High debt levels burden textile exporters even as orders surge

High debt levels burden textile exporters even as orders surge

Export orders at large textile firms have risen in the past few months as demand from the US and the UK markets return, but these companies are still under pressure from significant debt on their books.

Earnings for the three months ended 30 September signalled a recovery in the sector, but the crisis is far from over for the larger firms, analysts said.

Large exporters have spread themselves thin through big-ticket acquisitions and aggressive expansions of production facilities in the past year, when textile exports had hit a bottom. This has led to soaring debt levels. “Balance sheet pressure will continue to be a bottleneck for most textile firms and unless sufficient equity is infused, leverage will be a concern," said Jaibir Sethi, analyst, consumer and retail, at the India research arm of Noble Group, a British investment bank.

Though some firms have sold assets like land and restructured debt to lower their debt-to-equity ratio, they continue to explore options to bring down the ratio further.

With a debt of Rs6,900 crore, Alok Industries Ltd, one of India’s largest integrated textile manufacturers, plans to sell properties and land in Mumbai as well as dilute stake in its UK retail subsidiary, Grabal Alok UK Ltd, to strategic investors. It also plans to raise Rs800-1,000 crore to repay borrowings.

Alok Industries’ order books for the next three months are full at Rs900 crore, but high debt and increasing interest cost will remain a concern, Anand Rathi Financial Services Ltd said in an 18 November report.

Textile exports, which forms 5% of the country’s gross domestic product and 4% of the global textile and apparel trade, fell 7.3% in the first half of 2009-10, but have stabilized in the past two months.

On the back of two acquisitions—Hartmarx Corp. for $119 million (Rs551 crore) and premium Italian shirting firm Leggiuno SpA for an undisclosed price, the Nitin Kasliwal-promoted S Kumars Nationwide Ltd has piled on debt that stands at Rs2,400 crore, compared with Rs1,783 crore in the quarter ended 31 March.

The company, which didn’t put the brakes on aggressive expansions even during the downturn, got a shareholder nod to raise Rs1,000 crore by selling securities to institutional investors. S Kumars has a debt-to-equity ratio of 1:1. “The debt increased on our balance sheet because it added on the debt of the two acquired companies," chief financial officer Jagadeesh Shetty said.

Though orders have improved and firms have managed to acquire working capital for now, analysts believe some of them would need at least two more quarters to come out of the woods. “Most textile players are banking on the return of demand and rise in orders now after a year-long lull," said D.D. Sharma, vice-president, retail, Anand Rathi. “Companies will also try to raise money and repay debt to repair balance sheets."

Mumbai-based Bombay Rayon Fashions Ltd has tried cutting debt, which stood at Rs2,100 crore on 31 March, by raising funds through a variety of ways. It is raising $97 million by issuing global depository receipts and Rs200 crore through an issue of warrants, after mulling options such as selling shares to institutional investors. The money would be used for further expansion and on a new factory in Maharashtra as well as to repay debt.

“The debt has also increased due to the company’s expensive retail acquisitions like Guru, an Italian clothing brand," said an analyst at a Mumbai-based brokerage, who spoke on condition of anonymity.

Textile, being a capital-intensive business, has pushed companies to restructure debt due to a constant need of working capital. The analyst said firms such as S Kumars, Alok Industries and Bombay Rayon have used their retail business as a major growth driver.

“There are pros and cons to this," he said. “These are companies which want to grow very fast and have increased their manufacturing capacities even when demand was very low. During this time, they also tried their hands at growing their retail business."

Arvind Ltd, which has a long-term debt of Rs950 crore, repaid Rs40 crore in the last quarter and expects to grow 15% year-on-year owing to rising exports, chief financial officer Jayesh Shah said.

Celebrity Fashions Pvt. Ltd, a Chennai-based export firm, has restructured part of its Rs180 crore borrowings, of which Rs120 crore is long-term debt. It even sold a factory in 2008 for Rs40 crore. The firm cut its debt by Rs20 crore after a one-time settlement with two banks. “The good part is that our order book is full up to March," said executive director S. Surya Narayanan. “Though the pricing pressure on exports continue, margins have improved."