CRISIL assigns grade 3/5 to Aarvee Denims

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CRISIL assigns grade 3/5 to Aarvee Denims

CRISIL Research has initiated coverage on Aarvee Denim & Exports with a valuation grade of 3/5 in its August 10, 2010 research report.

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CRISIL Research has initiated coverage on Aarvee Denim & Exports with a valuation grade of 3/5 in its August 10, 2010 research report.

Narrowing demand-supply gap favourable for denim fabric manufacturers

Over the FY06-FY08 period, major denim manufacturers had lower operating rates due to excess capacities. However, since then, there has been a revival in demand for denim fabric driven by rising income levels and growing acceptance of denim jeans among semi-urban population. We expect the supply to remain steady with no major capacity expansion planned in the next year or so. Hence, the demand-supply gap for denim fabric has narrowed, auguring well for manufacturers like Aarvee Denims.

Strong dominance in the domestic market compared to peers

Arvind and Aarvee Denims are the two largest players in the denim industry in India. Denim fabric production is not Arvind's core business as it earns more than 50% of its revenues from shirting fabric, apparels and retail. Further, it mainly caters to the export market. Thus, in the absence of any other large player and continued focus on denim fabric production, Aarvee Denims enjoys a strong dominance in the domestic market.

Revenues to grow at a CAGR of 13.8%, EBITDA margin to improve

We expect Aarvee Denims' revenues to grow at a CAGR of 13.8% from Rs 3.8 bn in FY10 to Rs 4.9 bn in FY12. We expect EBITDA margin to improve to 17.3% in FY12 from 16.5% in FY10 on account of increase in realisations. Adjusted EPS is expected to double from Rs 6.0 in FY10 to Rs 12.3 in FY12.

Aligned valuations

We have valued Aarvee Denims based on the price-to-earnings ratio (PER) method. We assign the company a PER of 5.5x, which translates to a one-year fair value of Rs 68 per share based on FY12 adjusted EPS of Rs 12.3. We initiate coverage on Aarvee Denims with a valuation grade of '3/5', indicating that the current market price of the company is 'aligned' with our fair value of Rs 68," says CRISIL Research report

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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