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Brands, retail, real estate and technical textiles will drive us in future, says Arvind Ltd Chairman Sanjay S Lalbhai

Monday, 25 August 2014 - 5:23am IST Updated: Monday, 25 August 2014 - 11:40am IST | Place: Mumbai | Agency: DNA

These are exciting times for textile and garment maker Arvind Ltd, which has ventured into online e-commerce space with Creyate and has brought US apparel brand Gap into India. Most of the company's businesses are doing well and poised for a leap. Sanjay S Lalbhai, chairman and managing director, Arvind Ltd in conversation with Ashish K Tiwari, speaks about the group's overall business, key growth drivers, addition of new age business and succession plan. Edited excerpts...

Could you give us a lowdown on the group's overall business activities?
Most of our businesses have achieved critical mass, leadership position, are growing around healthy 20% and are very profitable. Some of the newer businesses (like technical textiles) are showing the promise with which we invested in them. On the brands side, one needs to understand that some take one or two years before becoming financially profitable. The brands and retail business is growing through organic and inorganic approach. We have established a good brand in real estate space by understanding and catering to the consumer requirements in Ahmedabad and Bangalore. We may enter the Pune market in the third phase, but the whole objective is to spin it off as a separate company next year in April and make real estate as a major business. Overall, it's very exciting times as the company is likely to grow at 20-25%. The new avenues for growth definitely are brands, retail, real estate and technical textiles.

How is the traditional business faring?
The old textile piece is growing at a lesser clip but there is growth for sure. If we combine garmenting with fabric making then the growth is very fast paced. In the older textile space like denim and yarn dyes – the main thrust is to take it vertical and put up more garmenting facilities. This will give the consumer a complete solution. For instance, when we go to Gap, instead of Gap buying fabrics from Arvind, converting in Bangladesh and then taking that of jeans or shirt to whichever location across the globe, we are giving them a final garment. Hence, a lot of investment is being pumped into garmenting, which has turned out to be very profitable for us in India. We are building scale of 10 million to 15 million garments annually. This will give us major turnover and growth in the textile vertical. This business is growing through garmenting and the new avenue in the form of technical textiles.

Adding different pieces to the group's business activities, was it all a done very cautiously?
Absolutely, a lot of thought went into conceptualising the businesses. Being very conservative, financially, every effort is made to ensure we are not leveraging the balance sheet. We are only growing from our free cash flows so no long-term debt gets added except working capital requirements.
Our group turnover is growing by Rs 2,000 crore to 2,500 crore annually, so the margin money or working capital required for growing that topline is the only debt being added. Everything is done in a very prudent manner. This is clearly evident from the fact that all our businesses have met the projections and we are very happy with the performance. Even with Gap's 40 stores, it will not happen in year one. Besides, the overall expansion will call for investments to the tune of Rs 400 crore to 500 crore. We will fund all of it through internal accruals, and there will be no external borrowing at all. If required, we will bring in private equity to fund us but will not leverage.

You mentioned about de-leveraging the balance sheet. How are you going about it?
One parameter we look at very carefully is the total Ebitda (earnings before interest, taxes, depreciation and amortisation) to total debt. While the effort is to see that it comes down constantly. It was at the same level last year due to a very large investment but it will come down this fiscal.

To what extent are you looking to cut debt?
It will not come down, because at least Rs 200 to Rs 300 crore, which is 20% of the Rs 2,000 crore will get added. And all our free cash flows – Rs 700 to Rs 800 crore – are going into fuelling these growth engines. So we are not borrowing long-term debt to create any assets for any of these categories except working capital debt.

The period since 2008 has been very challenging for businesses across the spectrum. How has the group managed to swim through this phase?
Luckily during these times, exports were really good as the world economy revived and we continued to be in a strong position with some of our consumers. So we have not really suffered during the leaner period in Europe and America. The domestic markets also went through the ups and downs but we have weathered them pretty well.

So what is the cause of troubles of textile manufacturers in the country?
There are two parts to it. Companies that were not leveraged grew steadily not exponentially did well, but there were a few like Vardhaman that felt the heat. Companies that tried to grow disproportionately may have come to grief but not because of the textile industry going through a bad period. It was more to do with them taking up too much and not being able to manage. Otherwise, by and large the good ones have done reasonably well.

You also have a telecom business, we haven't heard much on its activities though...
It's been there ever since my desire to go into telecom, when were bidding with French Telecom for all the circles. That was during the old telecom era where all our friends got the licence and we didn't bid very aggressively. The piece operates in one-two small niches like the walky-talky business for which we have an all India licence. At Rs 150 crore turnover that business is growing at 15-20% and is profitable, but there are no huge growth plans in that area.

And the infrastructure business...
That was a time when we thought of building roads and pursuing other infrastructure related developments to broaden the spectrum of activities. I think the infrastructure name was misleading and we didn't know where we wanted to play. We then zeroed in on real estate as that's going to be a significant part of our business in the future.

On the retail front, there is still a lot of concern in the market about the policy issues as a result of which lot of people are still undecided whether to take the plunge or sit on the fence...
I think each business is getting well-established. For instance, I am hearing Madura is going for private equity. They have four iconic brands and are not adding more, I think they will be valued phenomenally. My Ebitda as a portfolio is looking much worse than theirs because they have established brands and mine are some established, some getting established and some in infancy. So proven concepts are there now in this business, and there is huge amount of interest and investors are willing to give a phenomenal valuation for established businesses. This is because they all know that the best times are still to come.

Now with your sons Punit and Kulin getting involved and bringing in newer businesses to the group's activities, how will the company benefit?
I am very happy that both of them have taken up new challenges, which is very crucial for the growth of our overall business. While Punit is handling the technical textile business, the recently floated e-commerce initiative is spearheaded by Kulin. Over the last three-four years, both have done well and they will now have to prove themselves and make these businesses count as those are the growth engines for tomorrow's Arvind.

Will you be looking to raise funds for any of the new businesses in the near future?
We are open to the idea. Particularly for e-commerce, where I may need to put in a lot of resources to build a very large online business, and that requires private equity funding; then we will definitely go for it. But where there is no need for funds, we will definitely not go out and seek financial partners.

There was a time when e-commerce was seen as a bubble building up...
It is a disaster if one is only trying to build eyeballs with discounting while the margin model is non-existent. In such a scenario, even if you kept on growing at a phenomenal pace, the bottomline will be impacted. This is because the more you sell the more you lose, in fact losses are booked at every item being sold online. However, in the apparel category, in case of the same online platform, if you own the label/brand then there is 45-50% margin which is phenomenal as all the cost of obsolescence, building stores goes away. It's a very viable economic financial model to do a good private label/brands business through an online channel. What Kulin has done with Creyate is building a global brand for customised clothing.

So were you in two minds when Kulin came up with the e-commerce idea?
Not at all, on the contrary I was looking for a CEO like him. While I may not run the business, I certainly wanted to do e-commerce and had to have a leader like Kulin. So I would have selected someone who's gone to Harvard and worked with some of the smartest minds, has worked on this thesis and understand technology. Being an electrical engineer from Stanford and MBA from Harvard and orientation towards e-commerce, Kulin makes for an excellent fit for the job.

On the succession plan, have you given it a thought?
We have very good professional executives like Suresh who manages this entire lifestyle brands business and has built it on his own. I haven't met executives from Gap at all, he is the one who has met and sealed this partnership. The group has some excellent professionals working since many years.
I am a firm believer of not mixing up ownership and management. There's a clear segregation and understanding that I want the highest return and value for my money. If there is a better manager than me, why would I manage? And if the owners can also manage, are good managers then they can also be hired by somebody else.

Quotable Quotes

'In the apparel category, in case of online platform, if you own the label/brand then there is 45-50% margin which is phenomenal as all the cost of obsolescence, building stores goes away. It's a very viable economic financial model to do a good private label/brands business through an online channel.

'The old textile piece is growing at a lesser clip but there is growth for sure. If we combine garmenting with fabric making then the growth is very fast paced. In the older textile space like denim and yarn dyes – the main thrust is to take it vertical and put up more garmenting facilities. This will give the consumer a complete solution.'




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