words it must be a good citizen. But when we say that a corporation is undertaking Social Responsibility, we mean that the corporation, besides being a 'good citizen, is also addressing societal issues on its
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own volition. We believe that a corporations being a good citizen is a prerequisite for its undertaking Social Responsibility. CSR goes much beyond good citizenship.

This view of CSR is based on our conviction that corporations and society are interdependent. Though distinct, they are not mutually exclusive. They exist together and function together. Social issues affect corporations and the corporations actions in turn affect the society.

Obviously, no corporation can address all the societal issues. It has to make a choice about the societal issues it would address; still more important is the decision about the issues to be left for other organisations to resolve. How should a corporation make its choice? A good criterion for doing so, is what Professor Michael Porter calls the shared value. This suggests that a corporation should address only those societal issues that would create benefit for the society and the corporation both.

Once we accept the view that corporations and the society must exist together and work together, the debate whether corporations should accept Social Responsibility becomes futile. Social Responsibility then gets integrated with the corporations total functioningresults in what Professor Porter calls corporate social integration. Translating CSR into corporate social integration would result in corporations treating CSR as an integral part of its strategy and stop treating it as an act of philanthropy.

Arvinds CSR programmes have been informed by these considerations.

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1. SHARDA Trusts Programmes

2. Trusts first educational programme for skill upgrading in the financial year 2006-07

3. Trusts Programme for upgrading the education in the citys municipal schools.

4. Trusts Programme for helping the urban poor, get secondary and tertiary health care

5. Programmes of Narottam Lalbhai Rural Development Fund (NLRDF) for helping the rural poor.

6. Vocational Programmes for rural poor.

7. Upgrading the infrastructure in a rural primary school.


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8. Helping the rural poor in improving the yields in their farms

Global existence

Top 10 buyers in India (Gap, Wal-Mart, Li & Fung, The Childrens Place, JC Penny, H&M, Federated, Fifth Avenue, Carrefour and Synergies India) account for 35% of total textiles sourced from India Other major companies include El Corte, Ecko, Kellwood, VF Corporation, Tesco, Next, Karstadt-Quelle VF Arvind Brands - joint venture between Arvind Brands and VF Corporation to manufacture and sell latters brands in India

PHILOSOPHY

THEY BELIEVE In people and their unlimited potential. In content and focus in problem solving.
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In teams for effective performance. In intellect & its power. THEY ENDEAVOUR To select, train and coach people to obtain higher responsibilities. To nurture talent to build leaders for tomorrow's corporation. To reward, celebrate and activate all intellectual business contributions. THEY DREAM Of excellence in all endeavors. Of mutual benefit and prosperity. Of making the world a better place to live in. We Make Things Happen

Achievements

By 1991 Arvind reached 1600 million meters of Denim per year and it was the third largest producer of denim in the world. Arvind took its place amongst the foremost textile units in the country.

Asias first fabric manufacturing unit to receive an ISO 14001 certification


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