The textile industry has seen several false dawns in recent years, but a new breed of entrepreneurs is now attempting a fresh charge on the global stage.
India was believed to be a natural beneficiary of the open trading system that was introduced in 2005 for textiles. Access to consumers in rich nations was restricted by a system of quotas under the Multifibre Agreement; these quotas were replaced by tariffs.
However, the $72 billion (Rs 3.3 trillion) Indian textile industry could not grab the opportunity. Other nations such as China and Bangladesh captured lucrative markets. But China and Bangladesh are now struggling with rising wages while Sri Lanka is facing criticism by the European Union about its human rights record, perhaps providing an opening for Indian textile firms.
According to Technopak Advisors Pvt. Ltd, a management consulting firm that also formulates strategy for a number of Indian textile companies, domestic textile makers are betting on tripling the industry size to $220 billion by 2020 on the back of India’s strong domestic consumption story even as they plan acquisitions of international brands and retail outlets.
“The supply disruption in Bangladesh and China will only propel the growth story,” says Gautam Chakravarti, executive director at private equity firm Blackstone Advisors India Pvt. Ltd, which has a large investment in Gokaldas Exports Ltd, India’s largest garment exporter.
To reach Technopak’s growth estimates, the industry will need to make an investment of $68 billion across the textile supply chain, including new spindles and looms, over the next decade.
Graphic: Yogesh Kumar/Mint
The textile firms leading the charge this time around comprise a mix of the old and new, including B.K. Goenka of Welspun Group, Dilip Jiwarajka of Alok Industries Ltd, Rajinder Gupta of Abhishek Industries Ltd, Nitin Kasliwal of S Kumars Nationwide Ltd (SKNL) and Janardan Agrawal of Bombay Rayon Fashions Ltd.
There are, however, a few doubting Thomases. Premal Udani, chairman of the Apparel Export Promotion Council, says he is “pessimistic about the textiles and apparel industry reaching the target of $220 billion by 2020, given the current state of affairs where there is no restrictions on cotton exports fuelling cotton prices”.
Growth spin: Most manufacturers seeking to go international are relatively young; their growth dates back to just five years. Pradeep Gaur/Mint
“In the first four months of the fiscal, India’s apparel exports have fallen 8% as compared to the same period last year,” Udani says.
However, he admits there are 10-12 major buyers in the US and Europe, which include companies such as JC Penney Co. Inc., Wal-Mart Stores Inc. and Carrefour SA that account for 50-60% of the overall global retail. They are present in India.“They will increase their buying from India, but to what extent is difficult to say. I am pessimistic given the scenario of high cotton and yarn prices,” Udani says.
Speeding on slippery roads
Most firms the Technopak report refers to are relatively young and have grown in size only about five years ago.
That growth, however, has come at a price—alarmingly high levels of debt.
Gurpreet Chhatwal, director at Crisil Ratings, points out that the sector has a “good amount of leverage” and that the heady times will continue for at least another year. As a result, the debt in the industry on an average is about two-three times equity.
The risk-taking is more apparent in the cotton yarn sector as demand has exceeded supply.
The over-leveraging is also due to an interest subsidy of 5% offered by the government to firms for investing in equipment. The subsidy is scheduled to expire in 2012.
“Because they are so ambitious, they have leveraged (their businesses) heavily,” says Arvind Singhal, chairman of Technopak, comparing it with the telecom industry at the turn of the millennium, which was heavily leveraged, but was also poised at an inflection point as it entered a breathless pace of growth.
In the mid-1990s, Arvind Ltd went on an expansion of its denim capacity, funded mainly by loans from financial institutions. The market saw a shift in demand from denim to other cotton fabrics and Arvind’s balance sheet bled, resulting in the textile firm spinning wildly into a debt trap.
However, Singhal says that one good year coupled with restructuring, as firms unlock some assets and monetize them, would lighten the debt burden.
SKNL, for example, is mulling an initial public offering of its Reid and Taylor unit, while Alok Industries owns real estate in the heart of Mumbai. Raymond Ltd has real estate on the outskirts of Mumbai, which it plans to monetize, while Arvind owns Mega Mart, a retail chain which Singhal believes holds value that can be unlocked in the future.
Indeed there are risks these firms can’t ignore. Alok Industries, for instance has a debt-to-equity ratio of 3.38:1 at the end of fiscal year 2010 on outstanding debt of Rs 8,509 crore, according to financial data provider Capitaline.
It hopes to bring this down to 2:1 as it plans to sell real estate properties under its subsidiary, Alok Infrastructure Pvt. Ltd, as well as sale of commercial property in Lower Parel, says Sunil Khandelwal, chief financial officer at Alok Industries.
“We will invest Rs 450 crore every year for next two years and even as we make these investments, we will bring our debt-to-equity ratio down,” he adds.
In an interview with Mint, Kasliwal of SKNL said the firm was looking at raising money from the stock market to repay some of its debt and also to fund growth. SKNL ended fiscal 2010 with revenue of Rs 3,860 crore; Kasliwal put total debt at Rs 2,800 crore with average borrowing cost of 10%.
Young and restless
To be sure, not every old business family in the textile business is stagnating. Following Mumbai’s infamous strikes led by unionist Datta Samant in the early 1980s, a number of leading textile families—the Mafatlals, Piramals, Shrirams, and Khataus—sold the land their mills were located on and moved on to other businesses.
Others such as the Oswals (Vardhman Group), Singhanias (Raymond) and Lalbhais (Arvind) stood their ground and still control smokestack factories, besides major apparel brands.
Meanwhile, players such as SKNL, Abhishek, Alok and Welspun that have been around for about two decades have taken big strides in the past five years, aggressively acquiring global brands and retail outlets.
In 2009, SKNL acquired US-based clothier Hartmarx Corp., which directly owns or controls around 34 brands in the US, and Leggiuno SpA, a 100-year-old shirt fabric firm in Italy that supplies to such high-fashion labels as Prada, Hermes, Versace, Kenzo, and Burberry, among others. Earlier this year it also got the global franchise for DKNY menswear for all geographies except Japan.
Likewise, Welspun has acquired CHT Holdings Ltd, the holding firm of UK’s leading towel brand Christy, and Portugal-based Sorema, a supplier of luxury bath rugs, bath accessories and shower curtains.
“Our businesses are global and we are focused on global growth,” says Ashesh Amin, president (apparel and retail) at SKNL, explaining that the company is considering taking some of its Indian brands global now that it has access to major departmental stores in the US.
Khandelwal of Alok Industries is more direct in his projections. “We are on the highway now. It’s a long-term story as exports grow at 20%, domestic sector grows at 10%, we are catering to an unlimited appetite,” he says.
The focus on global growth, however, may slow as domestic consumption expands and textile makers are looking to tap opportunities at home.
Jiwarajka of Alok Industries, a Rs 4,314 crore firm, wants to triple revenue to $3 billion in three years. “To run global firms is not easy as it takes up a lot of your time. Since we can grow faster in India, we will focus on India now,” he says.
The reason is understandable, says Technopak’s Singhal. “Indian cupboards and wardrobes are still empty unlike in the West, where in order to put a new shirt in their wardrobe they need to remove something,” he adds.
Singhal is, of course, exaggerating, but the image provides a sense of why Indian businesses have set their eyes on the Indian consumer.
Demand also accrues from foreign retailers operating in India. Martin Jones, chief executive officer of Marks and Spencer Reliance India Pvt. Ltd, says: “This year Marks and Spencer (M&S) India will source 42% of everything it sells within India and we aim to increase this to about 70% within three years.”
M&S has increased the proportion of products sourced from within India significantly over the past 18 months. The UK-headquartered retailer has a sourcing office in Bangalore that sources products for its UK as well as Indian businesses.
With most Indian textile companies, among them Raymond, Welspun, Alok Industries, Arvind and SKNL, vertically integrating their businesses including retail outlets, the entire value chain is up for grabs.
Chakravarti of Blackstone, however, is not sure whether this is the correct strategy. “Apparel companies are traditionally owner-driven and have done forward integration into retail,” says Chakravarti, who is not convinced that retail ventures for textile manufacturers will be as stable as the rest of the business.