The Indian textile and apparel industry is at a crossroads. With a long history and an established presence globally, Indian players have the chance to cash in on emerging opportunities. Arvind is a recognized brand with a history stretching over eight decades. In a chat with The Hindu , Arvind’s Chairman and Managing Director, Sanjay Lalbhai spoke about the industry, its prospects, and plans for his company going forward. Edited excerpts:
What has been the impact of the slowdown, and what are the opportunities for the Indian textile and apparel industry given the signs of revival in the economy?
The export of Indian textiles as a value chain is doing very well. This is because China is becoming more expensive. Of the global textile trade of around $800 billion, China accounts for 35 per cent at around $270 billion. Their business is growing at 10-15 per cent but at three times India wages and costs. As they continue to be expensive, their government too is not so supportive any more. India has a $ 40billion industry and will benefit from this. I believe we should grow at 15 per cent per annum. But the domestic market has not been at its best as the economy was going through a tough phase but the down-cycle impact was less severe as China’s share was coming here.
Barring denims, the industry players have not done very well. What are issues confronting the industry and is it ripe for consolidation?
In the past, overleveraging and trying to grow too fast without having the relevant consumer base has led to problems. I think the industry has created the highest non-performing assets (NPAs) for banks. A huge amount of assets were created without the proper management back-up. These were created due to subvention on TUFs and benefits. State government and the Centre gave funds at nominal rates. But this is a tough business, and growing fast without systems, processes and consumer base in place because of easy money has been one of the major negatives. Regarding consolidation, once you have created assets indiscriminately, who will buy them? To restructure is both difficult and unwieldy. Bankers are happy to sell us some of the distressed businesses at very lucrative terms but we are not willing to manage that as it is not a viable option. Finally what will happen is difficult to say.
Is further government intervention and help desirable to aid the industry? From an industry perspective, what could the players do to move up to the next level?
The government has already done a lot. The earlier government removed excise duty from the value chain, and the new government is waiting to implement Goods & Services Tax (GST). We have duty drawbacks, state-level incentives on interest subvention, and labour policies are being liberalized. We cannot complain that we are not doing well due to government apathy. As an industry, we do not have scale. Without garmenting happening in-house, getting more market share from China will prove difficult. Companies approach China even though they are much more expensive because they are completely vertically integrated and have huge scale that they get from their dormitories. Although we have scale in fabric, we do not have it in garmenting. At Arvind, we are building a large dormitory near Ahmedabad to house 10,000 women. It can make 15 million garments. We have bought around 42 acres for the purpose but we are awaiting government approval. In the first phase, we will invest around Rs.130 crore to make 6 million jeans in the next few months. But this is not enough and will need to be replicated.
What is the money spinner for Arvind, and what about the business model being followed of getting licences to sell foreign brands here? How does it impact your own brands?
All our businesses are running in excess of 20 per cent Return on Capital Employed (ROCE) which is the cut-off for us. The new business of technical textiles -protective textiles, industrial textiles, composites and non-wovens - has reached this level, and others are in different stages. Our own businesses like garmenting, denims, voiles, shirtings, and knits are growing at 20-35 per cent ROCE. As far as laggards are concerned, we will not continue something, if it is not working out. It has to have a logical game-plan. If we do not see potential, we will cut it out with no emotions attached. Among brands, 4-5 established brands are at good ROCEs, while half-a-dozen are operating profit positive but still bleeding. Debenhams is not doing so well while Next and Nautica are doing very well. We will keep looking for iconic international brands as the slot here is available. We keep looking at international opportunities but also establishing our domestic business – Arvind, Mega Mart, Flying Machine, Creyate etc. We also have a plethora of private labels coming through our on-line platforms because that is the most cost-effective way of delivering on-line private labels.
Are you still open to brand acquisitions? What is the ticket size you are comfortable with?
With consolidation happening, domestic brands are available. I would buy a well established brand at the right price. As far as ticket price goes, we would not like to leverage our balance sheet but if it is an interesting proposition, I could consider private equity. Because if your objective is to create value and not ownership and control, then money is not a constraint as people are willing to write a cheque if I agree to get a piece of the pie. Ticket size is restricted by our free cash flows, which are around Rs.700 crore. I will borrow Rs.200-300 crore working capital, increasing it each year. I am looking at total debt to EBIDTA and that has to keep on improving. The financial boundaries are very clearly established by the board, and for anything beyond that, we will go for private equity.
What about the newer forays like real estate and recent e-commerce venture performing?
We have very ambitious plans for real estate. There are a lot of investors entering India and they are not mandated to invest in real estate businesses and prefer our brand, retail and textile businesses. So we decided to give the real estate business back to shareholders of Arvind. It is being spun off and will be subsequently listed. The business has done very well in a bad market. We have 11 ongoing projects in Ahmedabad and Bengaluru. Although Ahmedabad has slowed down, Bengaluru has the appetite for 4-5 more projects. We will increase geographies only gradually. All new projects have come in as special purpose vehicles (SPVs) and we are not leveraging the balance sheet. As regards our e-commerce business, we know how to build a brand, know about apparels, have design capabilities and have the supply chain in place. We will marry the e-commerce with this, and go through the omni channel. The Bricks and clicks business will have to co-exist as you need bricks to return rejects and to experience the products. We are well poised to deliver a lot of concepts and some niche products too. E-commerce is a high risk business with a different calibre of people. If the venture needs lot of funding, we could go the private equity way. Listing it is also a possibility.
What are the plans for your mainstay – textiles and apparels? Are there plans for an overseas foray?
While brands, retail, real estate and technical textiles are all exciting areas, in the old textiles space, the question remains how to create scale in garmenting. Do we stay in India or go to Africa because I believe that in 10 years, textiles is going to be all about Africa and not India because Indian textiles will remain for this market but the global business will move. Africa is going to be more competitive on labour cost, and, as a continent, is going to emerge as a large domestic play. They have bilateral treaties with Europe and the U.S. We are looking to set up manufacturing facilities in Ethiopia because of the excellent governance and the earlier mentioned advantages. We will start small to understand the geography, logistics and politics. Initially, we will start with exports to Europe and the U.S. The fabrics will go from here, and the initial investment will be in garmenting facilities which do not entail heavy capital expenditure. It is a measured initiative, and we will start very soon.
ramnathsubbu.r@thehindu.co.in
