Arvind expects operating margins to improve in Q2

Air-jet loom woven heavy denim and shirting fabrics manufacturer, Arvind reported a 47% fall in consolidated net profit year-on-year to Rs 32.4 crore in the first quarter of FY13. The company's consolidated net sales also dropped 1% to Rs 1,177 crore from Rs  1,190.2 crore from a year ago period.

In an interview with CNBC-TV18, Sanjay Lalbhai, CMD, Arvind said the company lose Rs 100 crore on sales and Rs 35 crore of profit due to the Naroda plant shutdown. The sale of branded garments were weak in may but, performance in July seems to be encouraging so far, he added.
Lalbhai is also hopeful of improvements in the fabric segment margins despite demand growth concerns persisting due to a weak monsoon. According to him, the weakness in branded business is going to be offset by fabrics and the company is expecting its operating margins to improve in Q2.
Going forward, Arvind is planning to launch three new real estate projects in August-September. Here is the edited transcript of the interview on CNBC-TV18. Q: Can you first start by quantifying what the impact of the Naroda plant shutdown would have been for the quarter?
A: I think something like Rs 100 crore of top-line and we have lost around Rs 35 crore of bottom-line. That's the kind of impact we have faced. Q: Is the impact completely behind you? You don't see a chance of any kind of recurrence?
A: No, I think it is behind us and things are very peaceful. Production and everything is working satisfactorily. Q: Has the market for branded garments turned sluggish in terms of off take?
A: You asked about garments or fabrics? Q: Branded garments.
A: The first quarter is always slow and May was pretty bad, but we are expecting the second quarter to be normal.
_PAGEBREAK_ Q: So it's not as if there is some kind of demand slowdown in that space and you expect things to sober down or plateau out for the rest of the year?
A: Too early to say. I think the worries are there. If the monsoon fails and if the consumer demand goes down, then there could be impact on the top-line and bottom-line. But it's too early to say. July has been going pretty well, but this is also a month for end of the season sales. It is too early to say how the rest of the year will pan out. Q: What about the fabric segment? How is that shaping up in this environment?
A: Fabric demand internationally is very strong because China is becoming expensive. So the margins are improving there and the depreciated rupee is also helping. As far as the domestic market is concerned, it is definitely slow. Brands and retail business for fabrics, for denim and the shirting fabrics is not as strong as we would want it to be. Having said that, we are meeting our budgets, but we were expecting that it would be a strong year, But, it is not. Q: Do you see yourself holding EBITDA margins in this 11-12% kind of range or is there downward risk to those kind of numbers?
A: No, I think as far as fabrics are concerned, we should be improving on our margins. As far as the brands in retail businesses is concerned, we are hopeful of improving our EBITDA numbers in July, August, September. Then it will greatly depend on how the Diwali pans out. It will also depend on how the economy works and what happens to the monsoon and that will finally determine what happens to apparel as a category as far as consumers are concerned. Q: Do you think you will be able to meet the kind of internal targets you had set for FY13 or have you started lowering those targets?
A: No we are still holding onto our targets. I don't think there in any revision as of now on our numbers, but I think from September onwards we will have to watch out as to whether the economy is slowing down further and whether that will have an impact on our brands in retail business. We don't see any kind of major issue as far as fabric business is concerned. Q: Any particular categories in fabrics or even in the branded segment where you are seeing the first warning signs of a slowdown?
A: May was pretty bad, April was as per budget and June has been as per budget. But, May just was a disastrous month for every brand in India. It is very difficult to say as to what is likely to happen. We are keeping our fingers crossed, everyone is cautious so we would also be cautious as far as our projected numbers are concerned.
However, it is too early to say whether we will meet our budget or we will improve on our budget or there would be at best if we do not meet our budget, we are seeing that there maybe a 10% reduction on our top-line and around 4-5% reduction on our EBITDA numbers, if at all. That is only for the branded and retail space. Most probably we will try and make up those numbers through our fabric business which is pretty strong. _PAGEBREAK_ Q: How are cotton prices moving right now and what impact is that having on your business and numbers?
A: Cotton prices are moderated greatly. From highs of 2 dollars a pound, it has come down to 70 cents. There is ample cotton all over the world. China is not buying and as a result cotton as a commodity is very bearish. We will have to figure out as to what happens to the Indian crop.
The first estimate is that there would be a 10%-15% reduction compared to the last year crop estimate. One will have to keep a close watch on what happens to cotton production in India but, if it reduces only by 10% as it looks today, then there should not be an alarm. If it goes further down because of a very bad monsoon situation in Saurashtra and Punjab, one will have to see as to what kind of an impact it will have on the cotton prices. Q: How are you preparing for it at Arvind?
A: Today we are covered till the next season. We will have to see what happens to the cotton production in the next season, but we do not intent to go long. We are not really very worried that it will become very bullish because there is ample cotton in the world and if rupee strengthens to around Rs 52, we will come very close to the minimum support price. There is no alarm as far as cotton is concerned. Q: Can you give us an update on what is going on in the real estate side?
A: Our real estate projects have done well. We will be launching three new projects. One in Bangalore, one on SG Road and in one of our mill premises. So three new projects will be launched in August or September. The second phase of Tata and Tata Township will also be launched in August or September. Our real estate business is going as per plan. We should have a healthy revenue coming out of our real estate business. Q: So what kind of revenues do you expect to book for FY13 once they start kicking in, in August-September?
A: Depends on what we do with one or two premises but, in the worst situation it would be around Rs 70 crore. The best situation would be like Rs 100 crore. But next year we are looking at around Rs 400 crore of top-line and a very healthy bottom-line.