Ever heard of flying machine? Maybe not, what about Arrow, US Polo Assn, and Tommy Hilfiger? It’s highly likely that a fashion-savvy individual in today’s era would know most, if not all, of the above brands. But what you might not know is the thread joining them all. In this fundamental report, we’ll go through a textile manufacturer, which is either the licensee of these big brands or a straight-upowner of some of them/stock with a run-up of 52.7% YoY and a textile powerhouse globally - Arvind Ltd.
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Before diving deeper into the company, let’s set the scene with details about the Indian textile manufacturing industry. With a history dating back centuries, India has been known for its textiles and is one of the world's largest textile producers and exporters. The Indian textile manufacturing industry is diverse, encompassing a wide range of textiles, including apparel, home textiles, technical textiles, and traditional handloom textiles. The Indian textile manufacturing industry isa significant market, contributing to India’s GDP and employment. It is one of the largest employers in the country, generating jobs across the entire value chain, from cotton farming and spinning to weaving, dyeing, printing, and garment manufacturing. India has several textile manufacturing clusters in regions like Gujarat, Maharashtra, Tamil Nadu, Uttar Pradesh, and West Bengal. These clusters specialize in different segments of the textile industry, such as cotton textiles, silk textiles, and handloom textiles, and contribute significantly to India’s textile production and exports.
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India is the world’s second-largest producer of textiles and garments. It is also the sixth-largest exporter of textiles spanning apparel, home, and technical products. India has a 4% share of the global trade in textiles and apparel. The textiles and apparel industry contributes 2.3% to the country’s GDP, 13% to industrial production, and 12% to exports. The textile industry has around 45 million workers employed in the sector, including 3.5 million handloom workers. India’s textile and apparel exports (including handicrafts) stood at US$ 44.4 billion in FY22, a 41% increase YoY. The industry is expected to grow at 10% CAGR tillFY26.

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COMPANY BACKGROUND
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The Lalbhai Group'sflagship firm Arvind (ARVND), which was founded in 1931 as Arvind Mills Ltd, is the biggest textile manufacturer in India. Important details regarding thebusiness include; In 1986, it was the first to introduce denim, a fabric that is widely used worldwide, to India. Currently, Arvind Limited, which has a 108 mmtp.a. production capacity, is the industry leader in the denim industry. With a130 mmt p.a. production capacity, the firm is also the biggest manufacturer of textile fabrics in India, producing shirting, voiles, khakis, and knits. The biggest cotton textile producer in the nation is Arvind Limited, with an installed fabric capacity of more than 200 MMT annually. Additionally, it is atop producer of denim fabric worldwide.

Polo, Armani Exchange,Diesel, GAP, Banana Republic, Calvin Klein, Hugo Boss, Esprit, Zara, Levi's,Miss Sixty, Ann Taylor, Brooks Brothers, Express, and Eddie Bauer are just a few of the well-known worldwide brands that like to purchase from this firm.With one of the strongest brand portfolios in the nation and Unlimited, the fastest-growing value retail chain in India, which was established in 2008,Arvind Limited also has a significant presence in the international brands and retail industry.

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FINANCIAL ANALYSIS
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Arvind Ltd. has been steadily increasing both its top line and bottom line in recent years. In FY23, the company's net profit increased by 15% while sales increased by 11%. Because to cost reductions and increased operational effectiveness, the company's margins have also been increasing. To achieve increased overall profitability, concentrate on brands. The revenue breakdown for Arvind Limited is seen in the graph above. Almost all four quarters of FY23 had an unsteady business climate, which persisted into FY24.
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The promoter’s holding in the company has been stable in the past several quarters and historically.The green and yellow represent the pledged and unpledged shares of the promoters, indicating the promoter's confidence in the company.

The first quarter forArvind Limited following the demerger of Anup Engineering and Arvind Fashionsbegan off as the finest first quarter ever. Towards the close of the quarter,commodity prices that had seemed to be climbing steadily began to decline.Throughout the year, the cost of freight and input raw materials continued todecline. On the demand front, it has been anticipated that there would be asignificant decline after the interest rate increases to combat inflation. Infact, quarter after quarter, the actual retail sales in the major marketplaceshave exceeded expectations. The prognosis is somewhat less bleak in the US as we close out FY23 and begin FY24, and the domestic markets are ratheroptimistic. At least in the short future, it seems that the European market will continue to be difficult. Businesses in the textile industry performed inconsistently. The Woven segment's volumes were solid and consistent throughout. Denim and garment volumes decreased steadily over the course of the quarters as our major clients postponed purchases and decreased lot and drop sizes to more effectively manage their inventories. Price realisation reached a high in Q2 and then began to trend downward to reflect the declining cost of raw materials. Human Protection, Industrials, and Composites divisions ofAdvanced Materials kept up the expected increase throughout the quarters and ended the entire year with combined sales that were 22% higher. These companies also saw margin growth in Q4 as the advantages of decreasing input costs began to materialise. Throughout the year, capacity augmentation activities were launched when the existing ones reached their maximum use. The second part ofFY23 saw the beginning of the implementation of expanded fabric processing setup, a new non-wovens line, increased capacity in garment manufacture, and investments in composites mould/diseases.
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For the full year, consolidated revenues of the Company stood at `8,382 crore which was higher by5% compared to last year. EBITDA margins (before other income) remained flat around 9.5% levels (`800 crore as compared to ` 808 crore in FY22). ProfitBefore Tax and exceptional items from continuing operations stood at 427 crore, which was similar to 427 crore last year. Profit after tax and exceptional items stood at a robust 408 crore, which reflects a lower tax outgo on account of losses on sale of subsidiary shares, and move to the new 25% tax regime. All the numbers have been adjusted for the discontinued operations which is stood at -4 crore for FY23. In comparison to the previous year, the company's consolidated sales for the whole year increased by 5% to $8,382 crore. EBITDA margins (before other income) were stable at 9.5% levels ($800 million against$808 million in FY22). 427 crore was the profit before taxes and unusual items from continuing activities, which was the same as 427 crore in the previous year. With the transition to the new 25% tax rate and a reduced tax outlay due to losses on the sale of subsidiary shares, profit after taxes and special items remained at a healthy 408 crore. All figures have been modified to account for ceased activities, which for FY23 totalled -4 crore.

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The company has one of the greatest brand portfolios in the nation, with presence in a variety of sectors and a portfolio of 28 brands, including 13 owned brands (FlyingMachine, Excalibur, and Raggs, for example), 15 licenced brands (Arrow, USPolo, Gant, and Hanes, for example), and Tommy Hilfiger (JV).This will cover arrange of price ranges and channels, with each brand having a distinct and well-defined customer offer.With its positioning as the best-in-class style for premium customers, Arrow is the leading brand in the premium market.ExcaliburBrand offers clothing options for young professionals.The goal of Flying Machine brand is to become an iconic young brand by positioning itself as the "YouthExpression'' platform. As a "campus clothing company for college students seeking "cheap fashion," Newport is positioned explicitly. Five ofIndia's top 10 worldwide brands were created by Arvind Limited, demonstrating its potent brand-building ability.February 6, 2014; Portfolio and positioning of Arvind Brands At the end of FY13, MOSLARVND had 684 outlets spread out throughout 150 locations, with a total retail area of 1.2 million square feet.Exclusive outlets, department shops, cash-and-carry, multi-brand, and factory outlets all sell brands in mass premium channels.The leading brand in the mass market is Ruff and Tuff, which is mostly merchandised via the recently developed channel of hypermarkets. The robust distribution network of ArvindLimited consists of 684 retail locations spread throughout 1.2 million square feet and 150 cities (including Unlimited). The company operates 656 department store counters and 700 MBOs around the country. It has a respectable international presence, with 113 department store counters spread around theMiddle East and South Africa in addition to seven retail outlets in Dubai andSouth Africa. 57% of Arvind Limited's income comes from EBOs, 16% from MBO (Vama, etc.), 15% from department shops, and the remaining 45% from other institutional sales, including 4% from internet. About 50% of the total outlets presently operate under the franchisee model, enabling speedier expansion.

In the textile value chain, brand retailing generates the highest returns, but production can only distinguish itself via scale. The majority of multinational companies saw large profits from brand development and design innovation. Only a select number of the major Indian traditional textile firms have been able to effectively transition their earnings from production to brand and retail. owing to its 1)integrated textile facility, 2) supply chain management, 3) branding, 4)negotiating power for retail space, and 5) excellent distribution in MBO and departmental stores owing to its scale, we think Arvind Limited is in a stronger position to capitalise on the "brand and retail" boom insideIndia.Over the next five years, the emphasis will be on dramatically expanding brand and retail business.By FY18, it is intended to raise brand and retail sales from INR15 billion to INR50 billion. In order to reduce the amount of money needed to build a brand, Arvind Limited has established the following criteria for acquiring new brand licences: 1) brands should be well-known to Indian consumers; 2) they should have significant scalability potential; 3) they should be for Indians of middle class and not luxury; 4) the licence should be for at least 20 years; and 5) the royalty should not exceed 4%. These requirements guarantee that brands' long-term commercial potential will be realised.
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The company’s financial position seems stable both in long term and short term basis as well. As per the data for FY22, the company is net positive on short term as well as long term asset to liabilities, with a huge corpus of long term assets.

KEY RISKS

The key risks and their corresponding mitigation measures are depicted below:

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1. Raw material risk:

The fluctuating costs of inputs like cotton, specialised fibres and yarns, glass roving, specialty chemicals, and various resins have a negative effect on the company's profitability. Furthermore, the prices of a number of raw materials used byArvind are correlated with those of crude oil, and fluctuations in those costs might result in decreased margins. Contracts are entered into with customers, and in an effort to maintain profit margins, it seeks to pass on changes in raw material costs to them.

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2. Economic risk:

The export market has slowed down as a result of the geopolitical unrest, the slowing global economy, rising inflation, and the potential for an impending recession in important markets like the US and Europe. The company's export business would suffer from demand compression. Though the export demand would remain uncertain, the macro situation in the US/EU markets has begun to show some improvement in the forecast. However, the domestic market will continue to provide the company enormous growth potential.

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3. Exchange rate volatility risk:

Because a large portion of the company's income is generated in foreign currency and a considerable portion of its expenses are incurred in Indian rupees, any changes in currency exchange rates might have an adverse effect on the company's performance. The Company's hedging strategy, which is routinely assessed to make sure that the effects of shifting currency exchange rates are correctly handled, is used to control exposures on foreign currency sales. The company works to balance its foreign currency exposures via assets and liabilities, and only the net position is hedged. Additionally, the Company uses forward contracts and foreign exchange options to manage risk brought on by changes and volatility in foreign exchange rates.