One of India’s oldest textile companies, Arvind Ltd., is undergoing a dramatic makeover. So much so that in as less as five years, almost all the looms it owns and runs, in its two manufacturing facilities in Naroda and Santej in Gujarat, will be divested to partners.
What that means is that almost all the textile manufactured, some 250 million meters of it, will be contract manufactured by these partners, processed in Arvind’s facilities and converted into apparel for Arvind’s clients. This ‘garmenting’ will be done in phases—from the current 10 percent garment manufacture, it will consume 30-40 percent of the company’s textile production in a couple of years.
In five years or so, all the textile production will be outsourced and the focus will be on garments, Sanjay Lalbhai, chairman and managing director of Arvind, told BloombergQuint in an interview at the Santej facility.
“In Naroda, we have given away all our looms to our partners and they are part of our value chain. So, we are becoming asset light. We will continue doing it and have started it here (Santej) also. We have 1,500 looms and in five years we will have none. This will only be a processing centre, designing centre; we will be creating innovation, giving complete solutions to our 10 most important customers globally, and 10 or more domestic customers.”
Lalbhai’s garmenting ambition fits right into the employment generation policies of a few states such as Jharkhand and Gujarat. Both these states will pay him a payroll incentive or subsidy of Rs 4,000 to Rs 7,000 per worker per month. In a couple of years, Arvind intends to employ at least 5,000-8,000 women in facilities in each of the two states to produce apparel. The new facilities in Ethiopia would also be focused on garmenting and offer duty-free access to European markets. This value addition will help Arvind become a one-stop shop, he explained.
“He (client) doesn’t have to buy from me, nominate my fabrics to Bangladesh, lose a huge amount of time in moving the goods, have a whole set of quality control people and merchandisers to manage this entire complex supply chain. Here, he will come to Arvind. We will work together as partners, we will design, innovate, bring new products, make fabrics and product intelligent.”
Running concurrent with that is Arvind’s desire to shift from cotton to manmade fiber. It is cheaper, more functional and dominant in the sportswear and athleisure segments that are the fastest growing in the garment industry, Lalbhai said.
Arvind also intends to launch its own eponymous garment brand to take on the likes of Raymond. “Arvind will emerge as a major apparel brand across price points,” he added.
And then, there’s the technical textiles or advanced material division business, currently doing a turnover of Rs 500 crore, according to data shared by the company.
Together, these will mark what Lalbhai describes as a “disruption” he’s unleashing at the over 120-year-old company.
“From a traditional textile business, we want to flip it completely and make it a technology company lead by IPRs (intellectual property rights), designs and strategic relations with customers.”
The Demerger And Life After It
The critical question is if this will help improve profitability and return on capital at not just Arvind but also Arvind Fashions, the business it will separate from in the next two quarters as part of a demerger to “unlock value”.
(The engineering business, Anup Engineering Ltd., is the third business that will be born of the demerger. It currently accounts for less than 5 percent of the company’s revenue.)
Arvind Ltd. (FY18)
Revenue: Rs 6,798 crore.
Profit: Rs 731 crore.
ROCE: 10 percent.
Branded Apparel Business (Arvind Fashions Ltd.)
Revenue: Rs 3,848 crore.
Ebitda: Rs 226 crore.
Net Loss: Rs 20 crore.
ROCE: 5.2 percent.
Source: Company filings. Ebitda: Earnings before interest, depreciation, tax and ammortisation. ROCE: Return on capital employed
For the last few years the textile business has been characterised by slow top-line growth and declining profit margin. Yet the margin in the textile business is higher than in the branded apparel business where revenue growth is double-digit strong.
Lalbhai is confident the changes he’s making to the traditional textile manufacturing business will help the demerged Arvind lift its ROCE from the current 10 percent to 18 percent by financial year 2022-23. That’s a better measure to follow for a business moving to an asset-light model, he says.
“Suppose I am getting 12 percent return only for garmenting and buy fabric from outside and I do only garmenting bit. At a 12 percent Ebitda, my ROCE would be 30-35 percent. So, that’s the model. Ebitda is not a measure there. ROCE should be the measure across.”
The tougher challenge will be to achieve a similar improvement at the currently loss-making Arvind Fashions. The branded apparel business has some 20 foreign brands that Arvind retails in India. In many cases, it also locally manufactures garments for them.
Of the 20, four are power brands—the ones with the highest earning potential— Flying Machine, Arrow, U.S. Polo and Tommy Hilfiger. The Ebitda margin for these four has increased from 9.5 percent in FY12 to 12.2 percent in FY18. The other 15 or so are languishing at an Ebitda margin of between 5 percent and 6 percent for the past six years.
Lalbhai points out that many of these brands are still in investment phase and as they scale up, operating leverage will improve profitability and capital efficiency. The company has guided that it will break even across all brands this financial year, a promise that it didn’t fulfill last year. Yet, analysts are hopeful.
“…as brands scale up, advertising expense reduces and, more importantly, the distribution model changes… all of which add to top line without any major incremental expense. Consequently, margins and return ratios show a great improvement.”
Post demerger, Arvind Fashions will have to fund its own growth as it won’t be able to depend on the textile business’ cash flows.
Lalbhai also hints that a pruning of the brand portfolio is likely but doesn’t commit to it. “We have certain businesses which are not giving us the return and that whole portfolio is looking at 5 percent but there are jewels in it. We will work on it because the only mantra we want to follow is to create shareholders value.”
“We believe the market is not differentiating between Arvind’s superior retail strategy and its competitors’. Robust retail segment growth and improving profitability could surprise the market, in our view. Transformation of the textiles business should improve ROCE and drive a potential rerating.”
It’s a long hard climb but the summit view is worth it. The men’s apparel market in India is worth $18-20 billion and expected to grow to $45-47 billion by 2025, according to estimates in a UBS research report. And only 20 percent of it is with the top 10 companies or branded players. Lalbhai says thanks to the Goods and Services Tax and the new insolvency and bankruptcy law, time is ripe to think big.
“Could I have built a $50 billion business then (in the past), the answer is no. We are among the largest players in this arena. We required all these reforms. We required formalisation of the economy (GST). We required that evergreening of businesses doesn’t happen and the inefficient are weeded out through the bankruptcy law. Now, that all these major laws are in place, we would now think of becoming large and big…”