‘SEZs and apparel parks are not going to solve textile problems’

‘SEZs and apparel parks are not going to solve textile problems’

Ahmedabad: Among the oldest textile firms in the country, Arvind Mills Ltd, founded in 1931, was at the vanguard of India’s textile exports boom in the late 1990s. Global market conditions and overcapacity, as well as dealing with the costs of expansion, saw its performance suffer in the early years of this decade. However, the company has since turned profitable.

Arvind ended the June quarter with revenues of Rs516 crore and a net profit of Rs6 crore. The comparable figures for 2006 were Rs426 crore and Rs5 crore, respectively. In 2006-07, Arvind registered revenues of Rs1,861 crore and a net profit of Rs120 crore. The 2006-07 profit was lower than the 2005-06 one of Rs127 crore, on lower revenues of Rs1,611 crore. Exports grew from Rs809 crore in 2005-06 to Rs827 crore in 2006-07.

In August, the company announced a restructuring exercise that involved merging its business units under two broad divisions, apparel and textiles. The journey for Arvind and other Indian textile and garment exporters has not been smooth in the past few years. In an interview with Mint, Sanjay Lalbhai, the managing director of Arvind Mills speaks of what went wrong and on the future of companies such as his own. Edited excerpts:

In the past, you were all for the World Trade Organization and the phase out of the multi-fibre agreement (that ended restrictions on the quantity of textiles and garments that could be exported from India). You had said that this would make Indian textile industry next only to its IT industry and there would be huge gains for the country. Nothing of that sort seems to have happened. What went wrong?

Well, it did not happen. It surprised us all. The other countries outran us. Exchange rate and subsidies in countries such as China, Bangladesh, Pakistan, Turkey, Brazil and (countries from the) Caribbean took away the advantage India could have potentially got. India has neither a bilateral treaty (with countries that are key markets for textile exports), nor any cost advantage due to the appreciating rupee.

Our energy bill too is high and our labour laws are still not flexible enough. All this saw India lagging in textiles sector. India today is not poised to compete at a global level in textiles at least. The domestic market, too, has not grown enough in size. We also have over-capacity due to the technology upgradation fund (TUF—a government scheme, which provided a subsidy to companies to modernize and upgrade their facilities). It is an asset bubble as investment happened with a belief that things would look good and India would emerge as a major exporter of textiles. The expected growth never came.

Do you mean to say that India has missed the textile ­opportunity?

No, I don’t exactly say that we have missed it. Anything can happen. Suddenly China might blink. They are already talking of an overheated economy and their currency, too, is artificially controlled. The cost of funds to textiles units there, too, is beginning to hurt them. Pakistan can any day be dubbed a rogue state, or Bangladesh could run into political chaos. Anything can happen and things may change dramatically. Nothing is predictable and if circumstances turn favourable, India can again be in the race and we may all sound bullish again.

Yes, I thought that textiles would be very big at this stage but the reverse has happened. Today, the textile industry is in trouble. Even the garment industry is witnessing a squeeze in margins. The rupee has appreciated 11% in three-four months. It is too big a shock for anyone to absorb. People in the IT industry with higher margins are feeling the pressure; the textile industry does not have an 11% margin to sustain itself. Many small units are now closing shop. What is making things difficult is that in the short run, the revival seems difficult as Pakistan’s and Bangladesh’s currency is depreciating further, while Chinese currency is almost stable.

So, the situation is bleak...

It is difficult for me to say. However, one thing looks certain— there is not going to be any investment in textiles for some time and huge exports market that was being talked about is unlikely to materialize.

Won’t special economic zones (SEZs) and apparel parks help?

See, the macro issues have not changed and are not going to change. The currency is strong. Interest cost is high. The labour laws are relatively less flexible. (The) energy cost (is) high. Cost of money high. (There is) no bilateral treaty in favour of India. Tariffs (of exporting products) into the US are at 17% and into Europe, 12%. SEZs and apparel parks are not going to solve problems that plague textile markets in India.

So, what is your medicine?

The government will have to do something. The finance minister has already said the textile industry is growing at zero percent, compared to the expected 22%. Inflation seem relatively under control, liquidity too is not a problem and interest rates may soften, some believe. They must correct discrepancy in duty drawback scheme (under this, exporters are refunded excise duty on inputs used to make export goods). We are still expected to take burden of sales tax, octroi, CST (Central sales tax) or VAT (value-added tax). In the short run, support is required. We do not see subsidies and support continuing in the long run, but with things difficult, what else can we expect (in the short run).

How has all this affected Arvind Mills?

We have obviously been affected. Profits are dramatically down, interest cost is up 2.5-3%. This is a very capital and working capital-intensive business and you cannot remain unaffected by these changes. You can’t compete in a globally competitive world with your currency rising by 11% in such a short time. All this has hit us hard at Arvind.

How does the future look for Arvind and the industry?

It is difficult to see beyond six months. We must remember that earnings from fabric and exports are unlikely to pick up in the country. The only growth is expected from brands and retail divisions. Say, if cotton prices soften due to a bumper crop, things may turn out to be different.

What vacuum has the demise of your uncle (Arvind Lalbhai) left in your life and the company?

See, he was over 90 years old. The succession plan was in place at every level, be it (at the) company or trusts or other institutions. So, at an organizational level things were taken care of. But on a personal front, that vacuum is there. It is lonely on the top, and so if you have some elder to look for guidance, he was always there. As a managing director or a chief executive officer, you cannot go around talking to everyone about your difficulties. There, I would definitely miss him.

What about the future succession plan? Will the company be managed by the family or professionals?

It will be in the hand of a competent person. It does not matter if it is in hands of a family or a professional. Today, professionals too have Esops (employee stock options) and they, too, have stakes. Nobody sees it from the angle that if owner has, say, 20 times equity of his top management professionals, he is 20 times more worried about creating wealth. At Arvind, it has and will always be about competence.

Even at present management, you can question whether we have diversified in different areas. That is a different issue. But when it comes to operational issues, I think the present management has done its job reasonably well. We have constantly cut down on costs and at a time when textile industry is reeling under pressure, our price realization has gone up by 10%. We have consciously taken a decision to cut down the production of denim at our Santej facility by 1.5 million metres because in this time of competition, it is better to serve niche segment. We had also decided that we would not drop prices beyond certain level. This has helped us and, today, we are operating at full capacity. Everything the management needs to do operationally has been done. So, you cannot question (our performance) on the operational aspects at least.