CORPORATE FINANCE PROJECT

QUALITATIVE, RATIO &

COST OF CAPITAL
ANALYSIS
OF
ARVIND MILLS LTD.

Submitted to –
Prof . T. Vishwanathan
Date – 31 st Dec 2010
Submitted by -
Antriksh Khandelwal (12)
Anup Agarwal (13)
Anup Kumar (14)
Arushi Goswami (18)
Kriti Wadhwa (42)
QUALITATIVE
ANALYSIS

INTRODUCTION
Arvind Mills is India's largest and the world's third largest denim manufacturer. Arvind mills
Ltd.(AML),the flagship company of the US$ 500 million Lalbhai Group, was incorporated in
1931.It aimed at manufacturing high-end superfine fabrics with imported state-of- the-art
machinery. With 52,560 ring spindles,2552 doubling spindles and 1122 looms, it was one of the
few companies in the early period of India’s
industrialisation to have spinning and weaving facilities along with full-fledged facilities for
dyeing, bleaching, finishing and mercerising. In the mid 1980s the Indian textile industry was faced
with a crisis on account of the power loom sector churning out vast quantities of inexpensive fabric
which led to many large composite mills losing their markets. While the company was operating at
its highest level of profitability during
this period, it took a proactive measure to increase its focus on the international markets to counter
the threat from the power loom sector. In 1988, the company entered the export market for two
segments, denim for leisure & fashion wear and high quality fabric for cotton shirting and trousers.
By 1991, the company had become the third largest producer of denim in the world.

The company has carved out an aggressive strategy to further expand its current operations by
setting up world-class garment manufacturing facilities and offering a one-stop shop, offering
complete garment packages to its international and domestic customers. Apart from this, the
company with a host of international and domestic brands like Lee, Wrangler, Arrow, Flying
Machine, Newport, Ruff& Tuff etc in its portfolio is focusing on becoming the largest branded
apparel company in India. The Indian promoters hold 37.0 per cent of the total equity in the
company. Foreign institutional investors, on-resident Indians and overseas corporate bodies hold 24.4
per cent stake in the company while the Indian public holds 20.03 percent stake. Mutual funds, banks,
financial institutions, insurance companies and private corporate bodies hold the remaining stake in
the company

Arvind Mills has been one of the leading textile producers in India. The company is present in both
the fabrics and garments segments of the textiles industry value chain. In fabrics, the items of
manufacture include denim, shirting, khakis, knitwear and voiles. Denim contributes more than 60
percent to the company’s turnover. In the
garments segment, it is present in both the domestic and international markets for formal and casual
clothing.
The company is one of the leading players in the domestic ready-to-wear garments segment. It has
successfully launched and established multiple brands - own as well as international ones (under
license from the respective companies).Its own brands are managed by its subsidiary Arvind
Brands Limited and are marketed in India and some neighbouring countries. Own brands include
Flying Machine, Newport and Ruff & Tuff in jeans and Excalibur in shirts. Licensed brands
include Arrow (formals and casuals),Lee (jeans),Wrangler (jeans) and Tommy Hilfiger (fashion).

Sector Synopsis
With a total market size (2004-05) of US$ 38 billion, the textiles domestic market comprises US$
25 billion and exports US$ 13 billion.
The Indian textiles sector has a strong contribution to the Economy
•14 per cent contribution to industrial production
•4 per cent contribution to GDP
•16 per cent contribution to export earnings
•Direct employment to more than 35 million people

The textile industry functions in the form of clusters (roughly 70 in number) across
India, producing 80 per cent of the country’s total textile

It is diverse, with the hand-spun and hand woven sector at one end of the spectrum,
And the capital intensive, sophisticated mill sector at the other.

Products and brands

Arvind Mills has been one of the leading textile producers in India. The company is present in both
the fabrics and garments segments of the textiles industry value chain. In fabrics, the items of
manufacture include denim, shirting, khakis, knitwear and voiles. Denim contributes more than 60
per cent to the company’s turnover. In the garments segment, it is present in both the domestic and
international markets for formal and casual clothing. The company is one of the leading players in
the domestic ready-to-wear garments segment. It has successfully launched and established
multiple brands - own as well as international ones (under license from the respective companies).
Its own brands are managed by its subsidiary Arvind Brands Limited and are marketed in India and
some neighboring countries. Own brands include Flying Machine, Newport and Ruff & Tuff in
jeans and Excalibur in shirts. Licensed brands include Arrow (formals and casuals), Lee (jeans),
Wrangler (jeans) and Tommy Hilfiger (fashion).

Arvind Mills’ contribution in making ‘Made in India’ global

Arvind Mills has over the years become a force to reckon with in the entire textile value chain. The
yarn manufactured by one of its subsidiaries, Arvind Cotspin, is ranked amongst the best in the
world. The company has a strong foothold in the international markets for denim fabric. Many
varieties of the shirting fabric manufactured by the company sell at a premium in international
markets. Its khakis are also becoming popular in the export markets. Its Knits division serves some
of the best brands in the world and the company is in the process of ramping up the capacities to
cater to the increasing demand. Arvind Mills' major change in market focus came about in 1987
when the company established its Denim division to market denim fabric in international markets.
Since then, it has become world’s third largest manufacturer of denim with a capacity of 110
million meters per year. Its vertically integrated denim plant ranks amongst the most modern in the
world. In 2005, the company sold denim worth about US$ 234 million, majority of which was sold
in more than 70 countries in Europe, US, West Asia, the Far East and Asia Pacific. The company
has a major presence in the international premium shirting market and has a modern shirting plant
to manufacture high value cotton shirting. The plant has a capacity of 33.5 million yards per year
and the company is one of the largest exporters of premium shirting fabric from India. The plant
has an integrated manufacturing facility from yarn to finished fabrics under one roof to produce
world-class quality. The shirting division has an in-house design studio with a team of qualified
professional designers, including designers based in Italy and UK. The company has a state-of-the-
art garment manufacturing plant at Bangalore (Karnataka) to manufacture shirts and tops primarily
for the international markets. The plant has an annual capacity of 4.5 million pieces. This factory
has been put up in technical collaboration with an Italian apparel consultancy firm, CF ITALIA,
which specializes in apparel manufacturing and technical consultancy. Most of the output from this
factory is being exported to USA and European markets. Apart from the above, the company has a
major presence in the international knitwear and khakis markets also. The knitwear division is a
part of the ‘multi-product textile facility’ set up at Gandhinagar (Gujarat) with an investment of
US$ 50 million in technical collaboration with Alamac Knits Inc. of USA.The company offers one
of the world’s most comprehensive range of knitwear products for renowned garment brands and
retailers of the world. The khakis division of the company is the only one in South East Asia to
launch two collections annually. The in-house product development team co-ordinates with
European designers to prepare the new collections on regular basis.
Globalization at a glance
• World class manufacturing facilities catering to the best brands in the world
• World’s third largest denim manufacturer
• Presence in more than 70 countries
• Independent design teams working with international designers for latest designs
• Technical collaborations for high quality products

Operating efficiency

Within the shirting fabric business, volumes are yet to increase since it operates around 80 per cent
of our capacity utilisation. Though realisations are stable in this segment, they are not expected to
grow further. Hence, it is positioning garmenting as a key driver for growth and are also planning
an increase its garment capacity. The company has a major presence in the international premium
shirting market and has a modern shirting plant to manufacture high value cotton shirting. The plant
has a capacity of 33.5 million yards per year and the company is one of the largest exporters of
premium shirting fabric from India. The plant has an integrated manufacturing facility from yarn to
finished fabrics under one roof to produce world-class quality. The shirting division has an in-
house design studio with team of qualified professional designers, including designers based in
Italy and UK. The company has a state-of-the-art garment manufacturing plant at Bangalore
(Karnataka) to manufacture shirts and tops primarily for the international markets. The plant has an
annual capacity of 4.5 million pieces. This factory has been put up in technical collaboration with
an Italian apparel consultancy firm, CF ITALIA, which specialises in apparel manufacturing and
technical consultancy. Most of the output from this factory is being exported to USA and European
markets. Apart from the above, the company has a major presence in the international knitwear and
khakis markets also. The knitwear division is a part of the ‘multi-product textile facility’ set up at
Gandhinagar Gujarat) with an investment of US$ 50 million in technical collaboration with Alamac
Knits Inc.of USA.The company offers one of the world’s most comprehensive range of knitwear
products for renowned garment brands and retailers of the world. The khakis division of the
company is the only one in South East Asia to launch two collections annually. The in-house
product development team co-ordinates with European designers to prepare the new collections on
regular basis.

In addition to this, Arvind Mills will further its strategy of supplying to key brands and offering
differentiated and unique products. 
Cost Structure

Arvind Mills is a composite mill. It has adopted world class, state-of-the-art technology for
production, which gives us a significant advantage. Value engineering at each possible level of
manufacturing helps to reduce costs. Lower labour cost and a cost-structure at par with
international manufacturers at the production level with international manufacturers, give us a cost
advantage.

Financial Analysis

Arvind Mills has witnessed a growth in gross sales during the period 1999 to 2005 at CAGR of
10.6 percent, with gross sales reaching US$ 389 million in 2005. Exports have grown at a CAGR of
8.6 per cent to reach US$ 177 million in 2005. Profit after tax has grown at a much higher CAGR
of 43 per cent in the same time period owing to improved market conditions, better price
realizations and lower financial expenses especially in the last three years. The company’s top line
and bottom line have been highly volatile in the past, particularly between 1999 and 2002, when it
faced rising interest costs because of high level of borrowings, volatility in cotton and other raw
material prices as well as depressed denim prices in the international markets. The company
managed to turnaround from 2002 onwards by undergoing financial restructuring which helped in
substantial reduction of interest cost. Apart from this, the company also followed a disciplined
strategy of improved product and customer mix, increased capacity utilization and control on
sourcing of cotton and other raw materials to reduce procurement costs. These changes have been
largely responsible for the upswing in the company’s profitability in the last 3 years. The company
achieved a higher capital efficiency, which is evident from its return on capital employed (ROCE)
of 9.1 per cent in 2005, which was better than the textiles industry’s ROCE of 7.3 per cent.

Future plans

The ATC ceased to exist from 1st January 2005 and with that the quota system between member
states of the WTO also came to an end. This has opened up all the big garment markets in the world
including the European Union and USA,which are the major importers of all types of garments.
India is expected to be one of the biggest beneficiaries of this development as additional garment
production moves to countries like India. Arvind Mills is already in the process of increasing its
capacities for various products and also tying up for outsourcing opportunities to take advantage of
the changing market dynamics. The company is focusing on optimising the product mix for all its
divisions to further improve the performance of each division, which is being done by emphasising
on the high value added products. As denim already accounts for about 60 per cent of the
company’s gross sales, it is trying to spread the product risks by reducing dependence on only one
product. As part of this, shirting, knits and khakis are being focused on to achieve a more balanced
product mix. The company also plans to have increased focus on high value added garments in both
existing and new geographies. Branded apparel consuming class in India is expanding at a CAGR
of 11 per cent and this is turning out to be a major force impacting the domestic apparel sector.
Arvind Mills has been making efforts to capitalise on this opportunity for some time now by using
one of its subsidiary companies 'Arvind Brands Limited' as a platform. The company plans to
renew its focus on the domestic branding and retailing of its own apparel brands as well as
developing closer relationships with the global retailers by increasing value added products in its
portfolio
 RATIO
ANALYSIS
\

Liquidity And Solvency Ratio

1. Current Ratio Mar Mar Mar
‘08 ‘09 ‘10
Current Ratio = Current Assets / Current Liabilities

Interpretation : 0.87 2.62 3.26

The current ratio of 3.26:1 for company signifies that current assets
are more than three-fold its obligations. Generally a current ratio of
2:1 is considered satisfactory. So there is sufficient cushion in the firm
and even with two-thirds shrinkage in the value of its assets, it will be
able to meet its obligations in full.

2. Quick Ratio

Quick Ratio = Quick Assets / Current Liabilities

Interpretation : 2.27 1.66 2.31

The ideal ratio for quick ratio is 1:1.
The quick ratio for the company decreased in 2009 and then increased
in 2010. although the ratio is more than the ideal ratio indicating its
ability to pay current liabilities, still, higher ratio indicates that its
assets are not being utilized to its full capacity.

3. Debt-Equity Ratio

D/E Ratio = Long-Term Debt / Shareholders' Equity

Interpretation :
If the ratio is more than 2:1, then it is danger signal for long term 1.37 1.77 1.32
lenders. As here it is less than 2:1, it shows it provide sufficient
protection to long term lenders.

4. Long Term Debt Equity Ratio

Long-Term Debt Equity Ratio = Long-Term Debt / Permanent Capital

Interpretation:
This ratio indicates the ability to pay back the long term borrowings, 0.9 1.77 1.3
so the lower the ratio, the better it is. As we see that the debt equity
ratio is increasing from 2008-09, this indicates that the company does
not have sufficient funds to pay back its debts. The ratio should be
ideally less than 1, but then as the ratio has slightly decreased from
2009 to 2010, this indicates that the company’s position has improved
to some extent. But still the company is facing crisis in terms of paying
back the long term borrowings.

Turnover Ratio
 5. Inventory Turnover Ratio

Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory 4.13 4.03 5.37

Interpretation:
A high inventory turnover ratio is good from the viewpoint of liquidity. It
signifies how inventory sells fast. Here increasing ratio indicates good
performance of the company in terms of inventory selling.

6. Debtors Turnover Ratio

Debtors Turnover Ratio = Net Credit Sales / Average Debtors 9.49 7.66 5.98

Interpretation:
The ratio measures how rapidly receivables are collected. Here
decreasing ratio indicates that the ability to quickly collect debts is
reducing and that debts are not being collected rapidly.

7. Total Assets Turnover Ratio

Total Assets Turnover Ratio = Cost Of Goods Sold / Average Total 0.74 0.73 0.7
Assets

Interpretation:
The main objectives of the total assets turnover ratio are to measure
how efficiency assets are employed. If the total assets turnover ratio
is high it implies that there is high degree of efficiency in assets
utilization and vice-versa. Here, the ratio has decreased but quite
insignificantly, so this suggests that the company is still in a good
shape.

8. Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio = Cost Of Goods Sold / Average Fixed Assets 0.85 1.15 0.77

Interpretation :
As the ratio decreases from the last year ratio, it shows that there is no
better utilization of fixed assets.
 Coverage Ratio

9. Interest Coverage Ratio

Interest Coverage Ratio

= Earnings before Interest and Taxes (EBIT) / Interest 0.65 0.79 1.33

Interpretation:
This low interest coverage ratio is a danger signal that the firm is using
excessive debt and does not have the ability to offer assured payment
of interest to the lenders.

Profitability Ratios

10. Gross Profit Margin (%)

Gross Profit Margin (%) = Gross Profit * 100 / Sales 4.17 5.26 8.44

Interpretation:
This ratio measures the margin of profit available on sales. As gross
profit margin is good and it has increased from last year which shows
that the profitability has increased. This shows that the sale of
company had increase or the cost had decrease but the price of the
product remained same.

11. Net Profit Margin (%)

Net Profit Margin (%)

= Earnings after Interest and Taxes (EAT) * 100 / Net Sales 1.22 -1.99 2.23

Interpretation:
As we compare to last year ratio, this year the net profit ratio has
increased this shows that the profitability has increase which is good
for company. There should increase year by year or it should mention
the same percentage as last year.

12. Operating Profit Margin (%)

Operating Profit Margin (%)

10.3 10.46 13.35
= Earnings before Interest and Taxes (EBIT) * 100 / Net Sales 4
Interpretation:
Operating profit margin ratio analysis measures a company’s operating
efficiency and pricing efficiency with its successful cost controlling.
The higher the ratio, the better a company is. So, here as the ratio is
increasing every year, it shows the company to be in a good state and
also that the company has a good cost control.
 Probability Ratio Related to Investments

13. Return on Assets (%)

Return on Assets (%)

= Net Profit after Taxes * 100 / Average Total Assets 63.1 52.18 60.93
1
Interpretation:
Return on assets (ROA) measures how effectively the firm's assets are
used to generate profits net of expenses. The higher the ratio, higher the
return on assets ratio, the more efficiently the company is using its asset
base to generate sales.
As is seen here, the ratio first declined from 63.11 in 2008 to 52.18 in
2009, but then further increased to 60.93. This indicates that after the
downfall of the ratio, the company managed to utilize its assets in the
most efficient way, but it still needs improvement as the ratio is less than
that of year 2008.

14. Return on Capital Employed (%)

Return on Capital Employed (%)

= EBIT * 100 / Average Total Capital Employed 3.46 5.44 6.3

Interpretation:
If the Return on Capital Employed increases then its good for company
as more investor are willing to invest in the company and here the
trend is increasing which is good for the company.

15. Return on Net Worth (%)

Return on Net Worth (%) = Earnings after Taxes * 100 / Net Worth 1.8 -4.33 3.62

Interpretation:
This ratio is one of the most important ratios used for measuring the
overall efficiency of a firm. . As the ratio reveals how well the resources
of the firm are being used, higher the ratio, better are the results.

16. Return on Equity (%)

Return on Equity (%) = Earnings after Taxes * 100 / Equity Shareholders' 12.4 - -
Funds 9

Interpretation:
This ratio indicates how efficiently shareholder assets are managed in
the company. Here the ratio increases which attract the shareholder to
invest more in the company.

17. Earnings Per Share (EPS)

EPS = Net Profit Available to Equity-holders / Number of Ordinary Shares Issued

Interpretation: 1.14 -2.26 2.21

Earnings per share is generally considered to be the single
most important variable in determining a share's price The more the
earnings per share ratio, more would be the profitability of the
company that means that the chances of getting high return on
investment is maximum, if you invest in the stocks of a company
having a high earnings per share ratio. So here, the people would
invest more in 2010 than in 2009 or 2008, because the ratio of 2010
is greater than that of other 2 yrs.

18. Book Value Per Share

Book Value Per Share = Net Worth / Number Of Equity Shares

Issued

Interpretation: 63.5 52.64 60.93

The higher the ratio is, the better the financial position of the 5
company. If, we assume the no. of equity shares issued is not
changing then the ratio is changing only because of the change in
net worth of the company. The book value per share decreased
from 2008 – 09 and the increased from 2009-10 indicating that the
net worth of the company decreased and then increased in 2009-
10.

19. Dividend Payout (D/P)Ratio (Cash Profit)

D/P Ratio = Dividend per ordinary share (DPS) * 100/ Earnings per
Share (EPS)

Interpretation: 0.26 0.4 0.07

The lower the payout ratio, the higher will be the amount of
earnings ploughed back in the business and vice versa. A lower
payout ratio means a stronger financial position of the company.
So, here as the payout ratio is decreasing we interpret that more
amount of profit is being ploughed back for the retained earnings.
Thus, suggesting that the financial position of the company is
strong.
COST OF
CAPITAL
 Cost of Capital

1. Equity Shares
No. Of Rs./Share Total
Shares Amount
Equity 254400000 10 254.4 Cr
Shares

β = 1.2662 (from Capitaline)

rf = 7.4896 % (from RBI site)

29/12/2010 65.5
29/11/2010 52.6
Stock Values 29/10/2010 57.7

(from Capitaline) 29/09/2010 44.55

29/08/2010 40.95
29/07/2010 23.95

Market Return

From 29/11/2010 to 29/12/2010 25%

From 29/10/2010 to 29/11/2010 -9%

From 29/09/2010 to 29/10/2010 30%

From 29/08/2010 to 29/09/2010 9%

From 29/07/2010 to 29/08/2010 21%

Average Market Return, Km = 15.2%

 Ke = rf + β (Km - rf) = 7.4896 + 1.2662 (15.2 – 7.4896)

= 17.25 %

2. Preference Shares

No. of Shares Rs./Share Total Amount

Preference
6950000 100 69.5 Cr
Shares

Dividend = 6% (from Arvind Mills Annual report 2010)

Floatation Cost, f = 5% Assumed

n = 20 years

Kp = d + (RV – SV)/n
(RV + SV)/2

= 6 + (100 - 95)/20
(100 + 95)/2

= 6.41%

3. Loan and Debt

Total
Interest rate
Amount
11% (given
Loan & Debt 1873.63 Cr
in notes)

Tax Paid = 8.77 Cr From P/L account

Profit before tax = 52 Cr

Tax Paid
Tax% = ∗100 = 16.86%
Profit before tax

Ki = 0.11

Kd = Ki (1 - tax) = 0.11 (1 – 0.1686)

 = 9.14%

4. Retained Earnings = 1117.34 Cr

Ke = 17.25%

Specific Cost
Type Amount (Cr) Total Cost (Cr)
(%)
Equity Shares 254.4 17.25% 43.884
Preference
69.5 6.41% 4.455
Shares
Loan & Debt 1873.63 9.14% 171.25
Reatined
1117.34 17.25% 192.74
Earnings
Total (y) = Total (x) =
3314.87 412.33

Overall Cost of Capital = x/y = 12.4%