Arvind Mills weaves no magic for investors
Deepak Singh Tanwar
The shareholders of Arvind Mills are an unfortunate lot. While the markets were buoyant and the company was doing well, the stock failed to garner enough buying interest.Investors' problems were only compounded by the negative reactions of FIIs - who sold heavily - to the merger proposal of Arvind Intex with Arvind Mills. Arvind Intex, in which Arvind Mills holds a 49 per cent stake, was to be merged with itself. The merger would have resulted in a marginal increase (1.3 per cent) in equity and there would have been operational synergy as Arvind sources 40 per cent of its yarn requirement from Arvind Intex. However, inadequate disclosures seem to be the prime reason for the opposition from FIIs. Another factor for the FII stand is the fear of a chain-reaction wherein other Lalbhai group companies, taking their cue from the above merger, would have followed suit and gone in for future amalgamations. During 1996-97, the company completed its merger with Rohit Mills. However, now when the market is
depressed, raw material prices have also been on an upward sprial. The stock price has dipped recently to a 52-week low of Rs 80, perhaps due to a 20 per cent jump in cotton prices in the last six months. And, with a lower crop estimate in the current season, prices are expected to remain firm. Although a rapid swichover to higher value-added products would progressively reduce the company's sensitivity to fluctuating cotton prices, higher cotton prices would defenitely have an impact on profit margins of the company. With an emphasis on ring, overdyed and stretch denims, the average cost of raw materials to sale will drop to the range of 35 per cent compared to 42 per cent. But, the market is unlikely to react to the positive performance untill the company perception improves. For that, the market needs some time. Kajaria Ceramics: Although the fall in share prices of Kajaria Ceramics - a major ceramic player - started in the first quarter of 1997, it gained momentum, perhaps, after shareholders
recieved the annual reports. During 1996-97, on a 9.9 per cent higher sales, the company maintained its profit at Rs 20.18 crore. While the slowdown was evident from a lower growth in sales, a closer look at the balancesheet suggested that the jump in sales at 34.5 per cent to Rs 34.19 crore - at the cost of increased debtors - accounted for 26 per cent of the total sales. A 27 per cent jump in borrowings to Rs 93 crore also indicated that interest burden would be higher in the current year. Perhpas this could be the reason why market did not wait for the first half's results and offloaded their holdings. As a result, before the market could annouce the results, the stock was down by 55 per cent since the March's level of Rs 140. On stagnated sales of Rs 60 crore, profit for the six-month-period ended September, 1997, stood at Rs 9.28 crore, down by 20 per cent from Rs 11.49 in the corresponding period in the previous year. Had the company provided for MAT, profit figures could have been even
lower. For the future, with no sign of rebirth in the construction industry, a recovery in the ceramic industry is unlikely. In fact, looking at the depressed conditions in the user sector, the ongoing expansion programme raises some doubts. The company is expanding its tiles capacity from 80,000 mt to 1,50,000 mt. This is likely to commence in the first quarter of 1998. As far as the market performance is concerned, even if the company manages to perform well, a lot would depend on discounting. Based on the latest earnings, at the current price of Rs 56, the PE stands at 4.5. As such, unless the market gives a higher discounting to the stock, the expectations of any capital appreciation is ruled out.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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