Arvind Mills: Unattractive

Recommendation: Unattractive

Reshma Krishnan

Set ARVIND Mills, the Lalbhai Group flagship and the largest denim manufacturer in the country, is putting through a massive debt-restructuring programme, and the rights issue is a key element of that.

The company is offering 7.5 crore equity shares of Rs 10 each on a rights basis in the ratio of three equity shares for every four held, as on October 16, 2001. This will aggregate to Rs 75.4 crore. The promoter's holding of 16.81 per cent will remain the same post offer.

Arvind Mills' principal business consists of making and selling cotton fabrics classified in the product groups of denim, shirting and knit fabric. Major manufacturing facilities are located in Ahmedabad.

There is excess capacity in denim world-wide. In the last few years, there has been a shift in the consumer preference to other cotton apparel such as khakis. This was the beginning of Arvind Mills' debt problems.

As of March 2000, its debts totalled Rs 1,986 crore, translating into a debt-equity ratio of 2.41. In its debt restructuring, the company plans to retire debt totalling Rs 500 crore. The company requires Rs 475.6 crore in the first year of the debt-restructuring programme. This will be finanaced by internal accruals, fresh borrowings and the rights offer.

A further equity investment in Arvind Mills is not advisable at this point for two reasons. First, the stock trades at Rs 8.55, at a discount of 14.5 per cent to the issue price of Rs 10.

Second, despite the bright future for readymade apparel, the company's fundamentals are weak at this point. In 1986, the company forecasted an extremely bright future for denim and initiated a huge expansion programme that resulted in capacity going from 3.6 million metre per annum in 1986 to 110 MMPA now. This was financed through heavy borrowings. Unfortunately, the actual growth did not measure up to expectations and the denim industry went through a phase of over-capacity and growth saturation. In 1999-2000, the company was unable to service its debt obligations.

The latest financials are not encouraging. Sales fell 1.53 per cent to Rs 1,197 crore for the year ending March 2001 from Rs 1,215.97 crore the previous year. Operating profits fell 24 per cent to Rs 119.62 crore from Rs 158.05 crore. Interest costs went up by 22 per cent to Rs 322.63 crore; interest cover is 2.7 times the operating profit, leading to a loss at the net level.

The company's performance has deteriorated since 1997 and it has not been able to report an EPS for the last two financial years because of its high leverage.

Despite the good prospects for readymade garments industry, Arvind Mills does not have the resources to harness that potential. Also, the future for denim is uncertain. Shareholders can wait for the company to completely restructure itself and put its balance-sheet in order before taking any more exposures in this stock.

Issue type :Rights issue

Issue opened :November 3

Issue closes :December 3

Issue price :Rs 10

No of shares :7,54,12,459 shares

Issue details :3 equity shares for every four held.

Lead managers :Ind Global Corporate Finance