CRISIL assigns valuation grade of 5/5 to Aarvee Denims

Aarvee Denims & Exports Ltd’s (Aarvee’s) revenues were in line with CRISIL Equities’ expectations driven by strong growth in demand for denim fabric. However, margins were lower than estimated due to higher cotton costs and operating expenses. We will revisit our estimates post our interaction with the management. We maintain the fundamental grade of 3/5.

Q4FY11 result analysis
• Aarvee’s Q4 revenues grew by 55.8% y-o-y to Rs 1,462 mn driven by 17.6% volume growth and 39.4% realisation growth. The realisations of denim fabric increased from Rs. 90.5/kg in Q4FY10 to Rs 126.2/kg in Q4FY11 led by the steep price increase in its key input - cotton. For the full year, Aarvee’s revenues grew by 31% y-o-y to Rs 4,949 mn.

• EBITDA margin contracted by 470 bps y-o-y to 13.3% due to higher raw material and employee costs. Raw material expenses as a proportion of revenues increased from 56% in Q4FY10 to 63.5% in Q4FY11.

• Adj PAT margin declined by 248 bps y-o-y to 4.1% due to lower operational profitability.

• The company has declared a dividend of Re 0.5 per share. At the current market price, dividend yield is 1%.

Key developments
• The company has bought back US$3.5mn worth of FCCBs in Q4FY11. Post the repurchase, US$4 mn of the total US$20 mn bonds are outstanding.

• The proposed capacity expansion of 24 mn meters of denim fabric is on schedule. The commercial production of 12 mn meters commenced in March 2011, as planned. The second phase is expected to be completed by August 2011.

Valuations: Current market price has strong upside
We continue to use the price-to-earnings (PER) method to value Aarvee. Our fair value of Rs 75 per share merits a valuation grade of 5/5. We could revisit our estimates and fair value after interaction with the management, says CRISIL Research report.

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