Buy Aarvee Denim; target of Rs 85: Angel Broking

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Broking house, Angel Broking in bullish on Aarvee Denim and Exports and has recommended buy rating on the stock with a 12-month price target of Rs 85.

Angel Broking report on Aarvee Denim and Exports

Investment Argument

Expanding the product portfolio - a strong step:

"Aarvee Denims is the second-largest manufacturer of denim fabrics in India. Facing intense competition from within and outside India, Aarvee has recently unveiled its plans for the future: to diversify from denim into gabardine fabric, and to increase the production of both. This is a sure step towards insulating its bottom-line in future years."

Changing the business model - staying with the times:

"Retail demand is booming, both globally and domestically. To keep pace in an industry, which is growing at more than 10% a year, Aarvee has set-up in-house garmenting facilities to supply directly to retailers. It is also shifting its business model, from a 100% revenue dependency on denim, to a revenue-mix of readymade garments, gabardine and denim fabric."    

Cost-efficiency - Aarvee charges down on its power costs:

"In an industry, which is rapidly turning into a high-volume low-cost game, Aarvee  has to control costs as best as it can. To do this, they have implemented a captive electricity generation programme - installing 15MW of captive power now and over the next 18 months. The target is to reduce power costs from the current 11% of sales to 6.5% of sales by 2008."

Managerial excellence - the best in the business:

"When we look at Aarvee's financials over the years, we come back extremely satisfied. A loss in only one year, prudent and timely investments, consistent growth in the turnover and return, margins well above the industry average, superb working capital management - all of these point to the experience and professionalism of Aarvee's management."

Valuation

"At the CMP of Rs.60, the stock is trading at 5.6x FY2007E earnings, and at 3.5x FY2008E earnings. We initiate coverage with a Buy recommendation on Aarvee Denims with a 12-month price target of Rs 85."