Aarvee Denim is engaged in the production of Denim with inhouse production facilify of Cotton Yarn which is Raw Material for Denim Fabric.. Company has capacity to produce 40 mn meters of Denim per year. Aarvee also has 21MW Wind Energy. Until 2 years ago, Aarvee had been performing extremely well. Subsequently, its performance declined sharply due to Denim overcapacity in India which led to huge fall in realization. During 2006-08, Denim capacity almost doubled from 280 mn meters to 550 mn meters. Such a sharp buildupof capacity, coupled with weak global demand at a later stage, resulted in huge imbalance in demand and supply. Mills had to reduce their capacity utilization. Root cause of the problem was huge capacity addition, without commensurate demand addition. Last year, Aarvee also made huge loss in derivative/ forex transaction. AARVEE HAS MADE STRONG TURNAROUND IN 9 MONTHS WITH PAT OF 21.07 CR. AS AGAINST LOSS OF 18.20 CR. IN CORRESPONDING PERIOD OF PREVIOUS YEAR.
Rationale for Recommendation: – Aarvee had suffered heavily in 08-09 mainly due to inventory write-off and forex loss. However, undergiven Table makes it clear that, fortunes of Aarvee are once again on the upswing. Denim market in India is growing at 9-10%. In fact, past 6 months have been very eventful and market has gained big momentum after overcapacity for over 2 years. Denim prices have gone up by 12-15%. Demand-
Supply mismatch in domestic market is now over. Globally also, lot of correction has taken place. In China, several mills have curtailed their capacity. Overall production has reduced by 30% as many small Plants in Turkey, Africa have shut. Although global demand may remain flat but Indian Denim Industry will achieve excellent growth. Recently, Aarvee has added 36 looms which has increased its denim capacity by 10%. Valuations :- 1. Scrip is available at 5.38 x FY10E EPS 2. Scrip is trading at 4.40 x FY11E EPS 3. CMP is 1 x Book Value. 4. Current Market Cap is just 32% of FY11E sales. Aarvee Denim valuations are extremely compelling. In stable market conditions, investors can gain 60% in 2010 itself
Related posts: