Denim makers take branding gambit

MUMBAI: Denim does not seem a great business idea now with prices falling 20 to 30% and the commodity slipping out of fashion — and with it the profitability of denim makers.

After a spot of improvement in financial year 2005, the business started sliding once again the following year, though denim prices did show some spark in the third quarter of last year - rising 3.3%.

Oversupply continues and the situation is expected to get worse once more projects, which are under implementation, get commissioned.

JPMorgan analysts Vinay Chugh and Latika Chopra, in a note on Friday, said though prices have stabilised over the past few months, there are no meaningful catalysts on the horizon to drive this higher.

The Indian market has always had large overcapacities with Arvind Mills, Century Mills, Aarvee Denims, Raymond bulking up to supply globally.

In revenue terms, the global denim fabrics industry is worth $50 billion, and uses up 5.5 billion metres. The production capacity is around 7 billion metres.

The market size is projected to touch $90 billion by 2012, which translates to a volume growth of around 8%.

Of this, China is the largest player with a market share of 30%, and India comes second producing almost 15% of global denim.

Bulk of the demand comes from the US and Europe.

Jayesh Shah, CFO & director, Arvind Mills Ltd agreed earnings are under pressure.

“But significant growth in the brands and garments business would be a good offset and can improve the bottomline,” Shah said.

Margins have been lower in the last few quarters in denim but things will improve in the next two quarters, he said.

Chugh and Chopra of JP Morgan said Arvind Mills’ strategy to focus on mid and premium brands in US and Europe has helped to increase the share of exports (which command 13-15% premium over domestic denim prices) from 55% in FY06 to 60% currently.

“However, benefits of such product mix changes could be more than offset by rising raw material costs and rupee appreciation of more than 2-3%,” they said.

Also, prices of cotton which accounts for 60-65% of total costs have firmed up by 8% since the beginning of this year. Although Arvind enjoys the cushion of low price cotton inventory till August 2007, it will have to replenish this at a higher cost of more than 5-10% in forthcoming season.

They are underweight on the stock and have a price target of Rs 45.

For the 1,700 crore Arvind Mills, denim accounts for around 60% of standalone revenues and that’s a big tilt.

Aarvee, another Ahmedabad-based denim maker, has taken a more severe beating due to the supply glut in the domestic market.  The company is foraying into retailing to overcome the slowdown.

Vinod P Arora, chairman and managing director, Aarvee Denims and Exports Ltd, told DNA Money diversification is crucial to profits going forward.  Industry experts said domestic market may be able to absorb more denim brands if the marketers have a focused strategy.

Companies should look at volumes through mass-market brands, said an analyst. But the largest consumer segment in denim is non-branded. With almost 100% over-capacity in the domestic market, the opportunity lies in upgrading non-branded consumers to new brands, said the analyst.