EXECUTIVE SUMMARY

The textile industry plays an important role in the Indian economy contributing 4% to the GDP
and providing employment to 105 million people directly and indirectly.

Although GST rollout, demonetisation and reduction of export incentives affected the industry
negatively and exports took a huge hit but the industry is gradually coming back to normal.
Growing Indian economy and higher disposable income will help create strong demand and
opportunities for the industry.

Analysis

We see that Arvind is doing good as far as the revenue from sales is concerned which has
grown at a CAGR of 8.49% as compared to Aarvee which has a negative growth rate of 3.63%
during the same period. This is due to the fact that the inclination of the people towards buying
from known brands has increased and Arvind having a plethora of big brands under has been
able to take the benefit of that. The Gross Margin for Arvind stands above 50% steadily but we
see that the Operating and the Net Profit Margin is way below and is decreasing. Now, low
Operating and Net Profit margins means that the company is not able to convert its revenues
into profit and there are operational efficiency issues. Low margins (OPM- ~11%, NPM-
~3.5%) hurt the perception of investors and creditors and make them question the sustainability
of the operations of a company. However, one should note that the reason behind Arvind’s low
margins are structural and not company specific. Higher input costs, higher wage payments
due to labour intensive business, reduction in duty drawback and rupee appreciation affecting
the exports negatively were the reasons behind low profitability. When looking at the figures
for Aarvee, we observe a similar trend with Gross Margins in the early 40% but NPM close to
1%. It can be said that the industry as a whole had been affected by the reasons mentioned
above and other big events such as Demonetisation and GST and the margins were almost
reduced by almost 30-40%.

Liquidity Ratios

Coming to the liquidity analysis for both the companies we see that, the Current Ratio figures
of both the companies are around the industry standards more or less over the years of study.
But the figures are around 1 which is not ideal if considered in isolation. There might also be
some concerns for Arvind since its Quick Ratio and Cash Ratio are questionable. With almost
half its CA being Inventories and Cash just being about 0.25% of the total assets, its liquidity
position is precarious. Aarvee too doesn’t have that great numbers but its still better than
Arvind and closer to the industry standards. Reading through various reports and research, a
observation we made was that Arvind was a highly leveraged company which took a lot of
debts to finance its expansion and was unfortunately not able to recover the same through sales
(due to incorrect forecasting) and has since sold its stake in subsidiaries and other assets in a
bid to repay the debts and interest. This might explain the low levels of cash with the company.
As for Aarvee, there were some one off expenses/losses due to which its profit and cash levels
were hurt in the year 2017.

Solvency Ratios

The leverage used by Arvind is falling continuously as it has been paying off its debt with the
money received from selling off a stake in its brand subsidiary and a few non core assets.
Owing to the same, we see that the the debt equity ratio for the company has fallen below 1
which is way lower than the industry standard of around 2. Looking into Aarvee, we see that
the Debt-Equity is consistently above 2 and rising. This may indicate the fact that the Aarvee
is trying to take the benefit a higher financial leverage may bring but there might be concerns
too if the company gets too aggressive to finance itself through debt and the figures move
higher. The issue being that it adds on to the burden of interest payments and makes the
earnings volatile. If the company is not able to generate enough returns and pay back the
interest obligations, it could lead to bankruptcy. If not used properly, high debt levels can
increase the chances of the company facing financial distress. Talking about interest payments
and coverage ratio, we see that as debt levels go down, the financing cost for Arvind is also
decreasing and the coverage ratio improving to a figure around 3 which is really good when
compared to the industry standards of around 1. The coverage ratio for Aarvee is more than 2
for all the 3 years in our study but there is a doubt regarding its sustainability- reason being
that the ratio is high because of high depreciation value and not because of higher profits earned
by the company.

Efficiency Ratios

Comparing the industry Inventory Turnover ratio of around the levels of 5 over the period with
that of Arvind (~3.6) and Aarvee (~3) we can say that the companies under consideration have
lower efficiency. It signals that the management is not effectively managing the inventory and
inventory is not selling at the average rate in the industry. One could also say that these
companies are keeping a inventory levels higher than required such that they are not getting
turned over. Arvind has an Asset Turnover ratio of around 0.9 and is gradually increasing over
the years while that of Aarvee is gradually decreasing from the level of 1 to 0.9 which suggests
that the former is improving its efficiency of using assets to generate revenues whereas there
seems to be some issues with the later. However, with the industry standards more than 1.5 we
see that both companies are inefficient in utilising their assets. Arvind has a better Debtor
Turnover than the industry and Arvee which suggests that it is better managing its debtors and
is able to collect cash from them quickly. However, one may also think that its credit policy is
too stringent which may affect the company sales. Creditors Turnover is lower than average
for both the companies which can mean that they are either having trouble paying or the credit
policy of the suppliers is too liberal. Both the companies doing well in operations means that
they aren’t having trouble paying.

Du Pont Analysis

ROE is the principal measure of the attractiveness of any business. the return that the business
is able to generate is of high importance. The higher the ROE the better it is. However, ROE
should not be checked in absolute terms. Its broken down into –

ROE captures Profitability, Asset Turnover and Leverage.

The ROE of Arvind has fallen from 10.58% in FY16 to 6.74% in FY18 which is not a good
sign.